An Honest Conversation About Owner-Financing

Let’s speak frankly for a second.  There are many (possibly hundreds) of folks out there who for years have operated in some manner or to some degree as a lender.

You might not have felt like a lender.  You probably didn’t even call yourself a lender. 

You probably thought you were just doing some “owner-financing.”  And you were. 

Now were you following every rule, reviewing all the documents, implementing policies and procedures to follow federal laws, training employees, documenting the maintenance of your compliance management systems, conducting the full rigors of loan origination, and properly underwriting?  Sure, right? Some of you were? (question mark intended)

Although some of you may have done that, I’m going to offer a guess.  My guess is that there were also those of you out there that started lending after a “process” that went something like this: You wanted to fill a space in your community or you wanted to sell a house (or both) and a consumer comes to your sales center and you quickly discover that either: a) no other “traditional” lender will offer financing to this consumer; or b) you want to lend your money (or your investors’ money) to this consumer.

Chances are in either scenario you are lending money to the consumer, but for different reasons.  One is because you have to, and the other is because you want to.  Regardless of how you got there, you are now a “lender.”  It is at this point you present to the consumer your “lending criteria,” the extent of which was along the lines of “$1,500 down, $29,000 loan at 12 percent interest, bad credit not a problem (especially if they came from category (a)), 12-year term and payments of $380 per month.”  I’ll offer another guess that for some out there this is pretty close and there wasn’t much variation to your “program.”

The consumer says it sounds like a good deal to him/her and you fill out the former TMHA Retail Installment Contract, TDHCA’s Application of Statement of Ownership and Location, and in box eight, for lienholder information, you put your name (or the name of your lending entity, if it’s a separate entity).  There were some other retailer compliance steps you took based on some state regulations for retailers, but more or less, you were done.  All you needed to do now was just collect the money. Oh, I nearly forgot; the person collecting the money was either someone on your sales team, your community manager, or yourself.

Raise your hand if the second scenario, compared to the first, is more closely aligned to your operations.

For those who are still reading, I think you get the idea.  If you were in group one, you can probably stop reading.  You have already had the honest conversation with yourself.

Before going on any further, I’m going to shift gears here for a second. 

“DJ, when are you going to give us the forms?”  I probably hear this, or read this in my emails, about three times a week.  I’m sure some of you reading this have also asked me about them. Forms, forms…dang-it, I said FORMS!  This seemingly simple request has caused countless sleepless nights for me personally as I try to figure out how to serve the membership and this obvious demand. 

My dilemma comes not from the request.  I have, am, and will continue to work on solutions to provide forms or provide options for members to acquire forms from vendors.  The troubling part for me is what the people asking for the “forms” really want.  Further, what does the fact that they are only asking for forms indicate about their approach towards complete compliance (this was a more advanced rhetorical question)?

I get lots of questions and requests.  I enjoy them.  Requests from members mean they are engaged and value the association.  It also means they trust us to not lead them astray, and this trust…this relationship is tantamount to me as the executive director.  It is this trust and this relationship that I take the most seriously with the membership because without it we don’t have members.

Ah just like a lawyer, you asked a question, received a 400 word response, and you still haven’t been given an answer. 

Fair enough. 

But let me keep my lawyer hat on for a second.  In order to answer the “forms” question, I need a little bit more information.

What forms do you need? 

How do you fill them out? 

When do you use them? 

How long do you need to keep them? 

How do you train your employees to use them? 

Which employees are licensed to use them?

How do you calculate the numbers that have to go into the forms? 

What happens if your calculations are wrong? 

And, in the world we are in now, what happens when the calculation result in numbers too high for certain limits that are in place, thus requiring more action and more forms?

At this point, I hope it is starting to become clearer that the answers to all of these questions are not simple, straight-forward or an easy “just follow this template” type responses.  And many of the answers change based on each individual’s business.

Ok, no more dodging the question.  Well, maybe just a little more evasion.  The start of the answer is you need forms.  You need to know which ones to use and when to use them.  You need to know how to calculate the numbers that go in the forms or systems that do the calculations for you.  You need to know what licenses are required and who needs to have them in order to fill out the necessary forms.  You also need to know when to give them to consumers, when to keep them and why they are important. 

