Homeownership is part of the American Dream, but for many North Carolinians, that dream has become a nightmare as predatory lending practices in the subprime market result in increasing numbers of foreclosures. Last month, two new bills to prevent foreclosures in North Carolina became law. The bills - the North Carolina Home Loan Protection Act (HB1817), and Protect Homeowners Reduce Foreclosures (HB 1374) - are the result of efforts by the NC Coalition for Responsible Lending, of which the NC State AFL-CIO is a proud member.
HB 1374 Protect Homeowners – Reduce Foreclosures is designed to help North Carolina homeowners avoid foreclosure by making the foreclosure process clearer and by helping protect homeowners from abusive mortgage loan servicing. The legislation requires loan servicers to notify homeowners of any fees charged on the loan and provide a full accounting of how payments are handled and fees accessed. HB 1374 also makes the foreclosure process fairer by requiring servicers to give a detailed accounting of the sums claimed to be owed at foreclosure and by giving homeowners better information about their rights in the foreclosure process. Finally, the legislation reverses two recent NC Supreme Court decisions that made it harder for borrowers to sue for illegal lending practices.
HB 1817 NC Home Loan Protection Act protects borrowers during the underwriting and origination process by placing new requirements and restrictions on mortgage brokers and by reining in abusive and risky underwriting practices for rate spread loans. New protections for rate spread loans prohibit prepayment penalties and require documentation of ability to repay.
HB 1817’s major reforms:
- Creates a new class of loans called “rate spread loans”, which follow a federal definition of subprime loans based on the APR (currently about 8%). New protections apply to these “rate spread loans”:
- No prepayment penalties
- Lender must ensure that the borrower can afford to repay the loan, considering the fully indexed rate, not the initial teaser rate.
- Lender must document the borrower’s income (no more “stated doc” loans)
- Amends the 1999 NC Predatory Lending Law by including yield spread premiums (broker kickbacks) in the points and fees test for high cost loans. If a loan is determined to be a high cost loan, a number of other additional protections apply.
- Amends the 2001 NC Mortgage Broker Licensing Law by strengthening broker duties. Most importantly, it removed the loophole in the duty of brokers to provide borrowers “a reasonably advantageous loan”. Previously, this duty was limited in that it was based on loans from lenders that the broker regularly did business with. This loophole allowed brokers who only dealt with subprime lenders to put borrowers in more expensive loans even when the borrower qualified for prime rates. The new language requires that brokers ensure that the loan make a modicum of sense for the borrower.
- Gives the NC Commissioner of Banks to authority to ban practices found to be unfair, deceptive, designed to evade state law, or not in the best interest of the borrowing public.
In short, the new law requires lenders to return to common-sense underwriting practices.