Rhode Island includes commitment fees in interest rate

Contributed by Kevin Braun of Bingham McCutchen LLP:

Supreme Court of Rhode Island finds a so-called “commercial loan commitment fee” in a loan agreement to be part of the interest rate charged, leading to a violation of Rhode Island usury laws.  Labonte (Am. Steel Coatings, LLC) v. New Eng. Dev. R.I., LLC, 93 A.3d 537 (R.I. 2014).

 Lawrence Labonte (the “Borrower”), owner of New England Development, filed objections to a loan (the “Loan Agreement”) between New England Development and American Steel (the “Lender”), secured by a mortgage on commercial property.  Per the Loan Agreement, Borrower received a 30 day short-term loan of $275,000.  At maturity, the Borrower was to pay back $325,000 plus interest at 16% per annum.  The $325,000 included a $50,000 commercial loan commitment fee.

The Borrower argued that the commercial loan commitment fee was interest in addition to the 16% per annum, violating Rhode Island’s usury laws (which allow a maximum interest of 21% per annum).  Borrower’s witness, a commercial finance specialist, testified that borrowers generally pay commitment fees at closing rather than at a later time, and that he had never seen “a situation where the commitment fee was paid at the time the loan was supposed to be paid off.”  The Lender replied by arguing that the commercial loan commitment fee fell under R.I. Gen. Laws § 6-26-2(c)(1)(iv) (listing fees not to be considered interest) and, additionally, that the Loan Agreement had a usury savings clause negating any usury concerns.  

The court concluded that the commercial loan commitment fee was in fact part of the interest rate on the loan, and although it did not identify the actual rate charged, it found that all calculations yielded numbers greatly exceeding the 21 percent allowed.

In reaching its conclusion, the court first noted that when a statute is clear and unambiguous, the court must give the words their plain meaning and apply them literally.  The statute at issue, § 6-26-2(c)(1)(iv), deems the following not to be interest:  “Commercial loan commitment or availability fees 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 fees.”  Per the court, this statute unambiguously requires availability of additional credit for a valid imposition of a commitment fee.  The court applied this plain meaning to the case and found that because the Lender made no additional funds available during the loan period, the court “simply [could not] conclude that the fee . . . was a commercial loan commitment.”

The court also stated that its ruling was consistent with the General Assembly’s intent, citing passages from NV One, LLC v. Potomac Realty Capital, LLC, 84 A.3d 800, 807-08 (R.I. 2014).  The court reiterated, “[T]he Legislature intended an inflexible, hardline approach to usury that is tantamount to strict liability . . . [u]surious 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.”  Therefore, including the commitment fee in the interest rate allowed the court to fulfil its responsibility of aligning statutory interpretation with the General Assembly’s policies and purposes.  

Lastly, the court noted that although the Loan Agreement contained a usury savings clause, such clauses are not valid in Rhode Island, as recently decided under NV One.