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Consumers Union Southwest Regional OfficePublic Policy Series, Vol. 5, No. 1

In Over Our Heads: Predatory Lending andFraud in Manufactured Housing

DirectorReggie James

AuthorKathy Mitchell

ResearchKevin Jewell, Rob Schneider

Design and PhotographyKathy Mitchell

This report was funded in part by a grant from the Ford Foundation.

Each year the Southwest Regional Office of Consumers Union issues reports on consumerissues of particular concern in Texas and the Southwestern United States. Topics includefinancial services, housing, health, utilities, and the environment. You may order copies ofreports by calling the Southwest Regional Office at 512-477-4431 or writing us at 1300Guadalupe, Suite 100, Austin, Texas 78701. Reports are also posted on our web site in htmland pdf formats. Please go to www.consumersunion.org. For internet versions of this reportand more consumer information about manufactured housing, go towww.consumersunion.org/mh.

The following reports were released in 2000 and 2001:

Access to the Dream 2000, Subprime and Prime Mortgage Lending, April 2000

Final Committal, Texas Problems with Prepaid Funeral Services, October 2000

Local Telephone Competition Still on Hold, January 2001

The Eyes Don’t Have it Yet, Contact Lens Prescription Access, January 2001

Sale-Leaseback Lenders Defy Regulation, February 2001

Manufactured Homeowners Who Rent Lots Lack Security, February 2001

Brackenridge Hospital, October 2001

Noncustomer Check Fees Reinforce Financial Divide, October 2001

Consumers Union is a nonprofit membership organization chartered in 1936 under the laws of the state of New York to provideconsumers with information, education, and counsel about goods, services, health, and personal finance; and to initiate and coop-erate with individual and group efforts to maintain and enhance the quality of life for consumers.

Consumers Union’s income is solely derived from the sale of Consumer Reports, its other publications and from noncommer-cial contributions, grants and fees. In addition to reports on Consumers Union’s own product testing, Consumer Reports, withapproximately 4.6 million paid circulation, regularly carries articles on health, product safety, marketplace economics and legisla-tive, judicial, and regulatory actions which affect consumer welfare. Consumers Union’s publications carry no advertising andreceive no commercial support.

Consumers Union’s Southwest Regional Office is dedicated to advocating the consumer interest, particularly of low-incomeconsumers, and to promoting the growth of the public interest movement in the Southwest.

Consumers need to beware of dealer promises andtoo-good-to-be-true offers, according to more than400 manufactured home consumers who filed

complaints with the Attorney General (AG) or the Officeof Consumer Credit Commissioner (OCCC).

Unlike most home purchase transactions the mobilehome sale can be much more like an old fashioned, high-pressure auto deal. Consumers must sign purchase andloan contracts before they have seen the home installed,and lenders distribute the loan funds to the dealer with-out an independent, visual appraisal to ensure repairs areadequate and the home is worth enough to support theloan.

Consumers report a variety of dealer problems includ-ing falsified down payment information on credit applica-tions, and misrepresentations about terms, price, or thehome itself. And while dealers are quick to ask for adeposit, they are sometimes much slower to refund itwhen consumers change their mind after seeing thecomplete deal.

Deposit requirements and credit checks discouragebuyers from adequate comparison shopping. Some dealersmade remarkable promises to get a customer to fill out thecredit application and put money on the table—promisesthat start families off owing far more than the home isworth. Consumers reported promises to pay off theircredit cards (and some dealers actually did this), orexpensive extras like trips or rebates. Documentation alsoreveals predatory lending practices that leave families“underwater” and vulnerable to a deficiency balance ifthey try to sell the home within 15 years of buying it.

General FindingsNearly half of the consumer complaints we reviewed

(46 percent or 196 individual cases) involved allegations ofdealer fraud or misrepresentation where the final deallooked very different from the deal consumer’s thoughtthey made. Consumers said:! the dealer switched the house with a different make,

model, year or size or a completely different home (29cases);

! the salesman tried to falsify loan application informa-tion, including falsifying the down payment amount ortaking money a consumer borrowed as a down pay-ment (27 cases);

! the actual price of the home increased from theoriginal quote to the final loan contract (17 cases);

! the terms or conditions of the sale worsened, includ-ing additional costs for items consumers thought theyhad already covered, additional loan fees, higherinterest and more (21 cases);

! ads were misleading or promised things not delivered(five cases);

! they were asked to sign blank documents (sevencases);

! the dealer refused to give buyers copies of contracts,including loan contracts (25 cases).

About 19 percent of consumer complaints involvedealers who are unwilling to return money after a con-

In Over Our Heads:FraudPredatory

Lendingin ManufacturedHousing Sales

and

sumer decides to walk awayfrom a deal—even if theytry to walk away long beforethe home is built or deliv-ered. Some dealers say oncea purchase contract hasbeen signed the consumeris on the hook even if theconsumer has not seen thehome or the final loanterms.

About 41 percent ofconsumers (175 cases)involved consumers who areupset about the conditionof the home, and 24 per-cent of consumers pre-sented no other issue(although home quality andinstallation complaints aremore properly addressed tothe Texas Department ofHousing and CommunityAffairs (TDHCA) Manufac-tured Housing Division,which handled more than6,600 complaints duringthis same period).

Consumers Unionreviewed loan documenta-tion for 127 consumers whoincluded such informationin their complaint to theAttorney General or theOCCC. Of the 127 loanswith interest rate disclo-sure, we found that mostloans were typically issuedto consumers at interestrates of 9 percent to 13percent APR, with a signifi-

cant minority (19 loans)issued at a rate greater than13 percent.1 Ordinary homeloans for the same periodhovered between 7 and 8.5percent.2

We collected reasonablycomplete loan information(with detailed breakdownof charges) for 65 of the 127people who reported theirinterest rate. Using stan-dards recommended by theNational Consumer LawCenter (NCLC) and theAmerican Association ofRetired Persons (AARP),more than three quarters ofthese loans could beconsidered predatory.NCLC’s new predatorylending standard recom-mends a total “points” andfees threshold of threepercent of the home priceafter down payment.3

Thirty six of these 65customers financed points,and in almost all of thesecases the points aloneadded more than threepercent to the net price.Additional consumersindicated some problemwith pre-paid, financedpoints but did not providecomplete information.

Fifty four of the 65complete loan documentsincluded some kind of add-on insurance or warranty,most commonly property

insurance, credit insurance,or an appliance/homesystems repair plan. Suchinsurance add-ons do notadd to the value of thecollateral, but they do addsignificant cost to the loan.

About half of the 65loans included more moneyto finance points, insuranceand extended warrantiesthan the consumers’ downpayment, starting thesefamilies off “underwater.”The true number of con-sumers in our study who are“underwater” is probablyfar higher, since dozens ofconsumers reported downpayment fraud, an inflatedhome price, “extras” addedto the loan that do notincrease the home value(like credit card payoffs andcash rebates), or reporteddelivery of a less valuablehome than the make,model, year or type of homethey thought they pur-chased. Taken together, atotal of 21.5 percent ofcomplaints involved loansthat were likely made forgreater than the initialvalue of the home--and thismay be a conservativeestimate. Vanderbilt Mort-gage recently told its asset-backed security investorsthat, upon repossession,manufactured homes aregenerally worth less than

the principal outstandingbalance on the loan con-tract.

Current studies ofmobile home appreciationhave produced conflictingresults.4 But even assumingthe home holds its value,consumers who start outowing more than the homeis worth will have no equityfor several years dependingon the loan term and rate(see sample graphs, p. 20).There is a good chance thata consumer who tries toresell the home during thatperiod will not be able toget a high enough price andend up with a deficiencybalance. Further, consumerswho have no equity in theirhomes have less incentiveto keep making paymentswhen job loss or other crisishits. Both consumers andtheir banks pay when a loanis made for far more thanthe value of the collateral.

The Consumers UnionStudy

This is the first of twocomplaint studies to beproduced by ConsumersUnion Southwest RegionalOffice. Initially, we reporton issues presented byconsumers to the Office ofthe Attorney General(OAG) and the Office ofConsumer Credit Commis-sioner (OCCC). In the

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second report, we willaddress concerns of themuch larger group ofconsumers (nearly 13,000over the past five years)who complain to the TexasDepartment of Housingand Community Affairs(TDHCA).

Consumers with amanufactured home prob-lem can complain to theAttorney General (fraud,misrepresentation), theOffice of the ConsumerCredit Commissioner(retail installment contractloans), or the Texas Depart-ment of Housing andCommunity Affairs (homequality, installation, war-ranty issues, advertising,refunds). There is someoverlap. About 24 percent ofconsumers who complainedto the AG and the OCCCreport problems exclusivelywith home quality, installa-tion or warranty repairs (noother problems noted).These complaints, underTDHCA’s jurisdiction, willbe addressed in more detailin our second report, to bereleased in the fall of 2002.At the same time, manyconsumers who complain toTDHCA report dealer fraud,refund problems, deceptivetrade practices and otherissues outlined here.5

We here focus ourattention on the issues

properly addressed to thetwo agencies under study.Consumers Union read thecomplete file for 424written complaints filedwith the OAG or theOCCC primarily in 1999and 2000.6 We looked at thetype of problems reportedby consumers, the agencyresponse, and asked con-sumers whether they weresatisfied in the end.

Clearly, these com-plaints do not reflect theexperience of satisfiedfamilies who receive a goodproduct in good order froma trustworthy dealership. Atthe same time, not allfamilies who are dissatisfiedactually find a regulator,and even those who domost often file only an oralcomplaint, leaving insuffi-cient documentation forstudy. Therefore, theproblems encountered bythe customers in thissample probably happenedto others. While some ofthese complaints relate tohighly individualizedincidents, most reveal apattern of problems sharedamong many consumersthat should be addressedthrough a stronger andmore coherent regulatorysystem.

Consumers Unionreceived various levels ofinformation on each case.

In some cases, informationwas redacted from thecomplaint file in compli-ance with various laws, butin general we were able todevelop a reasonablycomplete picture of theconsumer’s problem. Wealso mailed a short surveyto 369 consumers for whomwe had adequate contactinformation. Eighteenpercent (70 people) sentback the survey and pro-vided us with additionalinformation about theirexperience.

Shopping AroundMost consumers report

an easy initial sales experi-ence, as long as they don’twant to do a lot of compari-son shopping. They walkthrough a model home,decide they might beinterested, and go to theoffice to get a credit check.At this point, the dealerasks for anywhere from$100 to $500 dollars,explaining it as a “deposit”or “credit check fee” orsomething else.

