Title Tips - October 2015
TITLE TIPS BY JOE VITULLO - OCTOBER 2015
USURY is governed in Rhode Island by R.I.G.L. 6-26-2. If a promissory note or loan agreement is usurious in its interest provisions, the note and loan, plus any mortgage given as security, are rendered null and void. The pertinent language of the usury statute states, that "no person, partnership, association, or corporation loaning money...shall, directly or indirectly, reserve, charge or take interest on a loan, whether before or after maturity, at a rate which shall exceed...twenty-one (21%) per annum..." Section 6-26-2(a). A lender who charges interest in excess of 21 percent is liable for usury. On occasion, real estate attorneys find themselves involved with commercial notes and mortgages, together with construction loan agreements, where this statute can render the offending mortgage void. Even though the borrower agrees to such terms, Rhode Island law does not punish the borrower. R.I.G.L. 6-26-4 states that "every mortgage, pledge, deposit, or assignment made or given as security for the performance of the contract, shall be usurious and void." The Rhode Island Supreme Court has had occasion recently to rule on various aspects of the usury statute and the Superior Court has had occasion to void a number of large commercial loans for usury. The Supreme Court has stated that the "Legislature intended an inflexible, hardline approach to usury that is tantamount to strict liability."
In the cases of NV One, LLV, et al. v. Potomac Realty Capital, LLC et al, 84 A.3d 800 (R.I. 2014) and La Bonte v. New England Dev. R.I. , 93 A.3d 537 (2014) the Court delineated four basic rules for determining whether a loan is usurious. Firstly, to determine whether an interest rate, in promissory note, is usurious, the amount for computing the actual permissible rate of interest is not the amount on the face of the note, but rather, the actual amount received by the borrower. Industrial National Bank v. Stuad, 113 R.I.124, 125 (1974).
Thus the terms of a promissory note and construction loan agreement may not always indicate a usury violation separate from the actual loan disbursements and payments. The written terms of the loan documents are subordinated to the actual disbursements and charges. Secondly, the good intent of the lender to comply with the usury statute is irrelevant. See Burden v. Unruth , 47 R.I. 227, 231 (1926). Thirdly, any so-called usury "savings clause" is unenforceable in Rhode Island as contrary to public policy. An example of a "savings clause" would be a provision stating that the maker and payee intend to conform strictly to the usury statute and the agreement is strictly limited so that under no contingency or event shall the amount paid the payee as interest exceed the usury statute and any excess paid shall be deemed a mistake and refunded to the maker." Such a provision is without effect in Rhode Island. Fourthly, the characterization of any fees "Exit Fees" or "Commercial Loan Commitment Fee" or other denomination will not necessarily save them from being included as "interest" in the computation of usurious interest. The Court in NV One, LLC, above, pointed to a Rhode Island Bankruptcy case, In Re Swartz , 37 B.R. 776, 779 (Bankr.D.R.I. 1984) where the Federal Court found, based on RI law that a $4 filing fee, which accounted for the only interest in excess of the maximum rate, rendered the entire loan usurious and void. The Bankruptcy Judge commented on the "draconian tenor" of the statute, "intended to protect borrowers from hidden and pernicious interest charges, placing the responsibility on the lender for strict compliance." On the other hand, even though the terms of a promissory note may not always reveal whether interest will be charged in excess of the maximum set in the usury statute, the loan amount being irrelevant, default rates in excess of 21 percent were deemed by the Court to be usurious on their face.
There is one exception to the usury statute, which the lender must comply with in order to charge interest in excess of 21 percent: 1) The loan must be to a "commercial entity"; 2) It must be in excess of $1,000,000.00; 3) The repayment must not be secured by the residence of any borrower; and 4) The "commercial entity" must first obtain "a pro forma methods analysis", performed by a CPA licensed in RI, indicating that the loan is capable of being repaid.
15 Messenger Drive, Warwick, RI 02888 (401) 861-1511