§ 24-1.1E. Restrictions and limitations on high-cost home loans. - North Carolina Statutes

§ 24‑1.1E.  Restrictionsand limitations on high‑cost home loans.

(a)        Definitions. – Thefollowing definitions apply for the purposes of this section:

(1)        "Affiliate"means any company that controls, is controlled by, or is under common controlwith another company, as set forth in the Bank Holding Company Act of 1956 (12U.S.C. § 1841 et seq.), as amended from time to time.

(2)        "Annualpercentage rate" means the annual percentage rate for the loan calculatedaccording to the provisions of the federal Truth‑in‑Lending Act (15U.S.C. § 1601, et seq.), and the regulations promulgated thereunder by theFederal Reserve Board (as said Act and regulations are amended from time totime).

(3)        "Bona fide loandiscount points" means loan discount points knowingly paid by the borrowerfor the purpose of reducing, and which in fact result in a bona fide reductionof, the interest rate or time‑price differential applicable to the loan,provided the amount of the interest rate reduction purchased by the discountpoints is reasonably consistent with established industry norms and practicesfor secondary mortgage market transactions.

(4)        A "high‑costhome loan" means a loan other than a reverse mortgage transaction inwhich:

a.         The principal amountof the loan (or, in the case of an open‑end credit plan, the borrower'sinitial maximum credit limit) does not exceed the lesser of (i) the conformingloan size limit for a single‑family dwelling as established from time totime by Fannie Mae, or (ii) three hundred thousand dollars ($300,000);

b.         The borrower is anatural person;

c.         The debt is incurredby the borrower primarily for personal, family, or household purposes;

d.         The loan is securedby either (i) a security interest in a manufactured home (as defined in G.S.143‑147(7)) which is or will be occupied by the borrower as theborrower's principal dwelling, or (ii) a mortgage or deed of trust on realestate upon which there is located or there is to be located a structure orstructures designed principally for occupancy of from one to four familieswhich is or will be occupied by the borrower as the borrower's principaldwelling; and

e.         The terms of theloan exceed one or more of the thresholds as defined in subdivision (6) of thissection.

(4a)      "Mortgagebroker" is as defined in G.S. 53‑243.01.

(5)        "Points andfees" is defined as provided in this subdivision.

a.         The term includesall of the following:

1.         All items paid by aborrower at or before closing and that are required to be disclosed undersections 226.4(a) and 226.4(b) of Title 12 of the Code of Federal Regulations,as amended from time to time, except interest or the time‑pricedifferential.

2.         All charges paid bya borrower at or before closing and that are for items listed under section226.4(c)(7) of Title 12 of the Code of Federal Regulations, as amended fromtime to time, but only if the lender receives direct or indirect compensationin connection with the charge or the charge is paid to an affiliate of thelender; otherwise, the charges are not included within the meaning of thephrase "points and fees".

3.         To the extent nototherwise included in sub‑subdivision a.1. or a.2. of this subdivision,all compensation paid from any source to a mortgage broker, includingcompensation paid to a mortgage broker in a table‑funded transaction. Abona fide sale of a loan in the secondary mortgage market shall not beconsidered a table‑funded transaction, and a table‑fundedtransaction shall not be considered a secondary market transaction.

4.         The maximumprepayment fees and penalties which may be charged or collected under the termsof the loan documents.

b.         Notwithstanding theremaining provisions of this subdivision, the term does not include (i) taxes,filing fees, recording and other charges and fees paid or to be paid to publicofficials for determining the existence of or for perfecting, releasing, orsatisfying a security interest; and (ii) fees paid to a person other than alender or an affiliate of the lender or to the mortgage broker or an affiliateof the mortgage broker for the following: fees for tax payment services; feesfor flood certification; fees for pest infestation and flood determinations;appraisal fees; fees for inspections performed prior to closing; creditreports; surveys; attorneys' fees (if the borrower has the right to select theattorney from an approved list or otherwise); notary fees; escrow charges, solong as not otherwise included under sub‑subdivision a. of thissubdivision; title insurance premiums; and premiums for insurance against lossor damage to property, including hazard insurance and flood insurance premiums,provided that the conditions in section 226.4(d)(2) of Title 12 of the Code ofFederal Regulations are met.

c.         For open‑endcredit plans, the term includes those points and fees described in sub‑subdivisionsa.1. through a.3. of this subdivision, plus (i) the minimum additional fees theborrower would be required to pay to draw down an amount equal to the totalloan amount, and (ii) the maximum prepayment fees and penalties which may becharged or collected under the terms of the loan documents.