Dealers discourageshopping in a number ofways. Although a creditcheck costs the dealer verylittle (a few dollars atmost), consumers aresometimes charged $25 ormore for a credit check or“application fee.”7 Some

consumers report muchhigher charges to run creditreports. Ms. F. of Hidalgoreported a dealershipdeducting $162 from herrefund of deposit for acredit application charge. 8

Further, the industrywarns against getting creditchecks at multipledealerships. At a recentdealer training, a represen-tative of the Texas Manu-factured Housing Associa-tion told dealers thatconsumers who shoparound will have to agree tomultiple credit checks andthis will damage theircredit score.9 According toFair Issacs, multiple inquir-ies from auto or mortgagelenders within a shortperiod (“rate shopping”)will have little impact oncredit scores, but the policyis murky for manufacturedhome loans (see “RateShopping, right).10

Credit checks create asignificant deterrent toaggressive comparisonshopping. An even greaterdeterrent is the depositmany consumers are askedto pay to hold a house theymight like. Consumerstypically report depositrequests of $100 to $500.Porfirio P. of El Paso tried toshop around for rates andhomes. He ended upleaving a deposit of $100

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Borrowers Wait for Green Light onMobile Home Loan Rate Shopping

Lenders use a consumer credit report and a numericalcredit score to determine whether to make a loan and atwhat interest rate. The credit score is designed to representa borrower’s overall credit worthiness based on income,debt, repayment history and more. Each time a borrowerseeks credit, the lender sends an “inquiry” to the creditbureaus to check credit and calculate the current score.

Until recently, the credit score algorithm assumed thatseveral “inquiries” from lenders in a short period mightindicate that a consumer needed money and thereforemight be a worse credit risk. This had the unfortunate affectof punishing consumers who actually shop around for thebest loan deal.

Fair Isaac, the country’s major credit score developer,changed its calculation in 1998 to encourage rate shopping,and the new algorithm has slowly been adopted across thecountry by the major credit bureaus, but the implementationof this new system for mobile home buyers is uneven atbest.

Rate Shopping and the New Credit ScoringToday, the Fair Issac program does not reduce a

consumer’s credit score if several inquiries from auto ormortgage lenders are recorded within a 30 day period. Inaddition, the system looks back 12 months, and any clusterof inquiries from auto or mortgage lenders within a two weekperiod will only be counted as a single inquiry. Therefore, aconsumer could go to several auto dealerships in a week-end, get credit checks at each of them, and decide to holdoff altogether. The rate shopping weekend would be notedlater as a single inquiry. The effect of such an inquiry shouldbe slight when the consumer decides to go ahead with thatauto purchase at some future date.

These changes allow consumers to shop around for thebest rate and terms for their auto or home loan because the30 day “rate shopping” period does not count against thescore at all. The one year “look back” rule also takes someof the pressure off. Consumers can consider their home orcar loan options over several months and the clusters ofinquiries may have only a nominal affect on their score.

Implementation UnevenAccording to a November, 2001 statement from the

National Association for Mortgage Brokers (NAMB), manylenders are still not using the most up-to-date credit scoringmodels. “Some credit reporting companies and lenders arepresently using scoring models that date back to 1994,”said Ginny Ferguson, chairman of the NAMB Committee forCredit Scoring. “By continuing to use older versions, thechanges that have been made to improve the scoringmodels are useless for the consumer and the industry as awhole.”

In Texas, the largest credit bureaus report that most oftheir lender customers do use the most current Fair Isaacscoring model, although the older models that do not allowfor rate shopping are still in use by some of their clients.

But for consumers shopping for a manufactured home,there is an additional worry. Even if the lenders and bureaus

are using the 1998 credit scoring algorithms, they only applyto inquiries from lenders that are classified as “auto” or“mortgage” lenders. There are a small number of lendersdominating the manufactured home loan industry. Most ofthem use retail installment contracts rather than conventionalmortgage contracts for the majority of their lending. Thismeans that the consumer’s loan is a “personal” loan on“personal property” rather than a mortgage loan on realproperty.

Every time a dealer runs the consumer’s credit, it mayappear to be an inquiry for a personal loan, rather than amortgage loan or an auto loan. The changes to the creditscoring models do not allow consumers to initiate severalinquiries from personal loan companies without damage tothe credit score.

According to Fair Isaac, a manufactured home lendercould be classified as either a mortgage company, an autolender, or a personal credit lender by the individual creditorganizations using the Fair Isaac system. When asked, thecredit bureaus said that information about ways their clientsmight use the credit scoring system--including the classifica-tion of manufactured home lenders--would be up to eachindividual lender using the system.

RecommendationsUntil consumers can actually shop for a manufactured

home loan without damage to their credit scores, dealers willretain the upper hand in negotiations. No law currentlymandates that lenders use the most current credit scoringmodels that allow consumers to rate shop for auto andmortgage loans. No law currently requires lenders to con-sider a manufactured home loan “inquiry” the same as amortgage inquiry.

At this time, we recommend that consumers get theirown credit scores directly from the three Bureaus. Creditscores are readily available on the internet for a small chargeor by mail or phone.

TransUnion--http://www.transunion.com/Personal/OrderCreditReport.asp or call 800-888-4213.

Equifax--http://www.equifax.com/personal_solutions/index.html or call 800-685-1111.

Experian--http://www.experian.com/consumer/index.html or call 888-397-3742.

Armed with your own credit score, shop for a manufac-tured home but do not provide your personal information.Ask the dealer to give you a written quote with the price andthe estimated loan terms based on the credit score youprovide but without running a credit check.

To correct the problem and ensure that consumers canshop for a manufactured home:! The credit reporting industry should take the lead toensure that lenders all use credit scoring systems that allowconsumers to rate shop by phasing out older systems.! State legislators should mandate that financial institu-tions use credit scoring models that allow consumers toshop for the best interest rate, and require them to classifymanufactured home lenders as “mortgage” lenders forpurposes of credit scoring.

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with Tres “B” MobileHomes of El Paso andanother $300 with Nation-wide, but finally bought ahome from a third com-pany—an exercise incomparison shopping thatleft him $400 out of pocketuntil the Attorney Generalintervened.11

Texas law now givesconsumers the right to arefund of deposit moneywithin 15 days of a writtenrequest. The law is de-signed to encourage con-sumers to shop around,

knowing they can get adeposit back if they prefer adifferent home at a differ-ent dealership. But about19 percent of AG andOCCC consumer com-plaints involved dealerswho were unwilling toreturn a consumer’s invest-ment after he or shedecided to walk away froma deal. Hundreds moreconsumers filed complaintswith TDHCA to get arefund of their deposit.12

Some dealers refused togive back deposit money

once a loan had beenapproved. Tres “B” MobileHomes told the AG inNovember of 1999, “Oncewe get a customer approved[for a loan] we do notreturn their money back.”Georgetown Mobile Homesin 2000 gave consumers anotice saying that a refundof deposit was available ifthe dealer could not obtainfinancing. A whistle blow-ing dealership employee inSan Antonio reported inmid-2000 that consumerswere asked to sign a form

stating that if their loanswere approved, they wouldnot get a refund of deposit,“so they wouldn’t shop.”13

Prior to September 1,1999, dealers could keepdeposit money up to $200 ifa consumer cancelledbefore signing a creditagreement. Now, depositmoney is fully refundableuntil after loan closingunless the home is a“custom” home.14

Consumers who walkaway as soon as the dealstarts to look different from

Dealers make “freebie” offers to get people to the lot, and itappears to work. Although free gifts have nothing to do withthe long term value of a mobile home purchase, consumersreport responding to offers of free appliances, a free car, a freevacation, a free cell phone, a free coupon book, and more.

A McAllen woman heard a radio announcement in January2000, promising that consumers who bought a mobile homewould also get a free car. She called to confirm the offer, thenwent to the dealership, where she filled out a credit applicationand paid a $25 fee. She later added a $1,000 down paymentand purchased a home, but never got the promised car.According to the dealer, the sales people that made thatpromise had been fired and there would be no car.1

Most consumers report less costly offers. A dealer adver-tised that consumers who came to the lot could pick up a freegift worth $100 and a get a zero down loan on their home.Another consumer reported an advertisement that highlighteda “Summer Saver Package” with $1200 worth of “deluxe”appliances for consumers who bought today. But the con-sumer priced the models after they were delivered and foundthat they were lower end models worth less than claimed. Thedealer agreed to upgrade the dishwasher after the consumerwrote to the Attorney General.2

In general, buying a home based on the appliances, freefurniture offers, or other gift deals is a mistake. “Free” stuff isnot actually free. Instead, the costs will be added to the loan orto the underlying purchase price of the home itself. Mr. B. ofItasca, Texas reported several enticing freebies including $500in cash and $3,000 in furniture. “We were also given a freedrawing and whatever we drew from the jar was a free gift forbuying the home,” he wrote to the AG. “We drew a free 8’x10’deck for our home. But in the end never received the deckbecause...they had to cut it out of the deal to make the dealwork. So once again, you are not receiving a free drawing, it issomething you have to finance into your deal, and you have topay for it on a 30-year note!”3

Dealers who pad the home price or the loan will makethousands on the sale, and consumers who look only at themonthly payment can be fooled if the payment remains lowenough. Since most loans today are made for terms of 25 or30 years (rather than the 15 year loan standard a decade

ago),4 there is room to increase the underlying cost consider-ably while still offering reasonable monthly payments. Butextras wrapped into a retail installment contract leave consum-ers “underwater” for many years. While a majority of contractsinclude the cost of property insurance, home warranty plans orcredit insurance, some also include credit card payments, tripsand more.

When a Sunland Park, New Mexico couple took theirclosing documents home from an El Paso dealership, theyfound that the purchase price was much higher than expectedand the payments were more than they could afford. They hadexpected to pay $43,900 for the home, but the closing docu-ments gave a price of $48,546. The higher price apparentlyincluded the cost of a satellite dish, a $1,000 gift certificatefrom Sam’s Club, and a package trip to Orlando Florida or LasVegas. “Mr. Villanueva stated that this could not be removedfrom the contract because it was part of the deal,” they told theAttorney General.

The day after signing, they attempted to cancel the dealbecause they couldn’t afford it, but the dealership refused.When the consumers said they couldn’t afford the payments,the dealer encouraged them to “be positive” and “accomodatethe expense.” Restating his legal right to keep the title to theirexisting home, the dealer finally agreed to rescind the contractafter receiving letters from the Attorney General.

1 Complaint to Office of the Attorney General, filed 5/4/00,McAllen, Texas.

2 Complaints to Office of the Attorney General, filed 3/10/00, Marion, Texas and filed 2/23/00, Houston, Texas.

3 Complaint to the Office of the Attorney General, 4/20/99,Itasca, Texas.

4 Berenson, Alex, Trailer Owners and Conseco areHaunted by Risky Loans, New York Times, November 21, 2001.Most of the loans we reviewed in detail were made for terms of25 or 30 years, and we found relatively few 15 year loans. 30year loans were made by most of the major lenders in theTexas market, including Green Tree (Conseco), Green Point,CIT, 21st Century, Oakwood Acceptance and many others.

5 Complaint to Office of the Attorney General, filed 8/23/99,El Paso, Texas.

High Cost “Freebies” Not Free

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their expectations—andwithout signing anything—usually get a refund, thoughthey may need to contactregulators first. Edwardo R.of Houston put $500deposit on a Fleetwoodhome. But when the dealercalled him in to sign theloan contract, the termsdiffered from his expecta-tions. The price of thehome, the payments andthe loan term had changed,so Mr. R. refused to signand asked for his depositback. “No firme el contratopor todas las mentiras queestaban escritas,” he wroteto the Attorney General (“Ididn’t sign the contract dueto all the lies that werewritten in it”). Afterintervention from the AG,the company released his$500.15

Contract SigningLocks In PurchaseSometimes consumers

report signing a purchasecontract at the same timethey leave a deposit, andsometimes they return tosign the purchase contract.Dealers sometimes arguethat once a purchasecontract is signed, theconsumer is contractuallybound to accept thehome—even though theymay not have seen it oragreed to financing terms.

