North Carolina High-Cost Home Loan Law

Updated: December 2007 (Revisions are highlighted in yellow)

Coverage: The North Carolina High-Cost Home Loan law (the "NCHCL") applies to the following types of loans:

• closed-end and open-end loans (includes purchase, construction and refinance loans, and regardless of lien position)
• the principal amount of the loan (or the maximum credit limit in the case of an open-end loan) does not exceed the lesser of $300,000, or the Fannie Mae conforming loan limit for a single-family dwelling
• secured by a one- to four-family dwelling (which may be a manufactured home)
• owner-occupied as the borrower's principal dwelling
• meets or exceeds one or more of the "thresholds" as defined in the NCHCL

Reverse mortgages and loans primarily for business, agricultural or commercial purposes are expressly excluded from the definition of a high-cost home loan. To view a copy of the NCHCL, click here.

The NCHCL "thresholds": The NCHCL threshold are threefold: an APR Test, a Points and Fees Test, and a Prepayment Test:

1. The APR Test: The NCHCL APR Test is calculate in the same manner as under Section 32: either 8% (for first liens) or 10% (for subordinate liens) over the yield on Treasury securities having comparable periods of maturity on the 15th day of the month immediately preceding the month in which the application is received by the creditor. Note that unlike the Section 32 APR Test, which is limited to refinance transaction, the NCHCL APR Test applies to purchase and construction loans as well.
2. The Points and Fees Test: Total Points and Fees payable by the borrower at or before the closing exceed (i) five percent (5%) if total loan amount is $20,000 or more, or (ii) the lesser of eight percent (8%) or $1,000 if total loan amount is less than $20,000.
3. The Prepayment Test: The prepayment penalty exceeds 30 months or exceeds, in the aggregate, 2% of the amount prepaid.

The Points and Fees Test: Points and Fees are defined to include (or exclude) the following items:

	Prepaid Finance Charge - the total amount of prepaid finance charges
-	Prepaid Interest - to be deducted from prepaid finance charge
+	Other Charges Paid to Creditor/Affiliate - the total amount of all Regulation Z Section 226.4(c)(7) charges not included as a part of the Prepaid Finance Charge but only if paid to the creditor or creditor affiliate
+	Other Mortgage Broker Compensation - For loans entered into prior to January 1, 2008, the total amount of all non-prepaid finance charges paid directly by a borrower to a mortgage broker. For loans entered into on or after January 1, 2008, this category includes all compensation paid from any source to a mortgage broker, including compensation paid to the mortgage broker in a table-funded transaction. Accordingly, lender-paid compensation paid to a mortgage broker (e.g. YSPs) are included.
+	Maximum Prepayment Fees Permitted Under the Loan Documents Excluding Amount Excludable - if the prepayment penalty term exceeds 30 months or the prepayment amount exceeds 2% of the amount prepaid, the loan is by definition a high cost home loan. In addition, prepayment fees and penalties are included in the points and fees test. However, the NCHCL expressly excludes from points and fees, prepayment fees not exceeding 1% of the amount prepaid so long as the prepayment term is not more than 30 months after the loan closing. For purposes of our high-cost home loan analysis, we assume that, if the loan provides for a prepayment penalty, the maximum prepayment penalty is equal to 2% of the amount prepaid. So long as the prepayment term is 30 months or less, the NCHCL permits the exclusion of up to 1% of that prepayment fee from points and fees, and therefore, only 1% of the loan amount (i.e., the amount exceeding the excludable amount) will be included. However, if the prepayment period exceeds 30 months, none of the prepayment fee is excludable, and the entire two percent (2%) of the loan amount should be included.
-	Other Excludable Charges - the following charges are expressly excluded to the extent otherwise included: taxes, filing fees, recording and other charges and fees paid or to be paid to public officials to determined the existence of or to perfect, release or satisfy a security interest; the following charges and fees provided they are not paid to the creditor, a creditor affiliate, a mortgage broker or a mortgage broker affiliate: tax services attorneys' fees (if the borrower has the right to select the attorney from an approved list or otherwise) title insurance, fire insurance and flood insurance premiums
-	Bona Fide Discount Points1 - up to two (2) bona fide discount points may be deducted
+/-	Creditor Requested Adjustments - the total amount of all customer requested overrides

Note Regarding Points and Fees in Connection With Open- End Loans: For open-end credit plans, points and fees also include (i) the minimum additional fees the borrower would be required to pay to draw down an amount equal to the total loan amount, and (ii) the maximum prepayment fees and penalties which may be charged or collected under the terms of the loan documents. We assume: (a) there are no additional charges the borrower is required to pay to draw down an amount equal to the maximum credit limit; and (2) the borrower has no right or option under the loan documents to repay all or any portion of the outstanding principal balance at a fixed interest rate over a specified period of time.

Total Loan Amount: is defined the same as under Section 32.

What Happens If a Loan Is a High-Cost Home Loan?

There are many, many substantive limitations if a loan is found to be a high-cost home loan, including the following:

• No call provision
• No balloon payment
• No negative amortization
• No increased interest rate after default
• No more than two periodic advance payments
• No modification or deferral fees
• No lending without home-ownership counseling certification
• No lending without due regard to repayment ability
• No financing of fees or charges - a lender may not directly or indirectly finance:
  • Any prepayment fees or penalties payable by the borrower in a refinancing transaction if the lender or an affiliate of the lender is the noteholder of the note being refinanced;
  • Any points and fees; or
  • Any other charges payable to third parties.
• No benefit from refinancing existing high-cost home loan with new high-cost home loan
• Restrictions on home-improvement contracts
• No shifting of liability to the closing agent or closing attorney for any violation of this section.

Recommended Disclosures:

Right to Select an Attorney Disclosure: Attorneys' fees may be excluded from the total points and fees provided the borrower has the right to select the attorney from an approved list or otherwise. Therefore, it is desirable that the borrower receive a notice advising him or her of this right and indicating their exercise or waiver of this right.

Bona Fide Discount Points: The NCHCL requires that a borrower "knowingly" contract for the discount points in order to reduce the rate. Therefore, it is desirable that borrower acknowledge that he or she is agreeing, agrees to pay a specified number of discount points for the express purpose of reducing the interest rate on the loan.

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