September 20, Dear Ms. Petraeus,

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1 September 20, 2011 Holly Petraeus Assistant Director, Office of Servicemember Affairs Consumer Financial Protection Bureau 1801 L Street NW Washington, DC Dear Ms. Petraeus, CFED is a national, nonpartisan nonprofit organization that works to expand economic opportunity to all Americans by promoting asset-building efforts that expand access to education, entrepreneurship, homeownership, retirement and emergencies. Asset building is the vital component that can shift low- and moderate-income families from struggling to meet basic needs to having the capacity to weather emergencies, invest in their futures and achieve their goals. We are grateful to have this opportunity to work with the Office of Servicemember Affairs as you ensure that the nation s financial institutions meet their responsibilities to provide access to the safe, affordable, non-predatory loan products that military families rely upon to build assets. Our comments today focus on the potential of two CFED policy priorities to enhance the wellbeing of military families. First, improving the quality of financing available for manufactured homes will augment the supply of this critical source of affordable housing and help the military families who choose manufactured homes to protect their investment, build wealth and maintain the flexibility that active duty service requires. Second, incorporating full payment records for utilities and telecommunications services into consumer credit reports will help many military families that currently lack access to mainstream credit and reduce their need to rely on higher priced alternatives such as payday lending and auto title lending. Manufactured Housing Since 2005, CFED has been addressing problems in the manufactured housing sector through the Innovations in Manufactured Homes (I M HOME) initiative. I M HOME develops, promotes and implements market- and policy-based strategies to help manufactured home owners gain financial security and build assets. I M HOME s goal is to enable owners of manufactured homes to enjoy the same benefits of homeownership as those realized by owners of site-built homes. I M HOME advocates for enhanced consumer protections, expanded access to conventional mortgage financing, resident ownership of communities, and the use of high-quality, energy-efficient manufactured housing to increase and upgrade the nation s

2 affordable housing stock. Manufactured housing is a particularly appealing housing option for military families because it is high quality, affordable and readily available in rural areas. Manufactured housing is the largest source of unsubsidized affordable housing in the nation. Millions of households have selected manufactured homes as their housing of choice or necessity: more than 17 million Americans live in manufactured homes. 1 Eighty percent of manufactured home occupants own their home while 20% rent their home. In 2009, the median household income for those living in manufactured housing was $30,000, compared to a national median of $49,777. Manufactured housing is a particularly important affordable housing resource in rural areas. Sixty-nine percent of the housing stock is located in rural areas, and 26% of low-income homeowners in rural areas own a manufactured home. Unfortunately, no federal agency tracks what proportion of manufactured homes are occupied by active-duty military families or veterans. Although the American Housing Survey (AHS) the primary government source of statistics on manufactured homes in the United States includes some information specific to manufactured homes, this data is insufficient. For example, AHS does not track what type of financing the owners of manufactured homes receive, or whether homes are located on fee-simple land or in communities where homeowners lease plots of land. 2 While the Department of Housing and Urban Development (HUD) regulates the quality and safety standards for manufactured home construction and installation, it does not track or publicize the number of homeowners who report quality and safety concerns. Since data on single family manufactured home loans is scarce, the I M HOME initiative is currently engaged in a data collection project with a number of state housing finance agencies, Community Development Financial Institutions and other lenders to compile manufactured home loan origination and performance data. For the first time, data from a diversity of lenders and geographies will be collected and analyzed, thanks to lenders voluntary participation. It is likely, given the known demographics of residents and geographic distribution of the homes, that manufactured housing is a significant source of housing for military families. CFED believes that manufactured housing has the potential to be an excellent solution to the 1 It is difficult to estimate the total number of manufactured homes. The American Housing Survey of the U.S. Census estimates that approximately 9 million units exist, of which nearly 7 million are occupied. The Manufactured Housing Institute, using an alternative methodology, estimates that there are more than 10 million manufactured homes. 2 CFED submitted comments to the Office of Management and Budget regarding improvements to the American Housing Survey in February See: pdf.

