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Manufactured Housing and Captive Finance: Can it be done successfully in Today’s Environment?

1) – Introduction and background. Let's set the stage for what I sincerely hope will be an important dialogue within our industry. I've seen estimates that there are some 5 to 9 billion dollars worth of captive finance paper created by manufactured home professionals, mostly in the land lease community side of the industry. Much of this was created prior to the SAFE Act, Dodd-Frank and the sea change that took place in the U.S. financial landscape since 2008.

Even prior to 2008, states typically had regulatory requirements for initiating the creation of a note or financial instrument used for lending. The regulatory burden has only grown since then.

That captive finance has been a useful tool to sell homes ought to be self evident. The question before us today is, can captive finance (buy here, pay here, related finance, etc.) be done successfully in a legally compliant fashion in today's more intense regulatory environment?

A couple of days ago, I sent out a message to a cross section of professionals – including those well known for promoting captive finance – with the following subject line: We'd like your feedback. Let me stress that these initial comments are not the end of the subject. Pros can post comments on the website via the Disqus system, or can email them to me, in the same way that what follows in #2 below was done.

Here was the invite:

http://MHProNews.com/blogs/tonykovach/cubes-and-angles/

We have already received an interesting range of comments on the last topic in the blog post linked above.

Some of the comments, on captive finance, to spark yours:

> only medium to large sized operators will be able to keep up with the compliance burden, smaller players will not be able to do so.
> most MHCs and those retailers who use captive finance would be better off working with an industry lender or local bank.
> yes, it is doable, but it will take intense and costly work to do so.
> our Industry has to learn to attract finance-able customers, which avoids the entire problem.
> true, it is not possible for smaller operators to keep up with the regulatory compliance needed in the current environment, and the best proof are the community banks who are getting out of lending.  If small banks can't do it, how can a mom and pop MHC owner hope to pull it off?

We'd be interested in YOUR comments.  Please use the subject line:

>>> Captive Finance in today's regulatory environment

There is no word limit for your comments.  We ask that any comment not be promotional in nature, but rather fact, experience or opinion based.  Then let us know If you'd like your name used or if you prefer an anonymous comment. We will honor either request.

We Provide, You Decide. Against that backdrop, we will share some fresh replies, and anticipate sharing more in the days ahead as they come in from readers and professionals like yourself.

2) The reply that follows was from a lender, who asked to remain unidentified (anonymous). Quoting:bank-credit-finmarkusa-posted-manufactured-home-pro-news-.jpg

Why on earth would a manufactured home park enter the finance business?

I am a lender so obviously I am biased and feel that the parks should let the Bank be the Bank. However, if the entity is very large, I suppose it could make some sense. The larger mega park owners can surround themselves with quality experienced lending talent, law firms that have experience in consumer collections and bankruptcy laws, as well as a good software platform that is compliant with all current and changing lending laws. All of this does not come without a price.

For smaller park owners you should answer the following:

  1. Do I have a thorough understanding of regulations B and Z.?
  2. Do I understand the Safe Act, the Patriot Act, Dodd-Frank, HMDA and HOEPA?
  3. How do I know that my documents are compliant?
  4. Do I have a firm written credit policy and is the criteria of this policy applied constantly to every applicant?
  5. Is my support system compliant with interest accruals, late charge assessments,

payment posting and APR tolerances?

  1. How much do I know about debt collection laws in regards to what I can say, what I can do and what verbiage can be put in a collection letter?
  2. Am I prepared to deal with chapter 7 and 13 bankruptcies?
  3. Am I prepared to promptly deal with complaints from the CFPB, States Attorney and other government agencies the consumers often complain to?
  4. How much do I know about the legal requirements of repossession procedures, required time frames and repossession title procedures?
  5. Am I willing to take on fair lending risks in addition to fair housing laws?
  6. Do I understand insurance escrows, proper monitoring and force placing?
  7. Can I deal with the time and expense of a delinquent that won’t pay and refuses to vacate the home?
  8. Do I have the time and available sources and reserves to return repossessed homes back into a sale-able condition to retail? Average is $5,000 to $8,000 per home.

I ran some numbers on a typical MH loan at a typical interest rate. Wow the profit looks like the finance business is the way to go. Even if the money is borrowed to support a captive finance company, the margin is huge.

Is the risk worth the reward? Am I going to build a monster? I understand that financial institutions spend hundreds of thousands of dollars on compliance and a compliance staff every year? If a bank won’t approve a loan to an applicant, should I really be approving it? I think all of this compliance stuff will get better and go away? I don’t think all of these regulatory agencies will really bother me?

If all of your answers are “yes” go for it.

3)The following are notes from a conversation with a community owner that called, this is not a word for word quotation, as the above was, so we willmanufactured-home-community-credit-finmarkusa-posted-manufactured-home-pro-news-.jpg bullet point the community owner's comments.

  • I've done a number of loans on homes in my communities.
  • We've had pretty good loan performance overall. The business has been profitable.
  • I know that we are not legally compliant. We are 'flying under the radar.'
  • I don't think that it is possible to get and stay legally compliant for an operation of my size. Too much paper work, too many laws, too costly to do it the way the state or federal government requires.
  • We are currently researching options that would let us bring in a manufactured housing lender that will take over this book of business. I know the risks are too great to continue to do what we have in the past. So I want to off-load those risks in a responsible, legally compliant fashion with an MH lender that knows the ropes.

4)The following are bullet points from a phone call with a veteran MH Industry expert.

    • It is not possible for a small community operator today to get and stay legally compliant in the current regulatory environment.
    • The risks are too great, the compliance burdens are too many and the rewards are too small.
    • Community banks are getting out of lending because of the high costs of compliance. How can the small or even mid-sized communities think they can become compliant when lending professionals are exiting under the burdens imposed by Dodd-Frank and the CFPB?
    • The industry must seek de minimus exemptions. It is the only way for the mom and pop operation to hope to do captive lending.

    5)There are some topics – this being one of them – where anonymous comments will be the most likely way to get people to respond. The community owner who called to say, they are making loans without all the licensing needed is but one example of why this is so. The lender who doesn't want to sound like they are taking aim at an person or company is another example.

    We welcome more comments on this captive finance topic. You or others are welcome to join in this conversation and discussion. Please follow the guidelines spelled out in #1 above. We plan to publish more comments on this topic in the days ahead.

    As this is an important subject that impacts literally thousands of locations in our industry, we won't segue today into other topics. For the latest, please check out the Daily Business News, MHI and MHARR news, Corporate Press releases and Industry Voices on other subjects, or click here for this months Featured Articles.

    Let's catch up mid week; my thanks as always for being a regular reader here on MHProNews. ##

    PS: Check our many Exclusive and Red Hot Featured Articles for July and see the

    L. A. "Tony" KovachL. A. 'Tony' Kovach
    ManufacturedHomeLivingNews.com | MHProNews.com |
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    L.A. 'Tony' Kovach, MHM - Publisher, Marketing Director and Industry Consultant
    http://www.linkedin.com/in/latonykovach
    Manufactured Home Marketing Sales Management trade journal
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