In LaBonte v. New England Development R.I., LLC et al., No 12-328, the Rhode Island Supreme Court recently clarified the state’s usury law by holding that a fee could be included in the calculation of interest even though it was nominally exempt.  This case involved a private loan for $275,000 that required repayment of $325,000 in 30 days.  The loan agreement and related documents provided that the borrower would pay the additional $50,000 at the time of repayment as a loan commitment fee.  Under the Rhode Island usury statute (R.I. Gen. Laws § 6-26-2), commercial loan commitment and availability fees are deemed not to constitute interest.

The statute defines commercial loan commitment or availability fees as charges imposed by lenders “to assure the availability of a specified amount of credit for a specified period of time or, at the borrower’s option, compensating balances in lieu of the fees.”  In the LaBonte case, the $50,000 fee did not provide any assurance as to the availability of the $275,000 principal loan, nor was it accompanied by any borrower option to increase the amount of the loan.  In light of these facts, the Court ruled that the loan commitment fee did not fall within the statutory exemption and must be considered interest.

The parties did not dispute that, if considered interest, the loan commitment fee rendered the loan usurious, but the lender argued for the application of a usury savings clause in the loan agreement.  Earlier in the 2014 term, however, the Court held that such clauses are unenforceable in Rhode Island.  NV One, LLC v. Potomac Realty Capital LLC, 84 A.3d 800 (R.I. 2014).  Thus, the loan was void.

This case serves as cautionary tale to lenders in Rhode Island, particularly private lenders who are – as the defendant in LaBonte described itself – perhaps less sophisticated than commercial banks about the usury laws.  Rhode Island courts will look past the terminology employed in the loan agreements and examine fees and costs associated with the loan to determine if those fees and costs should be deemed interest.  The remedy for violation of the usury statute is severe and parties cannot avoid it through a savings clause in the loan agreement.