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Abolish Certain Deficiency Judgments (HB 1057)

October 1, 2009
Mortgage Lending
Bill Law

Full Session Law

This act, which became effective October 1, 2009, prohibits deficiency judgments on predatory home loans in North Carolina. A deficiency judgment is a lender's way of recovering the balance owed on a loan in the event that the proceeds of a foreclosure sale do not fully cover the amount owed.

Under this law, deficiency judgments are restricted under the following conditions:

  • The loan was secured by property that is or will be the borrower's principal dwelling
  • The loan principal does not exceed the conforming loan size for a single-family dwelling, as established by Fannie Mae
  • The loan was either:
    • A nontraditional loan (e.g., interest-only or negative amortization) at the time it was originated, or
    • A rate-spread loan made anytime after 2004, whether it was rate-spread at the time of loan origination or became such as the result of a modification made after 2004

For these nontraditional or rate-spread loans:

  • If the loan was made in 2005 or after, deficiency judgments are not allowed, unless the lender pursues a judicial foreclosure
  • If the loan made in 2010 and beyond, deficiency judgments are disallowed on all regardless of the method of foreclosure

This bar on deficiency judgments does not apply to the following types of loans:

  • Home equity lines of credit
  • Construction loans
  • Reverse mortgages
  • Bridge loans with a term of 12 months or less
  • Subordinate loans (e.g., second liens), unless made contemporaneously with a rate spread or nontraditional loan subject to these provisions
  • Loans in which the lender is a natural person not engaged in the business of lending who makes no more than one loan a year