North Carolina's predatory mortgage lending law: 1999 N.C. Sess. Laws Chap. 332.

• Author: Morton, Heather
• Position: On Consideration

THE ACT'S GOALS

* Prohibit prepayment penalties on first-lien mortgages of less than $150,000.

* Prohibit lenders from refinancing an existing home loan when there is no reasonable, tangible net benefit to a borrower (commonly referred to as flipping).

* Require that would-be borrowers of high-cost loans receive financial counseling before entering into the transaction.

* In high-cost home loan transactions, prohibit the financing of fees, balloon payments, negative amortization, and lending without regard to a homeowner's ability to repay. A high-cost home loan is defined generally as a loan with fees in excess of 5 percent, or annual percentage rates over the federal law trigger level, which is currently more than 8 percent above comparable U.S. Treasury securities.

* Prohibit the financing of single premium credit insurance.

* Prohibit lenders from recommending that a borrower who is attempting to refinance a home loan default on an existing loan.

Senate Bill 1149 passed both houses of the North Carolina General Assembly by an overwhelming majority in July 1999. The law addresses unfair and deceptive practices in the prime and subprime mortgage lending industry. Prime loans are granted to people with good credit histories; subprime loans go to individuals with limited credit histories or problem credit.

"Our goal was to protect consumers from abusive practices that can rob them of their homes without restricting consumers' access to credit," says North Carolina Attorney General Roy A. Cooper III, former Senate majority leader who sponsored the law.

FIVE YEARS LATER

Mortgage lenders have been operating under the law for five years, yet there are still questions about how well the law is working for subprime borrowers. Four studies have examined the effects of the law, and each agrees that, overall, subprime loans decreased after the law went into effect. But whether that is because the law is achieving its goal of protecting North Carolina citizens from abusive mortgage lending practices, or merely limiting access to mortgage loans for subprime borrowers remains unclear.

Two studies found that the law is protecting North Carolina citizens from predatory loan practices and two others found that the law restricts the flow of credit in the state.

"The data are good, but not perfect," says North Carolina Commissioner of Banks Joseph A. Smith, in explaining the conflicting results. "There is a good faith disagreement whether having an...