North Carolina Predatory Mortgage Lending Law
Frequently Asked Questions
1. Why was this law necessary?
Too many North Carolina homeowners were losing their hard-earned home equity due to abusive mortgage practices such as excessive loan fees, costly and unnecessary insurance policies, large "balloon" payments, high interest rates, and frequent refinances. At the time this law passed in 1999, we estimated that an estimated 50,000 North Carolinians were already victims of predatory loans. There was strong evidence that some predatory lenders were systematically targeting families who can least afford high cost loans. Minority and low-income consumers, as well as elderly homeowners, who often have the most home equity but very limited incomes, were particularly vulnerable. We estimate that this law will save these NC consumers $1 billion in home equity over the next 5 to 10 years.
2. How was this law developed?
This law was developed over five months of intense discussion by the NC Bankers Association, the NC Mortgage Bankers Association, the NC Credit Union Network, the NC Association of Financial Institutions, the NC Association of Mortgage Professionals, the NC Attorney General's Office, and the Coalition for Responsible Lending.
3. What general restrictions are included in this law?
There are three very important general prohibitions included in this new law. These general prohibitions apply to all home loans, not just "high cost home loans":
- No prepayment penalties for home loans of $150,000 or less.
- No flipping. This prevents a lender from repeatedly refinancing an existing home loan in an attempt to collect upfront fees that strip equity from the home.
- No financing upfront, single premium insurance. This section applies to credit life, disability or unemployment insurance, as well as any other life or health insurance premiums. Monthly payment insurance is still permitted. Financing insurance payments hides the cost of the insurance, and results in unnecessary interest payments. A borrower is also locked in an expensive loan, because they must pay off this upfront premium before they can refinance into a more favorable loan. We estimate that this single change will save NC consumers between $50-100 million annually.
4. How does the law define a "high cost home loan"?
A loan is defined as a "high cost home loan" based on either high fees, a high interest rate, or a substantial prepayment penalty:
- High fees: Loans where the borrower is charged more than 5% of the loan amount in upfront points, fees or other charges. This percentage:
- Does include:
- Fees paid directly by the borrower to mortgage brokers
- Any prepayment penalty in excess of 1%.
- Does not include:
- Escrows collected at closing
- Fees paid to third parties, such as attorney fees, appraisals and credit report fees
- Back end payments that lenders pay to brokers (yield spread premiums, etc.)
- Does include:
- High interest rate: Loans where the borrower is charged an interest rate that is 10% or more than the comparable Treasury bond rate. The current threshold rate is about 15-1/2% (5-1/2% + 10%), and will rise or fall as market interest rates fluctuate. As of October 2002, this rate threshold will lower to 8% over Treasury rates, about 14 ½% at February 2002 interest rate levels (5-1/2% + 8%), as Federal HOEPA limits are lowered.
- Prepayment penalty longer than 30 months or more than 2% of the amount prepaid.
Under this law, lenders are still allowed to make "high cost home loans", but specific consumer protections apply. This definition only applies to residential home loans, for consumer purposes, of $300,000 or less.
5. What consumer protections apply to these "high cost home loans"?
Once defined as a "high cost home loan", a number of practices are prohibited:
- No financing of fees. This prevents the financing of fees on high cost home loans as part of the loan amount. Unscrupulous lenders can take advantage of unsophisticated borrowers by folding excessive fees into the overall loan, increasing the amount of money borrowed.
- No lending without consumer counseling. If a borrower is taking out a high cost home loan, before closing they must consult with a home loan counselor approved by NC Housing Finance Agency. This single requirement should dramatically reduce abusive lending practices.
- No balloon payments. With a balloon, the monthly mortgage payments does not fully cover the entire cost of the loan, and the borrower must make a large final payment. Balloons artificially lower the monthly mortgage payment, enticing unsophisticated borrowers into taking out a 'debt consolidation' loan at a high cost. This practice also greatly increases the rate of foreclosure.
- No negative amortization. With negative amortization, the monthly mortgage payments cover only a portion of the interest due, and no principal. In these cases, the loan amount due actually increases over time.
- No lending without regard to the borrowers ability to repay the loan. This prohibits making high cost home loans if the lender does not reasonably believe the borrower can make the payments. The provision presumes that a person can repay the loan if the monthly payment is less than 50% of their gross income.
- No call provisions, no advance payments, and no fees to modify or amend the loan to defer payment. No increased interest rate after default, except for variable rate loans.
6. Will this law cut off mortgage credit to consumers?
No, in the vast majority of cases, this law will not cut off credit. Many of the targeted borrowers have good credit histories, or only minor credit problems, and qualify for loans with much better terms than what they were receiving. Legitimate lenders have continued to serve these borrowers. However, some of the pre-1149 abusive loans should simply not be made, because the borrower cannot afford them and will likely lose their home.
7. When did the law go into effect, and how is it enforced?
Most of the predatory lending restrictions in this act went into effect on July 1, 2000. The prohibitions against prepayment penalties and flipping went into effect on October 1, 1999. The NC Commissioner of Banks and the NC Department of Justice have enforcement responsibility for this law. Borrowers may also bring private legal action if they feel that their rights under this act have been violated.
8. Will this law solve the problem of predatory lending in NC?
This law will certainly not eliminate all predatory lending in our state. Federal reform is also needed to prevent federal law from weakening our NC consumer protections, and to set stricter national standards for high cost home loans.
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