Lenders new to the manufactured housing market, or those that exited the market and are now reentering, may be surprised by the limitations imposed on how potential borrowers find financing at a retailer.
The Shift to a Direct Lending Model
Prior to the SAFE Act, the manufactured housing finance market — particularly the chattel-only market — operated predominantly on an indirect lending model. A purchaser would enter a retail installment sales contract (RIC), which was held by the retailer in portfolio or assigned to a financial institution or sales finance company.
After the SAFE Act, there was a shift to a direct lending model. The reason behind the change was that the individuals at the retailers who were taking the applications or offering or negotiating the terms of the RICs needed to be licensed as mortgage loan originators, which created a burden that most retailers could not overcome.
After the change, while retailer employees could not engage in mortgage loan originator activity, retailer employees were able to provide some assistance to consumers in finding an appropriate lender.
The CFPB’s LO Comp Rule
The CFPB’s Loan Originator Compensation Rule placed further limits on activities retailer employees could perform in helping consumers find appropriate lenders. Lenders and retailers are particularly concerned that retailers and their employees will engage in activity that will make them loan originators under the LO Comp Rule and, as a result, are concerned that prohibited loan originator compensation will be paid. Concomitantly, lenders are also concerned that if a retailer or its employee is engaged in loan originator activity, then amounts received by the retailer in connection with the sale may need to be included in “points and fees” for the high-cost home loan calculation.
The LO Comp Rule does provide an exemption for retailer employees. Specifically, the exemption allows the employee to “assist” a consumer in finding a lender, provided he or she does not engage in any other loan originator activity. On its face, the exemption is promising. In reality the exemption is not particularly useful. Notably, the CFPB’s Official Interpretations to the LO Comp Rule provide that “referral” activity is an activity that makes someone a loan originator under each of the activities that a retailer employee cannot engage in under the exemption. Further, the CFPB’s Official Interpretations provide a very narrow list of activities that can be performed while still qualifying for the exemption, such as “providing or making available general information about creditors or loan originators that may offer financing for manufactured homes in the consumer’s general area, when doing so does not otherwise amount to ‘referring’” and generally describing the credit application process to a consumer without advising on credit terms available from a creditor.
The adoption of this activities-based exemption has contributed to retailer employees’ inability to provide useful information to customers regarding lenders that may be available. Due to the LO Comp Rule, in practice retailer employees are generally limited to providing lists of lenders to customers and allowing lenders to provide marketing materials on their “lender wall.”
S. 2155 May Change the Landscape Again
S. 2155, if it becomes law, would provide a clear compensation-based test for determining whether an employee of a retailer is engaged in loan originator activity. Specifically, S. 2155 would amend the definition of a “loan originator” in the Truth in Lending Act to exempt a retailer or retailer employee who does not receive compensation or gain in excess of what would be received in a comparable cash transaction, provided the retailer or employee does not directly negotiate with the consumer or creditor on loan terms.
If this change becomes law, retailers and their employees will be in a better position to meaningfully assist a customer who needs to find financing to purchase a home. These changes would also provide lenders with additional assurances that loan originator compensation, including prohibited loan originator compensation, is not being paid in connection with the origination of their loans.
Even with these changes, retailers and their employees are not free from restrictions when assisting consumers with finding financing. Notably, S. 2155 expressly prohibits the direct negotiation of loan terms. In addition, S. 2155 does not exempt retailers and their employees from licensing under state law, including mortgage loan originator licensing, which means retailer employees will need to still refrain from engaging in licensable activity, such as taking applications or offering or negotiating loan terms.
Conclusion
After the SAFE Act and the CFPB’s changes to the LO Comp Rule, the manner in which a retailer employee can provide assistance to a customer in finding an appropriate financing source is heavily restricted. While pending legislation, including S. 2155, would remove some of these restrictions, it would not remove all of them.
A lender that makes loans secured by manufactured homes should continue to be cognizant of the restrictions that are in place, now or in the future, to make sure retailer employees’ conduct does not expose the lender to regulatory risk.
Jeffrey Barringer is a member of the Albany, N.Y. office of McGlinchey Stafford and concentrates his practice in consumer financial services regulatory compliance. Jeff regularly advises lenders and other market participants on issues related to manufactured housing finance.
