2007 NC PREDATORY LENDING LAW (HB 1817)
FREQUENTLY ASKED QUESTIONS
What does the new predatory lending law do?
The 2007 North Carolina Predatory Lending Law, House Bill 1817, protects North Carolina homeowners against dangerous lending practices that put them at high risk of losing their home. Specifically, for subprime loans, the law bans prepayment penalties, prevents lenders from approving loans based solely on artificially low interest rates that the lender knows will rise, and requires verification and documentation that the borrower can make the monthly payments including property taxes and insurance. The law requires mortgage brokers to find a loan that is "reasonably advantageous" to the borrower, and changes the 1999 predatory lending law to include broker compensation (known as "yield spread premiums") when determining which loans receive extra protections. The bill also allows the NC Commissioner of Banks to ban abusive lending practices.
Why is this law necessary?
North Carolina, like the rest of the country, is experiencing an epidemic of foreclosures caused by abusive subprime mortgages. Dangerous lending practices and loose underwriting in the subprime market have put 2.2 million families at risk of losing their homes to foreclosure. These families are trapped in "exploding" adjustable rate mortgages (ARMs) that are due to increase to unaffordable interest rates. In fact, hundreds of thousands of families face rate increases at the same time that their homes are worth less than the balance on their mortgage. Few of these homeowners will be able to sell or refinance. Loan servicers who could modify these loans are not doing so. Unfortunately, incentives to make abusive loans have not gone away. This new law is designed to ensure that we prevent another subprime disaster in the future.
N.C. has some of the strongest anti-predatory lending laws in the country. Why didn't laws already on the books stop recent lending abuses?
It's true that NC has been a leader in predatory lending reform, passing significant protections in 1999 and 2001. These two NC laws provided substantial protections, but those laws couldn't anticipate the emergence of dangerous hybrid loan products ("exploding" ARMs, option pay loans, and others) coupled with increasingly loose underwriting standards. At the time the earlier laws were written, subprime lending was a very small portion of the overall market and these risky loan products did not exist. However, the subprime market expanded enormously in a short time, and exploding ARMs quickly became the dominant type of subprime loan offered. For several years, dangerous products and market abuses were masked by record-setting housing appreciation and repeated refinancing to avoid the interest rate increases. Over the last year, the subprime foreclosure crisis began to unfold as this house of cards fell. The 2007 NC Predatory Lending Law (HB 1817) addresses loan origination and underwriting abuses that have contributed to the most recent wave of predatory lending.
What loans are covered by this new law?
HB 1817 covers subprime loans as defined under the federal Home Mortgage Disclosure Act (HMDA). As of December 2007, loans with an annualized interest rate over approximately 8% would be covered (3% over the comparable US Treasury rate).
Are mobile homes covered?
Yes, mobile homes are covered by HB 1817 if the home loan is for the borrower's primary residence and is secured by a security interest in the manufactured home or by a mortgage or deed of trust on real property that has or will have a manufactured home on it.
What underwriting protections apply?
For subprime loans, new protections include:
- Prohibit prepayment penalties;
- Require underwriting to ensure the borrower's ability to repay at the fully indexed rate, not just the initial teaser rate; and
- Require that the borrower's income used to underwrite the loan must be verified and documented, ending the practice of using stated income or no documentation (no-doc) loans to boost interest rates and fees charged. All borrowers are able to provide some form of income verification.
How does the law strengthen the 1999 N.C Predatory Lending Law?
Under the 1999 law, not all of a mortgage broker's compensation was included in the calculation to determine whether a loan is "high cost" and thus qualifies for extra protections. (Loans with fees that add up to 5% or more are designated as "high cost" under the law.) The 1999 law included front-end compensation in determining a loan's status under the law, but it did not include back-end compensation—most notably, "yield-spread premiums." A yield spread premium (YSP) is a kickback paid to a broker for placing a borrower in a higher interest rate than the best loan for which they qualify from that lender. Essentially the lender is splitting the extra profit on the higher interest rate loan with the mortgage broker. HB 1817 strengthens the 1999 law by including YSPs in the costs used to determine whether a loan is "high cost," and thus triggers additional protections.
How does the law strengthen the 2001 N.C. Mortgage Lending Law?
The 2001 NC Mortgage Lending Law (SB 904) includes a broker duty to provide borrowers with a "reasonably advantageous loan from lenders with whom the broker regularly does business." This loophole allowed brokers who did business only with high-cost subprime lenders to place borrowers in a more expensive loan, rather than a better loan from another lender. HB 1817 strengthens this duty by removing the language that limited it to "lenders with whom the broker regularly does business", clarifying that the broker's duty goes beyond simply connecting a borrower with a lender that will make a loan.
Six new statutory duties of mortgage brokers include:
- To timely and clearly disclose information to the borrower, as specified by the NC Commissioner of Banks, including total compensation the broker expects to receive;
- To notify lenders before closing if the broker knows that more than one loan is being made by different lenders. This avoids a situation when a lender thinks they are lending at 80% loan to value (LTV), when in fact another loan is closed that takes the overall LTV to 100% or higher;
- Offer services to all applicants on an equal basis;
- Use reasonable means to provide the borrower with prompt credit decisions, and when credit is denied, comply with notification requirements;
- When credit is denied, allow the applicant to correct or explain the adverse or inadequate information, and provide additional information; and
- Ensure that advertising materials make the borrower aware that the broker cannot engage in prohibited discrimination.
In addition, the following mortgage broker activities are prohibited:
- Brokering a subprime adjustable rate loan (ARM) without disclosing to the borrower the terms and costs associated with a fixed rate loan from the same lender at the lowest APR for which the borrower qualifies;
- Failing to comply with all applicable federal laws and regulations; and
- Engaging in unfair, misleading, or deceptive advertising related to soliciting a mortgage loan.
When does the law go into effect, and how is it enforced?
HB 1817 applies to subprime loans written on or after January 1, 2008. The NC Commissioner of Banks and the NC Department of Justice have enforcement responsibility for this law. Borrowers may also bring private legal action to address any violations.
How can we protect against new lending abuses not covered by this law?
To protect against lenders who may try to circumvent the provisions of this new law, HB 1817 authorizes the NC Commissioner of Banks to prohibit, by order, any practices that he finds to be unfair, deceptive, or designed to evade NC statutes or that are not in the best interest of the borrowing public. This new authority will be very important in reining in creative attempts to circumvent our lending laws.
Could this state law be preempted by federal law?
Unfortunately, yes. Congress can enact federal legislation that overrides state lending laws. In fact, current federal proposals would do exactly that, for portions of this law. To find out more about the national foreclosure crisis and Congressional mortgage lending bills, join the NC Coalition for Responsible Lending and sign up to receive national email updates from the Center for Responsible Lending.
Get more information about mortgage law in North Carolina
1999 NC Predatory Lending Law: Summary, Frequently Asked Questions, and bill text
2001 NC Mortgage Brokers Law: Summary, Frequently Asked Questions, and bill text
2007 NC Predatory Lending Law: Summary and bill text
Read what the North Carolina Commissioner of Banks has to say about the 2007 NC Predatory Lending Law: Legislative Update Letter and Summary.
