Are Prepayment Penalties Allowed on DSCR Loans in Rhode Island

[Robin Simon]

Prepayment Penalty Rules for DSCR Loans in Rhode Island

Prepayment Penalties are Allowed with a Maximum Fee of 2% and Maximum Duration of one year for Refinance DSCR Loans and Allowed with No Maximum Fee and a Maximum Duration of five years for Acquisition DSCR Loans in Rhode Island.

R.I. Gen. Laws § 34-23-5, places rules on loans secured by residential properties of one to four units in the state, typically interpreted to apply to both owner-occupancy and business-purpose uses. What makes Rhode Island a distinctive state regarding prepayment penalty restrictions is that the applicable state statutes, and , differentiate between purchase transactions and nonpurchase (refinance) transactions. For purchase DSCR Loans, a one-year duration and two-percent fee limit applies. But for refinance DSCR Loans, subsection (b) permits prepayment penalties of up to five years in duration and places no cap on the fee percentage, provided the lender complies with basic disclosure rules, similar to those used in states like Colorado and Oregon. As a result, a reasonable interpretation of the statute suggests that Rhode Island DSCR refinance loans may include standard prepayment penalty structures, such as 5/4/3/2/1 or even flat 5-year provisions (e.g. 5-5-5-5-5) in the Ocean State.

It’s also important to note that Rhode Island can also arguably be classified as a state with “varied interpretations” of prepayment penalty provision rules, and many DSCR Lenders still apply the 1-year/2% cap across all transactions, purchase or refinance, likely out of conservatism or for internal policy consistency. Borrowers exploring a DSCR loan in Rhode Island, especially for a refinance, should confirm their lender's interpretation and prepayment policy early in the process, as lender practices vary despite what the statute may allow.

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