James E. of Tyler signedcontracts and left $500 butchanged his mind withinhours. The salespersonrefused his written cancela-tion notice and said hewould have to come upwith $1,500 more, accord-ing to Mr. E’s wife. He gothis money back a few dayslater. Under the depositlaw, consumers can stillcancel after signing pur-chase contracts. As cur-

rently interpreted byTDHCA staff, dealers arerequired to fully refund aconsumer’s investmentunless the consumer hassigned a loan agreementand the funds on deposithave been transferred tothe down payment.16

Victor S. of Canutilloand his wife went out toshop for a mobile home. Inan initial visit to a Nation-wide dealership, theypicked a home, signed apurchase contract, andasked for copies. They alsosigned over their own hometitle as earnest money. Toldthey could have copies oftheir paperwork at “clos-ing,” they went homeempty handed and unsureabout the deal. That sameday, they decided to shoparound some more andcalled the dealer to cancel.When another dealeroffered a better price andinterest rate, they called toget their title back.

“We told him we justwant to pick up our title,and he said that he wasgoing to keep our title if wedidn’t purchase a homefrom him. He also said thathe could keep our mobilehome if he wanted tobecause my husband hadsigned papers and that if wewanted our title we had tosend him our attorney.”The new dealer contactedNationwide’s nationaloffice, which ordered thetitle released, but the firstdealer filed a report withthe credit bureau saying theconsumer owed $60,000.The dealer refused toremove the chargeoff fromthe credit report even aftercontact by the AG unless“he comes in, honors thecontract signed and takeshis home.”17 According to

the dealer, this home was aspecial order home (seestory, p. 24). Although thefamily cancelled the sameday, refund rights forspecial order homes aremuch more limited. Fur-ther, the law does notprohibit dealers fromplacing the full cost of thehome on a consumer’scredit report as an unpaiddebt.

Ms. F. of Hidalgo left$500 at a dealership inWeslaco, thinking that shewould have no additionalout of pocket costs for hermanufactured home pur-

chase. She signed somedocuments but didn’t reallyknow what they werebecause they were all inEnglish. At closing shediscovered they wanted herto pay $6,000 more—moneyshe didn’t have. She walkedout of closing and asked forher $500 dollars back. Afterwaiting three weeks sheturned to the AttorneyGeneral for help. The AGultimately got her depositback from the dealer, andshe eventually purchased adifferent mobile home onterms she understood (nosurprises at closing). She is

Dealers will sometimes advertise the sale of a lowpriced repossessed or used home to get people to thelot, then qualify them for a higher priced new homeinstead. Nancy Richardson of San Antonio called thenumber on a newspaper ad for a repossessed home, andthe number connected her with a dealership. After touringthe available repossessed homes, she selected one, filledout a credit application and left $500. The following weekshe called back. “Al told me he had not heard on the repoyet, but he had run an application for a new home and Iwas approved.” Ms. Richardson insisted she was onlyinterested in the repo. The next day she visited the lot andviewed the new home approved for her, but insisted shedid not want a new home. A day after her visit, thedealership told her that her credit application for therepossessed home had been denied.

“I feel like this whole thing is a scam and they usethese repos to bait you and then reel you into a newhome,” she told the AG. “I will not be forced into buying anew home with higher payments than I can afford.”1

A former employee of a dealership in San Antoniofiled a whistleblower complaint alleging that the dealer-ship ran deceptive bait-and-switch ads for a non-existenthome in Leon Valley. According to the whistle blower, theads referenced non-existent sales people, and whenconsumers called they were told that those salesmenwere out but someone would call them back. Then, a realsales person would invite the consumer to see threehomes, none of them the non-existent home in theadvertisement, and pressure the consumer to select one.2

1 Complaint to Office of the Attorney General, filed 3/6/01, San Antonio, Texas. Also survey response confirm-ing satisfaction with AG assistance.

2 Complaint to Office of the Attorney General, filed 4/26/00, San Antonio, Texas.

Bait and Switch

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very happy now in her newhome, according to herinterview with ConsumersUnion.18

Many consumers putdown money and sign apurchase contract based ona dealer promise to getthem credit approval.Before 1999, Texas lawspecifically required dealersto return all but $100 (or10% of the deposit, which-ever was less) if they wereunable to corral a lender.Today, the law requires arefund in full.19 But someconsumers turned down forcredit still reported consid-erable difficulty gettingtheir money back.

A Spanish speakingcouple from Austin left$1,000 on a home in 2000,contingent on creditapproval. Their credit wasnot approved. Four weekslater they hired a lawyer tohelp them get their moneyback.20 After a dealer saidher credit had already beenapproved, a disabledCaldwell, Texas woman put$1,500 down on a home—money she borrowed from asister’s credit card account.But soon after, the sales-man told her that her creditwas not approved after all.More than nine weeks latershe sought help from theAttorney General to get hersister’s money back.21

Rather than give back aconsumer’s deposit, dealerssometimes try to force

consumers who have beenturned down for credit intoalternative financing oranother home. AnotherSpanish speaking couple inSan Juan left their depositwith a promise of creditapproval. When the dealercouldn’t get a loan ap-proved, he suggested thecouple find someone else tobuy the house for them(called a “buy for” deal).They refused and filed acomplaint when the dealerdidn’t return their money.22

Ms. W. of New Waverly left$1,200 on a 1999 home.Weeks later the salespersontold her she had not quali-fied for credit on the 1999trailer, but they would sellher a 1980 model instead.She didn’t want the oldermodel, and asked for hermoney back. The dealerrefused because “he hadgotten me approved for ahome,” she told the Attor-ney General, even though itwas not a home she wanted

to buy. “I told him that Iwas coming to bring thehigh Sheriff with me. Hetold me that I could bringGod, that I wouldn’t beable to get it [her deposit]back.”23

While some consumersreport a single “closing”with purchase and all loancontracts, others reportmore than one trip to thedealership: once for thepurchase contract (with thedeposit) and again for theloan closing. Once thepurchase contract is signed,but before the loan closing,construction on the lot maybegin (clearing, foundation,electric hookups, septic,etc.), and those contractorswill need to be paid. By theloan “closing,” the con-sumer is essentially lockedinto the deal.

A retired military manfrom Kemp, Texas selecteda home for $67,000. By thetime he went to the loanclosing at the dealership,

his slab had already beenpoured, although the homeitself had not yet beendelivered. As he reviewedthe loan documents, henoticed that his home pricehad risen to a remarkable$80,900. Although he wasshocked, he continued withthe closing because theworkers had to be paid.Ms. R. of Kingsland had thedealer completely redo theloan documents at closing.“My mother told me towalk out,” she said. “I wasstuck in a hard place,because Palm Harbor hadK--- installing my septicand paying for it $2,400,and B--- Constructionputting my pad down forthe double wide, $1,500. IfI did not go through with it,someone had to paythem.”24

LoanContracts

Once the loan contractsare signed, consumerscannot change their mindand get their downpaymentback, even if the home hasnot been delivered and nosite preparation started.The law requiring refundsof “deposits” does not applyto “down payments,” soonce a deposit becomes a“down payment” (when itis transferred to the loandocument as part of theconsumer’s share of thepurchase price), it is nolonger refundable. Nor does

The image of old, dilapidated trailers abandoned by theirowners continues to haunt the industry.

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Texas law provide for a“cooling off” period toconsider the details of amanufactured home loan.

Ms. G. of Pharr, Texaschanged her mind a fewdays after signing the loandocuments and purchasecontract for an Oakwoodhome (but before delivery).According to Ms. G., sheasked if she would be ableto change her mind and gether down payment back atany point and sales peoplehad assured her she could.Oakwood denies any suchrepresentations. Ms. G. wasconcerned that she was notgoing to be able to makethe payments. And her loanpayments were scheduledto increase in three stepsfrom an initial $370.02 to$515.26 for most of the lifeof the loan (28 years). In aletter to the AttorneyGeneral, Oakwood re-sponded, “The fact thatMs. G. has had a change ofheart about the home doesnot relieve her from hercontractual obligations toOMHI.”25

Lenders generally havea strong interest in aconsumer’s ability to repaya loan, and most lendinglaw assumes that an inde-pendent loan approvalprocess will eliminatepeople who are over ex-tended. But in the manu-factured housing market,many of the lenders(Oakwood, Vanderbilt,Countryplace, and others)are affiliated with themanufacturer, and share aninterest in high salesvolume.

Independent lendershave recently emphasizedvolume over quality, andtens of thousands of loansto people who could notafford them are already

foreclosed. James Clifton ofthe Manufactured HousingInstitute recently said, “Inmany cases you werelending to people whosecredit scores suggest theywere never capable ofmaking a payment in theirlives.” 26

A mandatory “coolingoff” period of at least fivedays, with full and finaldisclosure of loan terms,would give consumers theopportunity to realisticallyassess their ability to paybefore finalizing a deal.

Home Delivery:This is not my

Beautiful House!Manufactured homes of

the same model should bevery similar, one to thenext. They are built in afactory with standardizedconstruction methods, avariety of floor plans, andstandard upgrade packages.The model home that aconsumer walks through atthe dealership should bejust like the actual homethat arrives on theconsumer’s lot, with anychanges requested by thebuyer. This is why mostconsumers accept the factthat they must sign con-tracts and put money downwithout actually seeingtheir own home con-structed first.

But sometimes thehome that arrives is verydifferent from the modelhome, and consumers whotry to reject the home upondelivery may have to get alawyer to get them out ofthe deal—although theDeceptive Trade PracticesAct clearly prohibits anykind of bait and switch.27

Twenty nine families, orabout 7 percent of com-plainants, reported delivery

New Home? Old Home.Alice Hogue and her son Jimmy bought a 2000 RedmanStonebrook singlewide from an East Texas dealer in Julyof that year. According to Ms. Hogue, the dealer asked atclosing whether they would like copies of the contractsand she declined, saying she could come by and getthem later if she needed them.

Like so many others, Mrs. Hogue trusted that therewould be no problems and the system would work asexplained to her at closing. The dealer told her to make alist of anything that needed to be repaired and he, thedealer, would send someone out. When the home wasinstalled she made her list of repairs and delivered it to thedealer, but the dealer didn’t send anyone to fix the home.This first glitch led to the discovery of others.

Tired of waiting, her son forwarded the information tothe manufacturer, who sent out a repairman. Whilecompleting some of the repairs, the repairman told themthat the home was actually a 1998 model, not a 2000model. According to the N.A.D.A. bluebook, a 1998 modelis worth less than a 2000 model in 2000.

Upset that her new home might actually be two yearsold already, Ms. Hogue called the dealership back andtold them she would come by to pick up those contracts.“He asked what for,” she wrote to the Attorney General inMay, 2001. “I told him I just wanted a copy of all thepaperwork. T—— said everything was at his house incase someone broke into the office. I told him I would beby the office the next day to pick them up. Well there’sbeen no next day. I’ve called. My son’s called. Went by theoffice. No one’s there.”

