North Carolina Passes Predatory Lending BillRobert S. Lotsteinpredatory lending, Senate Bill 1149, high cost home loan, HOEPA, Lotstein and Buckman(This Memoranda is one of a series written to track changes in the North Carolina bills.)
The mortgage industry must stay focused on efforts on the state level which attempt to place
unfair limitations on the mortgage industry. These efforts are not just damaging to industry but
are also detrimental to consumers. If these limitations become law, they will chill the availability
of certain types of loans now available to consumers. Several states approved or are considering
bills that would affect mortgage originations or servicing. Connecticut, Minnesota, Kansas,
Mississippi, North Carolina, and Texas have new laws in effect while Illinois, New York,
California, and New Jersey have proposed bills.
North Carolina Senate Bill 1149 on predatory lending was passed by both houses and signed into
law by the governor on July 22, 1999. After several months of negotiations, many of the
provisions discussed in the initial draft of the bill remain, such as imposition of restrictions and
limitations on high-cost home loans and the limitations on fees. Some of the consumer protection
provisions were eliminated from the final version of the bill, as well as the outright ban on
prepayment penalties. Detailed below are changes to the bill as initially drafted and summarized
in our Memorandum dated May 5, 1999.
Senate Bill 1149-Prohibition of Predatory Lending
The proposed revisions to Senate Bill 1149 eliminate the following provisions contained in the
initial draft of the bill:
++Eliminates the total prohibition against prepayment penalties. Prepayment penalties are
prohibited in connection with loans in which: (i) the principal amount of the loan is $150,000 or
less; (ii) the borrower is a natural person; (iii) the debt to be incurred is primarily for personal,
family, or household purposes; and, (iv) the loan is secured by a first lien mortgage or deed of
trust on the borrower's residence. For loans that do not fall within this definition, a lender and
borrower may agree as to the terms of any prepayment penalty.
++Eliminates several triggers for high cost home loan prohibitions and limitations contemplated
in the initial bill. In the previous draft of the bill, the triggers were much more expansive than
current HOEPA and than those proposed by consumer advocates in connection with mortgage
reform.
While the additional triggers created in connection with the charging of prepayment penalties
remain, the bill replaces the rate tests by incorporating the current triggers under HOEPA. The
bill also expands the points and fees test contained in the previous draft of the bill into two
prongs: if the total points and fees payable by the borrower at or before the loan closing exceeds
(i) 5% of the total loan amount if the total loan amount is $20,000 or more; or (ii) the lesser of
8% of the total loan amount or $1,000, if the total loan amount is less than $20,000. Please note
that certain discount points and prepayment penalties fees and penalties may be excluded from
the calculation of the total points and fees, with certain limitations, payable by the borrower.
++Eliminates the prohibition against mandatory arbitration in connection with high cost home
loans.
++Eliminates all proposed revisions to the chapter on "Monopolies, Trusts and Consumer
Protection" of the North Carolina statutes. However, it is replaced by a new provision to North
Carolina's chapter on "Interest," which provision contains prohibitions on the following: (i) the
financing, directly or indirectly, of credit life, disability, or unemployment insurance, or any
other life or health insurance premiums; (ii) "flipping" mortgage loans; and (iii) any loan made in
violation of North Carolina's chapter on consumer protection shall be considered to be usurious
and unlawful as an unfair or deceptive act or practice. Provisions that were eliminated from the
initial draft of the bill include prohibitions against (i)"packing" of mortgage loans, (ii) charging
consumers points, fees and other charges that significantly exceed the usual and customary
charges incurred as to be unconscionable; and, (iii) brokering or making loans with repayment
terms that clearly exceed the borrower's capacity to repay as to be unconscionable.
Unfortunately, the revised draft of this bill contains many of the same features of the initial draft
of the bill as well as the addition of some new provisions, including:
++Limitations on the fees that a lender may charge a borrower. In connection with certain loans,
under this proposal, fees, charged to a consumer by a lender, that are not expressly authorized in
the proposed bill cannot exceed, in the aggregate, 0.25% of the principal amount of the loan or
$150.00, whichever is greater. This provision was introduced in the initial draft of the bill.
++Does not authorize or prohibit a lender, borrower or any party to pay compensation to a
Mortgage Broker or Mortgage Banker for services provided in connection with certain loans.
Again, this is a troublesome provision.
While this provision does not prohibit direct or indirect compensation to a Mortgage Broker, it
does not authorize it. This provision could invite litigation over the legality of both direct and
indirect broker compensation. This provision was also introduced in the initial draft of the bill.
++Places limitations on deferral fees. Deferral fees: (i) may be charged only pursuant to a written
agreement; (ii) may not exceed the greater of 5% of each installment deferred or $50.00,
multiplied by the number of complete months in the deferral period; (iii) may not be charged if
any payment would have been timely and sufficient but for the previous deferral; (iv) may
include a late charge only if the amount deferred is not paid when due under the terms of the
deferral agreement and no new deferral agreement is entered into with respect to that installment;
and, (v) cannot be charged for modifying or extending the maturity date or the date a balloon
payment is due. The revised bill builds upon the limitations placed on deferral fees contained in
the initial bill.
++Creates restrictions on high cost mortgage loans. As discussed above, this provision is much
more expansive than current HOEPA. Many of the prohibitions and limitations contained in the
initial draft remain, such as: (i) no call provisions; (ii) prohibition of scheduled payments that are
twice as large as the average of earlier scheduled payments, i.e., no balloon payments (current
HOEPA-only limits their utilization); (iii) no modification or deferral fees; (iv) no lending
without home-ownership counseling; (v) no lending without due regard to repayment ability;
(vi) no financing of fees or charges, including those fees charged by third parties and any
prepayment penalties if those penalties are paid to the lender; and (vii) no benefit from
refinancing high cost home loans with new high cost home loans. Again, this proposal in many
ways mirrors the proposed expansion of HOEPA supported by consumer advocates; in other
ways, it goes beyond that proposed by the consumer advocates.
++Renders the making of a high cost loan in violation of the proposed revisions usurious and
unlawful as an unfair or deceptive act or practice.
This new provision differentiates between violations made in bad faith and those made
unintentionally. Those lenders who violate the proposed prohibitions and limitations of high cost
home loans in good faith or unintentionally will have the opportunity to cure. These provisions
are similar to those contemplated by the mortgage industry in the mortgage reform effort.
Conclusion
Despite the efforts of the North Carolina Association of Mortgage Brokers to halt its enactment,
this bill passed both houses and was presented to the Governor on Thursday, July 15. The
mortgage industry must remain ever vigilant that the consumer advocate groups do not obtain
many more successes on the state level.
Robert S. Lotstein is a partner with Buckman and Lotstein, PC, a Washington D.C. law firm
specializing in nationwide licensing and compliance for mortgage lenders, brokers, and bankers.
He may be reached at (202) 986-1200, ext. 110, or E-mail:
[email protected].