3 affordable housing needs of active-duty service members and their families, and that a manufactured housing strategy can contribute to troop readiness and financial wellbeing. Manufactured homes cost approximately half the price per square foot as site-built homes (excluding land costs), in large part because the manufacturing process provides remarkable efficiencies. Even though the same materials are used for both, manufacturing efficiencies allow faster construction and generate as much as 45% less waste than comparable site-built construction. These efficiencies translate into remarkable affordability: in 2009, the median cost of a new manufactured home was $69,000 and manufactured homes accounted for 43% of all new homes sold under $150,000. More than half (56%) of all manufactured home residents pay between $100 and $499 in monthly housing costs, compared to only 23% of site-built home occupants. These costs put homeownership within the reach of nearly any military family that desires it. Manufactured home communities, also known as mobile home parks, deserve special mention. Once it leaves the factory, a manufactured home can be placed either on land owned by the homebuyer ( fee simple ) or in a community of multiple manufactured homes and residents ( in-community ). Across the United States, there are approximately 2.9 million manufactured homes located in approximately 56,000 communities. These communities are generally single parcels of lands owned by commercial investors who in turn rent or lease sites to homeowners. The CFPB should specifically consider ensuring that servicemembers who reside in communities continue to have fiscally sound financing and their full civil rights including right to freedom of association and freedom of speech, freedom from retaliation, freedom from eviction without good cause and protection of the right to sell the home in place. In some communities, owners prevent homeowners from forming and operating resident associations through harassment, intimidation or retaliation through rent increases or eviction. In other cases, when owners sell their communities or convert them to another use, they evict homeowners without sufficient notice, leaving homeowners to bear the immense cost of either relocating their homes and families if they can afford it or sacrificing their homes altogether if not. Community owners sometimes arbitrarily deny potential buyers of residents homes from keeping the home in their community; this interference makes it incredibly challenging for residents to sell their homes in place and compromises the value of the home as well, since an asset that cannot be sold is not an asset. One relatively new characteristic unique to the manufactured housing sector is cooperatives of resident-owned communities. In a resident-owned community, homeowners have collectively organized to buy the land as a group; a cooperative ownership structure enables each community resident to have a say in how the neighborhood is maintained and contribute to setting the price of land leases. Homes located in resident-owned communities show greater capacity for appreciation, in large part due to the security of tenure that cooperative ownership confers. In addition to the wealth-building benefits, homes located in such communities also

4 have improved opportunities for resale compared with homes located in investor-owned communities. A final characteristic of resident-owned cooperatives is that makes them particularly well-matched to the needs of military families is that they foster and support the type of close-knit communities that characterize military bases. Despite the advantages and appeal of manufactured homes, there are a number of barriers that the Bureau and the Office of Servicemember Affairs can address that will improve the capacity of manufactured housing to meet the needs of military families. First, the primary type of financing for manufactured homes is not the conventional mortgage, but personal property loans, which have fewer consumer protections. Second, both market forces and federal housing policies constrain the resale market for manufactured homes. The type of financing available to buyers of manufactured homes varies according to the placement and titling of the homes; laws governing these factors vary state by state. Homes in land-lease communities are most often titled as personal property but may in some states be titled as real property. Homes placed on fee-simple land owned by the homeowners are titled either as real or personal property. 3 As of 2008, 63% of all manufactured homes were titled as personal property instead of as real property. These homeowners cannot access conventional home mortgages but must rely on chattel financing. Personal property titling generally precludes conventional mortgage financing. A home classified as personal property is appraised differently than a site-built home, using a formula similar to motor vehicle valuation, which automatically assumes depreciation of the home regardless of other relevant attributes such as land tenure. For this reason, as well as concerns over security of land tenure, mortgage lenders generally will not finance personal property-titled homes. Those homes only have access to personal property loans (also called chattel loans), generally available from a relatively small number of specialized lenders, many of which are non-bank entities such as the retailer or manufacturer or their affiliates. This constrains buyers ability to shop for the most affordable and personally appropriate loans. In most states where titling of manufactured homes as real property requires that the home is placed on fee-simple land all homes placed in communities are financed with personal property loans; mortgages are not available to them, even those homes in coops. The limited availability of conventional mortgage loans for manufactured homes presents consumer protection problems: chattel loans are more expensive and offer fewer protections compared to mortgages; although consumers frequently have the option to receive conventional mortgage loans, lenders steer buyers into chattel loans. I M HOME recently responded to the Bureau s requests for comments on changes to Regulation Z and supervision of nonbank 3 Even though most new homes are now sited on private land, in 2009 only 27% of new homes were titled as real estate.

