A home equity loan is a form of second mortgage that allows a homeowner to borrow against his property. Known in the lending industry as a "second lien" loan, a home equity loan is secured by the property. The borrower accepts a fixed or variable interest rate and agrees to either a "closed" loan with a set term, or an "open" loan that works like a revolving credit account. The state of North Carolina has adopted laws intended to prevent predatory or unfair practices by home-equity lenders.
Whether or not they carry a high rate of interest, first and second mortgages will charge fees to the borrower. The law allows lenders to charge fees for the services they provide, such as originating, documenting and closing on a home loan. But without legal restrictions, fees can turn expensive and deceptive. Under the guise of doc fees, origination fees, title fees, closing fees and many other labels -- and rolled into the principal loan amount -- they can turn a home-equity loan into a difficult burden for the unwary borrower. This is true even for loans that carry a reasonable market rate of interest.
Federal and state lending laws govern home equity loans and lines of credit. The federal Home Ownership and Equity Protection Act, for example, sets limits on fees that can be charged on home-equity loans carrying a minimum interest rate. This interest rate "trigger" for the HOEPA guidelines is 10 percent above the rate set by the U.S. Treasury for "second lien" loans. Loans covered by HOEPA are subject to rules on the charges for optional insurance programs, and the overall percentage of fees. Individual states, including North Carolina, have introduced their own laws on home-equity loans that go beyond the federal limits.
North Carolina Predatory Lending Law
North Carolina was the first state to pass its own "predatory lending" law, intended to prevent mortgage lenders from deceiving or cheating borrowers. The North Carolina Predatory Lending Act also sets a "trigger" interest rate that makes a loan subject to certain restrictions. For these loans, the state bans pre-payment penalties that lenders may try to charge a homeowner who is trying to pay off the debt early. In addition, a loan subject to the law may not include a large "balloon" payment at the end of the loan term.
Other Fees and Charges
The North Carolina law also bans lenders from financing points, closing costs or fees with the high-interest loan. These must be paid separately by the borrower. Also, the lender cannot roll into the loan premiums for credit, unemployment, life or disability insurance, which would pay off the loan in case of an adverse event. In addition, the law requires that anyone taking out a high-interest loan -- also known as a "sub-prime" loan -- must attend a credit counseling session, at which the borrower will go through the terms of the loan with a counselor. The counseling is free but must be taken with an agency or individual approved by the North Carolina Housing Finance Agency.
- Federal Reserve Bank of St. Louis: Local Predatory Lending Laws: Going Beyond North Carolina
- North Carolina Housing Finance Agency: Avoiding Predatory Lending
- North Carolina Legislature: Article 9. Instruments to Secure Equity Lines of Credit
- Responsible Lending: North Carolina General Assembly - [ S 1149 vc ] Senate Bill 1149
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