NC Mortgage Broker Licensing Law

Frequently Asked Questions

1. What does this new law do?
The NC Mortgage Lending Act, Senate Bill 904, requires that all mortgage bankers, mortgage brokers and mortgage loan officers be licensed by the state. For the first time ever, NC law imposes on mortgage brokers a clear duty to the borrower. It also outlines a number of prohibited acts and gives broad enforcement responsibility to the NC Commissioner of Banks. This new law goes into effect July 1, 2002.

2. How is this new law different from the NC Predatory Lending Law passed in 1999?
The previous law passed in 1999, the NC Predatory Lending Law, Senate Bill 1149, regulates the terms of a predatory home loan. It includes prohibitions on prepayment penalties, repeated refinancings, and upfront single premium insurance being financed into the loan. It also defines a high cost home loan, based on high fees or high interest rates. Additional restrictions then apply to these high cost loans, such as no balloon payments, consideration of the borrower's ability to repay the loan, and required counseling before closing. This new law, the NC Mortgage Lending Act, Senate Bill 904, requires licensing for mortgage bankers, mortgage brokers and loan officers, and regulates the brokering of a home loan in NC.

3. Why did we need this additional law?
Mortgage brokers now originate more than half of the home loans in NC, 130,000 brokered loans in the state each year. Though these brokers manage the largest financial transaction most families ever make, they have been very weakly regulated in NC. Broker firms have been required to register with the state, but enforcement authority over individuals has been extremely limited. Individual brokers guilty of misconduct could go from one mortgage company to another without detection. Even after the NC Predatory Lending Law went into effect in July 2000, a small number of unscrupulous mortgage brokers continued to write abusive home loans. This new licensing statute will make it possible to track individuals, penalize their misconduct, and hold them to a higher standard of practice. It is the second very important step in protecting the home equity of NC consumers.

4. How was this law developed?
This law was developed over several years, culminating in several months of intense discussion by the NC Association of Mortgage Professionals, the NC Mortgage Bankers Association, the NC Bankers Association, the NC Attorney General's Office, the NC Commissioner of Banks and the Coalition for Responsible Lending.

5. What are the most important new consumer protections included in this law?
Four of the most important provisions in the new law include:

  • Prohibit brokers from brokering a loan of $150,000 or less with a prepayment penalty. This will prevent borrowers from being trapped in expensive loans.
  • Prohibit making or brokering a loan in violation of the NC Predatory Lending Law. This will decrease claims of federal preemption by which lenders and brokers have circumvented NC lending laws.
  • Clear licensing requirements and enforcement powers. This will make it possible to track bad lenders and brokers and hold them accountable for their misconduct. Brokering a loan without a license is a Class I felony.
  • Specify a mortgage broker's duties to their client, including a requirement to make a reasonable effort to secure a loan that is advantageous to the borrower. This should dramatically curtail the practice of large kickbacks (yield spread premiums) from the lender to the broker for placing the borrower in higher interest rate than the rate for which they qualify.

6. What are the main licensing requirements included in the law?
The law requires all mortgage bankers, mortgage brokers and loan officers to be licensed by the state. Licensing requirements include:

  • Detailed licensing application. The application covers the applicant's basic contact information, as well as information about their financial condition, credit history, qualifications and business history including prior legal problems of the applicant and any officers, partners or directors.
  • Education and experience requirements. Mortgage bankers and mortgage brokers are required to have three years of mortgage lending experience. Loan officers must have completed a mortgage lending course. All licensed persons may be required to complete up to 8 hours of continuing education each year.
  • "Bricks and mortar" requirement. Mortgage bankers and brokers must maintain a principal place of business in the state. This avoids problems with out of state or internet operations that might try to circumvent NC laws.
  • Bonding requirement. Mortgage bankers must post a surety bond of $150,000, and mortgage brokers must post one of $50,000. The bonds are provided to cover damages in case of disputes, allowing borrowers to recover fees paid on an abusive loan. Bonds are not required when the company has a net worth of $250,000 or more.
  • Managing principal and branch managers. Each mortgage banker and broker must designate a managing principal, and each branch must designate a branch manager. This clarifies who is in charge of operations.
  • Licensing fees. The application fee for each mortgage banker and broker is $1000, and $50 for each loan officer. Renewal fees also apply. Fees are important since they fund enforcement.
  • Miscellaneous requirements. A number of other requirements apply such as displaying the license, maintaining records, establishing a separate escrow or trust fund for holding clients' funds, and providing amended information to the NC Banking Commissioner (change of address, change of loan officers, etc.).

7. Who is covered by this law?
Three groups are covered by this law:

  • Mortgage brokers accept loan applications, solicit and offer loans, negotiate terms of loans, and make loan commitments and guarantees. They may "hold" a loan for a day before it is sold or assigned to a lender (tablefund), but they do not hold and service the loan over time. They serve as intermediaries between the borrower and the lender.
  • Mortgage bankers (mortgage lenders) make mortgage loans, but do not tablefund loans.
  • Loan officers are employees of mortgage bankers or brokers, and may accept mortgage applications.

