Several recent cases, including one filed against a prominent Providence law firm, have centered upon violations of Rhode Island usury law. That law is not well-known and carries with it severe sanctions.
Usury is the lending of money at an excess rate of interest. The current prohibitions against excess interest are rooted in historical religious and cultural antipathy to money lending.
Rhode Island statute sets the maximum rate of interest on consumer and commercial loans at 21 percent, or 9 percent plus the prime rate, with some exceptions. Credit cards are excluded from these interest-rate limits. The only other exception allows an unlimited rate of interest for loans to commercial entities in excess of $1 million, so long as the borrower has satisfied certain criteria. Rhode Island courts take a hard-line approach to usury. This strict enforcement takes several forms.
Calculation of interest for the purpose of determining whether the loan is usurious considers only the net sums received by the borrower, rather than face value of the loan.
The usury analysis Rhode Island courts use also recharacterizes certain loan fees and costs as interest. Specifically, the usury statute lists certain fees and charges that are not considered interest. Such expenses include insurance premiums, closing fees, costs of title examination and other “customary and reasonable fees incident to closing, supervision and collection of loans.” If costs and fees do not fall within the ambit of “customary and reasonable,” those amounts are considered additional interest included within the calculation of the interest rate.
The burden is on the lender to prove that such costs and fees are legitimate. A recent Rhode Island case, Labonte (American Steel Coatings LLC) v. New England Development LLC, illustrates this point. In Labonte, the lender charged a $50,000 commitment fee on a short-term loan of $275,000. The loan delayed payment of the commitment fee until loan payoff, resulting in a total loan payoff of $325,000, plus accrued interest in 30 days.
The R.I. Superior Court found the commitment fee was a “disguised addition to interest,” rather than a legitimate fee – because the fee was not paid upfront and was grossly disproportionate to the loan value. The R.I. Supreme Court affirmed that decision on appeal.
Rhode Island, along with a handful of other jurisdictions, declines to enforce “usury saving clauses” on the basis that such clauses violate public policy. The typical usury savings clause states that the applicable interest is either the loan interest rate or the maximum rate of interest allowed by law, whichever is less. The result in Rhode Island is that these clauses will not rescue an otherwise usurious loan.
Rhode Island courts have also rejected the argument that sophisticated business entities should be held to the bargains into which they enter – including enforcement of usury savings clauses.
The remedies for a usurious loan, as the Rhode Island courts recognize, are “draconian” and “strong medicine.” A usurious loan is void, meaning unenforceable. That result renders the loan uncollectable. And, unlike other jurisdictions where the remedy is the return of payments made in excess of the legal rate of interest, in Rhode Island “the borrower is entitled to recover any amount paid on the loan.”
Armando Batastini is a commercial and real estate litigator in Nixon Peabody’s Providence office and is leader of the distressed commercial-debt litigation team.