Manufactured Home Creditors’ Unique Exposure to Consumer Claims

Manufactured home creditors are uniquely vulnerable to a consumer’s legitimate legal claims. Recent developments have only increased this exposure. As explained in this article, manufactured home creditors often:

• • Cannot force consumer claims into arbitration;
• • Unlike many home mortgage creditors, often cannot avoid liability for the misconduct of the manufactured home dealer;
• Are subject to warranty claims where automobile creditors are not;
• Are likely to face fewer limits on their liability for the consumer’s attorney fees than in a motor vehicle transaction;
• Must comply with numerous Truth in Lending Act requirements applicable to home mortgages but not to motor vehicle sales;
• When they violate UCC Article 9, can be liable for minimum statutory damages of tens of thousands of dollars;
• Must comply with special repossession requirements;
• Have exposure in rent-to-own transactions of manufactured homes not applicable to other RTO transactions;
• Must comply with a series of federal consumer protections if the creditor seeks to avoid state usury caps and does not qualify for other forms of federal preemption. 

Federal Law Prohibits Arbitration in Manufactured Home Credit

The federal Truth in Lending Act (TILA) prohibits arbitration requirements included with residential mortgage loans. 15 U.S.C. § 1639c(e); 12 C.F.R. § 1026.36(h). Residential mortgage loans are defined to include a consumer credit transaction that includes a security interest in a dwelling. 15 U.S.C. § 1602(cc)(5). Dwelling is defined as including a manufactured home. 15 U.S.C. § 1602(w). For more on these restrictions on arbitration requirements in manufactured home credit, see NCLC’s Consumer Warranty Law § 13.4.3.

Manufactured Home Creditor Liability for Sales-Related Misconduct Reaffirmed by New FTC Opinion

Unlike the typical home mortgage transaction, manufactured home credit, pursuant to the FTC Holder Rule, must include in the credit agreement that the holder is subject to all of the consumer’s affirmative claims and defenses against the manufactured home dealer. The language must be included where the dealer assigns the installment sales agreement to the creditor, refers the consumer to the creditor, or otherwise has a business relationship with the creditor. See 16 C.F.R. pt. 433. For example, the Holder Rule should apply where the home’s seller has a business relationship (such as interlocking ownership) with a creditor that makes a direct manufactured home loan to the consumer. See generally NCLC’s Federal Deception Law § 4.2.2.7.

The FTC Holder Rule applies to the sale of goods, and a dealer’s sale of a new manufactured home is the sale of goods, even if it is contemplated that the home will be permanently attached to land. Less clear is whether a manufactured home sale involves goods when it is already attached to real property. For a general discussion of when a manufactured home sale involves the sale of goods, see NCLC’s Consumer Warranty Law § 17.2.1.

On April 12, 2021, the FTC issued staff guidance that the FTC Holder Rule is not limited to transactions under $25,000. This FTC interpretation of the Holder Rule applies to any large dollar transaction, and not just to manufactured home sales.

This guidance specifically renounces a statement found in a 1976 FTC staff document limiting the rule to transactions under $25,000. The 1976 staff document referenced the then scope of the Truth in Lending Act (TILA), but that staff document was in error on multiple counts. The Holder Rule applies to finance charges as defined by TILA, but TILA’s former restriction of its scope to transactions with an amount financed under $25,000 has nothing to do with the definition of a finance charge. Moreover, then and now, TILA’s dollar exclusion does not even apply to credit secured by a dwelling, such as a manufactured home. The current Truth in Lending Act excludes credit not secured by a dwelling where the amount financed is over $58,300.

The new FTC guidance reaches the indisputably correct result that all manufactured home transactions, no matter their size, are covered by the Holder Rule, as long as the transaction involves the sale of “goods.” For more on why there is no dollar limit to the FTC Holder Rule, see NCLC’s Federal Deception Law § 4.2.2.8.

Manufactured Homes, The FTC Holder Rule, and the Consumer’s Attorney Fee Recovery

The FTC Holder Rule caps the creditor’s liability for claims pursuant to the Holder Rule as the amount remaining on the credit transaction and the amounts already paid on the credit. In the case of a manufactured home, the total of this cap is likely to be a dollar amount far larger than in the typical automobile sale. This not only allows a larger damage recovery than in automobile sales, but, where the dollar injury is less than the total cap, there is room under this larger cap for an attorney fee recovery.

