A New Danger

9 Replies

The Proposed Regulatory Prudential Standards for Non-Bank Mortgage Servicers put out by the CSBS could put all small lenders who are financing purchases of manufactured homes out of business in states that adapt these standards. http://www.csbs.org/regulatory/Documents/MSR-Propo...

There is a commentary period and I would suggest you contact them with a detailed response of how it would hurt both your business and the consumers you serve. The commentary period ends June 23d.

A few state trade associations have commented as has Rishel Consulting Group. You should contact your state association and encourage them to comment. The national association (MHI) responded with comments last week.

Consider asking for chattel lending to be specifically excluded in writing, and failing that, to be excluded from the capital requirements. If we are subject to the capital requirements less than 50 out of 5000 (known) captive finance lenders could survive. Note there is absolutely no exemption for very small operators.

The CSBS is stating orally that chattel lending on manufactured homes is not subject to these proposals, but we have all seen how that went with the SAFE Act and the Dodd-Frank Act where the same oral assurances were given to MHI.

For those of you with your head in the sand about getting compliant with state and federal laws, regulations, and rules, please note the CSBS states the current rules (which you are ignoring) aren't strong enough. You need to clean up your act, or stop lending - no matter how small you are.

Hi Ken, I know you are the foremost expert in the MH lending topic.  I need a bit of eduction.  My reading of Dodd Frank found specific mention of "mobile home" lending that had NO exemption from licensing requirements.  To me this has already eliminated "small lenders" on mobile homes including investors who buy MHs cheap, fix and then want to finance an occupant into the MH.  This is my understanding of Lonnie Deals and are now off the legal deal type list for investors (who presumably are unlicensed as a lender).

Who in your view is currently lending on MHs who will be shut out by this bill?

Ohh, I reread including the CSBS doc... this is pertaining to "loan servicing".  In my view no sane investor should service their loan on real property.  So I guess this is hitting the folks who illegally originate a MH loan to an occupant and also want to service the loan themselves.  So they'd be out of compliance in 2 aspects, the loan origination and the servicing.   

To spark debate, it's my view that Dodd Frank did away with investors lending on a MH to an occupant EVEN if they use a Licensed Mortgage Loan Originator.  My understanding is that lending to MH occupants has no exemption for licensing requirements.  So the use of a compliance tactic of a LMLO is a bandaid on an illegal activity, per my reading.

Originally posted by @Curt Smith :

Hi Ken, I know you are the foremost expert in the MH lending topic.  I need a bit of eduction.  My reading of Dodd Frank found specific mention of "mobile home" lending that had NO exemption from licensing requirements.  To me this has already eliminated "small lenders" on mobile homes including investors who buy MHs cheap, fix and then want to finance an occupant into the MH.  This is my understanding of Lonnie Deals and are now off the legal deal type list for investors (who presumably are unlicensed as a lender).

Who in your view is currently lending on MHs who will be shut out by this bill?

 Curt-

Our consultancy (Rishel Consulting Group) has over 500 retainer clients and over 6,000 customers who are engaged in some form of legal seller finance. A few of them are modified Lonnie Dealers who are using a different system for the finance side of their operations that we helped them set up. We hope to finish a project with the heirs to Lonnie's estate late this year that will allow more Lonnie dealers get back into the game.

The majority* of our retainer clients have set up legal captive finance companies to finance what they sell. They are a mixture of retailers and community owners. Because state licensing requirements vary, in some states they have to be doing a minimum of $250,000 to $300,000 per month in loans, and in other states where the requirements are easier they can do as little as $50,000 per month. The community owners often also finance other homes sold in their communities that they did not sell to preserve the value of all homes in their communities. (* We have a number of banks and credit unions as well as several non depository specialty lenders as retainer clients as well.)

Among our customers (as opposed to retainer clients) we also have smaller retailers and smaller community owners that are using one of several mechanisms we devised for them to create financing for their customers. Many, but not all, of them might also be affected.

The captive finance operators are not exempt from the SAFE Act or Dodd-Frank. Our clients, utilizing our assistance, are in compliance and fully licensed. You are correct that exceptions do not really exist.