(5a)      A "table‑fundedtransaction" is a loan transaction closed by a mortgage broker in themortgage broker's own name with funds advanced by a person other than themortgage broker in which the loan is assigned contemporaneously or within onebusiness day of the funding of the loan to the person that advanced the funds.

(6)        "Thresholds"means:

a.         Without regard towhether the loan transaction is or may be a "residential mortgagetransaction" (as the term "residential mortgage transaction" isdefined in section 226.2(a)(24) of Title 12 of the Code of Federal Regulations,as amended from time to time), the annual percentage rate of the loan at thetime the loan is consummated is such that the loan is considered a"mortgage" under section 152 of the Home Ownership and EquityProtection Act of 1994 (Pub. Law 103‑25, [15 U.S.C. § 1602(aa)]), as thesame may be amended from time to time, and regulations adopted pursuant theretoby the Federal Reserve Board, including section 226.32 of Title 12 of the Codeof Federal Regulations, as the same may be amended from time to time;

b.         The total points andfees,  as defined in G.S. 24‑1.1E(a)(5), exceed five percent (5%) of thetotal loan amount if the total loan amount is twenty thousand dollars ($20,000)or more, or (ii) the lesser of eight percent (8%) of the total loan amount orone thousand dollars ($1,000), if the total loan amount is less than twentythousand dollars ($20,000); provided, the following discount points andprepayment fees and penalties shall be excluded from the calculation of thetotal points and fees payable by the borrower:

1.         Up to and includingtwo bona fide loan discount points payable by the borrower in connection withthe loan transaction, but only if the interest rate from which the loan'sinterest rate will be discounted does not exceed by more than one percentagepoint (1%) the required net yield for a 90‑day standard mandatorydelivery commitment for a reasonably comparable loan from either Fannie Mae orthe Federal Home Loan Mortgage Corporation, whichever is greater;

2.         Up to and includingone bona fide loan discount point payable by the borrower in connection withthe loan transaction, but only if the interest rate from which the loan'sinterest rate will be discounted does not exceed by more than two percentagepoints (2%) the required net yield for a 90‑day standard mandatorydelivery commitment for a reasonably comparable loan from either Fannie Mae orthe Federal Home Loan Mortgage Corporation, whichever is greater;

3.         For a closed‑endloan, prepayment fees and penalties which may be charged or collected under theterms of the loan documents which do not exceed one percent (1%) of the amountprepaid, provided the loan documents do not permit the lender to charge orcollect any prepayment fees or penalties more than 30 months after the loanclosing;

4.         For an open‑endcredit plan, prepayment fees and penalties which may be charged or collectedunder the terms of the loan documents which do not exceed one percent (1%) ofthe amount prepaid, provided the loan documents do not permit the lender tocharge or collect any prepayment fees or penalties more than (i) 30 monthsafter the loan closing if the borrower has no right or option under the loandocuments to repay all or any portion of the outstanding balance of the open‑endcredit plan at a fixed interest rate over a specified period of time or, (ii)if the borrower has a right or option under the loan documents to repay all orany portion of the outstanding balance of the open‑end credit plan at afixed interest rate over a specified period of time, 30 months after the datethe borrower voluntarily exercises that right or option; or

c.         If the loan is aclosed‑end loan, the loan documents permit the lender to charge orcollect prepayment fees or penalties more than 30 months after the loan closingor which exceed, in the aggregate, more than two percent (2%) of the amountprepaid. If the loan is an open‑end credit plan, the loan documentspermit the lender to charge or collect prepayment fees or penalties (i) morethan 30 months after the loan closing if the borrower has no right or optionunder the loan documents to repay all or any portion of the outstanding balanceof the open‑end credit plan at a fixed interest rate over a specifiedperiod of time or, (ii) if the borrower has a right or option under the loandocuments to repay all or any portion of the outstanding balance of the open‑endcredit plan at a fixed interest rate over a specified period of time, more than30 months after the date the borrower voluntarily exercises that right oroption, or (iii) which exceed, in the aggregate, more than two percent (2%) ofthe amount prepaid.