Whether in fact the FTC Holder cap applies to the consumer’s attorney fee award is presently disputed. There is no doubt that the Rule does not limit an attorney fee recovery where the consumer is suing the creditor for the creditor’s own law violations. Nor does it limit the attorney fee recovery when the consumer sues the creditor for the dealer’s law violation, where the basis of the consumer’s attorney fee recovery is a different statute than the one leading to the consumer’s damage recovery. See 84 Fed. Reg. 18,711 (May 2, 2019). For example, attorney fees should not be capped where they are sought under a state statute that provides for a prevailing consumer’s attorney fees where the credit agreement provides for attorney fees for a prevailing creditor. See NCLC’s Collection Actions § 17.1 (analyzing a number of theories for consumer attorney fees other than the statute upon which the consumer’s claim for damages is based).

A 2021 California appellate court decision does an excellent job setting out the competing views as to whether the FTC Holder Rule in fact does cap an attorney fee recovery even where authority for the fee recovery is found in the same statute that forms the basis of the consumer’s claims against the seller. Even in this situation, the appellate court found the cap did not limit the fee recovery. See Pulliam v. HNL Auto. Inc., 60 Cal. App. 5th 396, 274 Cal. Rptr. 3d 547 (2021).

Creditor Liability for Manufactured Home Defect Claims

The same warranty claims arise in a dealer’s sale of a manufactured home as in any other sale of goods: not only does UCC Article 2 apply (damages, revocation of acceptance, withholding payments), but also the Magnuson-Moss Warranty Act (damages and attorney fees). See NCLC’s Consumer Warranty Law § 17.2.2. To the extent that the consumer’s warranty claim is against the dealer (as opposed to the manufacturer), the creditor is liable for those claims pursuant to the FTC Holder Rule.

Of special note are the many state warranty laws applicable specifically to manufactured homes. These laws may require the manufactured home dealer offer a minimum one-year written warranty. Because of this written warranty, under the Magnuson-Moss Warranty Act, the dealer cannot then disclaim implied warranties. The state manufactured home warranty statutes may also make dealers jointly and severally liable with the manufacturer and also may make dealers liable for set-up problem. Recovery under these statutes may include attorney fees. See generally NCLC’s Consumer Warranty Law § 17.4.2.

For FHA-insured manufactured homes, HUD regulations also place duties upon the dealer to assure that transportation and setup of the manufactured home are done properly. 24 C.F.R. § 201.21(c)(3), (4). For FHA-insured loans, the lender must also investigate the manufacturer’s warranty compliance and obtain certifications that the home site complies with minimum standards. 24 C.F.R. § 201.21(d)(3), 201.21(e)(4). Under the Manufactured Home Construction and Safety Standards Act, additional warranty mechanisms are provided to assist consumers in resolution of warranty disputes and federal standards for home construction are established. See NCLC’s Consumer Warranty Law § 17.3.

That the dealer and not just the manufacturer is thus liable for manufactured home warranty problems has significant implications for the creditor’s liability. Where a manufactured home dealer is liable for the consumer’s warranty problems, the FTC Holder Rule language is clear that the holder is liable for the consumer’s warranty claims against the seller.

Truth in Lending Act Provisions Applicable to Manufactured Homes

As described above, a residential mortgage loan under the Truth in Lending Act (TILA) includes manufactured home credit, so the following TILA provisions apply to manufactured home credit that would not apply to automobile credit:

• Limits on credit originator compensation and steering.  See NCLC’s Truth in Lending § 9.3.2.
• Requirements relating to the consumer’s ability to pay and qualified mortgages.  See NCLC’s Truth in Lending § 9.3.3.
• Limits on the financing of credit insurance and debt cancellation insurance.  See NCLC’s Truth in Lending § 9.3.4.
• Limits on prepayment penalties.  See NCLC’s Truth in Lending § 9.3.5.
• For manufactured homes that are a consumer’s principal residence, various appraisal standards apply. See NCLC’s Truth in Lending § 9.4.2.
• For manufactured homes that are a consumer’s principal residence, regulation of various servicing practices. See NCLC’s Truth in Lending § 9.4.3.
• For manufactured home credit meeting the definition of either higher cost mortgages or high cost (HOEPA) mortgages, additional protections may apply.  See NCLC’s Truth in Lending §§ 9.5, 9.6.

