Study: N.C. Predatory Lending Law Saves Borrowers $100 Million

NC Law Does Not Hurt Low-Income Credit Availibility


Center for Responsible Lending
August 13, 2002

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DURHAM, N.C. -- North Carolina’s 1999 landmark anti-predatory lending law, the first of its kind in the country, saved consumers at least $100 million in predatory lending costs in its first year without drying up the availability of subprime credit for low-income borrowers in the state, according to a new study released today by the nonprofit Center for Responsible Lending.

Based on review of over 28 million home loans in all 50 states between 1998-2000 reported to federal regulators under the Home Mortgage Disclosure Act (HMDA), the study found that:

  • The law has been effective at protecting families’ wealth from predatory lending. The new law saved consumers at least $100 million by preventing predatory loan terms that would have been expected to occur in the law’s absence.
  • Subprime lending is thriving in North Carolina. North Carolina was still the sixth most active state for subprime lending in 2000, with borrowers 20 percent more likely to receive a subprime loan than borrowers in the rest of the nation. One in every three loans to low-income North Carolina families (annual incomes of $25,000 or less) was subprime, the highest such proportion in the country.
  • Lenders who specialize in subprime lending continue to lend in the state. No major subprime lender exited North Carolina, and every major subprime lender that reported new lending anywhere in the U.S. in 2000 also reported new loans in North Carolina. And as reported last week in the Wall Street Journal, a Morgan Stanley survey of 280 subprime branch managers found that tougher predatory lending laws have not reduced subprime lending and lenders don't seem to be exiting the market.

"The North Carolina law was passed with widespread support of banks and credit unions who knew that borrowers were being abused by rogue lenders in our state," said Eric Stein, spokesman for the Center for Responsible Lending. "Now we know, based on official data reported to federal regulators, that it's possible to reduce predatory lending while maintaining access to credit for low-income borrowers. We commend North Carolina lawmakers for curbing abuses with the law without harming the availability of credit for families across the state. We urge lawmakers in other states to look closely at these study findings when considering passing their own laws."

"North Carolina, like it has on so many issues –- from clean smokestacks to patient’s bill of rights, to our prescription drug program for seniors -– is serving as a model for the rest of the country," said North Carolina Governor Mike Easley. "Our predatory lending law is making a difference while saving consumers and estimated $100 million and preserving access to fair credit."

Passed with overwhelming bi-partisan support in 1999, the North Carolina Predatory Lending Law was aimed at curbing an estimated $232 million in predatory lending abuses in the state. Its major provisions prohibited three predatory practices: financing single premium credit insurance (SPCI), making fee-loaded refinance loans to the detriment of borrowers, and charging prepayment penalties on loans of less than $150,000. In addition, it provided borrower protections on high-cost loans charging excess fees, including requiring borrowers of high-cost loans to receive financial counseling before closing their loan.

The provisions of the law certainly would have helped James Stewart, a disabled construction worker from Hillsborough, North Carolina. Mr. Stewart built his family’s home with his father on family-owned land some thirty years ago and owned the home free of any debts. He responded to a television ad for "Mr. Cash" promising low interest rates for mortgage loans in 1997 when his roof needed repairs. The lender convinced him to borrow a much larger amount than he needed for the repairs at a high interest rate; fourteen months and two "flips" later, Mr. Stewart found himself with a $56,000 loan and a 13.99 percent APR.

Two of the loans included single premium credit insurance (SPCI), a predatory practice outlawed by the N.C. law that was subsequently dropped by almost all of the industry’s major lenders. The premium financed in Mr. Stewart’s last loan was more than $5,000. The loan amount is beyond Mr. Stewart’s ability to repay; he is in litigation with the lender. "I didn’t know I had insurance in this loan," said Mr. Stewart, who never had a mortgage prior to responding to the TV ad. "If someone could have told me I could end up in this situation, I never would have taken the loan."

Most of the law's provisions, including the prohibition against SPCI, took effect in July, 2000. Researchers estimated that borrowers in North Carolina saved $41.6 million in 2000 by banning SPCI – a conservative estimate since the borrower also pays unnecessary interest on the premium for the life of the loan, which can triple the cost; $29.7 million by banning prepayment penalties; $10.5 million by effectively cutting excess fees and $18.6 million by preventing unnecessary flipping. The Center's analysis of some $3.3 trillion in loans reported to HMDA compared lending levels nationally and in the state in 1998, 1999 and 2000.

"This is the first time we’re aware of that federally-reported data has analyzed the impact of a state predatory lending law," Stein said. "Now we know, based on official data reported to federal regulators, that the first predatory lending law in the nation is working to protect families by dramatically reducing predatory lending, and it is doing so without drying up credit to lowincome borrowers. These findings bode well, not only for North Carolina and its citizens, but also for other states that want to control abuses within their borders with strong state legislation."

Contact: Malcolm White at 919-956-4480
Stephanie Kendall for CRL at 703-276-3254 or skendall@hastingsgroup.com

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About the Center for Responsible Lending

The Center for Responsible Lending is a nonprofit, nonpartisan research and policy organization dedicated to protecting homeownership and family wealth by working to eliminate abusive financial practices. CRL is affiliated with Self-Help, one of the nation's largest community development financial institutions.