These Tough Lending Laws Could Travel

North Carolina's progressive protection laws for borrowers may become a nationwide model

North Carolina has not had the same subprime grief as Nevada or Colorado. Nor is it known for the high-octane activism of California or New York. Yet as Washington lawmakers hash out how to deal with millions of potential foreclosures, North Carolina's predatory-lending laws are shaping the debate.

The Tarheel State's progressive stance dates back long before subprime became a dirty word. North Carolina passed its first comprehensive predatory lending law in 1999 and has revisited the issue several times since. In August, Governor Mike Easley signed the toughest law yet. The North Carolina Home Loan Protection Act bans penalties for borrowers who pay off their mortgages early, mandates that lenders verify income, and is expected to limit the fees brokers collect for arranging certain high-rate mortgages. Only a handful of states, including Ohio and Maine, have enacted similar restrictions this year. And North Carolina's latest regulation is a model for proposals now making their way through Congress, including a bill sponsored by Presidential hopeful Senator Christopher Dodd (D-Conn.). "North Carolina was at the vanguard," says housing expert Kathleen C. Engel, a professor at Cleveland-Marshall College of Law in Ohio, who notes that more than half of states now have some version of North Carolina's original law on their books.

Critics of that 1999 law argued it would crimp North Carolina's housing market. But academic studies have found no such impact. In fact, the state thrived during the boom and has fared better than most during the downturn. Foreclosure filings rose 39% in this year's first half, far less than the 56% jump nationwide, according to research firm RealtyTrac. In the second quarter, median home prices were up 8% in Charlotte, the state's largest city, and Raleigh, the capital, vs. a 1.5% average drop for the U.S. "The bottom line is that [the regulations are] working," says North Carolina Attorney General Roy Cooper, who sponsored the 1999 law as a state senator. "North Carolina has strong banks that are tough but fair, and there's plenty of available credit."

In many ways, North Carolina has been the perfect home for these reforms. With a populist tradition, the state has some of the strongest unfair-trade practice laws in the country, notes Margot Saunders, counsel to the National Consumer Law Center. Still, it took an unlikely coalition of consumer advocates, bankers, and politicians to bring the issue to the forefront.

Martin Eakes was one member of that group. A Yale-educated lawyer, Eakes grew up in Greensboro, N.C. There he saw firsthand the financial discrimination against poor black families, who lacked easy access to capital to start a business or buy a home. So in 1980 he and his wife, Bonnie Wright, founded the Self-Help Credit Union to reach out to borrowers of modest means and blemished credit.

In the late 1990s, homeowners sought out Eakes for help renegotiating mortgages with onerous terms like prepayment penalties and high origination fees. Infuriated by such practices, he teamed up with Easley, then the Attorney General, to educate the industry on the toxic loans afflicting poor neighborhoods. That got the attention of big bankers, who had long fought against lending legislation. Lenders that weren't writing such loans feared the whole industry could get a black eye. "[Eakes] painted a picture that was, one, convincing, and two, pretty bleak," remembers Paul H. Stock, an executive vice-president of the North Carolina Bankers Assn., a group that spent months hammering out the details of the proposed law and lobbying for it in the state legislature. "My counterparts around the country weren't exactly complimentary. But the longer you drag it out, the worse it gets--and that could bring legislation that goes too far."

So far the national proposals haven't gotten such widespread support. The Mortgage Bankers Assn. has been a particularly strong opponent. The industry trade group argues that the underwriting standards in certain proposals will prevent needy borrowers from qualifying for a mortgage. "The government is deciding some people shouldn't get mortgages," says Kurt Pfotenhauer, the MBA's senior vice-president for government affairs and public policy.

The opposition hasn't stopped Eakes, who in 2002 started the Center for Responsible Lending, a lobbying and advocacy group now at the center of the national push for lending and bankruptcy reforms. He and others in the North Carolina consortium are pressuring folks inside Washington's Beltway to follow the state's lead. Already, the Federal Reserve has embraced one of the state's requirements that lenders, when underwriting a loan, look at a borrower's ability to repay it after the low teaser rates adjust upward--rather than basing it on introductory rates. Plenty of the bills working their way through Congress replicate North Carolina's law. This early in the process, though, it's not clear which one--if any--will have the momentum to pass. "Subprime mortgages can be productive and fruitful," says Eakes. "We just have to put boundaries in place."


Borrowers and lenders are scrambling to fend off foreclosures

Bankruptcy Blues

More troubled borrowers are declaring bankruptcy. Consumer filings were up 44.8% during the first nine months of the year, according to the American Bankruptcy Institute. In an effort to keep their homes, The Wall Street Journal reported on Oct. 23, owners are increasingly filing under Chapter 13, which gives them more flexibility to stave off foreclosure if they can work out a payment plan with their lenders. The rise comes at a time when U.S. lawmakers are debating whether to tweak the existing bankruptcy rules to give judges more leeway to renegotiate loans. The Center for Responsible Lending argues that such changes would save 600,000 homes from foreclosure, but the Mortgage Bankers Assn. contends they would further cripple the credit market.

A Preemptive Move?

Countrywide Financial, the nation's largest mortgage lender, said on Oct. 23 that it plans to refinance or modify up to $16 billion worth of loans as part of a commitment to keeping borrowers in their homes. But as wrote that day, that's not a new initiative. One analyst sees the voluntary program as a "preemptive move ahead of a call by regulators" for lenders to modify mortgages.

By Nanette Byrnes

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