NC Loan Broker Act Remains an Important Lending Statute and Litigation Tool

By Adam Altman

The North Carolina Loan Broker Act was enacted in 1979 “to protect the public from unscrupulous loan brokering practices.”  Brief of Amicus Curiae Roy Cooper, Attorney General of North Carolina at 4, Printing Services of Greensboro, Inc. v. American Capital Group, Inc. 361 N.C. 347, 643 S.E.2d 586 (2007).

The North Carolina Loan Broker Act (the “Act”), codified in Article 20 of Chapter 66 of the General Statutes, requires that loan brokers provide prospective borrowers with a disclosure statement, obtain a surety bond or establish a trust account, and file certain disclosures with the North Carolina Department of the Secretary of State.  See N.C.G.S. §§ 66-107, 66-108, 66-109.  The Act prohibits loan brokers from collecting an advance fee from prospective borrowers prior to the closing of the loan.  See N.C.G.S. § 66-108(c).  There are several categories of persons and entities that are expressly excluded from the provisions of the Act.  See N.C.G.S. § 66-106(b).  If loan brokers fail to comply with the Act, prospective borrowers may void the loan brokerage contract and sue for damages, recover attorney’s fees, and obtain treble damages.  See N.C.G.S. § 66-111.  The treble damages component is available because the violation of any provision of the Act “shall constitute an unfair trade practice under G.S. 75-1.1.”  N.C.G.S. § 66-111(d).

Despite the Act’s strict requirements for loan brokers and comprehensive damages for victimized borrowers, the last published appellate opinion interpreting the Act was the North Carolina Court of Appeals decision in Printing Services of Greensboro, Inc. v. American Capital Group, Inc., 180 N.C. App. 70, 637 S.E.2d 230 (2006), aff’d per curiam, 361 N.C. 347, 643 S.E.2d 586 (2007).  In that case, the Court of Appeals held that the defendant was “not precluded from being considered a ‘loan broker’ governed by the Loan Broker Act simply because the party for whom the loan is intended is a corporation and not an individual.”  Printing Services, 637 S.E.2d at 234.

This spring the Court of Appeals issued its decision in Quantum Mortg. Corp. v. Ghelani, No. COA17-940 (N.C. App. April 3, 2018) (unpublished) in which it affirmed the trial court’s award of treble damages and attorney’s fees to the prospective borrowers against a loan broker.[1]  The case arose out of a contract entered into in North Carolina in which the plaintiff, Quantum Mortgage Corporation, agreed to assist the defendants, Cannon Ghelani and ShoreRock Group, LLC, in procuring a loan for a construction project in New Jersey.  Plaintiff filed suit for breach of contract alleging that defendants failed to pay plaintiff its commission fee due under the contract.  Defendants filed counterclaims for (1) violations of the Act for failing to comply with the Act’s requirements for loan brokers and (2) Unfair and Deceptive Trade Practices.  Defendants filed motions for summary judgment as to plaintiff’s breach of contract claim and as to their counterclaims.  In two separate orders, the trial court granted both of defendants’ motions, dismissed plaintiff’s claims with prejudice, and awarded defendants treble damages under the Unfair and Deceptive Trade Practices Act (“UDTPA”) and attorney’s fees under the Act.

On appeal to the Court of Appeals, plaintiff first argued that the trial court should not have granted defendants’ motion for summary judgment as to plaintiff’s claims because the Act did not apply to the loan brokerage contract as it involved a New Jersey borrower, real property, and construction contractors.  Rejecting plaintiff’s argument, the Court of Appeals concluded that the Act applies because the parties entered into the contract in North Carolina and the record showed that the parties solicited, discussed, and negotiated the contract in this state.  See N.C.G.S. § 66-112.  The plaintiff then argued that the trial court should not have granted defendants’ summary judgment motion as to their counterclaims and awarded them treble damages and attorney’s fees.  Plaintiff claimed that the trial court could not, on the one hand, award attorney’s fees under the Act, and, on the other hand, award treble damages under the UDTPA because the remedies were “inconsistent with each other.”  The Court of Appeals disagreed with that argument and affirmed the trial court’s award of damages and attorney’s fees because the Act “explicitly states the remedies therein are ‘in addition to’ any other remedies allowed for by law.”

In conclusion, the Loan Broker Act contains many strict requirements for the way that loan brokers conduct business in our state.  Brokers and borrowers (and their counsel) should be familiar with these requirements to reduce the likelihood of disputes and liability.

[1] The author represented the prospective borrowers in the trial court and in the Court of Appeals.