Are the rumors true? Has North Carolinas predatory lending law crippled subprime lending in the state? Is it doing even wider damage by disrupting conventional lending?
The answer to all three questions is the same: No. Those of us who operate in North Carolinas lending markets know that the law has not hurt the flow of legitimate loan capital in any way.
Enacted in 1999, it is the nations first state legislation aimed at curbing predatory mortgage lending. It protects the equity North Carolina homeowners have invested in their homes by curbing the worst predatory practices, such as excessive fees, the financing of single-premium credit insurance, prepayment penalties that lock borrowers into bad loans, and flipping repeated refinancing that does not benefit the borrower.
The law got overwhelming bipartisan support in a state known more for its banking industry prowess than for consumer protection, and it was backed by all the major financial trade associations in the state, including those of banks, thrifts, credit unions, mortgage bankers, and mortgage brokers. These are not exactly the ingredients of a radical stew.
Now a handful of self-interested revisionists intent on blocking similar legislation in other states are spreading patently untrue horror stories about the supposedly adverse effect of North Carolinas law.
You can be sure that if the law were so onerous, the states lending community would never have supported it in the first place. The law is a carefully crafted compromise that strikes directly at predatory lending without hamstringing legitimate lending. It allows subprime lenders ample room to make profitable loans. As in any good compromise, it leaves both sides wanting more.
The only significant data to date about the laws effects are from Residential Funding Corp., the nations largest issuer of subprime mortgage securities. The results are comforting. Residential Funding reported that North Carolinas share of subprime mortgages issued nationwide actually increased in 2000.
And what about the one lender that blamed the new law when it pulled the plug on its North Carolina operations? It turns out that Countrywides subprime lender, Full Spectrum, was only minimally active in the state, making an average of just 66 loans per year.
It appears that the North Carolina law provided Countrywide with a convenient face-saving exit strategy for its unsuccessful subprime division. Countrywides conventional lending in North Carolina is still going strong, averaging over 10,000 loans for over $1 billion.
How is North Carolinas predatory lending law really working? We have publicly and repeatedly challenged lenders to show us a single responsible loan made impossible under the law. No one has accepted our challenge to date.
Mr. Eakes is the chief executive officer of Self-Help, a nonprofit community development lender in Durham, N.C.
