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Silverstein v. Shadow Lawn Savings and Loan Association

Decided: January 17, 1968.

JACOB SILVERSTEIN AND SHIRLEY SILVERSTEIN, HIS WIFE, ON BEHALF OF THEMSELVES AND ON BEHALF OF ALL OTHER MORTGAGORS SIMILARLY SITUATED, PLAINTIFFS-APPELLANTS,
v.
SHADOW LAWN SAVINGS AND LOAN ASSOCIATION, A BODY CORPORATE OF THE STATE OF NEW JERSEY, DEFENDANT-RESPONDENT



For reversal and remandment -- Chief Justice Weintraub and Justices Jacobs, Francis, Proctor, Hall, Schettino and Haneman. For affirmance -- None. The opinion of the court was delivered by Hall, J.

Hall

[51 NJ Page 32] This case concerns the method of computing interest on a long term amortizing mortgage bond, payable in equal monthly installments covering interest and principal. The question is whether what is roughly referred to as a "365 day year" or a "360 day year" is to be used in the computation. It arises under a claim asserted by the plaintiffs-mortgagors against their mortgagee for breach of contract. Usury is not involved in this case. The action was framed as a purported class suit on behalf of all mortgagors

of defendant similarly situated. The Chancery Division granted summary judgment in favor of defendant on the substantive issue and so found it unnecessary to determine whether the suit was a class action. Plaintiffs' appeal to the Appellate Division was certified on their application before argument in that tribunal. R.R. 1:10-1A.

Following the original argument of the appeal, we felt the question was of such importance to all lending institutions in the state as to call for information respecting the custom and practices of lenders and a further expression of views on the problem. To that end we invited briefs and oral participation by the Commissioner of Banking and Insurance and the other amici curiae and held a reargument.

The facts as to the substantive issue insofar as it concerns plaintiffs are undisputed. On November 23, 1959, the defendant made a mortgage loan to plaintiffs in the amount of $20,300. The covenant of the obligor contained in the bond, so far as pertinent, was: "To repay the Obligee the aforesaid principal indebtedness with interest at the rate of five & one-half per cent (5 I/2%) per annum, to be computed from the 23rd day of November, 1959, * * * in the manner following: By the payment of One Hundred Twenty four Dollars 67/100 ($124.67) per month on the first day of each and every month hereafter, beginning January 1st, 1959 [ sic; presumably 1960 was intended], or on such other day as may be appointed for that purpose until the entire principal sum of $20,300.00 plus interest and all other charges hereunder shall have been fully paid and satisfied".*fn1 (Emphasis supplied).

The bond further provided that the monthly payment was to be applied: "To the reduction of the principal indebtedness hereby evidenced, which indebtedness shall be balanced and stated monthly, and interest computed on the balance of the indebtedness remaining unpaid at the end of the preceding month". This simply means that the monthly payment is first credited to the extent necessary to cover interest for the preceding month on the unpaid balance and the remainder to the reduction of principal.*fn2

Although the bond did not set forth a terminal date, it was clearly intended to be a 25 year obligation. The defendant's records so denominated it and the plaintiffs so understood. Indeed, this was the statutory limit at that time on direct reduction mortgage loans by savings and loan associations, N.J.S.A. 17:12A-78 providing that "[e]ach direct reduction loan shall require periodical payments sufficient to pay the principal and interest of the loan in full in a period of 25 years or less". (The maximum term was subsequently increased to 30 years. N.J.S.A. 17:12B-147).

More important -- and this leads to the nub of the controversy -- is that the monthly payment of $124.67 would mathematically satisfy, within a few cents, the principal and interest of the obligation in exactly 25 years (300 payments) from its date, computing the interest by the method plaintiffs

say must be used and in fact was utilized in arriving at this monthly payment figure.

This method, in determining the portion of each monthly payment to be allocated to interest, calls for dividing the annual interest rate specified in the obligation by 12 (the number of months in a year) and then multiplying the unpaid balance by the percentage so obtained (the monthly factor), regardless of the exact number of days in the particular month. A variation producing the same result is to divide the annual interest rate by 360, multiplying the unpaid balance by that figure (the daily factor) and then further multiplying that result by 30, again regardless of the exact number of days in the particular month. These methods are commonly referred to as the 360/360 basis of computation.

Another method is to divide the specified annual rate by 365 (or 366 in case of a leap year), multiply the unpaid balance by that figure (the daily factor) and then further multiply that result by the exact number of days in the month involved. This method is generally referred to as the 365/365 basis. Over a full year's period the 360/360 basis will not produce more interest for that year than the exact amount the specified rate calls for and the total will be arithmetically the same as if the 365/365 basis were utilized. For this reason we refer to these methods, for purposes of this case, as computed on a "365 day year".

Tables are prepared by publishing companies for the use of lenders in arriving at the necessary monthly payment figure to amortize a mortgage loan in the desired number of years as well as tables showing the amount of each such payment to be allocated to interest and to principal during the prescribed term. These tables are customarily computed on the 360/360 monthly factor basis. They were admittedly utilized by defendant in arriving at the $124.67 monthly payment amount set forth in the bond and in allocating that sum between interest and principal on this loan until some time in 1962.

In that year, defendant changed its method of computing interest and has since applied the new method to determine the allocation of each $124.67 payment. It did so without giving any notice whatever to plaintiffs or other mortgagors affected thereby. This method involves a 365/360 basis of computation, which we refer to as the use of a "360 day year". It is applied by dividing the annual rate of interest by 360, multiplying the unpaid balance by the percentage so obtained (the daily factor) and ...


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