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Changes of Note to Lenders From the 2013 Legislative Long Session

11.8.2013

During the 2013 legislative session, several new laws were passed which directly affect the banking and financial services industries. While most of these changes are relatively minor, they are certainly worth noting. Below is a list of the relevant changes with a brief description. This overview is not intended to be relied upon as legal advice. Should you need any further information regarding these changes, please do not hesitate to contact an attorney in our firm's Banking and Financial Services Section.

Anti-Predatory Lending and State Mortgage Lending Law Changes - Session Law 2013-399 (Effective October 1, 2013)

The new law amending the anti-predatory lending statutes make them no more restrictive than the federal laws and in doing so increases the points and fees threshold for high-cost home loans, which are those loans, other than reverse mortgages, where (1) the principal amount is in excess of the lesser of (a) the amount set by Fannie Mae or (b) $300,000, (2) the borrower is a natural person, (3) the debt is primarily for family, personal or household purposes, (4) the loan is secured by (a) a security interest in a manufactured home occupied or to be occupied by the borrower, or (b) a deed of trust on real estate upon which is located a dwelling for occupancy by one to four families and is or will be occupied by the borrower and (v) the threshold requirements of the statutes are met.

The changes increase the rate of interest allowed to be charged on loans of $20,000 or more from 4% to 5% and when calculating points and fees, all up-front fees collected from the borrower and paid to the Federal Housing Administration, Veterans' Administration or United States Department of Agriculture, are excluded rather than limiting such fees to a threshold. The state's definition and regulation of rate spread home loans were revised to incorporate the federal regulations while any rate spread home loan in violation 15 U.S.C. § 1639c(a) is now usurious and any prepayment in violation of 15 U.S.C. § 1639c(c) is now unenforceable.

Damages and liability under the Article were amended to clarify that a borrower may not be able to recover twice for any violations of the rate spread section and any mortgage broker that brokers one of these loans will be jointly and severally liable with the lender making such loan.

Consumer Finance/Maximum Interest Rate Allowed Changes - Session Law 2013-162 (Effective July 1, 2013)

The 2013 amendments increased the threshold loan amount allowed under the North Carolina Consumer Finance Act ("NCCFA") from $10,000 to $15,000. The NCCFA requires that anyone making small loans, those under $15,000, obtain a license from the North Carolina Commissioner of Banks. By obtaining the license, the person making the loan is allowed to charge an interest rate greater than that allowed under Chapter 24 of the NC General Statutes. Chapter 24 requires that loans under $25,000 charge the default rate set by the Commissioner, but having a license under the NCCFA allows license holders to now charge a higher rate than that set by the Commissioner for loans up to $15,000 rather than the previous $10,000 threshold.

The minimum and maximum allowable terms of these loans, which are not secured by real estate, have also been increased from a minimum of 6 months and maximum of 84 months to a minimum of 1 year and a maximum of up to 8 years. Additionally, for a loan over $10,000 a lender may now charge 18%, per annum, on the outstanding principal balance. For a loan under $10,000, a lender may charge, per annum, 30% interest on the first $4,000, 24% on the principal between $4,000 and $8,000, and 18% on the remaining outstanding balance of principal. While the different loan amounts carry different interest rates, the agreement between the borrower and lender may only charge a single interest rate that earns the same amount as the applicable percentages mentioned above. These changes were passed to set one standard of interest rates rather than having a capped rate and an optional rate as allowed in Section 173 and 176 of the previous statute.

Small loan lenders now have the specific authority to charge late fees, subject to the following limitations that the late fee: (1) may only be charged when a payment is late for 10 or more days after the due date, (2) may not exceed $15.00, (3) may not be charged more than once in respect to any single late payment and (4) may not charge an additional fee on any future payment which would have been on time had it not been for the prior default where a late payment had already been charged.

