By Justina Zou
A description of the data can be found under data descriptions.
To prevent predatory lending practices, protect homeowners, and establish a hierarchy of transparency and accountability, the North Carolina General Assembly enacted the Mortgage Lending Act (MLA) in 2001. This law set new licensing requirements for mortgage bankers, mortgage brokers, and mortgage loan officers throughout the state. The MLA gave the North Carolina Commissioner of Banks (NCCOB) authority to issue licenses and otherwise regulate mortgage brokers, non-bank mortgage lenders, and the individual loan originators who worked for them, as well as to enforce the provisions of the Act.
Enforcement of the MLA provides important insights into the conduct and practices of mortgage lenders and mortgage brokers leading up to the Global Financial Crisis of 2008. Consider our timeline of the number of Mortgage Enforcement Actions (MEAs). After an initial spike shortly after the Act’s passage, the number of MEAs came down before dramatically increasing in 2007 and peaking in 2008 with seventy-two.
One possible explanation for this pattern is that mortgage market players were unfamiliar with the MLA’s requirements just after enactment; another would be that at least some of those firms had an inclination to test the willingness of state regulators to enforce the law. Most likely, once market participants became familiar with the new requirements, and once the NCCOB established a reputation for aggressive enforcement, firms adjusted their business practices, thereby resulting in a decline in MEAs. These changes turned out to be short lived, as the continued housing market boom and the potential for mortgage brokers and lenders to make significant profits incentivized market participants to either ignore, or willfully, violate the licensing requirements in North Carolina. The boom also encouraged entry into loan origination and mortgage brokerage, increasing the potential number of offenders.
An examination of the most common types of violations over time supports our hypothesis. Initially, violations cited within the MEAs reflect an unfamiliarity with the MLA’s requirements. For example, the most cited violation in 2003 and 2004 was “failure to disclose criminal or civil conviction,” followed by “does not meet the financial responsibility requirements.” However, beginning in 2006 and rising sharply thereafter, the most cited violation became “falsification and misrepresentation of loans,” no doubt reflecting the euphoria of a booming housing market and the unscrupulous behavior it attracted. This was supported in our oral history interview with the former North Carolina Commissioner of Banks, Joseph A. Smith:
There were fake loans, there were loans that have been made up borrowers. There were terrible other examples of fraud to the point that the FBI’s chief agent in charge of these matters had said it was like a pandemic or epidemic of mortgage fraud and it had gotten to be the FBI’s top enforcement priority.
Interestingly, the second most cited violation in 2008 was “impermissible net-branching.” Net branching refers to the practice of licensed mortgage companies allowing unlicensed mortgage companies to illegally operate “under” their mortgage licenses, almost like a franchise. Although this violation did not appear until 2007, NCCOB did issue a declaratory ruling in 2003 warning against such arrangements.
The geography of violations also offers instructive evidence. While some MEAs list property locations pertaining to the borrower, this information can be misleading as borrowers may own multiple properties. Therefore, our analysis focuses on the location of the party, or licensee (mortgage broker/loan officer/etc.), which often includes the branch location involved in loan origination. Because most bank and non-bank branches tend to make loans only within their immediate and surrounding communities, focusing on the location of the licensee provides a better understanding of where problem lending was occurring within North Carolina.
Densely populated cities and their surrounding suburbs, such as Raleigh and Charlotte, have a larger number of MEAs. While some parties are located outside urban centers, they tend to be in vacation communities or near military installations (e.g. the Seymour Johnson Air Force Base in Wayne county). However, due to the large amount of missing values, it is possible that our data undercounts some rural areas. In addition, many violators were found through consumer complaints and/or investigations conducted by the NCCOB, which may impact the areas of enforcement. Finally, the geographic distribution of enforcement actions in many regulatory contexts mirror the location of regulatory officials, which often tracks areas of higher population density. Thus, actual enforcement actions may give a misleading impression of market behavior in rural communities.
North Carolina’s mortgage licensing requirements changed with passage of the federal Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act). The SAFE Act mandated a nationwide licensing and registration system for residential mortgage loan originators, and North Carolina responded by enacting the North Carolina Secure and Fair Enforcement Mortgage Licensing Act (NC SAFE Act), which replaced the North Carolina Mortgage Lending Act in 2009. This legislation imposed more stringent regulations on loan servicers, such as the requirement that loan originators send the schedule of fees and costs for servicing loans to borrowers as well as the NCCOB. Looking at the number of MEAs in North Carolina after passage of the NC SAFE Act, there seems to be a decrease in the number of MEAs, although the housing bubble had burst well before then.
 Clifford, Catherine. “Mortgage Fraud at an All-Time High.” CNNMoney. Cable News Network, March 16, 2009. https://money.cnn.com/2009/03/16/real_estate/mortgage_fraud/index.htm.
 Renuart, Elizabeth. “An Overview of the Predatory Mortgage Lending Process.” Housing Policy Debate 15, no. 3 (2004): 467–502. https://doi.org/10.1080/10511482.2004.9521511.
 Smith, Joseph. Interview by Kate Karstens. Tape recording. Durham, NC, December 9, 2019. https://apl.reclaim.hosting/oral-histories/joseph-smith/.
 Office of the Commissioner of Banks, RE: Declaratory Ruling 2003-01 Concerning the Mortgage Lending Act, by Joseph A. Smith. Raleigh, NC: NCCOB, 2003, https://www.nccob.gov/public/docs/financial%20institutions/mortgage/declaratoryruling2003_01netbranching.pdf (accessed 2/27/2020).