As the disastrous consequences of reckless subprime lending continue to mount, North Carolina lawmakers are standing up for homeowners by making it tougher to offer abusive home loans. This past month, the North Carolina Home Loan Protection Act (HB 1817) passed the State Senate 33-15 and the State House 113-0. Governor Mike Easley, a strong supporter of the bill, held a signing ceremony to usher in the new law, which offers stronger protections against dangerous subprime mortgages.
The new law directly addresses the current subprime crisis, weeding out questionable business practices on mortgage financing that are driving massive subprime foreclosures. A key provision in the law requires lenders to verify that their customers have the ability to repay the loans they are offered. This is particularly important for subprime mortgages with adjustable interest rates, since lenders must consider future rate increases before approving loans.
"North Carolina is simply saying that lenders must return to common-sense underwriting practices," said Michael Calhoun, President of the Center for Responsible Lending. "Until the subprime market veered out of control, all reputable lenders documented income and verified a home buyer’s ability to repay the mortgage."
The new law updates the definition of protected mortgages loans to make it consistent with a widely used federal definition, ensuring that most subprime mortgages will receive added protections.
These are among the key provisions in the law:
— Bans costly prepayment penalties that trap homeowners in high-cost
loans.
— Requires lenders to document income — a standard practice by
responsible lenders through most of the history of mortgage lending.
— Includes all broker compensation when determining whether a loan is
high cost.
— Strengthens brokers’ duties to serve the best interests of their
clients.
— Ensures that homeowners have the right to pursue legal actions when
violations occur.
Broad Support
The new law drew remarkably diverse support, including support from regulators and key industry leaders as well as consumer groups. North Carolina’s Attorney General was a strong and important ally in this fight, as was the Commissioner of Banks. Among the dozens of organizations behind the bill were the N.C. Bankers’ Association, the N.C. Credit Union League, the N.C. Justice Center, the N.C. Council of Churches, and the state chapters of the NAACP, AARP and the AFL-CIO. The broad support underscores the point that the new protections will be good for consumers, and they will be good for responsible businesses, too.
Building on Previous Protections
In 1999, North Carolina passed the first comprehensive law aimed at predatory lending on home loans. That law — which became a model for many other states — focused on equity-stripping practices, such as loan flipping and abusive single-premium credit insurance. This "first wave"
of state protections did not address ability-to-repay requirements, since, until recently, most lenders performed such assessments routinely. North Carolina joins Ohio, Maine and Minnesota in taking the lead in combating a second wave of predatory lending practices, one that has been dominated by dangerous loan products and loose standards for loan approvals.