5 lenders in certain financial markets with recommendations that would benefit these homeowners. 4 The 27% of new manufactured homes that are titled as real property are appraised through similar methods as those used for site-built homes, and as such are more likely to appreciate in value, particularly if real estate titling is combined with secure land tenure. 5 This makes them more attractive to conventional mortgage lenders. Key advantages of conventional mortgage financing include longer repayment periods, lower interest rates, enhanced rights when in default and more competitive lenders. Apart from titling and loan options, owners of manufactured homes generally have fewer rights and benefits: for example, the Real Estate Settlement and Procedures Act (RESPA) does not require disclosure of closing costs when a manufactured home classified as personal property is financed without land. Regulators and lenders alike have expressed uncertainty as to whether disclosure is required when a manufactured home is titled as real property but not financed with land. Additionally, the Truth in Lending Act (TILA) includes exemptions for some employees of manufactured housing retailers who assist consumers with financing. Consequently, homeowners have fewer consumer protections from the moment they begin shopping for a loan. From loan steering and predatory lending to their limited rights when in default and foreclosure, owners of manufactured homes face steeper barriers to successful and sustainable homeownership than other homeowners. In many states, a new manufactured home may be titled as either chattel or real property. Manufactured home lenders, especially those who are affiliated with retailers or manufacturers, have less incentive to engage strong underwriting practices on chattel loans because of their interest in selling the home and related products, which produces significant up-front profits. This high default rate pushes loan prices up, which in turn contributes to further to higher default rates. As a result, the long-term sustainability and performance of chattel loans is far lower than that of conventional mortgages; nearly 20% of chattel loans eventually default. Retailers and lenders have a strong incentive to steer borrowers into chattel loans, often chattel loans that they themselves offer or that are available from affiliated entities. Chattel loans are often disadvantageous for the consumers. They are more expensive, offer fewer consumer 4 See: 5 Contemporary manufactured homes have the potential to appreciate in value when they are properly installed on a high quality foundation and on land over which the homeowner has long term control, whether through traditional ownership, cooperative ownership or a long term lease with built in tenant protections. Consumers Union studied manufactured housing appreciation rates and found that consumers can make decisions which can improve the appreciation of a manufactured home. Land ownership, location, purchase price and maintenance expenditures are among the factors that predict appreciation. See:

6 protections, feature fewer disclosure requirements, more frequently go into default and face extremely limited capacity for refinance or resale. Consumers, however, are generally unaware of their titling options, much less how the titling impacts the types of loans they may receive, and there are few disclosure requirements. For these reasons, loan steering is a serious problem in the manufactured housing finance market. An additional challenge is the limited resale market for manufactured homes. Many lenders will not finance a used manufactured home regardless of its quality or condition. This problem is exacerbated by federal housing finance policies. Federal Housing Administration (FHA) loans, for example, may not be used to finance the resale of a manufactured home unless the original loan was also FHA-backed. Imagine the impact on the wider housing market if FHA loans were restricted to new homes properties that have only previously been financed with other FHA loans; low- and moderate-income homeowners would lose a significant source of affordable home loans. Many would be locked out of homeownership. This seems unthinkable, yet it is the case for millions of manufactured homes. Rules for financing the resale of manufactured homes are similarly complex, though not as prohibitive, under affordable housing loan programs offered by the Department of Agriculture s Rural Housing Service. Due to the geographic location and modest household earnings of many military families, FHA and Rural Housing Service loans are both critical sources of home loans. CFPB and, specifically, the Office of Servicemember Affairs can help military families and other working American families better access manufactured homes and build wealth through homeownership in several ways. CFED recommends that the Office of Servicemember Affairs: Work with the Mortgage and Home Equity Markets team to cooperatively collect and publicize more specific data on the types of housing that military families occupy, including the prevalence of manufactured homes. Engage troops about affordable homeownership options, including manufactured housing and recommend mortgages instead of chattel loans. Develop manufactured housing-appropriate pre-purchase educational materials specifically for military families; make these materials available on bases and to leadership. These could include information on buying and selling a manufactured home and working with credit unions to provide appropriate mortgages. Furthermore, CFED recommends that CFPB:

