Recent Changes to Dodd-Frank Impacting MH Retailers by S. 2155 - What we know, and where we go from here
Background
On May 25, 2018 President Trump signed into law S. 2155 - the Economic Growth, Regulatory Relief, and Consumer Protection Act.
Section 107 of the bill grants a new exception from some of the previous limitations on manufactured home retailers when it comes to assisting consumers to locate financing.
Since the original passage of the Dodd-Frank Act in 2010, retailers have been limited in assisting customers or answering financing questions out of fear they would impermissibly “steer.” The relief provided by S. 2155 now allows retailers to assist customers with some of their financing questions so long as the retailer is not compensated more on the transaction than he/she would have been if it was a cash sale.
There is still a level of nuance in the new law that retailers need to be cognizant of, which is explained later, as well as a new affiliate disclosure requirement.
MHI’s Helpful Q&A
MHI, who was the leading advocate and obtained passage of S. 2155, recently published a helpful Q&A document that runs through many of the common questions they have fielded at a federal level since the law went into effect. We encourage everyone to review their document.
Where We Are Currently
The law is brand new. What does that mean?
It means there are no regulations yet, fleshing out all the details. It means there haven’t been court cases that have made their way through the appeals process sketching out the limitations and boundaries with judicial precedent.
So where does that leave us? Better off than we were before the law was passed for sure, but still less than certain on where exactly all the lines are drawn.
Current opinions vary on what is permissible and what is still not permissible for a retailer. The truth is that the industry will not know for certain until the BCFP publishes final rules updated to reflect the law change. The rules are 12-18 months away.
What this leaves us with are various levels of comfort based on an individual’s risk tolerance, legal counsel, position defensibility and personal business decisions. I expect retailers to exist up and down a spectrum on what they think they can and cannot do under the new law.
The degree of regulatory exposure is difficult to pin point as well, and this has a state component as well. There is the exposure that federal action will be brought directly by the BFCP on an individual for actions alleged to be outside of the bounds of the new law. MHI has submitted a “No-Action Letter” requesting that the BFCP not pursue administrative action against any retailer or seller while it revises its regulations to be consistent with the new law.
In addition to federal enforcement, there could also be state enforcement exposure. This will vary depending on the aggressiveness of a given state regulator.
For Texas, our regulator (on chattel MH loans) at the Office of Consumer Credit Commission still operates under a consumer complaint driven process. Therefore, Texas’ state regulatory exposure is limited to direct consumer complaints. In other states with more aggressive regulators, I could see their exposure and scrutiny being substantially higher.
Did this change the SAFE Act?
The new law did not touch the SAFE Act.
For many states, their state SAFE Act laws will certainly still be a concern. In Texas, as it relates to S. 2155 this is not as big a concern because the language in S. 2155 is essentially the same as the Texas SAFE Act exemptions.
Meaning they both now contain the exclusion that if there is not additional compensation to a retailer on a financed deal compared to a cash deal, then they are exempt from Texas’ SAFE Act and now certain provisions under the federal loan originator provisions.
Section 107 Language
SEC. 107. PROTECTING ACCESS TO MANUFACTURED HOMES. Section 103 of the Truth in Lending Act (15 U.S.C. 1602) is amended— (1) by redesignating the second subsection (cc) (relating to definitions relating to mortgage origination and residential mortgage loans) and subsection (dd) as subsections (dd) and (ee), respectively; and (2) in paragraph (2) of subsection (dd), as so redesignated, by striking subparagraph (C) and inserting the following:
‘‘(C) does not include any person who is—
‘‘(i) not otherwise described in subparagraph (A) or (B) and who performs purely administrative or clerical tasks on behalf of a person who is described in any such subparagraph; or
‘‘(ii) a retailer of manufactured or modular homes or an employee of the retailer if the retailer or employee, as applicable—
‘‘(I) does not receive compensation or gain for engaging in activities described in subparagraph (A) that is in excess of any compensation or gain received in a comparable cash transaction;
‘‘(II) discloses to the consumer—
‘‘(aa) in writing any corporate affiliation with any creditor; and
‘‘(bb) if the retailer has a corporate affiliation with any creditor, at least 1 unaffiliated creditor; and
‘‘(III) does not directly negotiate with the consumer or lender on loan terms (including rates, fees, and other costs).’’.
Breakdown
The changes now allow retailers to engage in the activities of subparagraph (A), so long as they don’t receive any compensation beyond what they would have received had it been a cash deal.
Subparagraph (A) lists three types of actions, which are:
(i) takes a residential mortgage loan application;
(ii) assists a consumer in obtaining or applying to obtain a residential mortgage loan; or
(iii) offers or negotiates terms of a residential mortgage loan;
The new language in subpart (C)(ii)(I) says that a retailer will not be considered a mortgage originator if they do engage in any activity listed in subparagraph (A), so long as their compensation is the same as it would have been in a cash transaction.
This reads in (I), to initially say that they can do all three – (i),(ii), and (iii).
But then in (C)(ii)(III) they take back out what it appears they just gave, which was subpart (iii) of (A). This is why above subpart (iii) is struck through because a retailer still can’t negotiate specific loan terms.
They give’th, and they take’th away.
