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North Carolina's New Anti-Deficiency Statute

10.14.2009

 
During its 2009 session, the General Assembly enacted House Bill 1057, which created North Carolina’s anti-deficiency statute. The types of loans covered by this legislation are: (a) “Rate Spread Home Loans” originated on or after January 1, 2005 (including loans modified after January 1, 2005, which became a Rate Spread Home Loan); and (b) “Nontraditional Mortgage Loans” (including Nontraditional Mortgage Loans created by modification).

“Rate Spread Home Loan” is defined in N.C.G.S. § 24-1.1F as a loan that meets all of the following requirements: (a) the borrower is a natural person; (b) the debt is incurred primarily for personal, family, or household purposes; (c) the principal amount is less than the conforming loan size limit for a single-family dwelling as established from time to time by Fannie Mae; (d) the loan is secured by a security interest in a manufactured home or a mortgage or deed of trust on real estate containing a one to four family dwelling structure (either built or to be built) any of which is or will be the borrower’s principal dwelling; (e) the loan is for the purpose of purchasing the dwelling, constructing, repairing, rehabilitating, remodeling, or improving the dwelling or the real property on which it is located, refinancing an existing obligation secured by the same real property, or consolidating existing consumer debts into a new home; and (f) the loan’s annual percentage rate exceeds all three of the rate spread characteristics. The rate spread characteristics are as follows: (1) the annual percentage rate exceeds the “Average Prime Offer Rate” for a comparable transaction as of the date the interest rate is set by 1.5% or more for first mortgages if the loan is secured by a first mortgage and 3.5% or more if the loan is secured by a subordinate lien mortgage; (2) a rate spread of more than 3% on first mortgages and more than 5% on second mortgages when compared to the loan’s annual percentage rate and the U.S. Treasury bills; and (3) a rate spread of more than 1.75% for first mortgages and 3.75% for second mortgages when compared to the “conventional mortgage rate” for fixed rate mortgages published by the Federal Reserve Board.

“Nontraditional Mortgage Loan” is defined as a loan that: (1) meets all of the requirements (a) through (d) of the Rate Spread Home Loan; and (2) the terms of the loan permit the borrower as a matter of right to defer payment of principal or interest and allow or provide for the negative amortization of the loan balance.
 
The legislation specifically exempts the following types of loans: (a) certain home equity lines of credit; (b) certain construction loans; (c) certain reverse mortgages; (d) a bridge loan with a term of 12 months or less; (e) a loan made by a natural person who makes no more than one loan in a twelve month period and is not in the business of lending; and (f) a loan secured by a subordinate lien on the borrower’s principal dwelling, unless the loan was made contemporaneously with a Rate Spread Home Loan or a Nontraditional Mortgage Loan.

If a loan is subject to the anti-deficiency statute, deficiency judgments are prohibited if the property was occupied by the borrower as a primary residence at the time the foreclosure proceeding was commenced. For mortgages or deeds of trust recorded before January 1, 2010, this prohibition applies to foreclosures under power of sale; for mortgages or deeds of trust recorded on or after January 1, 2010, the prohibition applies to foreclosures under power of sale and judicial sale.

This legislation provides for recovery of any attorneys’ fees by the borrower in full for improper deficiency suits, regardless of the terms of the loan documents or any statutory presumption as to the amount of attorneys’ fees.

The anti-deficiency statute became effective October 1, 2009, and applies to actions filed on or after that date. To be codified at N.C.G.S. § 45-21.38A.
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