Mrs. Hogue eventually did get a copy of the loandocuments directly from the lender. The loan documentsshowed a place where “2000” was marked out and“1999” written in ink. “It also had my initials, which I don’tremember putting on the contract under the 99. I’m notsaying I didn’t initial it. I don’t remember signing it. T—told us it was a 2000 model.” Mrs. Hogue’s 30-year loanalso included $3,225 in financed points, and her interestrate remained high at 12.32 percent APR.

She hoped the Attorney General could help her getcopies of her contracts and the model year trailer sheordered, but when Consumers Union contacted her shehad yet to receive copies of those contracts and her sonhad moved into the home they had delivered.

Source: Complaint to the Office of the AttorneyGeneral, 5/7/01, Lone Oak, Texas.

Ms. Hogue remembered initialling several places in hercontract, but she did not remember initialling the changeto the year/model identification.

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0of a very different homefrom the one they thoughtthey purchased.

Sometimes consumersreject the home because itwas poorly constructed,lacked special features, orwas otherwise differentfrom the model theywalked through. AnEdinburg family purchaseda Southern Energy doublewide from E-Z Manufac-tured Housing, putting$5,625 down. But when thehome arrived, the familyrejected it outright andwanted their down pay-ment back. “We were inshock. The mobile homewas not built like I hadordered it. All of us weredisappointed with theconstruction and workman-ship of the home. It wasconstructed poorly….[thesalesman was] disappointedwith the mobile home. Hespoke to... a representativeof Southern Energy. He saidwe would have to take legalactions.” According to thedealership, the familyultimately accepted thehome and the dealershiprepaired the items ofconcern.28

An Itasca, Texas coupleselected their home be-cause thesalesper-sonofferedseveralspecialfeatures,includinga built-instereo,six inchinterior walls, shutters allthe way around (not just onthe front), and a popcornacoustic ceiling. The homearrived with 4 inch interiorwalls, shutters on the frontonly, no stereo, no french

doors, and no popcornceiling. According to thedealer, the manufacturer nolonger built the home withthe requested features.The manufacturer saidsome of the special featureswere not on the order form.The dealer would notrefund their deposit (seediscussion of Special OrderHomes, p. 24).29

About half of thesefamilies reported receivinga home that was smaller,older, used instead of new,without upgrades, orotherwise less valuable thanthe make, model, year ortype of home they thoughtthey purchased. When theytried to reject the homesthey faced loss of theirdown payment, a bad creditreport, and mandatoryarbitration.

Ms. S. of Eagle Lake,Texas signed loan andpurchase contracts to buy asingle wide mobile homefor $27,000. According toMs. S., the home that wasdelivered was not the oneshe ordered. It did not havetwo bathrooms and thearrangement of rooms wasincorrect, so she refused toaccept it. The dealerrefused to refund her

$3,100 downpayment.30

Similarly,when a 74-year oldPorter, Texaswomanrefused toaccept deliv-ery on a homethat was not

what she ordered (an oldermodel year), the dealerrefused to take it back andthe lender reported her tothe credit bureau. Thehome sat for three months,according to the consumer,

before the lender picked itup for resale, and she wasturned down for creditwhen she later attemptedto buy a car. “I had nothingagainst my credit when Isigned the contract, and

Green Tree refused todelete from my credit,” shewrote. After correspon-dence from the AttorneyGeneral, Green Tree agreedto “request a deletion ofany negative credit report-ing it may have placed onthe credit report.”31

Mr. E. of Breckenridgebought a mobile home froma Ft. Worth dealer in 1998,but when the home wasdelivered and he saw thetitle he found that thehome was 4 feet shorterand 112 sq. feet smallerthan he expected. “Webased our purchase almostentirely on cost per square

foot in comparison to otherhomes we were looking at,”they told the AttorneyGeneral. Although thedimensions he thought hepurchased were typedthroughout his closing

documents, the dealerexplained that this wasmerely a typographical errorand suggested that Mr. E.go to mandatory arbitra-tion.33

A Lancaster, Texasconsumer responded to aflier from a dealership inHillsboro describing arepossessed three bedroomdouble wide. She looked atthe home, took the flier anddecided to buy it. Believingshe was buying the home inthe flier, she signed all theclosing papers, but whenthe home was delivered itwas a completely differenthome—different year,

Francis Latham in front of her new manufactured home. Shewanted a home just like the model, but was still not happy withthe installation and repairs more than a year after her puchase.

Before I close this letter, alaw should be, that before

you have to sign a Contracton a mobile home, it should

be on your property andeverything as it should be.

Like building a house.J.W. Latham, Nacogdoches

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smaller by 96 square feet,different floorplan. Itturned out this smallerhome was the make andmodel actuallywritten into some ofher closing docu-ments. Threemonths later shehired a lawyer toforce the companyto rescind the loan contractand refund her money.34

The Telephone Auditand Final RepairsWhen a consumer

purchases a site built homethat will need repairs toensure its value as collat-eral, the lendertypically does notrelease the finalloan funds until alender’s inspectorhas walkedthrough the hometo verify that all repairs arecomplete and adequate.Although all manufacturedhomes require repairs uponinstallation, manufacturedhome lenders may releasefunds based on a “tele-phone audit” with theconsumer. The lenderverifies by phone that thehome was delivered, butmay release the funds tothe dealer before repairs areactually complete. Onedealer instructed consum-ers to complete the tele-phone audit as soon as the

house was delivered and“blocked” and beforecompletion of installation,let alone repairs.35

Since the lendermay not send anindependent witnessto the site, dealerscan encourage falsephone reports. Aconsumer living in

Abilene purchased a homein Bastrop, to be placed onland in Bastrop. Sightunseen, the dealer told theconsumer to report toConseco that the home wasdelivered and on the lot.Instead, the lot chosen bythe family was not actually

for sale and only anumber of undesirablelots were available.When Conseco begandemanding paymentson the loan, “I told himthat we have never

even seen the home. Heasked if we had given aphone audit stating thehome was on the land. Weexplained that we weremisinformed and were toldto tell Conseco that thehome was on the land.”36

Some consumers reportno contact with the lenderat all. When Ms. S. of EagleLake (above) rejected herhome, she asked theAttorney General, “Whywas it that Conseco Bankcould release a check toNationwide without any

kind of contact with myself...or my mother?” Shecalled the lender as well.“What kind of bank wouldlet you make a majorpurchase like this and notcome out to see if theirconsumer was satisfied.”

Since the lender mayrelease funds as soon as thehome is “blocked,” theconsumer’s payments maybegin well before repairsare complete, even if theconsumer cannot yet live inthe home. Mr. H. ofSpicewood bought a land/home package in May of1998, but the dealer wouldnot do any repairs. Theconsumer even agreed tomediate, but when themediator found for theconsumer and required thedealer to void the contract,the dealer claimed themediation was illegal.According to theconsumer’s March, 2000letter to the AG, “the homehas never been lived inbecause they would neverdo the repairs. They havestarted the paymentsbefore we ever didthe walk through.”37

J.W. and FrancisLatham of Houston,a retired couple, putten percent down ona $65,950 home at adealer in Lufkin. When thehome was delivered to thedealership, they were

invited to see it and signthe loan documents. Theythought the home lookedok, although it was hard totell since it was in pieces,but they did not want tosign anything else until itwas put together on theirlot. “He told me if wedidn’t sign the loan con-tract, that home wasn’tgoing anywhere,” Mrs.Latham told ConsumersUnion.

So the couple signedand started to make pay-ments, even though theinstallation and repairs werestill not complete to thecouple’s satisfaction a yearlater. They moved in tenmonths after the purchase,although the home did notmatch their expectations.“We wanted everything inthe house like the model onthe lot,” said Mrs. Latham.Mr. Latham had a sugges-tion for the AttorneyGeneral. “Before I close thisletter, a law should be, thatbefore you have to sign acontract on a mobile home,it should be on your prop-

erty and everythingas it should be. Likebuilding a house.”

Some banksentering the manu-factured housingloan niche have

discovered the importanceof an independent, finalhome inspection as part of

This subdivision of double wide homes east of Austin represents the new image of manufactured home living.

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the loan process. MurphyBank, which lends to high-end manufactured housingbuyers in California, flies itsloan officers in to visit eachhome personally beforeextending a loan. Lendersthat spend less money andtime investigating each dealhave faced serious losses.Home Federal Savingssuggested that banks makeloans only to local custom-ers--not those several statesaway--after it wrote offmillions in bad loans. Theselenders believe it is impor-tant to keep an indepen-dent eye on transactions fortheir own good and thegood of the consumer.

More recently,GreenPoint Financialcharged off $663 million inmobile home business.According to the company’sCEO, the manufacturedhousing loan business islike auto lending, but withoutthe same checks and balances.Fitch Investors Service

notes that recent trendstowards “irrational pricing”helped push the industryinto a free fall. With ad-equate and independenthome inspections prior torelease of loan funds, bothbanks and consumers wouldhave confidence in theunderlying value of theasset and dealers wouldhave to provide promptrepair service if theyexpected to be paid.38

Predatory LendingMost discussions of

predatory lending focus onhome equity loans securedby standard homes, orsometimes very high cost,short term personal loans.But any loan can be preda-tory if it meets some or allof these criteria:! High interest;! Excessive fees andinsurance;! Deceptive marketing;! Incomplete loandisclosure and fraud; or! Lending without regard

to a borrower’s ability torepay the loan.39

A high cost or decep-tively marketed 30-yearretail installment contractfor a manufactured homemay share many of thesefeatures, but most impor-tant for our purposes, itstrips a family’s equity inthe home.

There remains somequestion whether a manu-factured home—in and ofitself—appreciates overtime (creating familywealth). Consumers Unionhopes to weigh in on thatquestion in the near future.But regardless of theappreciation rate, a homethat is tied to a high inter-est loan packed withexcessive fees, prepaid andfinanced points, andexpensive insurance may beworth far less than is owedfor the first half of thecontract.

High Cost LoansConsumers Union

reviewed loan documenta-tion for 128 consumers whoincluded such information

in their complaint to theAG or the OCCC. Many ofthese consumers filed theirloan documents eventhough their complaint wasabout something elsealtogether (frequentlyhome repair or installationissues). We assume thatthis sample will include asomewhat larger share ofhigh cost loans than themarket as a whole, sincecomplaints correctlyaddressed to the AG or theOCCC tend to involvemisrepresentation, includ-ing loan representations.

In general, the manu-factured home loans wereviewed were offered atinterest rates substantiallyhigher than ordinary mort-gage loans. Of the 128 loanswith complete interest ratedisclosure, we found thatmost loans were issued toconsumers at interest ratesof 9 percent to 13 percentAPR.40 The bulk of theloans (46 percent) wereissued at 11 percent to12.99 percent. The medianrate for this group of loanswas 11.5%, only slightlyhigher than the median ratefor mobile owners ingeneral as reported byConsumer Reports in 1998and slightly lower than theaverage rate reportedrecently by the ailingConseco (11.7% pluspoints).41 Vanderbilt, whichrecently securitized a large

number of Texas loans,reports rates ranging

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from 7.75 to 19 percent,with a weighted average of10.8 percent.42 Ordinary 30-year fixed rate home loansfor the same period hoveredbetween 7 and 8.5 per-cent.43

The National Con-sumer Law Center(NCLC) and the AmericanAssociation of RetiredPersons (AARP) recently

released new recommendedstandards for “high cost”mobile home loans. Accord-ing to NCLC, any first lienon a mobile home that isoffered at eight pointsabove the weekly averageon five-year Treasurysecurities should be consid-ered a “high cost” loansubject to special consumerprotection law.44 Between

The current TILA disclosure is not intuitive to consumerswho finance their “prepaid” points. Dealers can use thisconfusion to mislead. If you finance points by borrowing themoney from the lender, the “Amount Financed” in the familiarTILA disclosure box is no longer the “bottom line,” as it is withmost loan contracts.