Questions Coming In
This leaves questions like: can a retailer help fill out the loan application? Can a retailer provide a translation to another language? Can a retailer fill out the application for a customer or take dictation from a customer regarding the loan application? Can a retailer submit the loan application to a lender on behalf of a customer – either by operating the fax machine, filling out the online application on the retailer’s computer or emailing the customer’s application from and attached to the retailer’s email address to a lender?
Prior to the law change the previously forbidden act of “taking an application” lead many conservative interpretations to conclude that a retailer should not touch a credit application. However, the new law now allows for a retailer to take an application. In addition, the new law allows explicitly for the retailer to “assist a consumer.” The still forbidden act of “offer or negotiate” terms are now the only remaining boundary limits.
Therefore, some have concluded that acts described above, when careful attention is paid to stay within taking an application and assisting a customer, but not offering or negotiating terms, are now permissible acts. But then there are still more conservative takes who conclude actions should continue to be avoided out of concern starting some of the actions related to assisting on a credit application too easily can cross over into discussing specific terms.
Recall that under the original law the rules essentially added a trigger of a retailer “assisting” a consumer as triggering mortgage originator status and thus licensure requirements. The new law potentially opens up previously forbidden assisting type activity in the non-additionally compensated retailer scenario.
Questions have come up like: can a retailer now tell the consumer their opinion on which lender is a better fit/deal? Can they tell the consumer after seeing their credit scores which lenders will automatically deny them because they are below their acceptable FICO levels? Can a retailer talk to the consumers about how some lender products might be less expensive and possibly better for the consumer even if the monthly payment is higher than other loan products because the term is shorter or has a lower rate? Can a retailer tell the customer what they see from the various lenders as far as points and fees and give an opinion on which product is better? Can a retailer go so far as to encourage customers use a specific lender, their in-house lending operation, or an affiliated lender so long as the new disclosure is provided?
These greyer areas are difficult to know in the absence of regulations. I expect legal opinions will vary as to various levels of permissible and impermissible “assisting.”
The analysis will come down to interpretations on how linked or necessarily linked addressing, considering or discussing specific loan terms are in the assisting role. Also, if specific terms are included or necessary in the discussion, then does the discussion go so far as to “offer or negotiate” those terms.
Some will take the more aggressive interpretative posture that merely discussing various terms offered, not by the retailer, but by various lenders does not cross the line. Similarly, some could interpret the new law to allow a retailer’s opinion as to the best loan for a customer without the retailer’s opinion constituting a negotiation if the retailer is presenting his/her opinion based on several loan product options.
What does it mean to “negotiate”
Other questions have come in regarding the term “negotiate.”
Who can and cannot negotiate? Does it matter who you are negotiating with or if the retailer is negotiating for the consumers’ benefit?
Clearly an unlicensed mortgage originator retailer could not negotiate back and forth with a consumer on specific loan terms the retailer is offering. For example, a retailer could not say, “if you [prospective buyer/borrower] can increase your down payment from 10% to 15%, then I can give you a rate that is 1.5% less, so your house payment can drop from $458/month to 389/month?” This type of activity is still prohibited under the new law for unlicensed loan originators.
However, the question has come in if a retailer can negotiate on behalf of the consumer with a lender to get what the retailer thinks are the best loan terms for the customer? Could a retailer assist a customer to navigate multiple loan offers and go back and forth with lenders to have the lender potentially compete for the borrower?
Again, these or similar actions should be discussed individually with the retailers own legal counsel, so they can evaluate their possible level of risk and make their own business decision.
New Affiliated Disclosure Requirement
The new law adds a consumer disclosure requirement when the retailer has a “corporate affiliation” with any creditor. Additionally, if a retailer presents to a consumer a lender they do have a corporate affiliation with, then the retailer must also present to the consumer at least one other creditor that the retailer does not have an affiliation with.
What does a “corporate affiliation” mean?
While it certainly could be made clearer in later rule writing, the other “affiliate” provisions in Truth in Lending say that “affiliate” has the same meaning as “affiliate” defined in 1026.32(b)(5) of Regulation Z, which is the High-Cost Mortgage Loan section.
Section 1026.32(b)(5) says:
“(5) Affiliate means any company that controls, is controlled by, or is under common control with another company, as set forth in the Bank Holding Company Act of 1956 (12 U.S.C. 1841 et seq.).”
The definition section of the Bank Holding Company Act defines “affiliate” as:
“(k) Affiliate.— For purposes of this chapter, the term ‘affiliate’ means any company that controls, is controlled by, or is under common control with another company.”
Generally, “control” over another company occurs when another company or shareholder, directly or indirectly is considered, or acting through one or more other persons, owns, controls, or has power to vote 25 percent or more of any class of voting securities of the other company; the company or shareholder controls in any manner the election of a majority of the directors, trustees, or general partners (or individuals exercising similar functions) of the other company; or the company or shareholder, directly or indirectly, exercises a controlling influence over the management or policies of the other company.
We hope to better understand the new corporate affiliation disclosure requirement once the BCFP promulgates final rules.
For those looking for the most conservative, least risky position until rules are finalized, disclose to a customer any affiliated relationship with a creditor, even if the level of “control” is only slight. And always provide at least one creditor to the customer in which there is not the remotest of connection to the retailer.