Lawmakers consider easing requirements for NC mortgage lenders

N.C. House members expect to vote Friday on whether to recommend easing requirements for mortgage lenders – a move that proponents say would cut costs for the industry but critics say would dilute protections for borrowers.

Rep. John Bell, co-chair of a study committee examining the proposed changes, told the Observer on Thursday that he and other lawmakers plan to file legislation to be taken up when the General Assembly convenes in January.

Bell, a Republican from Goldsboro, said the changes, backed by the mortgage industry, would provide relief to small mortgage firms that he said are struggling to grow because of the costs to comply with existing state laws.

But consumer advocates worry about any loosening of rules for the mortgage industry seven years after shoddy home loans plunged the U.S. into the worst economic downturn since the Great Depression. They argue the changes could make it easier for bad actors to operate in North Carolina’s mortgage industry.

“Mortgage bankers and mortgage brokers were a big reason why we got into the financial crisis. The last thing we want to do now is relax standards and let unqualified people into the business,” said Chris Kukla, senior vice president for the Durham-based Center for Responsible Lending.

The bipartisan House study committee, which has been reviewing the issue for a year, is scheduled on Friday to take a final vote on whether to recommend the changes. They would apply to mortgage lenders that don’t take deposits, as opposed to banks.

Consumer advocates are questioning two of the proposed changes in particular:

Mortgage lenders currently are subject to the bond and net worth requirements in order to be licensed as a lender in North Carolina, regardless of where the lender is based.

The N.C. Office of the Commissioner of Banks, which regulates North Carolina’s mortgage companies, has not taken a position on the proposed changes.

George Teague, a lobbyist for the Mortgage Bankers Association of the Carolinas, said eliminating the auditing requirement would affect fewer than 100 mortgage companies in North Carolina. The other change, reducing the bond, would benefit the roughly 550 mortgage lenders and brokers licensed in the state, he said.

The changes would especially help small mortgage brokers, which usually feel the cost burden from the audit and bonding rules more than larger businesses, he said.

The changes come at a time when U.S. banking industry regulations are again becoming a hot topic politically.

This week, President Barack Obama signed into law a $1.1 trillion spending bill that included a provision to roll back certain regulations imposed on large banks by the 2010 Dodd-Frank Act, created in response to the 2008 economic meltdown.

Bond amounts to fall

Advocates of lowering bond amounts say it could reduce the cost for mortgage firms to do business in North Carolina and make the state more competitive with nearby states. It’s cheaper for mortgage firms to do business in those states, where bonding amounts are lower, advocates say.

Critics argue that dropping the amounts could make bond companies scrutinize mortgage companies less. The higher the bond, the more bond companies will screen out unscrupulous companies who might later cause them losses, critics say.

Under the bond changes being considered, the minimum amount for which a broker would need to be bonded would drop from the current requirement of $75,000 to $25,000.

Other states, including Virginia and Tennessee, have lower starting bond levels than North Carolina, some mortgage industry officials said during a March meeting hosted by the commissioner of banks, according to a report from the commissioner.

Bond amounts would be lowered in other instances, under the changes. For example, current law requires a mortgage broker who originates $50 million or more in loans in North Carolina in a calendar year to have a minimum bond of $250,000. Under the changes, that broker would be allowed to originate a larger amount of loans – $100 million or more – and be bonded for less: $150,000.

Audits could be scrapped

Lenders say it can cost them thousands of dollars to have their financial statements audited, a cost critics say can be a big burden for small lenders. Those costs might then be passed on to consumers.

“That was really hurting some of the small mortgage companies,” said Bell, the legislative committee co-chair.

Supporters of the audits say they help ensure the accuracy of the numbers the mortgage companies report. Unaudited statements provide no protection against false reporting by bad actors, they say.

“Prior to these requirements being in place … we had a lot of bad actors in the mortgage industry who were … acting inappropriately and hurt a lot of homeowners and homebuyers in North Carolina,” said Al Ripley, director of consumer and housing affairs for the North Carolina Justice Center.

Bell said the bonding and auditing changes would not create more potential for mortgage industry abuses.

“I personally believe that these were reasonable and well-vetted (changes) and these recommendations will continue to be vetted through the committee process in the General Assembly before becoming law – if they become law.”