Technology TransactionsNew North Carolina Mortgage Law Chills Washington Lobbyists
With a number of mortgage reform bills in Washington now under consideration, it"s interesting to see what progressive consumers and business folk can pull off by working together.
Last week the North Carolina Home Loan Protection Act (HB 1817) was signed by the state"s governor, a law which impacts some of the core mortgage issues now being debated in Washington.
And what does this little law say? According to the Center for Responsible Lending, the legislation:
Bans prepayment penalties that trap homeowners in high-cost loans.
Requires lenders to document borrower income -- a standard practice by responsible lenders through most of the history of mortgage lending.
Requires all broker compensation to be counted when determining whether a loan is or is not a high cost mortgage product.
Strengthens brokers" duties to serve the best interests of their clients.
Ensures that homeowners have the right to pursue legal actions when violations occur.
The particulars of this legislation are interesting. For instance, the law doesn"t ban prepayment penalties entirely, but it does prohibit their use with loans of $150,000 or less -- meaning that virtually all first-time and subprime borrowers are protected. As to those with mortgages above $150,000, prepayment penalties are often waived (or negotiated away) for borrowers with bigger loans and better credit.
The North Carolina approach to prepayment penalties is in the middle of the choices being discussed in Washington, choices which range from an outright ban to the industry preference which would allow prepayment penalties on all loan products for up to three years.
The new North Carolina law, which goes into effect January 1st, essentially ends stated-income loan applications for state-regulated loans, applications where borrowers estimate their income and lenders usually don"t check. Since stated-income loan applications represent additional risk, lenders get a higher interest rate when such applications are used -- even from borrowers with jobs, W-2 forms, payroll stubs and tax returns who can readily document their income.
Other than a higher interest rate, it"s hard to see why any lender would favor stated-income mortgage applications, what are generically known as liar loans. The FHA program, as one example, requires borrowers to document income and even though the FHA largely insures loans for entry-level borrowers the program has a default rate which is less than half the rate for private-sector subprime mortgages.
The North Carolina law says lenders have a responsibility for acting in the best interests of their borrowers -- not quite an agency obligation but a step in the right direction. In Washington, perhaps for the first time, there is now serious consideration to the idea that loan officers should have a fiduciary obligation to borrowers, a standard which does not currently exist.
Truth is, there is nothing in the North Carolina legislation which would have been anything other than standard practice among lenders 20 years ago: Know your borrower, document loans and don"t overcharge.
The new law, says the Center for Responsible Lending, has drawn remarkably diverse support. It says backers include regulators, key industry leaders and consumer groups as well as the North Carolina Attorney General and the state"s Commissioner of Banks. Other supporters include 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.
However, the North Carolina law presents a "problem" in Washington for those who say that progressive legislation is unwanted, unneeded and unnecessary. Plainly that"s not the case in North Carolina, and it"s not the case anywhere else.
The North Carolina legislation passed 33-15 in the State Senate, 113-0 in the State House and was instantly signed by Gov. Mike Easley. However, like all state financing regulations, the North Carolina law does not apply to mortgages from federally regulated lenders and there will be extensive industry efforts in Washington to assure that federal rules are not changed to parallel the North Carolina standards.
The argument on Capitol Hill will be that "uniform" lending standards nationwide benefit everyone. The term "uniform" is merely a way for lending lobbyists to mask their true goal, which is to use federal legislation to get rid of consumer protections such as those now mandated at the state level in North Carolina.
The government in North Carolina and the wide array of groups that supported HB 1817 ought to be congratulated. Now it"s time for regulators and lawmakers in other jurisdictions to pick up the ball. If it can be done in North Carolina, why not elsewhere?
For more articles by Peter G. Miller, please press here.