(7)        For a closed‑endloan, "total loan amount" has the same meaning as the term"total loan amount" as used in section 226.32 of Title 12 of the Codeof Federal Regulations, and shall be calculated in accordance with the FederalReserve Board's Official Staff Commentary thereto. For an open‑end creditplan, "total loan amount" means the borrower's initial maximum creditlimit.

(b)        Limitations. – Ahigh‑cost home loan shall be subject to the following limitations:

(1)        No call provision. –No high‑cost home loan may contain a provision which permits the lender,in its sole discretion, to accelerate the indebtedness. This provision does notapply when repayment of the loan has been accelerated by default, pursuant to adue‑on‑sale provision, or pursuant to some other provision of theloan documents unrelated to the payment schedule.

(2)        No balloon payment.– No high‑cost home loan may contain a scheduled payment that is morethan twice as large as the average of earlier scheduled payments. Thisprovision does not apply when the payment schedule is adjusted to the seasonalor irregular income of the borrower.

(3)        No negativeamortization. – No high‑cost home loan may contain a payment schedulewith regular periodic payments that cause the principal balance to increase.

(4)        No increasedinterest rate. – No high‑cost home loan may contain a provision whichincreases the interest rate after default. This provision does not apply tointerest rate changes in a variable rate loan otherwise consistent with theprovisions of the loan documents, provided the change in the interest rate isnot triggered by the event of default or the acceleration of the indebtedness.

(5)        No advance payments.– No high‑cost home loan may include terms under which more than twoperiodic payments required under the loan are consolidated and paid in advancefrom the loan proceeds provided to the borrower.

(6)        No modification ordeferral fees. – A lender may not charge a borrower any fees to modify, renew,extend, or amend a high‑cost home loan or to defer any payment due underthe terms of a high‑cost home loan.

(c)        Prohibited Acts andPractices. – The following acts and practices are prohibited in the making of ahigh‑cost home loan:

(1)        No lending withouthome‑ownership counseling. – A lender may not make a high‑cost homeloan without first receiving certification from a counselor approved by theNorth Carolina Housing Finance Agency that the borrower has received counselingon the advisability of the loan transaction and the appropriate loan for theborrower.

(2)        No lending withoutdue regard to repayment ability. – As used in this subsection, the term"obligor" refers to each borrower, co‑borrower, cosigner, orguarantor obligated to repay a loan. A lender may not make a high‑costhome loan unless the lender reasonably believes at the time the loan isconsummated that one or more of the obligors, when considered individually orcollectively, will be able to make the scheduled payments to repay theobligation based upon a consideration of their current and expected income,current obligations, employment status, and other financial resources (otherthan the borrower's equity in the dwelling which secures repayment of theloan). An obligor shall be presumed to be able to make the scheduled paymentsto repay the obligation if, at the time the loan is consummated, the obligor'stotal monthly debts, including amounts owed under the loan, do not exceed fiftypercent (50%) of the obligor's monthly gross income as verified by the creditapplication, the obligor's financial statement, a credit report, financialinformation provided to the lender by or on behalf of the obligor, or any otherreasonable means; provided, no presumption of inability to make the scheduledpayments to repay the obligation shall arise solely from the fact that, at thetime the loan is consummated, the obligor's total monthly debts (includingamounts owed under the loan) exceed fifty percent (50%) of the obligor'smonthly gross income.

(3)        No financing of feesor charges. – In making a high‑cost home loan, a lender may not directlyor indirectly finance:

a.         Any prepayment feesor penalties payable by the borrower in a refinancing transaction if the lenderor an affiliate of the lender is the noteholder of the note being refinanced;

b.         Any points and fees;or

c.         Any other chargespayable to third parties.