Instead, the actual amount the consumer has borroweddoes not appear in theTILA box at all. Theconsumer borrows the“principal outstandingbalance” or “unpaidbalance” listed in muchsmaller print in the“Itemization of theAmount Financed.” This

confusion leads many consumers to make angry calls to theirlender and to the Office of Consumer Credit Commissionerwhen they get their first statement and the balance owed isthousands of dollars higher than the amount they thought theyborrowed (eg the “Amount Financed.”)

Alfred Williams of Atascosa, Texas got a letter from hislender annoucing a payoff amount more than $4,400 higherthan he expected. “The contract clearly states I am to befinanced for $40,821 after origination and funding and insur-ance was taken from my down payment,” he wrote to the AG.But according to the company, he actually borrowed$45,292.44, listed on his loan agreement as the “Unpaidbalance,” while the amount he thought he owed was theAmount Financed listed in his TILA box. According to thelender’s attorney, “Prepaid financed (sic) do not mean that theconsumer actually prepaid those charges, as your letterimplies. In fact, Mr. Williams did not “prepay” his “prepaidfinance charges;” rather he financed those items as part of theloan.”1

The official staff commentary to the TILA regulationsdirects lenders to use this ‘now-you-see-it-now-you-don’t’disclosure, where the Amount Financed is reduced by any“prepaid finance charges,” even if those charges are notactually “prepaid.”2 The TILA disclosure does accuratelydescribe the effect that financing prepaid finance charges hason the interest rate. According to Mr. Williams loan company,he must pay back $45,292.44 at 12.25%. This is mathemati-cally the same as a loan of $40,821 at 13.809%, the interestrate and Amount Financed disclosed in his TILA box. The“prepaid finance charge” plus the interest on the prepaidfinance charge must be incorporated into the total “FinanceCharge” in the TILA disclosure, rather than the amount fi-nanced, and this has the effect of substantially increasing thedisclosed APR interest rate.

1 Complaint to the Office of the Attorney General, 9/6/99,Lytle, Texas.

2 Official Staff Commentary to Regulation Z, 12 C.F.R. Sec.226.18, Comment 18(b)(3).

1998 and 2000, Treasuryrates averaged just over 6percent, dropping to 5.15percent in 1998.45 Loansover 14 percent APR, onlyeight in our sample of 128,might be considered “highcost” during this periodbased on this rate standard.

The 77th Texas Legisla-ture set 12 percent as thestandard for a “high cost

loan” and mandated a newnotice to consumers.46

About a third of the 128loans report APR interestover 12 percent. Withinthree business days ofapplication for the loan,mobile home consumerswith loans above 12 percentmust be provided informa-

When the Bottom Line Isn’t

...continued on page 17

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Consumers should be skeptical of low downpayment dealsbecause the down payment is usually a significant indicator tolenders that a family is financially ready to take on a homeloan. In our review, 27 families (or about 6.5 percent of all thecases we reviewed) reported what appeared to be violations oflender downpayment requirements. Dealers offering lowdownpayment deals sometimes paid the additional downpayment money out of other funds or borrowed funds, andloan contracts show an incorrect down payment amount.

Ms. C. of San Antoniowanted her mobile homeloan refinanced after shefound several problems inher paperwork, including thefalsification of a downpayment and “buy-for”fraud. She and her grand-mother had answered an adto rent a manufacturedhome from Oakwood. Thesalesperson offered insteada “zero down” purchase thatwould cost her only $269 amonth. Ms. C’s grand-mother agreed only to co-sign the loan, not to actuallytake a loan in her ownname.

After running a creditcheck, the dealer called the two back in to settlethe terms, but this time asked for $1,600 down.Since they had planned to rent rather than buy,they had no downpayment money and re-minded the salesperson that it was to be a “zerodown” deal. Eventually, the salesperson calledthem in again, and showed them the $1,600 listed as a downpayment but said he had “found a loophole.” He asked Ms. C.to sign one set of papers, her grandmother to sign another andgave copies to neither, according to Ms. C. She did notactually leave any down payment, and in the end, all thecontracts were actually in her grandmother’s name.

“When I went to pick up the paperwork from OakwoodMobile Homes office, there was only my grandmother’spaperwork,” she wrote to the AG. “I asked where my paper-work was and no one remembered that I had signed a set ofpapers, and Mr. C------ was no longer there. He had beentransferred to another office, they said.” The Attorney Generalmade repeated attempts to solicit a response from the dealer-ship to these accusations, but after waiting four months theyclosed the file and recommended that Ms. C. might pursue herclaim in small claims court.1

Even if the offer is not a “zero down” offer, consumersmust be careful that their paperwork is the same as the dealthey made. A consumer from Weir, Texas reported that he put$1,000 down on the home, but the down payment shown onhis loan documents was actually $3,060.2 A couple fromAlamo, Texas reported that they could no longer pay for ahome purchased on their grandfather’s credit, and wantedhelp getting out of the deal. Without comment, the couplecircled the down payment on their contracts ($6,038.25) andprovided a copy of their downpayment reciept ($1,000).

According to the company response, the couple kept thehome and the dealership offered payment assistance for 12months.3 A consumer from Huffman, Texas reported using awedding ring as a down payment because she had “nomoney.” The loan documents report a $5,000 down payment.4

Land/home deals have resulted in different forms ofcreative financing for the down payment. In response to aquery from the Attorney General, a San Antonio developerreported loaning one couple $8,000 towards their down

payment in a separate loan agreement, and thenwrapped the home and land together in a “contractfor deed.” The final loan document shows a$10,000 downpayment rather than the $2,000 thecouple actually paid.5

A Houston consumer reported that she backedout of a land/home deal when she realized that shewas told different down payment and closing costamounts by the lender and the dealer, and thedealer had suddenly changed the cost of the landby $2,500.6 To try and curb dealer fraud in land/home transactions, the 77th Texas Legislature last

year passed a law designed to prohibitdealers from using money from thesale of land to fund a consumer’sdown payment, points, or fees.7

Most consumers who report theirstories to regulators appear to havebeen aware that the down payment onthe documentation was not the sameas the down payment they actuallypaid, and some try to back out if theyrealize that the deal actually will requirethem to lie.

A Hearne, Texas consumer re-ported that the dealer wrote a check to

his brother for “lot clearing” to cover the down payment.“Doug, the general managed, drove me in his corvette to thebank where I cashed a check written to me for services I didnot do, and instructed me to hand him the cash money,” thebrother wrote in a sworn affidavit to the Attorney General. Whenthe brothers questioned this part of the transaction, the dealerassured them it was a common practice, “done all thetime...nothing to worry about.”

After moving in, the two brothers discovered that they hadindeed perpetrated a fraud and wanted the dealer to come getthe house. “I am a retired Military Veteran and take stringentexception to involuntarily and unknowingly being made part ofany such activity,” he wrote to the AG.8

Consumers who sign contracts where there is somedifference between the deal presented on paper and the dealthey think they negotiated may place themselves in a positionof collusion with fraud. On the other hand, dealers are quick tosay its “done all the time” or allowed under some “loophole”and are ultimately responsible for convincing vulnerablefamilies to do something wrong.

Buying a home is among the most complex and confusingfinancial decisions most families ever make, even if everythingis above board. For low-income families and those withimperfect credit, the process can be overwhelming. Dealerstake advantage of this difficult time when they present “cre-ative” solutions to credit or financial problems.

Downpayment Fraud

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tion about home loancounseling and a warningthat their loan may beexpensive.47 Unfortunately,this new law wouldn’t have

interest information.50

While we cannot claimthese to be a representativesample of all manufacturedhome retail installmentcontracts, our review ofthese examples unearthedpractices common enoughin the industry to appear indifferent contracts by avariety of lenders all aroundthe state.

Of the 65 reasonablycomplete loan files, onlyfour of the loans containedorigination fees, and twoothers contained poorlyidentified fees. In general,we did not find the kinds offees typical of mortgageloans (documentary fees,appraisal fees, recordingfees, title insurance, etc.).

On the other hand, wefound that these loans werecommonly structured toinclude thousands of dollarsfor “points” that consumersfinance into the loan.Thirty six of these custom-ers financed points, and in28 of these cases the pointsadded more than 5% to the

Finding Solutions to FraudLast year, the Oregonian produced a major two part

expose of fraud issues in the sale of manufactured housing inOregon. The paper found that dealers and lenders routinelycircumvent the minimum 5 percent down payment standard formanufactured home loans, and failure to enforce downpayment standards leads to increased default.9

In response, the state Attorney General led a Task Force inthe development of new fraud deterrents in state law, andproposed them in March, 2001. In general, the Oregon Attor-ney General recommended better, standardized itemization ofall costs, including costs not part of the financing, a “coolingoff” period, and information about housing counseling agen-

Are Financed Points a Good Deal?Reduces Long Term Interest CostsThis Kingsland consumer was surprised by$5,000 in previously undisclosedpoints at closing. Over 30 yearsshe would pay lessinterest with “points”.

$180,000

$160,000

$140,000

$120,000

$100,000

$80,000

$60,000

$40,000

$20,000

00 5 10 15 20 25 30

100%

80%

60%

40%

20%

0%

-20%0 5 10 15 20 25 30

But Financed PointsSlow Equity Buildup$5,000 in points on this loan would haveeliminated her equity in the first five years,and reduced her ownership in the homefor the first 15 years.

Cash price, $65,439 with five percen tdown calculated at 8.99%with $5,000 financed points and at 11.04% without points.

resulted in notices to mostof the consumers with APRinterest over 12 percent inour loan pool, because theregulation implementing itdefined 12 percent as the“contract rate” rather than

the TILA annual percent-age rate.48 Many retailinstallment contractsactually sport two interestrates, one that includesprepaid financed points(the higher TILA rate) andone that does not (thecontract rate.)

Prepaid FinancedPoints

According to KamiWatson, spokesperson forthe Manufactured HousingInstitute, the higherinterest rate on retailinstallment contractsoffsets lower closing costs.Mortgage loans typicallyinclude a number of coststhat are not calculated inthe interest rate. “Manufac-tured housing lenders havethese same costs, but theycollect them over the life ofthe loan (which means ahigher interest rate).”49

We collected reasonablycomplete loan information(with detailed breakdownof charges) for 65 of the 128people who reported

Continued from page 15

Total Interest Cost toConsumer without PointsTotal Interest Cost toConsumer with Points

Equitywithout PointsEquitywith Points

cies for consumers to get a second opinion about their deal.10

We also believe consumer complaints to state agencyregulators should more frequently result in investigation andenforcement. In our review of complaints to the AG and OCCCwe found no cases where the regulatory agency did more thansend letters. Sometimes the dealer responded with a satisfac-tory solution for the consumer (usually a simple refund ofdeposit). But if the letters were ignored, the agency closed thefile. Current law already makes most down payment fraudillegal. But without enforcement, unethical dealers can expectto play fast and loose with the rules indefinitely.

