North Carolina has created a new category of predatory loan, the so-called "rate spread home loan." The new law is contained in North Carolina G.S. Section 24-1.1F (a copy of the bill enacting this new section is available
here). Below is a description of the new law along with a description of the audit DocMagic is implementing to identify such loans.
Home Loan Defined: North Carolina G.S. Section 24-1.1F applies to home loans that meet certain criteria. A "home loan" is defined generally as any closed-end loan the principal amount of which is equal to or less than the Fannie Mae conforming loan amount for a single-family dwelling and which is secured by a 1-4 family (including a manufactured home), owner-occupied dwelling. The definition of home loan does not included open-end loans (HELOCs), reverse mortgages, commercial loans, and loans secured by multifamily properties.
Rate Spread Home Loan Defined: A "rate spread home loan" is one in which the following apply:
- First Lien Loans: (i) The difference between the loan's APR and the yield on U.S. treasury securities having comparable periods of maturity on the 15th day of the month prior to the loan application is equal to or greater than 3%; and (ii) the difference between the loan's APR and 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 is equal to or greater than 1.75%.
- Junior Lien Loans: (i) The difference between the loan's APR and the yield on U.S. treasury securities having comparable periods of maturity on the 15th day of the month prior to the loan application is equal to or greater than 5%; and (ii) the difference between the loan's APR and 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 is equal to or greater than 3.75%.
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 |
| - | The obligor (meaning each borrower, co-borrower, cosigner or guarantor obligated to repay the loan) must have the ability to repay the loan (and any other contemporaneously made loan) and applicable real estate taxes and hazard insurance premiums in the lender's reasonable and good faith belief, based on the lender's analysis of an obligor's financial status other than the home's equity, the accuracy of which lender must reasonably verify. In determining ability to repay, the lender must consider principal balance increases due to negative amortization, and the monthly principal and interest payment must be calculated assuming the entire loan amount is disbursed at closing, the loan is fully amortizing (no balloon payment), and using a fully-indexed interest rate. Reasonable commercially recognized underwriting standards and methodologies may be used, including automated ones, provided they comply to the foregoing requirements. |
| - | Enforcement action may be brought by any party, 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. |
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 meets the definitional requirements of a "home loan," then at the time that a worksheet is audited, if both 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 new 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 in which the application date. 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.
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