Is the interest rate in our Rhode Island contract capped, and what happens if we go over?
Yes, and going over voids the whole contract, not just the excess. Section 6-26-2(a) forbids any person or entity “loaning money to or negotiating the loan of money for another, except duly licensed pawnbrokers”, to “reserve, charge, or take interest on a loan, whether before or after maturity, at a rate that shall exceed the greater of twenty-one percent (21%) per annum or the alternate rate specified in subsection (b)”, and (b)’s alternate rate is “nine percentage points (9%) plus” the Wall Street Journal domestic prime rate on the last business day of the month preceding the agreement or the redetermination. The consequence in § 6-26-4(a) is total: “Every contract made in violation of any of the provisions of § 6-26-2, and every mortgage, pledge, deposit, or assignment made or given as security for the performance of the contract, shall be usurious and void”, and under (c) a borrower who paid “either of principal or interest” may recover it back. A willing and knowing violation is criminal usury punishable by up to five years (§ 6-26-3). In NV One, LLC v. Potomac Realty Capital, LLC the Supreme Court held the statute imposes “an inflexible, hardline approach to usury that is tantamount to strict liability”, that “[u]surious interest rates are to be avoided at all costs and the onus is on the lender”, and, as a matter of first impression, “that, in loan contracts such as the instant loan, usury savings clauses are unenforceable as against the well-established public policy of preventing usurious transactions.” Three carve-outs are inside the chapter and must be read with it: § 6-26-2(d) hands credit-card transactions to ch. 6-26.1 exclusively; § 6-26-2(e) removes any rate limit for a loan to a COMMERCIAL ENTITY over $1,000,000 not secured by a mortgage on any borrower’s principal residence, but only if “the commercial entity has first obtained a pro forma methods analysis performed by a certified public accountant licensed in the state of Rhode Island indicating that the loan is capable of being repaid”; and § 6-26-4(d) removes regulated financial institutions from § 6-26-4(a)-(c) entirely and substitutes forfeiture of “the entire interest on the debt” plus a two-year action for twice the interest paid. Section 6-26-5 exempts licensed pawnbrokers from §§ 6-26-2 through 6-26-4, and § 6-26-2(a) is expressly “Subject to the provisions of title 19”.
The trap
The $1,000,000 commercial exemption is a paperwork trap, and NV One is the case that shows it closing on a lender. The Court found the loan “surely qualified for the exception” (commercial parties, over $1,000,000, no principal-residence mortgage), but “[b]y not securing the requisite pro forma analysis, PRC failed to avail itself of the exception and is therefore bound by the maximum interest rate.” The Rhode Island-licensed CPA opinion has to exist BEFORE the loan; there is no cure afterwards. Nor does the boilerplate save it: the clause NV One held unenforceable was the ordinary one, section 4.4 of the note, reciting an intention to conform strictly to the usury laws in force and limiting every agreement between the parties so that no contingency could produce a higher rate. Giving such a clause effect “would entirely obviate any responsibility on the part of the lender to abide by the usury statute, and would, in essence, swallow the rule.” Rhode Island also computes the rate against what the borrower actually got: § 6-26-2(a) measures against “the unpaid principal balance of the net proceeds of the loan”, so origination fees and undisbursed holdbacks push the effective rate up. Two more edges. A recovery under § 6-26-4(c) belongs to the borrower who paid: in Commerce Park Realty, LLC v. HR2-A Corp. the Court rejected the argument that “so long as one named borrower makes a payment on a usurious loan, all named borrowers may share in the disgorgement payments”, so a guarantor or a co-borrower who paid nothing recovers nothing even though the loan (26% to 36% per annum) was “usurious and null and void”. And the defence can be given up: DeFusco v. Giorgio holds that “waiver of a usury defense should be permitted when it is freely and knowingly made after reasoned reflection for the legitimate purpose of avoiding or settling litigation”, while expressly reserving the case of “a release of all claims or defenses of usury either contemporaneous with the signing of a promissory note or in exchange for additional advances of funds”, which is the release a lender would actually want.