Footnotes, p. 35.

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cost of the home. In addi-tion to these, another 14consumers filed complaintsthat indicated some prob-lem with pre-paid, financedpoints but did not containcomplete information.Overall, about 12 percent ofcomplaints we reviewedcontained indication offinanced points. We suspectthe number would be farlarger if all consumersreviewed their loan docu-mentation carefully.

Conventional mortgage

lenders will frequently offerconsumers a lower interestrate if the borrower agreesto pay a portion of theinterest—called prepaidpoints—in cash up front.This is good for lendersbecause the up front inter-est is theirs to keep, even ifinterest rates decline andconsumers refinance. Forconsumers who get a sub-stantial long term mortgagerate reduction, the arrange-ment can also be a gooddeal, reducing both monthly

payments and the long termcost of the loan.

In manufactured homeloans, however, consumersactually borrow the moneyto pay the points, and thecost of the points is addedto the principal outstandingbalance of the manufacturedhome loan. (see “BottomLine,” p. 15) It is correct tosay that financing points inthis way increases theinterest rate by spreading anup front cost over the life ofthe loan, as argued by Ms.

Watson. However, financingthe “prepaid points” signifi-cantly increases the cost ofthis option (consumers payinterest over 30 years on thepoints), and only works forconsumers if accompaniedby a significant reduction ininterest that consumers are“buying” with these points.

The NCLC model, NewYork, and Massachusetts lawenvision a “bona fide” pointstransaction where thereduction in the monthlypayment (from the original

In Texas, the Hispanic market for mobile homes is booming.Nearly half of Texas families living in mobile homes today areHispanic families.1 The president of one Texas retailer in Houstonreports that Spanish language advertising on Spanish radio hasdoubled his business and increased Hispanic customers to over60% of buyers--and that these customers are generally a goodcredit risk.2

Yet many Spanish speaking consumers reported transactionproblems, in part due to misunderstanding between the salespeople and the customers. Purchase and loan contracts aredifficult enough for English speakers to negotiate, but Spanishspeaking consumers essentially rely on the verbal promises of asalesman to get through the process because everything theysign is in English.

In Spanish, Mr. R. of Floresville wrote to the AttorneyGeneral when Conseco started billing him. According to R., thesalesman told him the home would cost between $16,000 and$18,000 cash and $26,000 including financing. “When I signedthe contract, I couldn’t read it because it was in English and heexplained that with everything including financing it would cost$26,000,” wrote Mr. R. (translated from the Spanish). He did notget copies, and did not understand that he would actually haveto pay $309 per month for 30 years (or about $110,000) until hegot the first bill from the lender. His 13.32% APR loan includedprepaid, financed points, property insurance and extendedwarranty, and the cash price of the home was actually $27,500.3

The Travis County District Attorney recently opened aninvestigation against Cornerstone, an Austin dealership, andsubpoenaed boxes of documents after a former employeereported fraud to the Texas Department of Housing and Commu-nity Affairs. According to the search warrant affidavit, “the

majority of the consumers involved were Spanish speakers whowere not likely to notice the discrepancies in the paperwork, orto report discrepancies if noticed.”4

Gilberto Amaya told investigators he paid $3,000 down forhis home, although the contract claimed a down payment of$10,944. His ability to repay the loan was also misrepresented.Although his original loan application reported his income as$1,800 per month, the application delivered to Dynex Financialshowed an income of $3,800 per month. Finally, Mr. Amaya’sloan was packed to include charges of $2,347 for appliancesand furniture he never received.

Hidalgo Alvarado got a loan from CIT when the dealerprovided the lender a Release of Judgement Lien for a previousdebt. According to Mrs. Alvarado, the family had not paid thatprevious debt themselves. Cornerstone promised to pay it forthem. She also told investigators that the family gave Corner-stone only $1,000 down, although the contracts reflect a muchhigher down payment of $5,666.

According to the original whistle blower in this case, thedealer took small down payments from consumers, but thenpurchased a much larger cashiers check using dealer funds toshow the lender. Once the lender was satisfied that an appropri-ate down payment had been made, the dealer redeposited thecashiers check in its own account.

Unfortunately, our complaint review indicates that manyother Spanish speaking families have been trapped by baddeals because they did not understand the documents theysigned or signed blank documents based on a salesman’spromises.

A Spanish speaking consumer from New Mexico purchaseda mobile home from a dealer in El Paso. According to the

Spanish Speakers Targeted for Dealer Fraud

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payment at a higher rate tothe new payment at a lowerrate) will “recoup” theinvestment in discountpoints within four years.51

Including finance charges onfinanced points, this systemwould mandate a verysignificant differencebetween a proposed rate andthe final rate.

In most cases, the fileswe reviewed did not containinformation about an inter-est rate drop. No consumerreported actually negotiat-

ing a lower rate by discuss-ing “points” in advance. Asmall number of filesdocumented a rate differ-ence (typically when theconsumer asked to have thepoints removed and the newcontract was issued at ahigher rate). It appearsinstead that the “buy down”rate was quoted initially.The current offer for a newPalm Harbor home on thecompany web site, forexample, sports an 8.99percent APR, 30 year loan

consumer, the dealer asked him to say he had made a downpayment of $4,300. He did not have that much money, and hehad significant existing debts, but the dealer ordered the homeanyway. The dealer also paid off $7,400 of the borrower’s debts.When the home arrived damaged, the consumer tried to rejectthe deal. He believed that no papers had yet been signed, butcommunication was poor.

“The bank called my residence, but we were unable tocommunicate, because no one spoke Spanish and I do notunderstand English. They wanted me to sign papers there in theoffice and that they would contact the bank for the financing, butI told them that I was not going to lie and say that I gave them$4,300 dollars as a down payment.” The dealer did not respondto these allegations, but agreed to release the consumer fromthe home only if he repaid the $7,400 in cash spent to clear hisdebts.5

A Port Lavaca Texas consumer had an English speakingfriend intervene for him when the mobile home he purchasedwas delivered with a few defects. When his friend asked to seethe documentation from the purchase, he found that his stack ofdocuments (all in English) did not include the actual purchasecontract, title, loan contract or mandatory TILA statement. “WhenI looked into the matter, I found that the dealer had required himto sign a number of documents, but had not given G. a singledocument about this transaction or the resulting financialobligation. The dealer did not register the mobile home in hisname or provide him any indication he had title.”

He also looked in local papers, and the only advertisementhe found for the dealership was in a Spanish paper. “They aresoliciting business amongst folks that have poor English skills inorder to cheat other unsophisticated buyers like they haveattempted to cheat G.,” he wrote to the Attorney General inJanuary, 2000. By May, 2000, the dealership responded to the

Attorney General that the title problem (the title was actuallyissued to a completely different person) had been resolved andthere was a lawsuit pending on the case.6

Many of the other complainants highlighted throughout thisreport were Hispanic buyers shopping in dealerships from oneend of the state to the other, and many of them report that theydid not understand the English language contracts as theysigned them. All told, about a third of the complaints filed byconsumers came from families with Hispanic surnames andabout 10 percent were drafted in Spanish by consumers whospeak very little English. These consumers are especiallyvulnerable to abusive loans and confusing deals.

RecommendationRecommendationRecommendationRecommendationRecommendation! In Texas, Spanish translations of the mobile home purchaseand loan contracts should be a routine part of doing business. Astandard mobile home purchase contract should be developedby TDHCA and a standard retail installment contract by theOffice of Consumer Credit Commission. These agencies shouldalso produce a standard translation. Every consumer should begiven the option to receive the translation, completely filled in, atthe time they are given the English language contracts to review.! Every consumer should have an opportunity to review thosecontracts and the translation—completed in full—at least threedays prior to actually signing them.

These simple changes would encourage more consumers tounderstand the agreement they are about to make in plenty oftime to walk away with no harm done if they don’t like the termsor conditions.

Footnotes, p. 35.

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Financed Insurance Eliminates Equity in the Early Years

Two San Angelo consumers bought a manufac-tured home and land together in 1999. They filed acomplaint when they discovered that the twohalves of the home didn’t line up and it wasn’tlevel. Any deterioration would only exacerbatetheir equity problem. After making a $3,000 downpayment, the pair financed $9,118 in insurance(five years of property coverage and 7 years ofjoint credit life), starting them off “underwater.”They will own no equity in their home for the firstten years of their loan.

$60,000

$50,000

$40,000

$30,000

$20,000

$10,000

0

($10,000)

Note: 30 year term, 9% APR, $3,000 down

$60,000

$50,000

$40,000

$30,000

$20,000

$10,000

0

($10,000)

0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30

Loan Year

0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30

Loan Year

Financing Both Insurance and “Points” Can PushHomeownership Back Even FurtherTimothy and Debbie Foss of Austin bought their home two years ago.When they arrived at closing, they were presented with a 13.16% APRnote that had more than $10,000 in unexpected charges ($4,160 forinsurance and $6,213 for points). With a down payment of $3,100, thisdeal would have left them without equity for the first 14 years of theirloan.

They told the dealer they were not willing to take that loan but signedanyway when the dealer promised to negotiate new terms later. Thecouple made initial payments directly to the dealer, now unaccountedfor, and at one point were told they would have to move becausetheir loan deal wasn’t settled properly. After nearlya year, they accepted a loan from the manufacturerwithout the insurance, at a lower rate, andwith $4,000 in points.

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with 8 percent in “points,”and does not mention therate without points.52

NCLC recommends thatpoints, fees and insurancetotaling more than 3percent should actually bepaid in cash up front soconsumers fully understandthe cost of their invest-ment.53

Some dealers appear tohide the points in the priceof the home, rather thandisclose them anywhere onthe loan documents. Scottand Michelle S. of Weir

bought a mobile home in1999. The dealer initiallyquoted them a price of$38,000, according to thecouple, but when theysigned their loan docu-ments the price hadjumped to $60,197. Amongthe many papers theysigned was a “Seller’sPoints Disclosure” an-nouncing that the lender,Sinclair Financial Group,would charge the dealer$12,039.40 in points tomake this loan. Accordingto the disclosure, “These

sellers points may or maynot be reflected in yourcontract price, amountfinanced or your APR. Infact, your contract price,amount financed or APRmay actually be higher thanif you financed your homepurchase elsewhere.”

