CHAPEL HILL, NC -- The nation's first anti-predatory lending law -- the North Carolina statewide measure that took effect nearly three years ago on July 1, 2000 -- has significantly reduced harmful refinance loans containing abusive terms while not limiting access to subprime credit for homebuyers and low-credit score borrowers, according to a report by the Center for Community Capitalism (CCC) at the University of North Carolina (UNC).
The UNC report revealed that loans in North Carolina containing prepayment penalties of three years or more (one of the most common characteristics of a predatory loan) dropped 72 percent in North Carolina after the law's passage, while rising in neighboring states, and by as much as 260 percent in South Carolina. On the crucial issue of credit availability, the report found that loans to North Carolina borrowers with impaired credit actually increased by 31 percent since the state's anti-predatory lending law was fully implemented, while subprime home purchase loans increased by 43 percent - keeping North Carolina on par with surrounding states, which did not have predatory lending curbs in place.
"The study shows that since the North Carolina law went into full effect, the subprime market has behaved just as the law intended," stated Dr. Michael A. Stegman, Director of UNC's Center for Community Capitalism, part of the Frank Hawkins Kenan Institute of Private Enterprise. "The number of loans with predatory characteristics has fallen without either restricting access to loans to borrowers with blemished credit or increasing the cost of these loans."
The first analysis of a statewide predatory lending law that looks at actual loan terms, the CCC report is based on a review of some 3.3 million subprime loans made in North Carolina and the rest of the nation from 1998-2002 - both before and after the state law took effect.
The database of loans included specific loan terms, some of which may be predatory. Key findings of the Center for Community Capitalism study were as follows:
- Predatory lending activity down sharply. While the number of subprime home purchase loans in North Carolina increased, the number of subprime refinance loans with predatory terms dropped significantly. In the subprime market, NC experienced a 43 percent increase in first lien purchase loans after the law was enacted, and refinances dropped 20 percent. Since the majority of predatory loan characteristics are found in refinance loans, the reduction of subprime refinances is consistent with a "weeding out" of bad loans since passage of the law.
- Sharp fall-off in abusive lending terms. The incidence of commonly abusive terms in subprime loans, such as prepayment penalties of three years or greater and balloon payments, declined dramatically after passage of the law.
- A prepayment penaltycan often cost a homeowner 5 percent to 7 percent of the loan balance when attempting to refinance into a lower cost home loan. Loans with prepayment penalties of three years or more dropped 72 percent in North Carolina after the law's passage, while rising in neighboring states, and by as much as 260 percent in South Carolina.
- A balloon loan requires payment of a large lump sum at the end of the loan term. This often requires families to refinance, costing extra fees, into a loan that pays off over time. Subprime refinance loans with balloon payments dropped 53 percent after the NC law's enactment, compared to 15 percent on average across the nation (South Carolina and Tennessee also had comparable drops).
- No negative impact on credit availability. Subprime loans to NC borrowers with low credit scores (below 580) increased by almost one-third (31 percent) since the law was fully implemented. Subprime home purchase loans increased by 43 percent during the same period. This growth is consistent with that in most neighboring states, suggesting that changes in North Carolina's regulatory environment have had no detrimental impact on the supply of subprime credit to high-risk borrowers, or to families attempting to buy homes. North Carolina's subprime interest rates actually increased less than rates nationally, indicating no reduction in supply of credit in NC relative to other states.
About the North Carolina Law
Passed with near unanimous support in 1999, the North Carolina Anti-Predatory Lending Law was aimed at curbing 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 ("flipping"), and charging prepayment penalties on loans of less than $150,000. In addition, it provided borrower protections on high-cost loans charging fees in excess of 5 percent, including requiring such borrowers to receive financial counseling before closing their loan.
About the Authors
Michael A. Stegman is the McRae Professor of Public Policy, Planning, and Business at the University of North Carolina at Chapel Hill, and director of the Center for Community Capitalism at the Frank Hawkins Kenan Institute of Private Enterprise, part of UNC's Kenan-Flagler Business School. Roberto Quercia is associate professor of city and regional planning at the University of North Carolina at Chapel Hill, and Senior Fellow of the Center for Community Capitalism. Walter R. Davis is research director of the Center for Community Capitalism.
About The Center for Community Capitalism
The Center for Community Capitalism engages in multi-disciplinary research and outreach activities that explore ways to apply private-sector approaches to the revitalization of America's distressed communities. The Center's work focuses on techniques that are both effective in building wealth and assets in disadvantaged communities and are sustainable from a business perspective. The study, news release and slide presentation are available at www.ccc.unc.edu.
Contact: Christine Kraly for CRL at 703-276-3258 or cKraly@hastingsgroup.com