by Josh Ducharme
Before I get too far along, let’s take a moment to provide a clear definition of captive finance for those not familiar with the term.
Captive Finance is a form of financing typically offered by a manufacturer or supplier to those who would not qualify for traditional financing. More specifically for the manufactured home (MH) industry, this “home only” chattel or personal property financing is offered by a number of community owners, retailers and manufacturers. Some call it ‘buy here, pay here’ lending.
There are notable examples in which this model has been utilized with success in the MH industry. For an article which presents a variety of perspectives regarding captive finance, click here.
Billions in Cash Tied Up in MH Captive Financing?
Recent estimates place the amount of captive finance lending in private portfolios at $12-15 billion. These privately held loans were made to facilitate manufactured home sales that would not have occurred otherwise.
Businesses are providing a lending source to customers that can’t qualify for 3rd party loans. This practice now requires increased licensure for individuals and businesses under Dodd-Frank. Businesses providing loans without being licensed are out-of-compliance.
The adoption of the new regulations enforced by the CFPB will likely take MH business owners more time to comply with the most recent guidelines. The new law and regulations lack true clarity for those seeking answers. The complexity has many businesses scratching their heads, as state and federal laws are conflicting in some instances.
When attending industry events this year in Kentucky, Mississippi and Nevada, I witnessed several community owners raise their hands when asked “How many of you are still financing your own customers?” As an industry professional, I am personally surprised by the size and scope of this continued practice. A sizable minority are making the choice to continue to conduct business as usual and accept the risk of offering non-compliant financing as unlicensed business or individuals rather than face the added expense, additional systems and record keeping now required.
The awareness of having to act compliantly when selling a manufactured home is spreading. Offering more than one financing option is a key message the new law provides. The experienced staff at Mountainside Financial offers options.
Our refinance and purchase programs offer a great value for the business owner. Although Mountainside Financial would like to be the only financing option for your MH financing needs, that is not realistic for any MH lender. Providing a list of available lending options in your market and allowing your customers to choose the lender is the best practice.
If you do offer captive financing, make sure that it is known so buyers do not become discouraged if they are turned down by traditional lenders.
Fine$ and More Fine$
Is it possible in the Dodd-Frank era for a ‘mom and pop’ size independent to underwrite CFPB compliant “captive chattel finance” if the big banks can’t do it correctly?
The answer, technically, is yes. There are reputable and experienced companies in the industry that provide guidance with this option. For some community owners and retailers, complaint captive financing may be a viable option.
But as a practical matter, the new regulations have made it more difficult and much more costly to comply with the law.
A common opinion I have heard from several independent community owners has been “the CFPB is not concerned with the few loans that I put on my books. The government is more concerned with the larger financial institutions than a small manufactured home community or sales center. The people in Washington that wrote the legislation were not even considering manufactured home owners or the industry when the legislation was written.”
On some levels, that view has validity. However a single complaint by a disgruntled customer or competitor are the likely scenarios that would expose a business offering non-compliant captive financing to heightened scrutiny from regulators.
Significant changes are in the forecast
This is not the time to think “it could never happen to me.” As industry professionals, we should be asking “what solutions are available today that protect my business and staff?”
As a division of San Antonio Credit Union (SACU), Mountainside Financial provides home-only loans directly to customers for purchase and refinance. Every captive finance 
The consumer can build credit by having their loan reported to the credit bureau. Most privately held loans do not report to the credit bureau and therefore do not help build the consumers credit rating. The business owner that financed residents at the time of purchase can regain capital spent. Add Mountainside Financial to your list of chattel lenders today!
Providing customers with a list of compliant lending options that includes Mountainside shows proof the business is aware of and acting within the current CFPB guidelines.
The Other Side of the Coin
Originating or holding non-compliant captive financing is unsafe business behavior. Such activities continue to get riskier as the CFPB takes more enforcement actions under Dodd-Frank. Lack of licensing or of up-to-date, written policies are among the risks you would face, if and when the business is visited by a regulator.
Do you want your cash tied up in inventory, when you can avoid it?
Is captive financing a good fit for everyone? As with most things in life, the “one size fits all” model sounds great in theory. However, this is rarely the case and captive financing is no exception.
The following list should be considered before choosing to start or continue to provide captive financing:
MLO licensure
Training and Education of your staff
The establishment of legally compliant written policy and procedures
Ongoing changes in regulations, which can be so complex that even community banks are exiting the banking/lending business.
CFPB and some state regulators openly encourage consumer complaints via their websites. The
FSRoundtable reports that the CFPB received 163,700 complaints in 2013 alone!
Housing-loan related complaints to the CFPB are growing in numbers. Don’t give a disgruntled resident or buyer the opportunity to report your business without having the required disclosures.
Prior to the Safe Act and Dodd-Frank laws, captive finance made good business sense. But today, offering compliant captive financing with the added CFPB and state requirements place a significant barrier from a cost stand point alone to business owners.
With the current regulatory environment and oversight, this practice should be viewed cautiously.
