Protecting NC Homeowners and Reducing Foreclosures:

The 2007 "PROTECT HOMEOWNERS & REDUCE FORECLOSURE" LAW (HB 1374)

What does the new mortgage servicing and foreclosure law do?

The 2007 NC "Protect Homeowners & Reduce Foreclosure" law, House Bill 1374, makes the foreclosure process fairer and helps protect NC homeowners from abusive mortgage loan servicing, such as misapplied payments, illegal fees and mishandled escrow accounts. These practices lead to default and contribute to foreclosures that could be prevented.  HB 1374 requires loan servicers to notify homeowners of any fees charged on the loan and to provide a full accounting of how payments are handled and fees assessed. In the notification, servicers must itemize the fees owed and provide the homeowners better information about their rights. This law also reverses two recent NC Supreme Court decisions that made it harder for homeowners to pursue justice for illegal 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.   Nationwide, dangerous lending practices, loose underwriting and abusive servicing in the subprime market have put 2.2 million families at risk of losing their homes to foreclosure.  Few of these homeowners will be able to sell or refinance.  The resulting foreclosures have significant "spillover" effects, as surrounding properties lose values and the entire economy suffers.  Loan servicers can do much to prevent foreclosures, but the practices of some servicers are so bad that they either create a financial problem for the homeowner or make an existing problem even harder to resolve. This new law is designed to protect current homeowners and reduce unnecessary foreclosures.

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 protecting homeowners against predatory lending, passing significant protections in 1999, 2001 and 2007.  Most of these previous laws have focused on lenders and brokers, not servicers .  This law focuses on protecting borrowers from abusive loan servicing and making the foreclosure process fairer by improving the information that struggling homeowners receive.  It also reverses two recent NC Supreme Court decisions that made it harder for homeowners to sue for illegal practices.

How does this law protect homeowners from loan servicing abuses?

HB 1374 requires loan servicers to notify homeowners of any fees charged on the loan and provide a full accounting of how payments are handled and fees are assessed.  Specifically, the new law:

  • Restricts the amount and conditions under which fees may be assessed by a servicer.
  • Fees must be assessed within 45 days and explained in a statement mailed within 30 days. If the servicer does not assess the fee and send the statement within these time limits, they can no longer collect the fee. 
  • Establishes the proper handling of escrow funds by the servicer. 
  • Creates a state version of the "qualified written request" (or QWR).
  • Requires the servicer to respond to requests for information within 10 business days and to maintain records of written requests for information made by the homeowner.
  • Homeowner is entitled to receive a copy of the original note and a statement of the full payment history within 25 business days of making the request.

How does this law make the foreclosure process fairer for homeowners?

When a lender sends a homeowner a notice of foreclosure, the first step in starting the process of foreclosure, this law requires them to send additional information, including:

  • Details about the loan and money they claim is owed, including:
    • An itemized, written statement of the account including principal, interest, and any other fees
    • A list of any borrower requests for information during the prior two years and how the lender responded to the requests
  • Details about the homeowner's rights during the foreclosure process
  • Information about where to seek legal advice. 

How does a request for information make the foreclosure process fairer for homeowners?

Abusive servicing companies often delay or even fail to respond to homeowners' questions about their loan. In the past few years, some homes were sold in foreclosure before the homeowner had received the answers to basic questions about fees and payments. House Bill 1374 provides a specific way for homeowners to ask questions about the servicing of their mortgage loan and receive answers in a timely manner.

How does a homeowner make a request for information?

A request for information must be in writing by homeowners, to his/her servicer outlining any problems or questions regarding the servicing of their loan, including escrow account questions.

Within 10 business days of receipt of the complaint the servicer must send the homeowner a written statement that includes:

  • Whether account is current or in default. If in default, why and when the account went into default,
  • The balance due specifying the principal amount, amount of funds held in a suspense account, and amount and status of escrow account,
  • Identity and contact information for owner of the loan, and
  • Contact information for servicer representative who can answer questions and resolve disputes.

Within 25 business days the servicer must resolve the complaint by correcting the account, if appropriate, and provide a copy of the original note and the following itemized information:

  • All fees and charges, and
  • Full payment history, including any escrow or suspense account activity.

The clock for "date of request" begins no later than 30 days from the date the servicer receives the request. Until the complaint is resolved, homeowners should continue to make the servicer's required payment. A foreclosure cannot proceed until a servicer complies with a request for information.

What is the difference between this NC "request for information" and the federal "qualified written request" or QWR?

A "qualified written request" (QWR) is part of federal law under Section 6 of the Real Estate Settlement Procedures Act (RESPA). A homeowner writes a QWR to his/her servicer outlining any problems with the servicing of their loan (including escrow account questions). The servicer must acknowledge the complaint in writing within 20 business days of receipt of the complaint. Within 60 business days the servicer must resolve the complaint by correcting the account or giving a statement of the reasons for its position. Until the complaint is resolved, homeowners should continue to make the servicer's required payment. 

North Carolina's request for information is, in essence, a state version of federal law's qualified written request. Servicers have to respond much more quickly to a request for information under NC law than they do under federal law.  In addition, the NC Attorney General and Commissioner of Banks may enforce the NC provision and NC borrowers can bring legal action, providing additional protection for NC homeowners.

What NC Supreme Court decisions are reversed and why? 

  • Shepard: Removing unduly restrictive time limits on usury claims.  This law reverses the Shepard decision by the NC Supreme Court, which had made it extremely hard for a NC homeowner to bring a usury claim against their lender, because the Court said the clock on the two-year statute of limitations started the day the loan was closed.  So, if homeowners discovered a problem two years and one day after the loan was closed, they could not challenge the loan based on North Carolina's usury laws.  This law reversed this Supreme Court decision by making it clear that the two-year statute of limitations begins anew with each usurious loan payment the homeowner makes.  Now, even more than two years after loan closing, homeowners who discover a problem can still challenge the loan.
  • Skinner: Removing a technicality that shielded lenders from legal actions.  This law also reverses the NC Supreme Court's Skinner decision, which made it difficult for a homeowner to bring legal claims against an out-of-state trust that held their loan.   Loans are often sold to out-of-state trusts, and this practice increased as a way to protect the lender or investor from legal claims.  HB 1374 reversed this decision, making it clear that NC courts have jurisdiction over home loans made for primary residences located in the state.

When did this law go into effect, and how is it enforced?

The Shepard and Skinner case reversals were effective August 16, 2007. Other sections went into effect April 1, 2008.  The NC Commissioner of Banks and the NC Attorney General have enforcement responsibility for this law.  Homeowners may also bring legal action if they feel that their rights under this act have been violated.

Could federal law preempt this state law?

Yes, Congress can enact federal legislation that overrides state lending laws. 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.  

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 (HB 1817):  Summary and bill text 
2007 NC Protect Homeowners & Reduce Foreclosures Law (HB 1374):  Summary & bill text

North Carolina Commissioner of Banks' (www.nccob.com) 2007 NC Predatory Lending Law: Legislative Update Letter and Summary