The new statutes regarding consumer lending also amend the laws regarding the charging of fees for the purchase of insurance by allowing a lender to collect a fee to purchase a nonfiling or nonrecording insurance policy to insure against any defects in filing of the lender's security interest, but if the lender makes a claim under the policy it must: (1) credit the full amount of the claim to the outstanding balance of the related loan, (2) close the loan account and cease collection if the loan was paid in full by the proceeds of the claim, (3) provide written notice to the borrower, unless prohibited, of (a) the partial or full payment of the loan and (b) instructions on any future payments if the loan is subject to the insurance company's subrogation rights, (4) cancel of record or credit any judgments against the borrower or file a partial satisfaction if only partially paid, and (v) accurately report any account adjustments to the proper credit bureaus used lender.

Finally, there are new requirements on loans to military service members holding certain positions within the military and the duty is on the lender to determine if a potential borrower is a military service member to properly document such information in the borrower's loan file.

Alternative Procedure for Satisfaction of Security Instruments - Session Law 2013-204 (Effective June 26, 2013)

The recent additions to the statutes provide an alternative procedure for noting on record the satisfaction of a security instrument by expanding when a satisfaction agent can sign and submit a satisfaction affidavit. Under the new procedures, the agent must have reasonable grounds to believe that the secured creditor received full payment or satisfaction and the affidavit must state that one or more of the following applies:
    1. the satisfaction agent, acting on behalf of the owner of the affected real property, gave notice to the secured creditor of its intention to file the affidavit of satisfaction and at least 30 days have passed since the effective date of the notification and the satisfaction agent (a) has no knowledge that the secured creditor previously submitted a satisfaction for recording and (b) has not received notification that the secured creditor remains unsatisfied;
    2. the secured creditor authorized the satisfaction agent to file the affidavit of satisfaction;
    3. the satisfaction agent has possession of the original security instrument with an endorsement of payment and satisfaction thereon made by an entity listed in the statute;
    4. the satisfaction agent has possession of the original security instrument together with the original bond, note, or other instrument secured thereby, or solely the original security instrument if it contains the obligation secured and does not call for a note, bond or other instrument and such instruments are at least 10 years old counting from the maturity date of the instrument;
    5. the satisfaction agent has possession of the original security instrument together with all evidences of the debt secured thereby, which is marked as paid and satisfied in full by any bearer or holder thereof; or
    6. the satisfaction agent is unable to identify the secured creditor after diligent investigation.
Copies of any of the items listed above may be attached to and recorded with the affidavit. Additionally, the new laws require that the affidavit be signed or (1) acknowledged as required by law for the conveyance of real property and (2) sworn to or affirmed before an officer authorized to administer oaths. In furtherance of the above changes, the statutory form affidavit has been revised accordingly and the liability of a satisfaction agent is now limited where the agent erroneously records or submits an affidavit for filing if the agent complied with the Article, notified the secured creditor in a form provided in the Article and the secured creditor failed to respond to the notification in a timely manner.

Technical Corrections to Mechanics Lien and Lien Agent Laws - Session Laws 2013-29 & 2013-117 (Effective April 1, 2013)

The 2013 legislative session also brought with it two bills making several technical changes to the recent mechanics lien and lien agent laws, which are an ever changing area of the law and will remain so for the near future while the new system evolves. The revisions clarify that the lien agent provisions apply to all projects over $30,000 where the owner does not reside on the property, even those without a building permit, and where there is not a building permit the lien agent requirement is determined when the owner enters the contract for the improvements.

Also, due to varying interpretations of the statutes, the laws clarify that the exemption for owner-occupied residential dwellings applies whether the owner is the general contractor or hires a third party to serve as the general contractor and, in clarification, the lien agent is not an agent for the owner for service of a claim of lien upon real property or funds. The LiensNC.com website is now the official website to use in North Carolina for filing and searching notices to lien agents.

Some more substantial clarifications addressed the discrepancy regarding a general contractor's ability to waive the lien rights of its subcontractors and that the lien agent must notify a design professional of its receipt of the design professional's information within three days of receipt of such information from the owner of the property. The changes also expand the lower-tier subcontractors for which the general contractors and higher-tier contractors must provide notice by adding that it applies to those that furnish labor, materials, rental equipment or professional design or surveying services.

Finally, the revisions to the statutes remove the requirements for notice to contractors and design professionals in relation to the custom home builders exemption and it set in stone the fees that title companies may charge for serving as a lien agent.

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