North Carolina has created a new category of predatory loan, the so-called "rate spread home loan."  The law is contained in North Carolina G.S. Section 24-1.1F (a copy of the bill enacting this new section is available here).  Effective October 1, 2009, North Carolina G.S. Section 24-1.1F has been amended by House Bill 1222 (Session Law 2009-457.  Below is a description of the new law along with a description of the audit DocMagic is implementing to identify such rate spread home loans.

Coverage: North Carolina G.S Section 24-1.1F applies to the following loans:

• the borrower is a natural person
• the debt is incurred primarily for personal, family or household purposes
• the principal amount of the loan does not exceed the Fannie Mae conforming loan limit for a single family dwelling
• the loan is secured by a manufactured home or a one to four family dwelling (either existing or to be constructed1 using the loan proceeds) that is or will be occupied as the borrower's principal dwelling

HELOCs, reverse mortgages, and bridge loans with terms of 12 months or less are expressly excluded from coverage under NC G.S. Section 24-1.1F.  Commercial loans and loans secured by either non-owner occupied properties or multifamily properties are also not covered.

Rate Spread Home Loan Defined: A "rate spread home loan" is one in which the loans APR exceeds each of the following thresholds:

• For First Lien Loans: (i) the yield on U.S. treasury securities having comparable periods of maturity on the 15th day of the month prior to the loan application by 3% or more; (ii) the conventional mortgage rate published in FRB Statistical Release H-15 for fixed-rate first mortgages during the week preceding the week in which the interest rate is set by 1.75% or more; and (iii) the average prime offer rate for a comparable transaction2 as of the date the interest rate is set by 1.5% or more.
• For Junior Lien Loans: (i) the yield on U.S. treasury securities having comparable periods of maturity on the 15th day of the month prior to the loan application by 5% or more;  (ii) the conventional mortgage rate published in FRB Statistical Release H-15 for fixed-rate first mortgages during the week preceding the week in which the interest rate is by 3.75% or more; and (iii) the average prime offer rate for a comparable transaction3 as of the date the interest rate is set by 3.5% or more.

General Prohibitions:  If a home loan meets the definitional requirements of a rate spread home loan, the following limitations and restrictions apply:

-	No prepayment fees or penalties may be charged or collected
-	No lender shall make a rate spread home loan without due regard to the borrower's repayment ability as of consummation, including the borrower's current and reasonably expected income, employment, assets other than the collateral, current obligations and mortgage-related obligations; The methodology and standards for the determination of a borrower's repayment ability is set forth in Regulation Z Section 226.34(a)(4), and the related Federal Reserve Board's Official Commentary thereto, is applied to determine compliance with the foregoing requirement.
-	Enforcement action may be brought by any party to a rate spread home loan, the Commissioner of Banks, or the Attorney General
-	Lenders and brokers are jointly liable.
-	Various cure provisions apply (i) within 90 days of closing, but only if made prior to institution of legal action against the lender, or (ii) 120 days after discovery of an unintentional compliance failure due to a bona fide error despite reasonable procedures to prevent, but only if made prior to institution of legal action against the lender and prior to lender's receipt of written notice of a compliance failure.
-	Effective October 1, 2008, no lender shall provide, and no broker shall receive, any compensation that changes based on the terms of the loan.  However, compensation based on the principal amount of the loan is not prohibited.

Rate Spread Home Loan Audit:  DocMagic has created an audit specifically to identify if a loan is a rate spread loan.  If the security property is located in North Carolina, and the loan falls within the coverage of the rate spread home loan law, then at the time that a worksheet is audited, if all three of the conditions for a rate spread home loan of that lien position are satisfied, then a warning substantially similar to the following will display:

WARNING: THIS IS A NC RATE SPREAD HOME LOAN (NC G.S. 24-1.1F)

Please note that the law incorporates by reference the procedures and calculation methods used under HMDA when determining the difference between the APR and the U.S. Treasury yield, provided that the yield used is as of the fifteenth day of the month preceding the month of the application date for the loan.  The method used for determining which Treasury yield to use is the same as that used for the federal Section 32 test and has been incorporated in this new audit (for further information, click here).

In order to determine which conventional mortgage rate to use, the DocMagic user must enter a date into the "Rate Lock Date" field in the worksheet.  If the Rate Lock Date is missing, then the audit will default the Document Date as the Rate Lock Date.

The conventional mortgage rate in the FRB H-15 statistical release is available here.  The audit will automatically use the most recently available rate available as of the week preceding the Rate Lock Date (as described above).

Please feel free to contact DocMagic's Compliance Department if you have any questions or comments regarding this audit.

1 NC G.S. 24-1.1F(7)(a) expressly excludes "a construction loan as defined in NC G.S. 24-10" from coverage.  NC G.S. 24-10 defines "construction loan" to mean "a loan which is obtained for the purpose of financing fully, or in part, the cost of constructing buildings or other improvements upon real property and the proceeds of which, under the terms of a written contract between a lender and a borrower, are to be disbursed periodically as such construction work progresses; and such loan shall be payable in full not later than 18 months in case of a loan made under the provisions of G.S. 24?1.1(1) or 36 months in case of any other construction loan made after the execution of the note by the borrower.  A construction loan may include advances for the purchase price of the property upon which such improvements are to be constructed."  This express exclusion for certain construction loans seems to conflict with other provisions which suggest that construction loans are indeed covered (see, e.g., G.S. 24-1.1F(a)(7)(e)).  Accordingly, DocMagic will continue to apply the rate spread home loan tests to construction loans that otherwise are covered by the rate spread home loan law.

3 See Footnote 2 above.