Originally posted by @Curt Smith :

Ohh, I reread including the CSBS doc... this is pertaining to "loan servicing".  In my view no sane investor should service their loan on real property.  So I guess this is hitting the folks who illegally originate a MH loan to an occupant and also want to service the loan themselves.  So they'd be out of compliance in 2 aspects, the loan origination and the servicing.   

To spark debate, it's my view that Dodd Frank did away with investors lending on a MH to an occupant EVEN if they use a Licensed Mortgage Loan Originator.  My understanding is that lending to MH occupants has no exemption for licensing requirements.  So the use of a compliance tactic of a LMLO is a bandaid on an illegal activity, per my reading.

 Again you are correct as far as you take it. Almost every retainer client we have does their own originations and their own servicing because they are fully licensed as lenders, have a compliance management system in place, and have built legal operations for origination and servicing.

You are also correct that the use of an outside MLO - often touted as an answer on this board - does not eliminate the problems of those engaged in lending money for the purchase of manufactured homes. I think this stems from a short period before the CFPB made changes in the regulations last January where this was technically legal if done very carefully, and following a narrow methodology. The problem was the MLOs and Mortgage Brokers did not know what they were doing to follow that narrow methodology so the whole transaction could have been interpreted as an "ongoing criminal conspiracy" which could have invoked the RICCO statutes. While we are not aware of anyone being so charged, it was a hell of a risk. All of that became mute last January with the changes in regulations.

Great observations!

@Ken Rishel

My reading of Dodd Frank picks up on the limit of 3 transactions per running 12 months per human being (not an entity).  

There's alot of bad info here and on a few threads on LinkedIn that are still advocating Seller Financing as the grand solution for getting more than the house is worth and avoiding agent listing fees.

My comment above was refering to that there is a hard limit for the seller financing exemption to being licensed AND in my reading the LMLO is a requirement for using the limited exemption. But the exemption requirements are re-stated in a few places in DF's text and I believe the LMLO is actually not "required" but in my view a smart service to use as well as sticking to 43% DTI or close to it.

I know I deviated off this tread's focus of "servicing requirements", which sane lenders will now use one of the national servicers or should have been using a servicer all along.

Originally posted by @Curt Smith :

@Ken Rishel

My reading of Dodd Frank picks up on the limit of 3 transactions per running 12 months per human being (not an entity).  

There's alot of bad info here and on a few threads on LinkedIn that are still advocating Seller Financing as the grand solution for getting more than the house is worth and avoiding agent listing fees.

My comment above was refering to that there is a hard limit for the seller financing exemption to being licensed AND in my reading the LMLO is a requirement for using the limited exemption. But the exemption requirements are re-stated in a few places in DF's text and I believe the LMLO is actually not "required" but in my view a smart service to use as well as sticking to 43% DTI or close to it.

I know I deviated off this tread's focus of "servicing requirements", which sane lenders will now use one of the national servicers or should have been using a servicer all along.

 Curt - As usual you are correct about "bad info"

One of the problems with just reading the law and the rules and the regulations when it comes to regulatory law is the lack of inputting the intent of the law, rule, regulation, etc. In a number of meetings the CFPB has made it clear the exemption (in their mind) exists only for the following reasons:

  • An individual who owner occupied a home wants to sell and finance the home they lived in.
  • An individual inherits residential property and wants to dispose of it by selling and financing the home(s) involved.

They have very specifically stated that the exemption does not exist for an individual to engage in a business, however limited, of buying and selling and financing homes.

What they have not been clear about is what their view is on the compliance issues related to financing the home. The FTC, DOJ, and FinCEN have been silent on the compliance issues related to the advertising and selling of the home.

Remembering that I am not any kind of attorney, least of all a regulatory attorney, I believe that anyone who thinks the exemption is some kind of get out of jail free card is engaged in very dangerous magical thinking. Those inclined to use their family members to sell and finance to avoid going over the exemption number could be construed as engaging in a criminal conspiracy, which could mean RICO statutes being engaged.

I would repeat again, MLOs cannot just handle the origination paperwork and keep one legal if the end lender/servicer does not have a  license to lend. The MLO who would do that is ignorant of the laws. Both the MLO organization and the end lender would be violating the law. There are very narrow methods that used to work when correctly employed, but unless the end lender/servicer has full licensure it would now be an illegal transaction. The only solution like this that works requires the MLO/Originator also be the owner and servicer of the loan throughout the process.There is a highly complex legal structure that must be set up for this to work correctly and I am not aware of any company offering this service to anyone doing less than 100 loans (of at least $25,000 in face value) a year anymore.

