Wednesday, January 14, 2015

Watch Out: North Carolina Fee Limitations on Home Loans

Like many states, North Carolina sets limits on closing fees and charges that a mortgage lender can impose on a borrower in connection with residential mortgage loans.  But North Carolina's fee restrictions are special in a number of ways.

First, on a "home loan" a lender's origination charges are limited to the following:

  • loan application, origination, commitment, and interest rate lock fees (HUD-1 801; GFE Box 1);
  • bona fide discount points (HUD-1 802; GFE Box 2); and
  • additional origination charges (in whatever name) in the aggregate not to exceed the greater of (i) 1/4 of 1% of the note amount, or (ii) $150.  (HUD-1 801; GFE Box 1)  See N.C. Gen. Stat. 24-1.1A(c)(1).

 The net result of the above limitation on a lender's origination charges is simple: other than application fee, origination, commitment fee, rate lock fee, and discount points, a lender can only charge an additional maximum of $150  to cover all other origination fees.  (It's worth noting that the statute does not limit the origination fee (point) to 1% or any particular amount.)  Anything beyond the limit will cause the loan to be out of tolerance.

Second, a "home loan" is defined to mean one where the loan:

  • has a principal amount (note amount) that is less than $300,000;
  • is a closed-ended transaction; and
  • is secured by a first lien against real property with, or to be built upon it, one or more single-family dwellings or dwelling units, or a manufactured home. 
Therefore, the definition is broad enough to cover purchase and refinance transactions to be secured by a principal residence, a second home, or investment property.  But, loans in a subordinate lien position is excluded.

Third, the applicable statute and regulations are silent on the penalties if a lender exceeds the limitation on origination charges.  Usually, it is acceptable under federal law, i.e., RESPA and TILA, to issue a lender credit at the time of closing, or a refund check post closing, to cure any tolerance violations.  When asked whether there is a cure mechanism applicable to a N.C. Gen. Stat. 24-1.1A(c)(1) violation, an employee at the mortgage compliance division of the North Carolina Commissioner of Banks indicated, via informal telephone guidance, that a refund check to the borrower along with a letter of explanation is an acceptable way to cure the violation.  Good record-keeping by a lender is advised in connection with discovering and curing a tolerance violation.   


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