N.C.'s law is superior on subprime lending.

• Position: Economic Outlook - Interview

North Carolina's predatory-lending law, one of the nation's first, took a hit in early 2004 when the U.S. Office of the Comptroller of the Currency weakened states' authority over the subprime-lending practices of nationally chartered banks, which are regulated by the federal government. State officials have said they will ignore the federal rules. Michael Stegman, director of the Center for Community Capitalism at UNC Chapel Hill, has studied the North Carolina law and discusses its impact and the OCC rules.

BNC: What do the OCC rules say?

Stegman: They exempt banks with national charters from state predatory-lending laws. The OCC argues that most of the predatory-lending problems are not caused by national banks. In North Carolina, that includes institutions such as Bank of America and Wachovia. So the agency says upholding the supremacy of federal rules over national banks isn't going to adversely affect the subprime market.

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What's the subprime market?

Most abusive lending centers are in the subprime market--that part of the lending market for people without stellar credit records or who have had problems paying off consumer loans. Because their credit is blemished, these consumers pay higher interest rates than they would on standard loans.

How is that abusive?

It's a collection of practices that's considered abusive. Characteristic of what's worst is lenders constantly encouraging borrowers to refinance, or flip, loans for a variety of reasons, and the lenders get high fees each time it happens. Another is life insurance where the premium is financed at high interest rates as part of the home mortgage. North Carolina law bans these practices as well as mortgage prepayment penalties that make it financially hard or impossible for qualified borrowers to switch to a lower-interest-rate loan.

How is North Carolina's law stricter than federal rules?

The federal rules give the OCC much more generalized power because they don't identify the different types of abusive lending that the North Carolina law does. The agency argues that it can adequately police predatory-lending practices under its authority to assure the safety and soundness of federally chartered banks. It is very hard to believe it can protect North Carolina consumers the way the state law does. The state law covers all banks in North Carolina, whether they...