The chart below shows that new bank openings have dropped like a rock, due in part to the high costs of regulatory compliance. Banks with dedicated compliance departments are challenged by the new guidelines. Is it unreasonable to expect that the independent community owner and retailer are finding it extremely difficult to navigate the maze of new guidelines?
(Editor‘s Chart Caption: The NYTimes and Minneapolis Federal Reserve charts above and below demonstrate that even professional lenders and finance companies close or merge due to regulatory burdens. When faced with facts like these, how can an independent MH community owner or retailer seriously believe they can successfully comply with current lending laws?)
Do You Know what others in MH are doing?
Did you know that a number of mid–to–large MH Community operators have ended their captive finance originations, due to their concerns over regulatory risks? The following financing options are currently being utilized to fill spaces and address resident’s needs as an alternative to captive financing today:
- Traditional lending programs offered by direct lenders.
- Hiring a licensed MLO to handle the finance duties of sales within the community.
- Lender sponsored community lending programs.
- Rent Credit Programs: Renting homes with tenant rental credits toward a future purchase.
- Lease with option: Traditional lease with a purchased “option” to buy the home outright in the future for it’s fair market value at that time.
Although other financing options have developed in response to the increased regulatory requirements, captive finance still occupies an integral place in the industry. What options are you currently utilizing to address the financing needs of your customers? It is important to offer your customer’s multiple options. Among the options that should not be over looked is the programs offered by direct lenders.
As a division of a federal credit union, Mountainside Financial is able to offer among the most competitive rates. This is why you should consider using us as one of your options today.
Why not abate compliance/risk headaches the smart way?
Mountainside Financial operates in 40 states offering refinance and purchase programs for manufactured housing. Homeowners that are currently on the books in a captive finance portfolio should be made aware of their options.
The point cannot be over stated. Refinance programs can be utilized as a tool to free up the community owner’s liquidity for use on other projects. Because all our loans report to the credit bureaus, using us as your exit can strengthen the borrower’s credit, which customers often appreciate.
Many manufactured home communities (aka “mobile home parks”) have homes with loan balances or selling prices of less than $25,000. Many lenders today won’t make loans of that size.
This is another area that a direct lender like a credit union can make a difference.
As a Division of a major Credit Union, Mountainside Financial does not have a minimum loan amount.
What this means is that small balance loans are not a disqualifying factor. We welcome all size loans. This is one of many possible examples of the credit union difference.
The Stop Stressing Solutions!
Mountainside Financial can help you recoup your money invested in captive finance loans, and put you on the path to more business growth, right now, TODAY! Here are 7 Ways we can help you, NOW.
A1) > Stop stressing over non-Dodd-Frank compliant loans! Yes, Mountainside Financial can help you with privately issued loans that may not be Dodd-Frank compliant.
2) > Rent spaces not homes! As much as possible you want to get back to your core business, collecting lot rents and selling, not carrying paper or renting homes.
3) > Collect full lot rent! Are you using a program that costs you lot-rent participation? Every loan we refinance for your customers means you can now collect your full lot 
4) > Free up your capital to buy more homes, fill more vacant sites! Enough said on this one.
5) > Realize the value of your homes now, rather than a reduced value in a few years. Selling a home to a qualified buyer today prevents rehabbing homes that may sell for much less in the future.
6) > Reduce exposure and set your balance sheet free! What’s not to love? No dealer package sign up required. Start telling your customer right now.
7) Eliminates licensing and reporting requirements associated with captive financing! Breathe a sigh of relief from the extreme burdens of financing in today’s regulatory environment. Are you taking advantage of all the options available to you and your business?
“Before you utilize your own funds for captive financing give Josh Ducharme or Jerry Bretton a call to discuss a direct lending option today 877- 475-6852 Ext. 2607 = Jerry. Ext. 2602 = Josh. ##
Business Development Executive
NMLS #675313
Mountainside Financial, a Division of SACU
60 Lake Street Suite 200 St Albans, VT 05478
Legal Notice: This material is made available with the understanding that Mountainside Financial is not engaged in providing legal advice and this should not be constructed as such. Please check with your association and/or legal counsel for the latest on issues such as steering, quoting rates, captive financing and how they might affect you.
(Image credits – please point your cursor over each image for that image credit. CFPB logo credit – Consumer Financial Protection Bureau log. Lady Liberty credit = Mauro Parra Miranda and flickrCreativeCommons, merged images and text by MHProNews.)
Image Credits:
1) Billions In Cash Tied Up – credit = Google Images/Shutterstock.
2) Cash And Judge’s Gavel – credit = The Situationist WordPress.
3) Lady Liberty – credit = Mauro Parra Miranda/ Flickr Creative Commons.
4) Mystery Shopper- credit= shutter Stock.
5) Gratitude Beyond Thanksgiving -credit= Will Bratt Counsellingwww.willbrattcounselling.
6) Submit A Complaint National – credit = Fedral Trade Commission.
7) 28 Bank Graphic- credit= Nytimes.
8) Minneapolis Federal Reserve Jan 2014 Community Bank Closures.
9) Rent to Own- credit= Shutterstock.
10) Solution – credit= Shutterstock.
11) Money – credit= Shutterstock.
