{"id":595,"date":"2014-03-10T23:36:55","date_gmt":"2014-03-10T23:36:55","guid":{"rendered":"https:\/\/www.apslaw.com\/on-appeal\/?p=595"},"modified":"2023-07-25T16:25:13","modified_gmt":"2023-07-25T20:25:13","slug":"lenders-beware-usury-savings-clause-validate-usurious-contract-rhode-island-law","status":"publish","type":"post","link":"https:\/\/www.apslaw.com\/on-appeal\/lender-liability\/lenders-beware-usury-savings-clause-validate-usurious-contract-rhode-island-law\/","title":{"rendered":"LENDERS BEWARE! USURY SAVINGS CLAUSE DOES NOT VALIDATE USURIOUS CONTRACT UNDER RHODE ISLAND LAW"},"content":{"rendered":"

In a case of first impression that has important implications for lenders in Rhode Island, the Rhode Island Supreme Court held this term that a usury savings clause in a commercial loan document does not validate an otherwise usurious contract.\u00a0 NV One, LLC v. Potomac Realty Capital, LLC<\/i>, No. 2012-262-Appeal<\/a>.<\/p>\n

\"Image<\/a>

Image courtesy of Stuart Miles at FreeDigitalPhotos.net<\/p><\/div>\n

As a result of the Court\u2019s decision, loan documents that impose an interest rate in excess of 21 percent per annum and do not fall within a statutory exception are usurious and void as a matter of law, regardless of whether they contain a usury savings clause.\u00a0 Id<\/i>. at 8.\u00a0 When a usurious loan document is declared void, the borrower is entitled to recover all amounts paid on the loan.\u00a0 Id<\/i>.[1]<\/a>\u00a0 A lender has no right to collect either principal or interest on a usurious loan.\u00a0 See Colonial Plan Co. v. Tartaglione<\/i>, 50 R.I. 342, 147 A. 880, 881 (1929).<\/p>\n

Pursuant to Rhode Island statutory law, the maximum allowable interest rate for most loans is 21 percent per annum.\u00a0 <\/i>NV One, LLC<\/i><\/a> at 8. (citing R.I. Gen. Laws \u00a7 6-26-2(a)).[2]<\/a> \u00a0Contracts that purport to impose an interest rate in excess of 21 percent per annum are usurious and void.\u00a0 Id<\/i>. (citing R.I. Gen. Laws \u00a7 6-26-4).\u00a0 The lender\u2019s subjective intent to comply with the usury laws is irrelevant.\u00a0 Id<\/i>.\u00a0 However, if the lender willfully and knowingly violates \u00a7 6-26-2, it can be found guilty of criminal usury, punishable by up to five years\u2019 imprisonment.\u00a0 R.I. Gen. Laws \u00a7 6-26-3.<\/p>\n

Through the passage of such statutes, the Rhode Island General Assembly has manifested an intention to protect borrowers by ensuring that lenders do not charge interest in excess of the maximum rate.\u00a0\u00a0 Id<\/i>. at 14.\u00a0 As the Supreme Court recognized, \u201cthe Legislature intended an inflexible, hardline approach to usury that is tantamount to strict liability.\u201d\u00a0 Id<\/i>. at 12.<\/p>\n

Since their enactment, Rhode Island has strictly enforced its usury laws, but until the Supreme Court\u2019s decision in NV One, LLC<\/i>, it had not addressed whether a usury savings clause could save an otherwise usurious loan.\u00a0 See<\/i> NV One, LLC<\/i><\/a> at 12 (tracing Rhode Island\u2019s \u201chistorically strict enforcement of the statute and its predecessors\u201d from 1926 through 1982).<\/p>\n

In concluding that usury savings clauses violate public policy, the Supreme Court reasoned that \u201cenforcement of usury savings clauses would entirely obviate any responsibility on the part of the lender to abide by the usury statute, and would, in essence, swallow the rule.\u201d\u00a0 NV One, LLC<\/i><\/a> at 15.\u00a0 The Court expressed concern that \u201cthe inclusion of usury savings clauses in loan contracts would lead to results that are injurious to the money-borrowing public, as well as potentially unconscionable or tending towards injustice or oppression.\u201d\u00a0 Id<\/i>. at 16.\u00a0 Indeed, \u201c[i]f lenders could circumvent the maximum interest rate by including a boilerplate usury savings clause, lenders could charge excessive rates without recourse.\u201d\u00a0 Id<\/i>.<\/p>\n

In the wake of the Supreme Court\u2019s decision, lenders should carefully scrutinize their loan documents to ensure full compliance with Rhode Island\u2019s usury laws, bearing in mind that a usury savings clause will not save an otherwise usurious loan agreement.<\/p>\n

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[1]<\/a>\u00a0 By statute, the remedy available when a regulated financial institution knowingly contracts or charges a usurious interest rate is different.\u00a0 In that scenario, the regulated financial institution must forfeit the entire interest on the debt.\u00a0 R.I. Gen. Laws \u00a7 6-26-4(d).\u00a0 If the debtor has already paid the usurious interest rate, he or she may recover from the regulated financial institution twice the amount of the interest paid.\u00a0 Id<\/i>.\u00a0 There is a two year statute of limitations for such actions, which runs from the date of the usurious transaction.\u00a0 Id<\/i>.<\/p>\n<\/div>\n

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[2]<\/a> There are some exceptions, such as for a loan in excess of $1,000,000 to a commercial entity when the loan is not secured by a mortgage against the principal residence of any borrower and the commercial entity obtained a pro forma methods analysis performed by a licensed certified public accountant.\u00a0 R.I. Gen. Laws \u00a7 6-26-2(e).<\/p>\n<\/div>\n<\/div>\n","protected":false},"excerpt":{"rendered":"

In a case of first impression that has important implications for lenders in Rhode Island, the Rhode Island Supreme Court held this term that a usury savings clause in a commercial loan document does not validate an otherwise usurious contract.\u00a0 NV One,…<\/p>\n","protected":false},"author":4,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[78],"tags":[7,79,14,80],"class_list":["post-595","post","type-post","status-publish","format-standard","hentry","category-lender-liability","tag-appeals","tag-lender-liability-2","tag-rhode-island-supreme-court","tag-usury"],"acf":[],"_links":{"self":[{"href":"https:\/\/www.apslaw.com\/on-appeal\/wp-json\/wp\/v2\/posts\/595","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.apslaw.com\/on-appeal\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.apslaw.com\/on-appeal\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.apslaw.com\/on-appeal\/wp-json\/wp\/v2\/users\/4"}],"replies":[{"embeddable":true,"href":"https:\/\/www.apslaw.com\/on-appeal\/wp-json\/wp\/v2\/comments?post=595"}],"version-history":[{"count":0,"href":"https:\/\/www.apslaw.com\/on-appeal\/wp-json\/wp\/v2\/posts\/595\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.apslaw.com\/on-appeal\/wp-json\/wp\/v2\/media?parent=595"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.apslaw.com\/on-appeal\/wp-json\/wp\/v2\/categories?post=595"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.apslaw.com\/on-appeal\/wp-json\/wp\/v2\/tags?post=595"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}