(4)        No benefit fromrefinancing existing high‑cost home loan with new high‑cost homeloan. – A lender may not charge a borrower points and fees in connection with ahigh‑cost home loan if the proceeds of the high‑cost home loan areused to refinance an existing high‑cost home loan held by the same lenderas noteholder.

(5)        Restrictions on home‑improvementcontracts. – A lender may not pay a contractor under a home‑improvementcontract from the proceeds of a high‑cost home loan other than (i) by aninstrument payable to the borrower or jointly to the borrower and thecontractor, or (ii) at the election of the borrower, through a third‑partyescrow agent in accordance with terms established in a written agreement signedby the borrower, the lender, and the contractor prior to the disbursement.

(6)        No shifting ofliability. – A lender is prohibited from shifting any loss, liability, or claimof any kind to the closing agent or closing attorney for any violation of thissection.

(d)        Unfair andDeceptive Acts or Practices. – Except as provided in subsection (e) of thissection, the making of a high‑cost home loan which violates anyprovisions of subsection (b) or (c) of this section is hereby declared usuriousin violation of the provisions of this Chapter and unlawful as an unfair ordeceptive act or practice in or affecting commerce in violation of theprovisions of G.S. 75‑1.1. The provisions of this section shall apply toany person who in bad faith attempts to avoid the application of this sectionby (i) the structuring of a loan transaction as an open‑end credit planfor the purpose and with the intent of evading the provisions of this sectionwhen the loan would have been a high‑cost home loan if the loan had beenstructured as a closed‑end loan, or (ii) dividing any loan transactioninto separate parts for the purpose and with the intent of evading theprovisions of this section, or (iii) any other such subterfuge. The AttorneyGeneral, the Commissioner of Banks, or any party to a high‑cost home loanmay enforce the provisions of this section. Any person seeking damages orpenalties under the provisions of this section may recover damages under eitherthis Chapter or Chapter 75, but not both.

(e)        Corrections andUnintentional Violations. – A lender in a high‑cost home loan who, whenacting in good faith, fails to comply with subsections (b) or (c) of thissection, will not be deemed to have violated this section if the lenderestablishes that either:

(1)        Within 30 days ofthe loan closing and prior to the institution of any action under this section,the borrower is notified of the compliance failure, appropriate restitution ismade, and whatever adjustments are necessary are made to the loan to either, atthe choice of the borrower, (i) make the high‑cost home loan satisfy therequirements of subsections (b) and (c) of this section, or (ii) change theterms of the loan in a manner beneficial to the borrower so that the loan willno longer be considered a high‑cost home loan subject to the provisionsof this section; or

(2)        The compliancefailure was not intentional and resulted from a bona fide error notwithstandingthe maintenance of procedures reasonably adapted to avoid such errors, andwithin 60 days after the discovery of the compliance failure and prior to theinstitution of any action under this section or the receipt of written noticeof the compliance failure, the borrower is notified of the compliance failure,appropriate restitution is made, and whatever adjustments are necessary aremade to the loan to either, at the choice of the borrower, (i) make the high‑costhome loan satisfy the requirements of subsections (b) and (c) of this section,or (ii) change the terms of the loan in a manner beneficial to the borrower sothat the loan will no longer be considered a high‑cost home loan subjectto the provisions of this section. Examples of a bona fide error includeclerical, calculation, computer malfunction and programming, and printingerrors. An error of legal judgment with respect to a person's obligations underthis section is not a bona fide error.

(f)         Severability. – Theprovisions of this section shall be severable, and if any phrase, clause,sentence, or provision is declared to be invalid or is preempted by federal lawor regulation, the validity of the remainder of this section shall not beaffected thereby. If any provision of this section is declared to beinapplicable to any specific category, type, or kind of points and fees, theprovisions of this section shall nonetheless continue to apply with respect toall other points and fees.

(g)        A mortgage brokerwho brokers a high‑cost home loan that violates any provisions ofsubsection (b) or (c) of this section shall be jointly and severally liablewith the lender.  (1999‑332,s. 2; 2000‑140, s. 40.1; 2001‑487, s. 14(a); 2003‑401, s. 3;2007‑352, ss. 1‑3; 2008‑227, s. 2; 2008‑228, s. 15;2009‑457, s. 1.)