Congress will consider HR 650 today, a bill that would undermine existing consumer protections under the guise of increasing the supply of credit for loans available for the purchase of manufactured homes.
Representative Stephen Lee Fincher (Rep-Tenn.) submitted the "Preserving Access to Manufactured Housing Act of 2015" earlier this year. It has moved out of the House Financial Services Committee and should come to the floor today.
The bill seeks to revise who is covered by the Truth in Lending Act ("TILA") and which loans trigger protections associated with the Homeownership Equity Protection Act ("HOEPA").
TILA covers rules for how lenders convey the terms and conditions of loans to consumers. In HR 650, some of the agents who interact with consumers to offer loans would no longer fall under the definition of an originator. In the new rule, as long as a salesperson who was involved in the process of facilitating a loan was not receiving compensation related to the financing, then he or she would not be considered an originator.
HOEPA amended TILA to provide additional protections for smaller loans. It was aimed to protect borrower's equity from abusive refinance and closed-end home equity loans, specifically in the instances when loans were offered with very high fees or for when they came with the kinds of terms that have a higher chance of leading to a foreclosure. For example, an HOEPA protection could be triggered if a loan of less than $50,000 came with thousands of dollars in application fees or with an interest rate that was more than 8.5 percentage points above a Treasury bill of a similar term length. In practice, this would mean that a lender would be discouraged from making a loan above about 12 percent.
Since its passage (and a subsequent update in Dodd-Frank), HOEPA has been a law that protects people who are accessing the worst credit products. Here are a few of its benefits:
- It has meant that lenders have to tell consumers that they do not have to take this loan as a condition of purchase.
- It bans balloon features for terms of less than five years.
- It bans negatively-amortizing loans.
- It bans lending under the Rule of 78th. It bans lending where the lender cannot demonstrate that the loan was underwritten for ability-to-repay.
- It bans loans that are designed as open-ended lines of credit.
We know that these kinds of loans are dangerous and the recent subprime crisis demonstrated that these features often lead to more foreclosures. HR 650 would allow loans to have higher interest rates before they could trigger HOEPA protections. CFPB Consumer Advisory Board member Adam Levitin, a professor of law at Georgetown University, submitted testimony to the House Financial Services Committee to rebut the bill. He rejected the concept that the bill would expand access, and instead, he posited that it could open the door to a lending environment where borrowers routinely pay fourteen percent interest.
The bill argues that HOEPA has reduced access to credit. But the number of manufactured housing loans has been increasing during the last few years. In North Carolina, for example, lenders made 7,954 loans for a manufactured home in 2013. As recently as in 2010, there were only 6,499 originations. While very high-cost loans are regulated by HOEPA, they can still be originated as long as they do not have the terms listed above. So if a lender feels compelled to charge a very high rate, they can still do so. They cannot originate a negatively amortizing loan booked under the Rule of 78ths that has a full balloon at the end of its 4-year term.
HOEPA in North Carolina
To better understand the impact of HR 650, let’s review manufactured housing lending in North Carolina in 2013:
- 26,690 completed applications.
- 13,289 loan approvals (about fifty percent approval rate)
- 7.954 loan originations
- 201 with interest rates greater than 8.5 percentage points above Treasuries of a similar term
So, there are 201 loans which fit the interest rate criteria for this rule. The old rule put restrictions in place when loans were priced at rates of more than 8.5 percentage points above the baseline Treasury and for less than $50,000. The new rule would reset the criteria to 10 percentage points and less than $75,000. In the existing system, 168 originations are flagged. There were 115 originations in 2013 that would have been captured by the new criteria.
This is a group of consumers who are mostly lower-income and who tend to live in rural areas. More than half of the borrowers in the new group (61 of 115) had incomes of less than $35,000. It seems reasonable that people making less than $35,000 who are paying thirteen to sixteen percent interest to buy a home deserve attention.
There are supply problems in manufactured housing finance. This is a market that has become too concentrated. Tennessee-based Vanderbilt Mortgage, a subsidiary of Clayton Homes, is among the largest. It issued 9,339 loans in 2010. They made even more in 2013.
But lenders are not shying away from making loans right now. I remember hearing Clayton's CEO (Kevin Clayton) bemoan their interest rate problems during a Congressional field hearing a few years ago. He was saying that his company has a hard time offering credit at rates below the high-cost threshold. Vanderbilt wrote 1,935 loans in 2013 for amounts less than $50,000 and interest rates above 10.5 percent. But this lending doesn't take place in isolation. In every one of those instances, the issuance of a loan facilitated the sale of a home. Clayton is not walking away from whatever regulatory burden they may feel.
This is a bill that serves the interests of a small segment of industry without providing a quid pro quo for consumers.