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Homeowner and Homebuyer Protection Act (SB 1015)

July 20, 2010
Mortgage Lending
Bill Law

Full Session Law

This legislation, effective October 1, 2010, provides basic protections for North Carolinians against foreclosure "rescue" scams, and abuses related to option-to-purchase and contract-for-deed contracts. Violations of this law constitute an unfair trade practice and the injured party may sue to recover damages, obtain declaratory or equitable relief, or rescind the transaction, in addition to any other remedy provided by law.

This legislation, effective October 1, 2010, provides basic protections for North Carolinians against foreclosure "rescue" scams, and abuses related to option-to-purchase and contract-for-deed contracts. Violations of this law constitute an unfair trade practice and the injured party may sue to recover damages, obtain declaratory or equitable relief, or rescind the transaction, in addition to any other remedy provided by law.

Foreclosure Rescue Scams

The act prohibits certain parties from having property transferred to them through "foreclosure prevention transactions", unless they pay the homeowner at least 50% of the fair market value of the property. This prohibition will prevent unconscionable transactions in which vulnerable homeowners are persuaded to give up title to their homes for significantly less than they are worth.

Foreclosure prevention transactions are defined as transfers of residential real property, in which the transfers have all the following features:

  • The transferred property is the principal residence of the transferor (i.e., the homeowner who is conveying the property to another)
  • The homeowner is in default (over 60 days delinquent on a loan secured by the property, including real estate taxes) or in legal proceedings to foreclose on the property
  • The transferee (i.e., the party receiving the property) represents that the transfer will allow the transferor to prevent, delay, or reverse the effect of foreclosure, and to remain in residence
  • The transferor retains an interest in the property after the transfer, including but not limited to any of the following:
    • Tenancy
    • Lease-purchase agreement
    • Option to reacquire

Under this law, the contracts for foreclosure prevention transactions must be in writing. The fair market value of the property must be determined by an appraisal conducted no more than 90 days prior to the transfer. If a homeowner enters a transaction that violates this law, he or she may sue to recover damages, void the transaction, or seek other relief.

This act does not apply to transactions where the transferee is:

  • A member of the transferor's immediate family
  • A government agency or organization
  • A bank, savings institution or credit union, or their subsidiaries or affiliates
  • A mortgage lender or servicer licensed by the NC Commissioner of Banks
  • A bona fide purchaser for value

Purchase Option Contracts

A purchase option contract is a contract that provides the purchaser a right to purchase the property within a specified timeframe, in exchange for a fee.

This legislation requires that the lease and purchase option contracts be executed at the same time, and that such contracts be written and recorded with the county's register of deeds. The written contract must include certain pertinent details, including the purchaser's right to cancel and right to cure a default, which this act establishes. The seller is responsible for recording the contract with the register of deeds within five business days of execution.

The purchaser's right to cancel extends to midnight of the third business day after the execution of the contract or delivery of a copy of the contract with all required disclosures, whichever is later. If he or she cancels the contract within that time, the seller is required to return all payments made for the contract, minus the fair rental value for any time that the option purchaser possessed the property and any damage beyond normal wear and tear, within 10 days.

The purchase option cannot be forfeited unless the purchaser has breached an obligation that the contract specifies may result in forfeiture. If such a default occurs, the option seller must notify the purchaser of the default, and his or her intent to forfeit if the breach is not cured. The purchaser has the right to cure a default (e.g., if the default is a failure to pay an installment, the purchaser can cure by making the payment) once in each 12-month period, and must be given at least 30 days to cure.

If the option seller defaults on a loan secured by the property during the option period, the purchaser can either exercise the option to purchase, or cancel and rescind the contract. If he or she cancels the contract, the seller must return all moneys paid by the purchaser, minus the fair rental value for the time the purchaser possessed the property and any damage beyond normal wear and tear.

For purposes of this act, the purchase option must be for real property located in North Carolina that includes at least one residential structure designed for one to four families. The option purchaser must also use the property as his or her principal dwelling, or plan to do so.

Contracts for Deed

Under this legislation, a contract for deed is an agreement to sell a property interest in exchange for five or more payments, not including the down payment, with the seller retaining title to the property until the payments are completed. This act applies to real estate with a residential structure designed for one to four families, or a manufactured home with a purchase price of at least $5000, which the purchaser occupies as a principal dwelling.

Such contracts must be in writing, and the seller must record with the register of deeds within five business days of execution. The contract must include certain disclosures and details of the agreement. Among the required elements are any charges or fees apart from the sale price, the interest rate on the unpaid balance, and notice of any encumbrances or pending orders negatively affecting the property of which the seller is aware. The purchaser must be able to make accelerated payments or prepayments without penalty, unless the property is encumbered by a deed of trust whose loan includes a prepayment penalty. Late fees may only be charged for payments more than 15 days past due, and may not exceed four percent of the payment amount due. The contract must also give notice of the purchaser's right to cancel the contract until midnight of the third business day after the contract is executed or a copy is delivered, whichever is later. If the purchaser cancels within that time, the seller must return any payments received within 10 days, minus the fair rental value for the time the purchaser possessed the property and any damage beyond normal wear and tear.

The seller may not execute a contract for deed if he or she does not hold title to the property. If there are any mortgages or encumbrances on the property, they must be in the seller's name, and the seller must continue to make timely payments on the mortgage or encumbrance, unless as a condition of the contract the purchaser agreed to make improvements to the property.

