A North Carolina community group and a state official are waging a war on predatory lending practices in the state.
Attorney General Michael Easley last week offered bills aimed at restricting "high-rate, high-fee loans targeted to borrowers ... with cash- flow problems."
Mr. Easley also said he is investigating five lenders in the state. Meanwhile, a newly formed statewide community group alleges that banks and finance companies are not reporting adequate Home Mortgage Disclosure Act data and that the finance companies are targeting minority group members for high-rate loans.
The two campaigns come as federal regulators, politicians, and housing agencies are turning up the heat nationwide on companies that make mortgages to people with poor credit records.
Lender trade organizations have tagged predatory lending the most important issue facing the industry. In bills that were introduced in the North Carolina House and Senate last week, the attorney general proposes creating a special category for high-rate mortgages.
If the bills are enacted, loans that charge interest rates that are "substantially above" current market rates would be subject to special restrictions and provisions, the attorney general's office said. Lenders would be prohibited from scheduling balloon payments, raising interest rates, and charging borrowers fees for modifying the loans. Borrowers would be required to attend counseling before taking out one of these loans and could not agree to allocate more than 50% of their income to mortgage and other debt payments.
The bills are intended to curb excessive fees and "flipping"-refinancing borrowers into ever-larger loans. Lenders would be prohibited from adding fees for non-mortgage-related goods or services without the informed consent of the borrower.
"Essentially, this sets up a whole new classification of loans," said a spokesman for the attorney general's office.
The bills were developed with the help of major banking and financial institutions, said the spokesman. The proposed state restrictions would be in addition to federal rules that require lenders to make additional disclosure for high-rate loans, commonly referred to as Section 32 loans.
Home Mortgage Disclosure Act data were reported on only one-third of loans made by mortgage and finance companies, according to a soon-to-be- released study by the Community Reinvestment Association of North Carolina.
The survey of all mortgage deeds issued during 1996 in Durham County, N.C., found that even the finance subsidiaries of banks often did not report HMDA data, thwarting analysis of subprime lending through these data.
"In understanding credit markets in minority and low-income census tracts, an analysis of HMDA data alone significantly underreports the effective demand for credit, the types of loans being made, and the institutions serving this market," the study said.
Subprime loans made up about 22% of all mortgages reported under HMDA in Durham County in 1996.
African-Americans totaled 10% of prime borrowers but 20% of subprime borrowers, the group said.
It added that this "raises the possibility of systematic predatory lending practices by some subprime lenders, including those owned by banks regulated by the Community Reinvestment Act."