27 authorities
- statuteR.I. Gen. Laws § 6-26-2enactment date not established
The words that state the rule
The alternate rate means the rate per annum that is equal to nine percentage points (9%) plus an index that is the domestic prime rate as published in the Money Rates section of The Wall Street Journal on the last business day of each month preceding the later of the date of the debtor’s agreement or the date on which the interest rate is redetermined in accordance with the terms of the debtor’s agreement.
- statuteR.I. Gen. Laws § 6-26-2enactment date not established
The words that state the rule
the provisions of this chapter shall not be applicable with respect to credit card transactions as defined in chapter 26.1 of this title. Chapter 26.1 shall apply exclusively to all such transactions.
- statuteR.I. Gen. Laws § 6-26-2enactment date not established
The words that state the rule
there is no limitation on the rate of interest that may be legally charged for the loan to, or use of money by, a commercial entity, where the amount of money loaned exceeds the sum of one million dollars ($1,000,000) and where repayment of the loan is not secured by a mortgage against the principal residence of any borrower; provided, that the commercial entity has first obtained a pro forma methods analysis performed by a certified public accountant licensed in the state of Rhode Island indicating that the loan is capable of being repaid.
- statuteR.I. Gen. Laws § 6-26-4enactment date not established
The words that state the rule
Every contract made in violation of any of the provisions of § 6-26-2, and every mortgage, pledge, deposit, or assignment made or given as security for the performance of the contract, shall be usurious and void.
- statuteR.I. Gen. Laws § 6-26-4enactment date not established
The words that state the rule
if the borrower shall, either before or after suit, make any payment on the contract, either of principal or interest, or of any part of either, and whether to the lender or to any assignee, endorsee, or transferee of the contract, the borrower shall be entitled to recover from the lender the amount so paid in an action of the case.
- statuteR.I. Gen. Laws § 6-26-4enactment date not established
The words that state the rule
The provisions previously stated in this section shall not apply to any financial institution and its subsidiaries, credit union, or bank holding company and its subsidiaries, organized under the laws of the state; any other entity regulated by the department of business regulation; a national bank and its subsidiaries; federal savings and loan association or federal credit union; or a bank, company, or association collectively and individually referred to as a regulated financial institution.
- statuteR.I. Gen. Laws § 6-26-4enactment date not established
The words that state the rule
In the event a regulated financial institution knowingly contracts or charges a usurious rate of interest in violation of any of the provisions of § 6-26-2, it shall forfeit the entire interest on the debt.
- statuteR.I. Gen. Laws § 6-26-4enactment date not established
The words that state the rule
In case the usurious rate of interest has been paid, the person by whom it has been paid, or his or her legal representative, may recover from the regulated financial institution in an action in the nature of an action on the debt, twice the amount of the interest so paid, provided that the action is commenced within two (2) years from the time the usurious transaction occurred.
- statuteR.I. Gen. Laws § 6-26-3enactment date not established
The words that state the rule
Any person, who, on his or her own behalf or on behalf of any other person, partnership, corporation, or association, shall willfully and knowingly violate any of the provisions of § 6-26-2 shall be guilty of criminal usury and shall be imprisoned for not more than five (5) years.
- statuteR.I. Gen. Laws § 6-26-5enactment date not established
The words that state the rule
Sections 6-26-2 — 6-26-4 shall not apply to loans made by duly licensed pawnbrokers on the security of a deposit of personal property.
- statuteR.I. Gen. Laws § 6-26-1enactment date not established
The words that state the rule
Post judgment interest on any judgment, and interest in all business transactions where interest is secured or paid, shall be computed at the rate of twelve dollars ($12.00) on one hundred dollars ($100) for one year, unless a different rate is expressly stipulated.
