North Carolina's home buyers and legislators are breathing a sign of relief that they didn't wait for a federal anti-predatory lending law or bow to industry criticism that state laws curb subprime lending.

Enacted in 1990, the nations' first anti-predatory loan law has saved consumers tens of millions of dollars and North Carolina's subprime lending market, according to a study released this week by the nonprofit Center for Responsible Lending .

"North Carolina’s Subprime Home Loan Market After Predatory Lending Reform" reviewed 28 million home loans made in 50 states between 1998-2000 and found:

  • The new law saved consumers at least $100 million by preventing predatory loan terms that would have occurred in the law's absence.
  • Subprime lending is thriving in North Carolina, the sixth most active state for subprime lending, with borrowers 20 percent more likely to receive a subprime loan than borrowers in the rest of the nation. One in every three loans to low-income North Carolina families with an annual income of $25,000 or less, was subprime, the nation's highest such proportion.
  • Not one major subprime lender has left North Carolina since the law was enacted. A recent Morgan Stanley survey of 280 subprime branch managers found that tougher predatory lending laws have not curtailed subprime lending.

    Predatory loans are a malignant outgrowth of the otherwise useful subprime residential mortgage sector. Subprime loans are generally more expensive than prime loans, but they are intended for borrowers who pose a greater risk to lenders, typically because of the lack of credit or previous credit problems. Without the subprime segment, some borrowers would be locked out of the American Dream.

    Unfortunately, in numerous documented class action suits, state-filed cases and other claims, too many subprime loans became predatory with exorbitantly high costs, penalties and other financially abusive features often directed at specific groups, including minorities, older, low-income borrowers and others who can least afford the added cost.

    Some state-level anti-predatory loan legislation has been thwarted or watered down by mortgage industry lobbying that argued poorly conceived laws reduce the availability of not only predatory loans but also useful subprime loans. The industry also has argued numerous state laws, rather than one federal law, will create a costly regulatory quagmire forcing legitimate subprime lenders out of business.

    "We haven't had any lenders leave who have more than a 1 percent share of the market," said Malcolm White, a spokesman for Responsible Lending.

    "As for numerous state laws, I'm not saying it would be a simple matter. If there were 50 state laws, it would be a nightmare. But if you are centralized and have to run business from different locations, it's no different than marketing any product in different states. The technology exists for it," White added.

    He said North Carolina had a chronic problem with predatory lending because its population mix is heavy in the demographics predators hunt -- rural residents, African-Americans, low-income households and less creditworthy customers not otherwise served by the prime lending sector.

    "We have kind of interesting mix and when there's a lack of prime lenders it's pretty well the best place for predatory lending to fester," White said.

    When the law was passed in 1999, Responsible Lending estimated 50,000 North Carolinians were already victims of predatory loans. The groups estimates the new law will save consumers $1 billion in home equity over the next five to 10 years.

    The first of only a handful of state laws (there is also a handful of city ordinances), North Carolina's law is one of the nation's most powerful.

  • On all home loans (not merely high-cost or refinanced loans) no prepayment penalties are allowed for home loans of $150,000 or less; No "flipping" or repeated refinancing with upfront fees is allowed for existing loans; Financing of upfront, single-premium credit insurance is prohibited, but monthly premiums are permitted.

    "Single premium credit insurance is of no value to borrowers and when a $5,000 product is financed over 30 years it's a lot more than $5,000," White said.

  • The law also creates special provisions for "high-cost" loans, defined as a residential home loan of $300,000 or less with either, upfront fees totaling 5 percent or more of the loan amount; or an interest rate of 10 percent (8 percent beginning in October 2002) more than the comparable Treasury bond rate. On those high cost loans, the law prohibits financing upfront fees and insurance premiums; balloon payments; negative amortization and lending without counseling and the consideration of a consumers ability to repay the note.

    "Yes a federal law would solve the problem, but lenders only started to talk that way after states started passing laws. It's tough making federal law. It's not an easy process," said White.

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