The same state that got the ball rolling on the state level in 1999 to combat predatory lending is at it again, this time to address subprime loan ills.
Last week North Carolina Governor Mike Easy signed legislation to weed out questionable business practices on subprime mortgages.
The North Carolina Home Loan Protection Act (HB 1817) passed through the state legislature in four months with bipartisan support -- 33 to 15 in the State Senate and 113 to 0 in the State House of Representatives.
Subprime loans, previously too often written for those who couldn't afford rate adjustments that came later, have been the primary culprit in the nation's mounting foreclosure levels.
A key provision in the law requires lenders to verify that their customers have the ability to repay loans, after the initial interest rate adjusts upward. A similar provision was included in the recent federal regulatory overhaul Statement On Subprime Mortgage Lending, but that applied only to federally regulated lenders.
A group of states quickly followed suit with "CSBS/AARMR/CACCA Guidance on Sub-prime Mortgage Products and Lending Practices" , but to put teeth in the guidance state-level regulatory mandates are necessary.
"North Carolina is simply saying that lenders must return to common-sense underwriting practices," said Michael Calhoun, President of the Center for Responsible Lending an outgrowth of the state's predatory lending reform effort.
"Until the subprime market veered out of control, all reputable lenders documented income and verified a home buyer's ability to repay the mortgage," Calhoun said.
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.
North Carolina's new law also includes provisions that:
- Ban costly prepayment penalties that trap homeowners in high-cost loans.
- Require lenders to document income.
- Includes all broker compensation in 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.
Support from the new law came not only from bi-partisan legislative support, but also from key industry leaders and consumer groups, including the North Carolina's Bankers' Association, the North Carolina Credit Union League, the North Carolina Council of Churches and state chapters of the NAACP, AARP and the AFL-CIO.
In 1999, North Carolina's comprehensive law aimed at predatory lending became a model for many states. It focused on equity-stripping practices, loan flipping and abusive single-premium credit insurance.
The initial law didn't address ability-to-repay because, at the time, lenders assessed that ability.