Ken

The proposal is aimed at Mortgage Servicing not lending.  Specifically non-bank entities like Ocwen, NationStar and Quicken among others.  I see it more as wrangling in the ever growing MSR activity in the secondary.  Ocwen for instance divested all of their prime portfolio leaving only distressed loans.  Further, the liquidity demand I see as a response to the securitization of distressed sub-performing and non-performing loans.  Those MSR's are carved out and sold and that service does have a high capital demand to meet the advancing requirements of the loans and the security documents.  So the rule directly targets actual/actual servicing and scheduled servicing.  This includes having to remit back to the bond holder regardless of borrower payment and having to make advances regardless of recovery from other pooled accounts.  Again from my understanding (and I re-read the proposal) this has zero impact on lending.  

Further, the standards are already implemented for Fannie, Freddie and I believe Ginnie loans.  I could see adjustments for non-GSE/Gov loan servicers requiring a little tighter diligence on the investor for liquidity or demands for advance deposits upfront to some extent.  That said, I am not sure the rule extends to those loans or will extend to those loans at final print.  

From my review, I understand that sometimes these rules do go off the ranch with rule proposals outside of the overall intent but I have not seen that in this.  Further, the 25 bps reserve requirement doesn't seem overly unreasonable.  I will admit though that it does lock out new entries or entries servicing under $1 billion.  I do not have a really good feel of just how many small time mortgage servicers there are under $1 billion in UPB but I don't think it is many.  Servicing is a costly enterprise now-a-days and I think the minimal UPB to actually make it make sense is probably at or slightly above the $1B mark.  Adversely in some states like California where license laws are fairly open they need to wrangle in ideas of licensed folks just deciding to service their own loans.  Other states which have stand along Mortgage Servicing licenses this is more par for the course though the capital demand is probably higher than those states mandate.  

Well @Ken Rishel I feel your pain!

This is really about the market share being lost by banking entities that are under capital requirements and small competitors playing in the sand box under different rules! 

While the real burden will fall on those servicing GSE I saw no exemption in the proposal for anyone holding a mortgage note or as to a portfolio size, I may have missed it, but was there a minimum threshold for compliance?

I know that this is much like the banks crying foul with unregulated mortgage brokers back in the day. They hit up the politicians and the regulators, point out safety and soundness issues, the regulators bring the justifications as to the public good in a proposal, you can write all the comments you like, but in the end, I'd say it's a done deal. How "done" they make it is the only question. 

As to RMLOs originating and underwriting private mortgages, yes, my comments were based on information prior to the changes in January. It was also an issue, since the original DF/SAFE Act as to the role of the RMLO, a RMLO is not necessarily a broker or lender that an RMLO must work under. 

From a prudence point of view, I have advocated that any seller financed note meet the DF requirements as not following those base lines may well be considered as predatory lending, by simply not following what was considered to be prudent by any lender. While the exemptions allowed for mom and pop aspects of predatory practices still apply. 

Expect small servicers to go under, larger ones survive and the costs of required servicing to go up! The market share will fall back as to its previous years.

Most folks on the street don't know that banks or regulated lenders have regulatory examinations that are paid for by that lender, I didn't get my paycheck from tax revenues as an examiner. They paid for my travel, motel, meals, salary and for everyone who knocks on the door for an examination. If you have an examination, you're going to get a bill.

Did you notice the risk compliance area, stress testing and third party compliance providers being in concert with state examiners?  I can understand the concern of losing clients as well as the compliance business getting more complicated in those 8 general areas. The same 8 areas that banks deal with.

Let's go a step further, RE financed transactions, doing a "Subject-to" or "wrap" deal, that is an extension of credit, the origination of a loan. If servicing requirements are commingled for any obligation,  lenders will be less concerned with due-on-sale issues, they will have the fear of compliance violations keeping sellers from engaging in such transactions in the first place. There might be a due-on-sale jail later on, LOL.

Lastly, where does that put our casual note investor? I don't think anyone with a brain should be servicing their own notes that fall under DF or this proposal. :)      

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