8. Who is exempt?
A number of people are exempt from these licensing requirements, including people who work for:

  • Companies that are already highly regulated, such as banks, credit unions, savings institutions, and their wholly owned subsidiaries. Affiliates or "sister" corporations in bank holding company structures are not exempt.
  • Government agencies, including state and municipal grant or loan programs.
  • The NC Housing Finance Agency and NC Agricultural Finance Authority.
  • Nonprofit corporations that make mortgage loans to promote home ownership and home improvements for the disadvantaged, provided that they are not primarily in the business of soliciting or brokering mortgage loans. This exempts groups like Habitat for Humanity affiliates, but not a mortgage broker who might try to circumvent the law by converting to non-profit status.
  • Employees who work in a clerical or administrative role and do not accept loan applications.
  • Real estate agents regulated by the NC Real Estate Commission and life insurance companies licensed to do business in the state.

Though not required to be licensed, exempt persons are required to file a form with the NC Commissioner of Banks stating their name and address, the basis of their exemption, and the regulatory authority to whom they report.

9. What about grandfathering?
Mortgage bankers and brokers registered with the Commissioner on July 1, 2002 are entitled to receive a license without application. Certain lenders, formerly exempt but now subject to licensure, may be licensed as mortgage lenders without regard to the three years' experience requirement. Loan officer licenses are available to loan officer employees and the general partners, managers, or officers of both currently registered mortgage bankers or mortgage brokers and of certain formerly exempt lenders, the HUD-approved supervised or non-supervised lenders. Grandfathered loan officers are relieved from the preliminary training requirement. Grandfathered licensees must, however, file a sworn application before October 1, 2002 providing contact information and certifying as to no conviction of a felony or a misdemeanor involving moral turpitude.

10. What are the new affirmative duties for mortgage brokers?
In the past, mortgage brokers have had common law duties to their clients. This new law, for the first time ever, codifies in statute additional broker duties, including:

  • Make a reasonable effort to secure a loan with a lender with whom the broker does business that is reasonably advantageous to the borrower considering all the circumstances. This new provision should drastically reduce the practice of large kickbacks (yield spread premiums) to the broker from the lender for placing the borrower in a higher interest rate than the rate for which they qualify. It should also reduce repeated refinances that are of no value to the borrower.
  • Safeguard and account for any money handled for the borrower.
  • Follow reasonable and lawful instructions of the borrower.
  • Act with reasonable skill, care, and diligence.

These affirmative duties establish a clear legal precedent that the broker has a statutory responsibility to their client, a point that some mortgage brokers have tried to refute in recent years.

11. What prohibited acts are included in the law?
Unlike the affirmative duties above, the prohibited acts outlined in the law apply to all persons involved in a mortgage loan transaction, including mortgage bankers, mortgage brokers and loan officers.

It is unlawful to:

  • Broker a loan of $150,000 or less that contains a prepayment penalty.
  • Broker a loan in violation of the NC Predatory Lending Law.
  • Broker a loan without a license (a Class I felony).
  • Misrepresent or conceal material facts or make false promises.
  • Refuse to payoff a mortgage.
  • Fail to account for or deliver funds, documents or anything else of value connected with the loan.
  • Collect a fee or charge an interest rate that violates NC statute.
  • Advertise terms that are not readily available.
  • Not disburse funds in accordance with the loan agreement.
  • Engage in any fraudulent or unfair dealings.
  • Fail to promptly pay fees to a licensed appraiser.

12. Why does this law repeat provisions already covered under the NC Predatory Lending Law, like the prepayment penalty prohibition?
Many brokers and lenders have continued to place prepayment penalties on NC home loans of $150,000 or less, even though the NC Predatory Lending Law clearly prohibits it. They add these penalties to loans covered by AMPTA (loans that have balloon payments or adjustable interest rates (ARMs) and are therefore covered under the Alternative Mortgage Transaction Parity Act). These brokers and lenders claim that AMPTA, a federal law, preempts state law, an issue of continuing legal dispute. The prepayment penalty prohibition included in this new law applies only to brokered loans, and should not be subject to preemption since regulating brokers is a state function.

Similarly, this law prohibits brokers from originating loans that violate the NC Predatory Lending Law. Again, this is added protection against federal preemption. With mortgage brokers now originating more than half of the home loans in NC, and estimated 130,000 brokered loans each year will be covered by these protections.

13. When does the law go into effect?
The effective date for the substantive provisions of this act is July 1, 2002, two years to the day after the implementation of the NC Predatory Lending Law. Section 8 went into effect immediately, and allows (but does not require) a Legislative Research Commission to study the implementation and enforcement of this act, as well as the NC Predatory Lending Act, and report its findings to the NC General Assembly.

14. How is it enforced?
The law gives the NC Commissioner of Banks broad enforcement powers including the authority to suspend, revoke, deny or refuse to issue or renew a license. He may impose civil penalties up to $10,000 per violation. He may order a person to cease a prohibited action, in which case the penalties can go up to $25,000. He may also conduct routine investigations of books and records, and detailed examinations related to a complaint or investigation. It is implicit in the statute that borrowers may also bring private legal action if their rights under this act have been violated.

15. Will this second NC law solve the problem of predatory lending in NC?
This new law, coupled with the NC Predatory Lending Law, will go a very long way in curbing predatory lending abuses in the state. It is clear, however, that these two laws will not eliminate this problem entirely. Additional steps that need to be taken include:

  • Monitoring the implementation and enforcement of this new law as well as the NC Predatory Lending Law.
  • Federal reforms that set strict national standards and eliminate attempts to preempt strong state laws.
  • Consumer education to make borrowers aware of potential abuses and lending alternatives.