In response to a queryfrom the Office of theAttorney General, thedealer stated that thepoints were a dealer costjust like delivery, freight orair conditioning. The dealerneither denied or admittedadding these costs to theprice of the home, butnoted that the $12,039.40in points resulted in aninterest rate reduction forthe couple from an initial12.75% to 11.95%. In otherwords, this couple paid 20%up front for a .8% reductionover the 25 year life of theloan. Assuming the finalhome price would havebeen $12,000 less withoutthese points, this dealactually increased thecouple’s cost by $29,690.54

Dealers much morefrequently disclose thepoints as required on theregular loan documentation.But the standard disclosureis confusing because it addsthe points to the loan inone place and then sub-tracts them again in another(see “Bottom Line,” p. 15).Many consumers reportedthinking that this was not afee they actually had to pay,and reported a wide varietyof explanations from

dealers.A Malakoff, Texas

couple purchased a manu-factured home, but whenthey sat down to sign theloan papers they noticed$4,500 listed as paid to thelender for “points.” Thedealer showed them wherethe points were subtractedfrom the Principal Out-standing Balance to get the“Amount Financed,” ex-plaining that this amountwas just listed for incometax purposes. The amountfinanced would be exactlywhat they agreed. Onlywhen their bills began toarrive did the couple realizethat the balance on theiraccount was thousandshigher than expected.55

Another consumerreports that he tried to stopthe closing when he sawthe points in the contract.“He assured us and showedus where the $2,942.42 wassubtracted out bringing thebalance to $42,034.58. Withthat assurance we contin-ued on with the closing,”he wrote to the OCCC.Only after he found thatthe payoff amount on hisnote was far higher than heexpected, did the lenderexplain that the pointswere included.56

Consumers who want toresell their home face aparticular burden if theirnote includes financedpoints. Even if the homehas not depreciated, it isunlikely that a used homewill sell for the sometimes

Timothy and Debbie Foss in their dream home, a double wideunit now placed at River Ridge south of Austin. The couple finallygot a loan they could agree to nearly a year after they purchasedthe house, and believe that the site was never properly prepared.As a result, cracks are appearing along the seam all through thehouse, but their warranty period has expired. They hope eventu-ally to move the home to their own land.

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substantially higheramount needed tocover additionalfinanced points andother add-ons inthe early years.

A Fort Worthcouple thoughtthey paid $65,416for their home, but the loanincluded $7,195.77 infinanced points. “At thetime we purchased thehouse, my wife and I weretold...that the pre-paidpoints were a rebatebecause of our goodcredit....At no point in timewere we ever informed thatif we decided to sell thehome that we would thenbe responsible for the pre-paid points that was re-duced from the amountfinanced.” According totheir complaint, they neverwould have purchased thehome for $72,600.57 If theyresell it, they must be ableto get at least that much,about ten percent morethan the new dealer price,in order to pay off theirloan.

Step Rate LoansConsumers no doubt balksometimes at the high costof a mobile home loan. Butdealers can offer borrowers

a much lower monthlypayment up front if theoverall cost of the packagestarts to look too high.These low monthly pay-ments quickly end, how-ever, as the loan payment“steps” up every 12months. We identified steprate loans from several ofthe major manufacturedhome lenders; Oakwood,Greenpoint, 21st Century,and Vanderbilt.

These “step rate” loansassume that a family isgoing to be better off, andbetter able to make higherpayments down the road.Sometimes that is clearlynot the case, especiallywith elderly buyers.

Mrs. D., aged 64, andher husband Mr. D., 74,traded in their mobilehome for a new model. Themanufacturer used their oldhome as a down paymentand started them on a newloan. “I was not informedthat the mobile home

“This is our story. We went to Crown Mobile Homes inCleburne, TX to buy a mobile home in May 2000. Wefound a new single wide on the used lot, but it was notused. We started talking to the salesman and he gave us agood price. He agreed to “hold” the home for a $500deposit.

My husband recently had a bankruptcy dischargedand we had bad credit. My parents-in-law agreed tofinance the home for us because they have outstandingcredit. The salesman and manager agreed the mobilehome would be signed, sealed, and delivered in 3 weeks.No later.

We had recently moved from Colorado and had nowhere to live, so we decided to live in a motel for threeweeks until our home was ready. After about a week, westarted to get the run around about the land. They told usthere were over 100 pieces of property to choose from. Inreality, there were only about 10 pieces of property andthey were all next door to each other and about 25 milesaway. We decided on a piece of property and thoughteverything would be getting along. Everyday the closingon the land was delayed to a later date.

We then got the contracts for the home.! The interest rate was higher than they told us. The

interest rate that the manager of the company quoted uswas around 10%. The contracts said 13%.

! The monthly payment and down payment werehigher than they told us. We were told that our totalmonthly housing payment would be $450. The contactstated that it would be over $600 a month.

! They added in the home insurance in two sepa-rate places. They also told us the insurance would be forthree years, but it said one year in the contract.

! They added in set up charges that were supposedto be free.

! They also charged us for flood insurance in thecontract in one place and in another part of the contract itsaid it was included in the insurance price.

We were not given copies of everything we hadsigned, but I made copies of everything before we signedthem, that the manager was not aware of.

I told them that my parents-in-law would not sign thecontract like it was. The manager said there was no way tochange it, because the finance company wrote thecontracts. I told him I was not comfortable and that I wouldlike my deposit back. He refused and said that they hadfees to deduct from it because I wasted their time. He toldme I would get the check in a few weeks.

I waited 15 business days and then filed a smallclaims case for my deposit and for the $900 we spent tolive in a motel room. The reason we lived in the motel wasbecause there were no apartments available for a month tomonth lease while we waited for this home.

I won the small claims case and my deposit wasreturned; however, I failed to be reimbursed for the motelexpenses. The judge concluded there was fraud, butbecause the mobile home company did not agree to payour living expenses from the start, they were not liable forthe motel expenses. I felt cheated during the wholeexperience.”

--Thea Gilliam, Cleburne, Texas, 12/10/01.

No Credit? No Problem!

Homes face the highway advertising low monthly paymentsand available land.

We have purchased real estate anumber of times over the yearsand fully understand what “buydowns” are and how they work.We are also aware that when a

contract is paid off within the firstfour years, points are not a good

investment. At the time ofpurchase we fully intended to

pay this contract in full within thefirst year pending the sale of our

house. With that in mind, whywould we have agreed to the

points?Malakoff, Texas

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payments would be in-creased after one year fromdate of purchase or that theinterest rate on the unpaidbalance would also increaseevery 12 months for threeyears,” Ms. D. wrote to theAttorney General.

According to Mrs. D.,only her husband, braininjured since 1991, saw andsigned the loan documents.Anxious to get out fromunder the payments, thecouple tried to sell thehome on consignment withthe dealer first. “We finallyhad to let the home go backand now Oakwood Homesreported us to the CreditBureau as mortgage foreclo-sure.” According toOakwood, the first paymentincrease corresponded to acall from the D’s sayingthat Mrs. D. had lost herjob. They sold the home fornearly what the D’s owed,but charged a deficiencybalance of more than$15,000 for “substantialcosts incurred in connec-tion with the sale.”58

Richard H. ofElmendorf was moreexplicit in his description ofthe promises that weremade to him. The dealercouldn’t give him themonthly payment originallyquoted, but said “that Icould refinance at the endof the year. We signed thepapers conditionally basedon the refinancing at theend of the year.” Mr. H’snote rose in four annualsteps from $436.73 per

month to $641.73, with anoverall interest rate of10.5%. According toOakwood Homes, Mr. H.could have refinanced hisnote at any time...at a fixedrate of 13%.59

Insurance Add OnsFifty four of the 65

complete loan documentsincluded some kind of addon insurance or warranty,most commonly propertyinsurance and an extendedappliance warranty (includ-ing heating and cooling)from the dealership. Insur-ance add-ons do not add tothe value of the home, butthey do add significant costto the loan.! 53 borrowers boughtsingle premium propertycoverage from the dealer,financing it in the loan.! 30 loans included aHomebuyer Protection Planor Extended ServiceWarranty.! 11 loans included singlepremium credit life insur-ance.

Much has been writtenabout credit life insurance.A very expensive insuranceproduct, as measured bythe ratio of premiumscharged to claims paid,Consumer Reports and othersgenerally advise againstbuying it altogether. Arecent Consumer Federa-tion of America/Center forEconomic Justice report

estimates that consumersnationwide paid $2.5 billiontoo much for credit insur-ance in 2000 becausecommissions to the seller(auto dealers, manufac-tured home dealers, furni-ture and appliance dealersand others) drive up thecost.60 Since relatively fewloans included creditinsurance, it appears thatmanufactured home con-sumers have begun to avoidthis costly add-on.

On the other hand,single premium mobileowners property insurancewas nearly universal inthese loans. Manufacturedhome dealers typically offerfrom one to five years ofproperty coverage for themobile home and write itinto the loan document.

According to the 53consumer files that in-cluded single premiumproperty insurance, ratesrange from about $400 peryear to more than $1400 peryear. Since more expensivehomes require more insur-ance, we calculated the costof property coverage perdollar value of the home,and found it ranged fromabout 1 cent to more than 3cents per dollar of coverageper year.

The consumers whofiled complaints financedan average premium priceof $1,630 (for an averageterm of 2 years). Including

interest charges, theseconsumers will ultimatelypay more than $5,200 forthis coverage on average,and at the end of two yearswill still need to go out andbuy insurance on theregular market.61

Some consumers maynot realize that shoppingelsewhere is an option. AKileen woman thought shehad to buy property cover-age through Vanderbilt, herlender. After looking at herdocuments, she realizedthat she paid $3045 for it,financed at 10.3%, over 23years. “This makes for veryexpensive insurance,” shewrote to the OCCC.62

Ms. F. of Shallowater,Texas, reported being toldby the dealer that she hadto purchase the propertyinsurance from AmericanModern Insurance Com-pany and they would add itinto the loan. She repliedthat she already had mobilehome insurance throughFarmers and would transferit to her new home. Thedealer then said, accordingto Ms. F., that since she didnot have a cashdownpayment (instead shetraded in her previousmobile home), she wouldhave to buy their insurance.The dealer responded thatthe forms she signednotified her that she couldobtain insurance else-where.63 Timothy and

Step rate loans assume that a consumer will be able to make higher monthly payments in futureyears. For most of these consumers, they will also have an additional payment for home insur-ance once their prepaid, financed insurance expires.

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Debbie Foss (story p. 20and 21) told the dealer topull the insurance off atclosing, but didn’t getanother loan deal finalizedfor a year.64

Dealers sometimes tryto reassure uncertainbuyers by telling them thatthe insurance will expireand their payments drop sothey can get their owninsurance later. But ofcourse, single premiumproperty insurance is paidin full up front but financedover the term of the loan.So when the insuranceexpires there is no drop inthe monthly payment.Instead, consumers mustadd the new cost of prop-erty insurance to theirmonthly home cost.65

About half of consum-ers also bought HomebuyerProtection Plans. Theseplans generally cost $480 to$580 and promised to payfor repairs to the appliancessold with the home andhome systems like heatingand air conditioning,sometimes with a consumercopayment at the time ofrepair.66 The plans do notcover existing defects(including manufacturerdefects), but after thetermination of the originalwarranty they promise topay repair costs for one year(used homes) or up to fiveyears (new homes).67

A Homebuyer Protec-tion Plan costing $580 andfinanced at 11 percent over30 years will actually cost

nearly $2,000. According tothe recent Consumer Reportsappliance repair survey,consumers say fewer than25 percent of major appli-ances (dishwashers,refridgerators, ranges,washers and dryers) needrepair during the first fiveyears, and repairs typicallycost $100 to $140.68 Torecoup the cost of the Planplus interest, consumerswith new appliances wouldhave to order dozens ofappliance repair visitsduring the Plan term(assuming a $35 per repaircopayment). Even if weassume that repairs to airconditioning and heatingunits will cost more, theseHomebuyer ProtectionPlans are an expensivegamble like their sisterproducts, the extendedwarranties available atappliance outlets.

