In an article that appeared in the June 13, 2014 edition of the New England Real Estate Journal ("What Are The New Risks for Real Estate Lenders in Rhode Island"), we discussed the Rhode Island Supreme Court’s interpretation of Usury Savings Clauses. Subsequently, in an opinion released on June 20, 2014 (Lawrence C. Labonte (American Steel Coatings, LLC) v. New England Development R.I., LLC), the Rhode Island Supreme Court elaborated further on this issue by setting a clear bright line rule which terminates the utility of Usury Savings Clauses in loan documents.
In Labonte, the lender provided a $275,000 loan to the borrower for a period of 30 days. The loan agreement required the borrower to pay commitment fees of $30,000 to the lender and $20,000 to the loan broker retained by the borrower. After defaulting on the loan, the borrower challenged the validity of the applicable interest rate under Rhode Island General Law §6-26-2, which defines the maximum allowable interest rate on loans within the State. Specifically, the interest rate on a loan may not exceed 21% or a “rate per annum which is equal to nine percentage points (9%) plus an index which is the domestic prime rate.”
The Rhode Island Supreme Court’s focus in Labonte was whether the so-called commitment fee of $30,000, either alone or aggregated with the loan brokerage fee of $20,000, was actually just another interest charge due to the lender. The Court quoted the trial justice by saying that there is “no good and clear definition” for the term commercial loan commitment fee, and explored the purpose of such a fee. The Court’s analysis began with the language of Rhode Island General Law §6-26-2(c)(1)(iv), which states that “[c]ommercial loan commitment or availability fees to assure the availability of a specified amount of credit for a specified period of time” are not deemed to be interest for the purposes of usury calculations; however, as the Labonte commitment fee would not be paid until the maturity date, the Supreme Court determined that the commitment fee indeed was an interest charge, and as such the Court easily concluded that the rate charged exceeded the maximum allowable rate.
In this case, much like NV One, the loan documents included a Usury Savings Clause. The lender’s attorney stated that he included this clause to “alleviate his concerns about any potential usury for the note.” Further, in its defense, the lender claimed that it did not generally make loans except to family members and the Usury Savings Clause should be used to preserve the validity of this loan. The Court seized on this opportunity to drive home one of the issues raised in NV One: "Usurious interest rates are to be avoided at all costs and the onus is on the lender to ensure compliance with the maximum rate of interest." Although the Rhode Island Supreme Court’s ruling in NV One was arguably dicta, the Court, through Labonte, has made it abundantly clear to lenders that usurious loans made within the State will be struck down with impunity without regard to a lender’s motive or mistake, and that a Usury Savings Clause really does not save.
Lenders are now on notice that they may not rely on a Usury Savings Clause to salvage a loan with usurious interest rates. Rhode Island courts can and will void or invalidate loan documents with interest rates above the prescribed limits. Please contact us if you would like to discuss the appropriate provisions to include and exclude from your loan documents.
Richard Nadeau and Ryan Sawyer co-authored this article.