7 Exercise its authority to supervise nonbank lenders in the manufactured housing finance market. CFED submitted comments to the Bureau in August 2011 with detailed recommendations. 6 Require disclosure for chattel loans, to the extent possible under law. Include chattel loans in its forthcoming anti-steering regulations. Alternative Data Credit Reporting As many as 70 million Americans are excluded from the mainstream credit system not because of bad credit history, but rather due to a lack of information. That is, their lack of credit history leaves them ineligible to be scored. Tens of millions of Americans have no credit files or no payment histories in their credit files, and consequently have no credit score. Tens of millions more have too few payment histories in their credit files to be scored with precision. Employers, landlords, banks and credit unions check consumers credit scores before hiring workers, renting apartments and approving applicants for checking accounts and other financial services. No or low scores translate into reduced access to mainstream credit, forcing borrowers to rely on higher priced lenders and preventing them from investing in their homes or businesses in economically productive ways. Alternative data credit reporting is a no-cost policy mechanism to expand access to mainstream credit to millions of households that currently lack access to affordable credit and instead must rely on expensive alternative financial services providers such as payday lenders. Utility and telecommunications bills are nearly universal; including all payment information for these transactions would enhance credit access for millions of households. This market-driven policy response will help lenders better assess credit applicants and decrease the nation s persistent and widening wealth gap. CFED s proposal to allow firms to report and consumer credit rating agencies to accept full payment data would help many of the 70 million gain access to mainstream credit and enable 120 million to have a more accurate credit score. 7 CFED coordinates this work with PERC and the Center for Financial Services Innovation through the Alternative Data Initiative. 8 Including utility and telecom payment information in consumer credit files can be predictive of future delinquency by individuals in general. And through the pervasive reporting of such non-financial payment data to consumer reporting agencies, millions of Americans with little or no credit history can establish payment histories and gain access to mainstream affordable 6 See: 7 For reference, see file_credit_reporting/. 8 For more information, see: sign on list.

8 credit. Studies on this issue by PERC 9 and the Brookings Institution Urban Market Initiative 10 show that the reporting of customer payment data will substantially benefit those with lower incomes, members of ethnic minority groups, young adults and the elderly. Moreover, there is no evidence that reporting utility and telecom payments leads consumers to overextend themselves by borrowing too much. Despite compelling evidence that alternative data credit reporting is a win-win scenario for borrowers and lenders, utility and telecom firms are reluctant to report full payment histories to the credit bureaus due to regulatory uncertainty; currently most firms only report late payments. Some states have introduced legislation to promote alternative data credit reporting while others have moved to prohibit the practice. At the federal level, some companies that previously reported full payment histories to the credit bureaus have stopped due to uncertainty about the impact of the privacy provisions of the Telecommunications Act of 1996 on full-file reporting. The Bureau s recent report on the sales of credit reports is an important first step to highlight challenges that all consumers face in credit information markets. Alternative data reporting may be part of the solution to the debt traps that harm many military families. More accurate scores and greater access to sources of affordable mainstream credit could improve service members financial security and ability to provide for their families by reducing their reliance on predatory alternatives. CFED recommends that the Office of Servicemember Affairs work with the Credit Information Markets team to study the impact that lack of access to mainstream credit has on military families. It has been well documented that service members are often targeted for predatory, wealth-stripping credit products, 11 but it is less well understood what alternatives these families have to fringe financial services such as payday loans and title loans. The Office of Servicemember Affairs and the Bureau generally can also encourage Congress to pass legislation that provides affirmative permission to utilities and telecom firms to report all 9 Varghese, Robin. Financial Inclusion Through Credit Reporting: Hurdles and Solutions. PERC. April Accessible online at 10 Stewart Lee, Alyssa, Anne Schnare, Michael Turner, Patrick Walker and Robin Varghese. Give Credit Where Credit is Due: Increasing Access to Affordable Mainstream Credit Through Alternative Data. Brookings Institution Urban Markets Initiative. December Accessible online at 11 In 2006, the Department of Defense released a groundbreaking study documenting predatory lending that targets soldiers: The Better Business Bureau s Military Line project tracks and reviews such products on an ongoing basis:

9 payment history to the consumer credit bureaus. Such legislation would provide a no-cost solution to a problem that currently limits the financial options of millions of families, including military families. Making the reporting automatic greatly increases servicemembers ability to have an accurate credit score without relying on them to maintain files of payment stubs and other paperwork. Explicitly authorizing full-file reporting would not only enable many to develop access to mainstream credit products and reduce their reliance on alternative financial services such as payday and automobile title lenders, it would also improve their investment capacity. In order to invest, families need not only to have some money saved but also to be able to use credit to leverage upfront purchases of appreciating assets. Thank you for the opportunity to comment on financial products and services that are of particular interest to the Office of Servicemember Affairs. It is essential that military families have access to safe, fair, and affordable credit products and financial services financial wellbeing is critical to troop readiness and the overall health of America s armed forces. I look forward to working with you and the rest of your staff in the future. If you have any questions or would like to discuss our recommendations in more detail, please do not hesitate to contact me at or alevere@cfed.org. Sincerely, Andrea Levere President