“Under Water”Insurance, extendedwarranties, and financedpoints do not add to thecollateral value of thehome. But they add signifi-cantly to the amount owedon the home. Fifty nine ofour 65 loan files includedsome form of add on, and48 people added more thanone extra to their loan.

NCLC’s new predatorylending standard recom-mends a total fee and add-on threshold of 3 percent ofthe total loan amount(defined as the cash priceof the home plus any

Consumers who purchase a “special order” homecan lose a deposit of up to five percent of the cash priceof the home if they try to back out, unless the home is notwhat was represented or the consumer did not receive anotice of the refund rule.1 There is no cancellation “win-dow” at all for special order homes, nor does the lawmake any exception for people who do not get creditapproved or do not want the credit terms they finally get.For consumers who are turned down for credit or use thetitle to their previous home as a deposit, the “specialorder” no-refund rule can be especially problematic.

After Nationwide Homes reported that a lender hadapproved them for a loan, a Joshua, Texas man signed apurchase contract, leaving $2,300 down, “When thehome was finished, they came back and told me theywas having problems getting my credit cleared, and I toldthem that was already supposed to be done,” he wrote tothe OCCC. “They run my credit through 6 differentfinancial groups. I told them to stop running my credit andcancel any further proceedings.”

The dealer, however, continued to look for lendersand insisted that since he had signed a purchase con-tract for a “special order” home, he was bound to takethe home. “Two days after I requested my money back, Ialready found another home. They called and told methey had financing for me...They told me I had to take itbecause I special ordered it.”2 Under current law,this would be true even if the terms of thefinal financing were not agreeable to theconsumer.

Any home that is available but not sitting on the lotcan be a “special order” home. When Edward and LeticiaG. of San Antonio went to purchase a manufacturedhome, they got a “special order” home and gave thedealer the title to their existing manufactured home as adown payment. According to their “special order” agree-ment, a special order home is one that is “not in inventoryand must be ordered from the home manufacturer.” Butwhen their credit information was processed by thelender, they were turned down. After three letters from theAttorney General, the dealer returned their title.3

Under the law, a consumer can back out if the homeis not what she ordered. Jaqueline B. of Austin put down$4,000 for a custom home. Then the sales person calledto say that her home had not arrived but they had otherson the lot she could see. She picked a different home,but asked the dealer to install a bay window. When shearrived to look at the altered home with a contractor, shefound many defects and decided to reject the home. Thedealer insisted that her “special order” agreementprecluded the return of her deposit, even though her real“special order” home had never arrived and the lot homewas unacceptable..4

1 Texas Manuf. Housing Standards Act, Sec. 6(m).2 Complaint to Office of the Consumer Credit Com-

missioner, 7/2/99, Joshua, Texas.3 Complaint to Office of the Attorney General, 11/5/

99, San Antonio, Texas.4 Complaint to Office of the Attorney General, 10/4/

99, Austin, Texas.

Special Order Homes

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installation costs less thedown payment). This issimilar to the fee standardset out in the Texas Consti-tution to protect Texashomeowners from preda-tory refinance loans.69

Unlike Texas law, theNCLC standard includes inthe 3% cap all kinds ofinsurance wrapped into theloan (but not monthlyinsurance payments madefrom an escrow account andnot financed).70 Under thisstandard, about threequarters of our 65loans withdetailed financial informa-tion could be considered“high cost loans” deservingof additional consumerprotections.

Most of the loandocuments we examinedshowed a 5% down pay-ment or less. Consumers

who financed more than 5%in extras on a note withonly 5% down start outowing more than the homeis worth. In all, half of loanswe analyzed included moremoney to finance points,insurance and extendedwarranties than the con-sumers’ downpayment.

The true number ofthese consumers who are“underwater” is probablyfar higher, since dozens ofconsumers reported avariety of loan frauds (mostcommonly, overstating thedown payment or reportingas a downpayment moneythe consumer borrowed),an increased home pricebetween the oral agree-ment and the final closing,or recieved a home that wassmaller, older, withoutupgrades, or otherwise less

valuable than the make,model, year or type of homethey thought they pur-chased.

Consumers also reportthat dealers will promise topay off their credit cards,give them significant cashrebates, furniture packagesor security system con-tracts—although suchpayments also add consider-able cost to the loan.71

A consumer in Poteetreported that his manufac-tured home dealer prom-ised to pay off two creditcards and a personal loan,and make the deal withzero down and insurance(both property and credit)included in the loan. Theconsumer was unhappy thatonly one of the two creditcards was paid, althoughthe dealer appears to have

fulfilled the remainingpromises.72 A buyer fromUtopia, Texas reported herdealer paid off three creditcards and an old, outstand-ing attorney fee along withthe first year’s rent on theland and a $500 cash awardfor referring another cus-tomer.73

A Kingsland, Texaswoman signed a loanagreement that includedmoney to pay off her carnote, as well as a credit cardbill, her septic tank, andinstallation of the padunder the home. Hermother wrote to the Attor-ney General because theyfelt deceived at closing.“[She] asked him the totalsales price and what herpayments would be, as theywere paying off her car anda credit card bill and paying

Repossessed homes compete directly with similarly priced new homes at consecutive dealerships along Highway 71. Accordingto Palm Harbor’s President and CEO, Larry Keener, repossessions have not yet peaked. Nationwide, 40,000 repossessed homesremain in inventory. More than 80,000 homes are now repossessed each year, and repossessions on loans made during the late1990s continue to increase, rather than leveling as normaly expected. Delinquencies also remain high.

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for the sewer hookup. Henever answered exactlywhat the sales price wouldbe but he did state that herpayments would be aroundfour hundred and some-

Summary of Selected Consumer Protection LawsRelated to Manufactured Home Sales Transactions

thing dollars.”74 Although atclosing her loan’s interestrate was higher than ex-pected, she felt compelledto sign because the contrac-tors had begun work on herlot and she couldn’t paythem without this loan.

Some consumers reportlarge cash rebates. A womanliving near Lubbock re-ported that her dealeroffered a $2,000 cash rebatefrom her home deal, butonly paid her $1,000. Theloan documents confirmed

her claim, and the dealersent her the remainder.75 ASpring branch womanbought a home with a “sidedeal” on paper promising$2,000 in cash to pay offcredit card bills, whichwould come from the homeloan. In this case, the dealerreleased $452 to allow theconsumer to repair her car,but never released therest.76

The real problem withsuch deals is the cost theyadd to the loan over and

above the value of thehome, leaving families“underwater” for years intotheir mortgage. Takentogether, a total of 22percent of complaintsinvolved loans that mayhave been made for greaterthan the initial value of thehome, leaving consumersunderwater in the earlyyears of their loan.

Mr. and Mrs. G. ofRosharon were quoted aprice of $30,000 for asimple, no frills single widetrailer (16x66). Accordingto the industry’s standardappraisal manual, this homewas valued at about$20,000. But the G. familywrote to the AttorneyGeneral when they re-ceived their first paymentcoupon announcing thatthey owed $45,902. Theactual cash price on theirpaperwork turned out to be$42, 695. Their 30 yearnote included $1,354 forproperty insurance, $1,467for credit life and $4,456 forprepaid, financed points—giving them a principalbalance to repay of $45,902.

“I feel I was taken bythe salesman for notspeaking or understandingbusiness English,” Ms. G.wrote, with the help of herdaughter. “Why did thetrailer go from $30,000 to$42,695 cost? I want toknow if my trailer is worth$42,695. Its a plain trailer.No frills.” Unfortunately, itappears that they may owesignificantly more than thecurrent value of the homeaccording to the appraisalguide, and $15,000 morethan they believed it wasworth when they agreed topurchase it for $30,000.77

Current studies conflicton whether a mobile homewill hold its value. Assum-

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and add-ons who tries toresell the home during thefirst ten years will not beable to get a high enoughprice, and may end up witha deficiency balance.

Sign Here,Initial Here and Here,

Sign Here.According to many consum-ers, these bad loan deals arepushed through when asales person thrusts a stackof papers forward, assuresthe buyer than any confu-sion can be worked outlater, and then walks offwith the paperwork.Thirty-two people explic-itly complained that theywere asked to sign blankdocuments or not givencopies of any contracts theysigned.

An elderly consumerfrom Euless, Texas chose amobile home on display in anew subdivision, on condi-tion that his loan had beenapproved at 8.5% with a 5%downpayment. At closing,his sales representativeannounced that she was

sick. “We suggested wewait until Monday or laterto sign our papers. Sheinsisted that it had to bedone right then,” he wroteto the OCCC. “She rushedform after form to besigned. I asked that I begiven a copy of everything Iwas signing without priorreading—considering that Iwould read before leavingher office and satisfy myselfof the conditions.” As thepages flew by, he calledattention to some items,but kept signing. “Yes, I didobject. But, yes, I contin-ued to sign forms withoutfully, and in most cases,none, reading.” After thestack was signed, thesalesperson whisked themaway, saying he would gethis copies later. Thisconsumer discovered thathis interest rate was higherthan expected, and his loanincluded prepaid, financedpoints.79

Dealers sometimespressure consumers to signcontracts by telling themthat a special sale price isonly available if they signnow. A Montgomery, Texascouple wanted to look atboth conventional slabhomes and mobile homes.While awaiting loan ap-proval for a conventionalhome, they visited a Na-tionwide dealer, who toldthem they could lock in the“February Incentive SalePrice” if they put down$250 and approved a creditcheck, which they did.Shortly thereafter thedealer called to say theywould have to come in andwork up a deal to “hold theincentive price.”

The couple came backto the lot, only to face thegeneral manager whopushed them through a

stack of papers even as theyinsisted that they wereplanning to buy the slabhome if approved. Thedealer left dates on thecontracts blank, saying hewould hold them til thecouple made a final deci-sion. Unfortunately, thedealer ordered the home,and refused to rescind theorder when a lender ap-proved them for the slabhome, even though theyhad made no down pay-ment. The dealer an-nounced that he consideredtheir original $250 to beearnest money establishinga valid contract.80

Consumers who re-ported that they couldn’tget copies of contracts wereamong those who alsoreported a variety of misrep-resentations, including ahigher than expectedprice,81 higher interest,82

and “buy-for” arrangementsagainst the intent of thefinal buyer.83 Some of theseconsumers felt that theywere at a particular disad-vantage because they speakonly Spanish, could not readthe English languagematerials they signed at thetime, and they did not getcopies.

ing the home holds itsvalue, consumers who startout owing more than thehome is worth may have noequity for ten years or moredepending on the loan termand rate (see sample charts,p. 21). Consumer surveysindicate that many familiesdo not even plan to live inthe home that long. Accord-ing to a Foremost InsuranceCompany consumer survey,about half of homeownersexpect to live in the home“always,” but a third expectto live in the home fewerthan five more years. A2001 survey by the Interna-tional Hurricaine Center atFlorida InternationalUniversity found that mostresidents surveyed hadlived in their home tenyears or less. The averagemanufactured home loan ispaid off by the consumer(by either rapid prepay-ment or sale of the home)in 7.55 years, according tothe Manufactured HousingInstitute.78 There is a goodchance that a consumerwith a low down payment