- statuteR.I. Gen. Laws § 6-26-11enactment date not established
The words that state the rule
Interest on medical debt shall be limited to the rate of interest equal to the weekly average one-year constant maturity Treasury yield, but not less than one and a half percent per annum (1.5% p.a.) nor more than four percent per annum (4% p.a.) as published by the Board of Governors of the Federal Reserve System, for the calendar week preceding the date when the consumer was first provided with a bill.
The words that state the rule
In a case of first impression, we are asked to determine whether a usury savings clause in a commercial loan document validates an otherwise usurious contract. In view of the facts and circumstances of this case, we conclude that it does not; we hold, therefore, that the promissory note at issue is void as a matter of law.
The words that state the rule
it is clear that the Legislature intended an inflexible, hardline approach to usury that is tantamount to strict liability.
The words that state the rule
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.
The words that state the rule
We therefore hold that, in loan contracts such as the instant loan, usury savings clauses are unenforceable as against the well-established public policy of preventing usurious transactions.
The words that state the rule
It bears mentioning that, because the two parties are commercial entities, the loan exceeded $1,000,000, and was not secured by either of the Cambios’ primary residences, the loan at issue surely qualified for the exception. By not securing the requisite pro forma analysis, PRC failed to avail itself of the exception and is therefore bound by the maximum interest rate.
The words that state the rule
In our view, the enforcement 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.
- caseNo. 2020-33-Appeal.Commerce Park Realty, LLC v. HR2-A Corp.R.I.decided 2021
The words that state the rule
That grant of partial summary judgment declared that a series of loans made by the RFP defendants carrying interest rates ranging from 26 percent to 36 percent per annum were usurious and null and void.
- caseNo. 2020-33-Appeal.Commerce Park Realty, LLC v. HR2-A Corp.R.I.decided 2021
The words that state the rule
In other words, Cambio plaintiffs submit that, under § 6-26-4(c), so long as one named borrower makes a payment on a usurious loan, all named borrowers may share in the disgorgement payments. We reject this contention.
The words that state the rule
In our opinion, however, waiver of a usury defense should be permitted when it is freely and knowingly made after reasoned reflection for the legitimate purpose of avoiding or settling litigation.
The words that state the rule
We emphasize that the case at bar does not present a situation in which a borrower has executed a release of all claims or defenses of usury either contemporaneous with the signing of a promissory note or in exchange for additional advances of funds.
The words that state the rule
Any contract in which the yearly interest rate exceeds the maximum permissible rate set by the Legislature is expressly declared void by § 6-26-4. This statute not only affords borrowers relief from the obligations of usurious agreements but also entitles them to recover any payments made of either principal or interest.
- statuteR.I. Gen. Laws § 6-26-2enactment date not established
The words that state the rule
Subject to the provisions of title 19, no person, partnership, association, or corporation loaning money to or negotiating the loan of money for another, except duly licensed pawnbrokers, shall, directly or indirectly, reserve, charge, or take interest on a loan, whether before or after maturity, at a rate that shall exceed the greater of twenty-one percent (21%) per annum or the alternate rate specified in subsection (b) of this section of the unpaid principal balance of the net proceeds of the loan not compounded, nor taken in advance, nor added on to the amount of the loan.
- statuteR.I. Gen. Laws § 6-26-2enactment date not established
The words that state the rule
Any of the preceding charges, if paid or advanced by the lender, may be considered part of the net proceeds of the loan, and if paid by the debtor, shall not be deducted from the net proceeds of the loan.
The words that state the rule
Based on our de novo review, after viewing the evidence in the light most favorable to PRC, it is clear to this Court that the loan was a usury in violation of § 6-26-2.
The words that state the rule
The defendants’ appeal is denied and dismissed, the order denying the motion to vacate judgment is affirmed, and the case is remanded to the Superior Court.
“Defective” means that reading found something to correct. What you are reading is the rule as it stands after that reading.