North Carolina has taken its fight against predatory lending to a new level.
Just over a year after the first statewide anti-predator law took effect, the governor signed the Tarheel States second such law on Aug. 29. The law, which will go into effect in July 2002, will require mortgage lenders and brokers to get a license from the states banking commissioner. Previously, lenders and brokers only had to register with the state.
The states banking commissioner also gains more power under the new law, winning broad authority to impose new restrictions as he deems necessary as well as the right to revoke these licenses, which must be renewed each year.
Some vaguely defined terms are giving banking lawyers fits. For instance, the law requires that loans be reasonably advantageous to the borrower.
Nobody know what a reasonable effort with lenders to secure a loan that is reasonably advantageous to the borrower means, said Robert Lotstein, a partner with the Lotstein & Buckman law firm in Washington. Its an invitation to litigation.
Mr. Lotstein said such ambiguity is found in many predatory lending laws that have cropped up around the country.
The industry is struggling for white lines, for regulators and legislators to say, Here is what is permissible and here is what is not, he said. If you dont have white-line tests, this is a setup for the plaintiffs bar to seize on.
But Mike Calhoun, general counsel for Self-Help Credit Union, a nonprofit community group and lender, said the provision is designed to prevent loan-flipping, a practice where originators refinance a borrowers mortgage repeatedly, making it a more expensive loan each time.
North Carolinas first predatory lending law, which was enacted in July 1999 and went effect a year later, has a similar anti-flipping provision that Mr. Calhoun said has been successful. The new law merely covers more lenders, he said.
Kate Crawford, a mortgage broker at First Financial Services Inc. in Charlotte, N.C., and legislative chairman of the North Carolina Association of Mortgage Professionals, said the laws passage is a victory for brokers, because it does not incorporate burdensome recommendations made by consumer advocates. Mortgage brokers support the law, she said, because it will weed out abusive lenders.
Still, opponents claim North Carolinas legislative actions on the issue will lead to chaos in the lending industry as more states and local governing bodies pass similar regulations. With a patchwork of anti-predatory laws across the country, these observers say, it will be expensive and complicated if not impossible for lenders to operate.
Don Lampe, an industry lawyer with Smith Helms Mulliss & Moore LLP of Greensboro, N.C., said the North Carolina law may violate the Alternative Mortgage Transaction Parity Act of 1982, a federal law designed to prevent states from reducing the supply of subprime loans.
The banking commissioner and the North Carolina attorney general contend it doesnt override the federal preemption, but there are plenty of people who would like to argue about that, he said.
North Carolinas 1999 law barred balloon payments on loans with more than five points in fees or interest rates 8 percentage points or more above Treasury bill rates. It also outlawed frequent refinancing of loans, financing of certain insurance costs, and prepayment penalties for loans of $150,000 or less.
A bill awaiting the governors signature would make California the second state to enact a law against predatory lending. Various cities and counties have adopted local ordinances against the practice.
Rob Garver contributed to this story from Washington.