The purchaser's rights cannot be forfeited unless he or she breaches an express obligation that the contract establishes may result in forfeiture. If such a breach occurs, the seller must notify the purchaser of the specific default, and the seller's intent to forfeit if the default is not cured by means which the seller must specify. The purchaser must be given at least 30 days to cure, from the date the notice is served.

At least once per 12-month period, the seller must provide an account statement to the purchaser, indicating the amount paid, the amount still owed, the number of payments remaining, the amount paid for taxes and insurance, and the balance on any loans secured by the property.

The act prohibits certain parties from having property transferred to them through "foreclosure prevention transactions", unless they pay the homeowner at least 50% of the fair market value of the property. This prohibition will prevent unconscionable transactions in which vulnerable homeowners are persuaded to give up title to their homes for significantly less than they are worth.

Foreclosure prevention transactions are defined as transfers of residential real property, in which the transfers have all the following features:

  • The transferred property is the principal residence of the transferor (i.e., the homeowner who is conveying the property to another)
  • The homeowner is in default (over 60 days delinquent on a loan secured by the property, including real estate taxes) or in legal proceedings to foreclose on the property
  • The transferee (i.e., the party receiving the property) represents that the transfer will allow the transferor to prevent, delay, or reverse the effect of foreclosure, and to remain in residence
  • The transferor retains an interest in the property after the transfer, including but not limited to any of the following:
    • Tenancy
    • Lease-purchase agreement
    • Option to reacquire

Under this law, the contracts for foreclosure prevention transactions must be in writing. The fair market value of the property must be determined by an appraisal conducted no more than 90 days prior to the transfer. If a homeowner enters a transaction that violates this law, he or she may sue to recover damages, void the transaction, or seek other relief.

This act does not apply to transactions where the transferee is:

  • A member of the transferor's immediate family
  • A government agency or organization
  • A bank, savings institution or credit union, or their subsidiaries or affiliates
  • A mortgage lender or servicer licensed by the NC Commissioner of Banks
  • A bona fide purchaser for value

Purchase Option Contracts

A purchase option contract is a contract that provides the purchaser a right to purchase the property within a specified timeframe, in exchange for a fee.

This legislation requires that the lease and purchase option contracts be executed at the same time, and that such contracts be written and recorded with the county's register of deeds. The written contract must include certain pertinent details, including the purchaser's right to cancel and right to cure a default, which this act establishes. The seller is responsible for recording the contract with the register of deeds within five business days of execution.

The purchaser's right to cancel extends to midnight of the third business day after the execution of the contract or delivery of a copy of the contract with all required disclosures, whichever is later. If he or she cancels the contract within that time, the seller is required to return all payments made for the contract, minus the fair rental value for any time that the option purchaser possessed the property and any damage beyond normal wear and tear, within 10 days.

The purchase option cannot be forfeited unless the purchaser has breached an obligation that the contract specifies may result in forfeiture. If such a default occurs, the option seller must notify the purchaser of the default, and his or her intent to forfeit if the breach is not cured. The purchaser has the right to cure a default (e.g., if the default is a failure to pay an installment, the purchaser can cure by making the payment) once in each 12-month period, and must be given at least 30 days to cure.

If the option seller defaults on a loan secured by the property during the option period, the purchaser can either exercise the option to purchase, or cancel and rescind the contract. If he or she cancels the contract, the seller must return all moneys paid by the purchaser, minus the fair rental value for the time the purchaser possessed the property and any damage beyond normal wear and tear.

For purposes of this act, the purchase option must be for real property located in North Carolina that includes at least one residential structure designed for one to four families. The option purchaser must also use the property as his or her principal dwelling, or plan to do so.

Contracts for Deed

Under this legislation, a contract for deed is an agreement to sell a property interest in exchange for five or more payments, not including the down payment, with the seller retaining title to the property until the payments are completed. This act applies to real estate with a residential structure designed for one to four families, or a manufactured home with a purchase price of at least $5000, which the purchaser occupies as a principal dwelling.

Such contracts must be in writing, and the seller must record with the register of deeds within five business days of execution. The contract must include certain disclosures and details of the agreement. Among the required elements are any charges or fees apart from the sale price, the interest rate on the unpaid balance, and notice of any encumbrances or pending orders negatively affecting the property of which the seller is aware. The purchaser must be able to make accelerated payments or prepayments without penalty, unless the property is encumbered by a deed of trust whose loan includes a prepayment penalty. Late fees may only be charged for payments more than 15 days past due, and may not exceed four percent of the payment amount due. The contract must also give notice of the purchaser's right to cancel the contract until midnight of the third business day after the contract is executed or a copy is delivered, whichever is later. If the purchaser cancels within that time, the seller must return any payments received within 10 days, minus the fair rental value for the time the purchaser possessed the property and any damage beyond normal wear and tear.

The seller may not execute a contract for deed if he or she does not hold title to the property. If there are any mortgages or encumbrances on the property, they must be in the seller's name, and the seller must continue to make timely payments on the mortgage or encumbrance, unless as a condition of the contract the purchaser agreed to make improvements to the property.

The purchaser's rights cannot be forfeited unless he or she breaches an express obligation that the contract establishes may result in forfeiture. If such a breach occurs, the seller must notify the purchaser of the specific default, and the seller's intent to forfeit if the default is not cured by means which the seller must specify. The purchaser must be given at least 30 days to cure, from the date the notice is served.

At least once per 12-month period, the seller must provide an account statement to the purchaser, indicating the amount paid, the amount still owed, the number of payments remaining, the amount paid for taxes and insurance, and the balance on any loans secured by the property.