For public policy reasons, the Rhode Island Supreme Court recently held that usury savings clauses are void and unenforceable. In NV One, LLC v. Potomac Home Capital, LLC, borrowers who had defaulted on their note filed a lawsuit against the lender, alleging that the interest rate in a commercial loan agreement violated Rhode Island's usury law. The borrowers sought to void the note and mortgage encumbering the property.
Like many loan agreements, the note contained a usury savings clause that set the "default rate" of interest at the lesser of 24 percent per annum or the maximum rate of interest allowed under applicable law. Because the borrower defaulted on the loan, and the default interest rate exceeded the 21 percent maximum allowable interest rate in Rhode Island, the court considered whether the usury savings clause protected the loan from a violation of the usury law.
The court held that usury savings clauses are unenforceable as a matter of public policy, explaining that allowing lenders to enforce them would "entirely obviate any responsibility on the part of the lender to abide by the usury statute, and would, in essence, swallow the rule." The court observed that allowing these clauses would shift the burden of proving noncompliance to the borrower, even though the lender is in a better position to ensure that its loans comply with the usury laws.
Further, the court said, "[i]f lenders could circumvent the maximum interest rate by including a boilerplate usury savings clause, lenders could charge excessive rates without recourse. This would have the reverse effect of incentivizing lenders to attempt to charge excessive interest rates because, at worst, the lender could invoke the savings clause and the interest rate would simply be reduced to the highest acceptable rate without any penalty to the lender."
Because the usury savings clause was unenforceable, the loan violated the state's usury law. Under Rhode Island law, usurious contracts are void, and the borrower is entitled to recover any amount paid on the loan. Accordingly, the loan and associated mortgage were void, and the lender's liens on the property were removed from the land records.
Violation of usury laws in Rhode Island (and elsewhere) results in severe penalties. Lenders should take note of this recent decision to ensure that their loan documents comply with the usury laws in the states in which they are operating, and to avoid the potentially harsh penalties associated with a usury violation.