The "guts" of North Carolina's well-known predatory lending statute, N.C.G.S. ¤ 24-1.1E, became effective July 1, 2000, and create special rules for "high-cost home loans." The "HCHL" statute is based in part on the federal Home Owners Equity Protection Act ("HOEPA"), which is part of the Truth-in-Lending Act. Unlike HOEPA, the high-cost home loan statute covers all residential mortgage loans, including purchase money loans. The "thresholds" for high-cost home loan transactions are somewhat convoluted and made complicated by cross-references to HOEPA. In short, any residential mortgage loan (including manufactured home loans) in which the principal amount does not exceed the lesser of the FNMA conforming loan size or $300,000 and in which the interest rate is greater than 10% of the Treasury rate, the "points and fees" (less certain "bona fide discount points" and certain prepayment fees) exceed 5% of the total loan amount for loans of $20,000 or more or the lesser of 8% or $1,000 for loans of less than $20,000, or prepayment fees in excess of 2% may be collected more than 30 months from closing.

Concerns for closing attorneys and title insurance companies arise due to the breadth and complexity of the statute as well as the unique penalty provisions of G.S. ¤ 24-1.1E:

• Lenders' written instructions typically require the closing attorney to close the loan "in accordance with applicable laws." Section 24-1.1E(b) and (c) list various requirements and prohibitions for "high-cost home loans." It ordinarily will not be possible for the closing attorney to determine whether all aspects of underwriting and document preparation are in compliance with the HCHL statute. In addition, issues of federal preemption will make the analysis even more difficult.
• Questions have arisen as to whether a title company's closing protection letter directed to the lender will protect the lender against the closing attorney's failure to recognize "high-cost home loan" requirements and prohibitions. It seems to be a stretch to believe that a title company, issuing a standard form of closing protection letter, would be liable to the lender under these circumstances.
• The North Carolina General Assembly just recently weighed in on the issue of closing attorney or closing agent liability in HCHL closings. Embedded in the "short session" technical corrections bill (SB 1335) is a prohibition under N.C.G.S. ¤ 24-1.1E against a lender shifting "loss, liability or claim of any kind" to the closing attorney or closing agent for violation of the high-cost home loan statute. (The bill will not become law until the Governor signs the legislation, which is expected to occur by the end of July.) It may be that this prohibition means that the lender should not even contract with (by instruction letter or otherwise) the closing attorney regarding the closing attorney's potential liability for "high-cost home loan" violations. It is more reasonable to believe that the lender should not seek to enforce liability against the closing attorney for Section 24-1.1E violations.
• If the title company serves as "closing agent" in a HCHL transaction, then likewise the lender cannot hold the title company liable for HCHL violations. It remains unclear, even with the "technical correction" to the HCHL statute, whether the title company issuing the insured closing letter could be liable for the closing attorney's role in closing a HCHL transaction which violates the new law. In any case, title companies should take care that insured closing letters do not extend liability for risks not intended to be covered.
• Title companies should exercise caution in issuing usury endorsements covering residential home loans in North Carolina. Section 24-1.1E is part of the usury statute (Chapter 24), such that a usury endorsement may well provide coverage against losses of a lender who violates the statute. Remedies and penalties expressly include Chapter 75-type remedies, including treble damages and attorneys' fees. See N.C.G.S. ¤ 24-1.1E(d).
• The statutory remedies in Section 24-1.1E do not include avoidance of the mortgage (deed of trust) securing a noncompliant high-cost home loan. Title companies and attorneys should expect, however, Section 24-1.1E violations to be used to bolster equitable actions to enjoin foreclosure, whether under N.C.G.S. ¤ 45-21.34 or otherwise. It is not yet known whether the courts will recognize rescission of the deed of trust as a remedy for violation of the statute.
• Section 24-1.1E(e) provides a unique and troublesome framework for the correction of errors. If a "compliance failure" occurs, the lender has the right (absolutely within 30 days of loan closing; conditionally within 60 days) to notify the borrower of such failure in order to avoid liability under the statute. The lender then is required to make restitution and the borrower is given the choice to require the lender to (i) satisfy the statutory requirements of subsections (b) and (c), or (ii) change the terms of the loan "in a manner beneficial to the borrower so that the loan will no longer be considered a high-cost home loan" under the statute. It appears, therefore, that if the lender steps forward to avoid liability, the lender risks "losing it all" because one of the ways the borrower could require the lender to "cure" would be release of the deed of trust. A more thorough discussion of the difficulties of Section 24-1.1E is beyond the scope of this brief article. It will behoove title companies and closing attorneys to become intimately familiar with this statute.

Lampe is a partner with Smith, Helms, Mulliss & Moore, LLP, in Greensboro, NC. E-mail: don_lampe@shmm.com

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