North Carolina has enacted three new laws that impact mortgage lenders and servicers. All three bills become effective on October 1, 2009.
What is a North Carolina Rate Spread Home Loan?
North Carolina’s Interest Provisions impose restrictions on both high-cost home loans and higher-priced home loans, called “rate spread home loans.” Previously, a mortgage loan was considered a “rate spread home loan” if the APR on the loan exceeded two indexes. Specifically, the APR had to (1) exceed the “conventional mortgage rate” by at least 1.75% if the loan was secured by a first lien mortgage or 3.75% if the loan was secured by a subordinate lien mortgage and (2) exceed the yield on U.S. Treasury securities by at least 3% if the loan was secured by a first lien mortgage or by 5% if the loan was secured by a subordinate lien mortgage. The yield on U.S. Treasury securities is determined using the same procedures and calculation methods used to determine whether a loan must be reported under HMDA.
2009 House Bill 1222 added a third index to apply to a loan to make the rate spread determination. As of October 1, 2009, the APR must also exceed the “average prime offer rate,” as determined under TILA, by at least 1.5% if the loan is secured by a first lien mortgage or 3.5% if the loan is secured by a subordinate lien mortgage.
To further complicate things, the Federal Reserve Board recently amended HMDA. As of October 1, 2009, HMDA will no longer require lenders to report loans based on the spread between the APR and the rate on U.S. Treasury securities. Instead, HMDA applies a test based on the “average prime offer rate” as determined under the higher priced loan rules in TILA. As a result, it is not clear how lenders should apply the test based on U.S. Treasury securities in North Carolina.
In theory, there are two possible ways a lender could interpret this change in the North Carolina law. First, a lender could continue to apply the methodology that existed before HMDA was changed. Second, a lender could apply the methodology that HMDA imposes under its new formulation, just with respect to the U.S. Treasury yield. Until the Commissioner of Banks Office issues formal guidance on the matter, adaptable lenders must try to comply with the three-prong threshold test to determine if a loan constitutes a rate spread home loan under North Carolina law.
New Restrictions on Deficiency Judgments.
North Carolina currently prohibits deficiency judgments with respect to purchase money loans. 2009 House Bill 1057 expands that limitation to certain non-purchase money loans. Under the new law, a lender is prohibited from seeking a deficiency judgment if: (i) the home is occupied by the borrower and (ii) the property was sold under a power of sale. After January 1, 2010, lenders may not seek a deficiency judgment after a judicial sale.
The limitations will only apply to certain types of non-purchase money loans, including any loan originated after January 1, 2005, that was a rate spread home loan or a non-traditional mortgage loan at the time it was originated and any loan that was modified to become a rate spread home loan or a nontraditional mortgage loan after January 1, 2005.
A “nontraditional mortgage loan” could include any loan made to a natural person for primarily personal, family, or household purposes under the Fannie Mae conforming loan size for a single family dwelling. The loan must permit the borrower to defer payment of principal or interest and permit negative amortization.
Ready to Foreclose? Think again …
Until recently, a mortgage lender had to prove certain facts in order to foreclose on a mortgage loan. The lender had to show that: (i) the borrower owed money, (ii) the borrower was in default, (iii) the mortgage provided for a right to foreclose, (iv) the lender notified all parties entitled to notice, and (v) if the loan was a subprime loan, that the lender had delivered a pre-foreclosure notice to the borrower. However, once the lender met that criteria, the clerk of the court could issue an order entitling the lender to foreclose.
Under the new law, if the property is the borrower’s principal residence, the clerk of the court may not issue the order to proceed with the foreclosure unless the clerk believes the lender and borrower have done everything they can to avoid the foreclosure. Under 2009 Senate Bill 974, the Consumer Economic Protection Act of 2009, if the clerk finds that there is good cause to believe that additional time or additional measures have a reasonable likelihood of resolving the delinquency without foreclosure, the clerk can delay foreclosure. The clerk must consider whether (i) the lender has offered to modify the loan or some other commonly accepted resolution plan, (ii) the lender has been responsive to the debtor on the phone or at in-person meetings, (iii) the borrower has indicated that he or she has the intent and ability to resolve the delinquency under a resolution plan, and (iv) the foreclosure could be avoided if the parties initiated or continued resolution efforts in good faith.
Emily Miller is an associate in the Maryland office of Hudson Cook, LLP. Basis Points readers can reach Emily at 410-865-5418 or by email at emiller@hudco.com.