An anti-predatory lending law enacted in this state more than three years ago has done exactly what was intended-protect consumers from unscrupulous lenders without limiting their access to subprime credit, said an author of a study on the impact of the law in that state.
Using a database of 3.3-million subprime loans- provided under license by Loan Performance, Inc.- made in North Carolina and the rest of the nation from 1998 to 2002-before and after the law was enacted-researchers of the Center for Community Capitalism at the University of North Carolina at Chapel Hill said their analysis showed that prepayment penalties of three years or more dropped 72% in North Carolina after the law's passage, while prepayment penalties rose in surrounding states during the same time frame. Prepayment penalties that can lock borrowers into high-rate loans are common practice in predatory lending.
"The study shows that since the North Carolina law went into full effect, the subprime market has behaved just as the law intended,'' said Dr. Michael A. Stegman, director of the University of North Carolina's Center for Community Capitalism. "The number of loans with predatory characteristics has fallen without either restricting access to loans to borrowers with blemished credit or increasing the cost of these loans.''
Stegman and several other speakers talked about the study during a live teleconference with reporters from UNC last week.
Critics of the North Carolina law expressed concerns that it would increase the cost of credit for subprime borrowers and reduce the flow of subprime capital in the state.
Not so, the study's authors stated. Subprime purchase first lien loans increased by 43%, while refinance loans dropped 20%, Stegman said. Comparable increases were found in Virginia (44%), and Tennessee (39%). Other parts of the South experienced slower growth, Stegman said.
"The abuses in lending are much more part of the refinance market,'' he said. "People are much more willing to pay high fees if they're simply added to the equity in their house whereas if they have to put cash on the table, they're not going to do that knowingly.''
Eric Stein, spokesman of the Center for Responsible Lending, whose organization funded the study, said the findings are in sync with an analysis by the Center for Responsible Lending that said the law saved North Carolina borrowers $100 million a year in predatory lending charges. That study used HMDA loan data
"The law sought to plug holes in the federal law that you could drive a truck through,'' he said "Its purpose was to protect the wealth of home owning families by limiting excessive fees.as well as to outlaw flipping and fee-loaded refinances that do not benefit borrowers.''
Stein said through access to "richer data,'' Stegman and his colleagues were able to determine that the law has reduced predatory lending, prepayment penalties and balloon payments and steered people to subprime loans.
"These findings bode well, not only for North Carolina and its citizens, but also for other states that want to control abuses within their borders with strong state legislation.''
"The most striking finding in the report is that home purchase loans did not diminish at all, and in fact grew by 43% after the implementation of the bill,'' said Martin Eakes, CEO of Self Help CDCU in Durham.
Eakes, a major player in the bill's passage, said he was impressed by the extensive data that allowed researchers to break down loan types. "The study is certainly the most comprehensive to date. No one has had access to that detailed data before.'' Eakes added that the results "essentially validated'' that the law is doing what is was designed to do.
While predatory lending has become a $14-billion industry by preying on financially vulnerable families and senior citizens, it has also come under close scrutiny by state and federal regulators.
North Carolina was the first state in the nation to pass a law aimed at curbing an estimated $232 million in predatory lending abuses in the state. Its major provisions prohibit equity stripping, rate-risk disparities and excessive foreclosures. More specifically, it prohibits prepayment penalties on first-lien mortgages of less than $150,000, prohibits the financing of fees, balloon payments and lending in high-cost homes without regard to a homeowner's ability to repay. (High-cost was defined generally as loans with fees in excess of 5%), and requires that would be borrowers of high-cost loans receive financial counseling before entering into a transaction.