What does all this really mean?  You need to know how to be a lender.

The days of merely doing a little bit of “owner-financier” are over.  That is the honest part of this conversation. 

Well, that is part of the honest part, here is the rest: to be a lender you will have to do more, learn more, pay more, monitor more, train more, document more, and yes….you need some new forms.

With the launch of our new Owner Finance Resources webpage we have provided a combination of links to disclosures and samples provided in federal and state regulation along with vendor options who provide forms and can integrate forms into existing systems.

But here is the honest punch line: To be a lender in today’s world….you don’t just need a new magic form.

Ok, dead horse beaten enough.  “We get it, we don’t just need a form. So what do we need to do to be a lender?”

As they say, you have to start somewhere. So where is a good place to start?  After many consultations with legal experts, as well as being personally immersed in all of this over the last two years, as good a place as any to start is with a series of critical questions (yes, more questions).

We are big on lists, so here is the list:

1. Do you originate chattel only loans?
2. Do you hold these loans in a portfolio or do you have to sell or finance your loans?
3. Are your lending operations housed out of a separate entity from your retail operations entity?
4. What loan origination systems are you using?
5. How are you underwriting your loans?
6. What, which, and how (three in one there) loan documents are you using (fourth question coming) and where did you get those documents from?
7. What written polices do you have for compliance with state and federal lending laws?
8. What procedures do you implement and document to comply with state and federal lending laws?
9. What licenses do you have for compliance with state and federal lending laws?
10. How are you conducting employee trainings and training updates?
11. How are you managing your quality control?
12. How are you servicing (collecting monthly payments)?
13. How are you auditing all of the above to make sure the actual actions under these operations, policies and procedures are abided to?

What was your answer rate on those 13 questions?  I’m not even asking if your answers were right, just if you had answers at all.

The answers to these questions, even generally, would be way too long to cover in a single article.  It is important to also know that there are general answers, but at some point for those who want to be lenders, the detailed answers will turn on the unique nature of your business.  At that point, you will need customized and specific help to take you across the goal line.  

Our goal is to provide you the education, foundational understanding, vendors and service providers so that you can make a business decision to either be in the lending business on your own, shop and affiliate yourself with third-party providers who will alleviate certain burdens of being a lender or, and, I hope this unfortunate scenario is in the stark minority, decide to exit the business entirely. 

On our new Owner Finance Resources page we have listed various vendors, consultants, attorneys, software systems and other lending professional tools.  It is up to each individual to research and decide on any of these vendors, or other providers that might be available, to help you with your specific business.
We can get you to the 50-yard line, but you are going to have to cross half the field running your own offense.

Again, there is too much to cover in one article and it would be so long and intimidating that I fear even I couldn’t maintain the reader’s attention and comprehension for the hundreds of pages I would need to cover everything.  So here is what we are going to do.  TMHA is going to produce resources on the subject matter of being a lender in the niche space of manufactured housing lending in Texas.  These educational offerings will provide a foundation for what you will need to know to make competent business decisions.  The topics in this series of articles will come from our owner finance members.  The questions and comments you send in to ownerfinance@texasmha.com will be compiled and reviewed for broad application and appeal.  Then we will research the topic or question and publish new articles similar to our first two articles (both of which came from member questions) – Land, the Whole Land and Nothing but the Land and What’s the Deal with High-Cost Loans?

I have received many requests that can be summarized as, “Don’t tell me how to build the watch; just tell me what the time is.”  Unfortunately, on this topic there is a necessary level of watch construction education needed.  Now we won’t go into watch building for all types of lending and all types of loan products and companies.  To make it digestible and relevant, we are narrowing the focus as much as we possibly can.  Our goal is not limited to simply putting you on a path to tell the time. We also want to make sure you have the tools to build the watch you need.

This isn’t your mama’s owner-financing. In fact, this isn’t even your 2013 owner-financing.  Welcome to the brave new world.