UCC Article 9 Statutory Damages Are Significant in Manufactured Home Cases

UCC Article 9 statutory damages are 10% of the cash price plus 100% of the finance charge. U.C.C. § 9-625(c)(2). Although some states vary this amount (see NCLC’s Repossessions § 13.2.4.1), in most states this amount will be significant considering both the high cost of manufactured homes and the lengthy term of many manufactured home loans, increasing the finance charge. A transaction with a $50,000 cash price and a $70,000 finance charge would have statutory damages of $75,000.

Article 9 statutory damages are available for any violation of Article 9 Part 6, including:

• Obtaining waiver of certain consumer rights;
• A repossession that breaches the peace, that occurs when the consumer is not in default, or that occurs when there is no valid security interest;
• Commercially unreasonable disposition of the collateral, or the secured party’s purchase of the collateral at a private sale;
• Failure to provide proper notice of sale;
• Improper calculation of a deficiency or failure to pay a surplus;
• Failure to sell the collateral within ninety days if more than sixty percent of the loan has been repaid;
• Retention of the collateral in satisfaction of the debt (strict foreclosure) without giving the debtor notice and obtaining the debtor’s consent or acquiescence;
• Denying the debtor the right to redeem collateral; or
• Failing to reimburse the owner of real property for damages caused by removal of the collateral from it.

See NCLC’s Repossessions § 13.2.4.2. See also id.§ 13.2.4.3 (non-UCC violations leading to UCC statutory damages).

Special Creditor Repossession Obligations as to Manufactured Homes

Some states prohibit self-help repossession of a manufactured home, and in other states such actions face special problems for a creditor, as opposed to repossession of an automobile. See NCLC’s Repossessions § 6.3.3. In some situations or in some states, Article 9 does not apply to the seizure and disposition of the home, and the creditor must instead comply with state foreclosure procedures. See NCLC’s Home Foreclosures Chapter 11.

States may also provide a right to cure a manufactured home loan default, even where one is not available for motor vehicle credit. A federal statute provides a right to cure for manufactured home loans if a creditor wishes to avail itself of certain federal usury preemption provisions. Even if the creditor is not seeking such preemption, it may include a right to cure in the contract, and then failure to provide it is a breach of contract and may lead to UDAP or other remedies as well. See NCLC’s Repossessions §§ 4.5.2, 4.5.3.

Compliance with Federal Manufactured Home Consumer Protections

The application of state usury caps to manufactured home credit is a complicated topic. Rate exportation (the ability of a creditor to apply its home state usury cap to a transaction in another state) applies only where a federally insured or federally chartered bank or savings association originates the credit. Rate exportation rights do not apply where a dealer enters into an installment sales agreement and immediately assigns it to a federal depository or other lender.

Other forms of federal preemption of state usury caps apply for manufactured home transactions involving an FHA, VA, Rural Housing Service, or federal credit union loan. But if none of these other forms of preemption apply, to override a state usury cap, the creditor must decide under a federal statute commonly called DIDA to comply with a series of federal consumer protections governing the refund of pre-computed finance charges, prepayment penalties, late charges, deferral fees, balloon payments, and the consumer’s right to notice before repossession, foreclosure, or acceleration. 12 C.F.R. § 190.4.

If the creditor fails to comply with all of these federal consumer protection provisions, then the consumer has no direct federal remedy under DIDA. Instead, the creditor loses the benefit of the DIDA preemption. If no other federal interest rate preemption applies, then losing DIDA preemption means the creditor must comply with the state usury cap. Failure to do so will often provide the consumer significant state usury remedies. For a discussion of DIDA and this complex topic, see NCLC’s Consumer Credit Regulation § 3.8.

Manufactured Home Rent-to-Own Transactions

It is not uncommon for a used manufactured home to be sold on a rent-to-own (RTO) basis. RTO transactions would involve the sale only of the home and not the sale of the attached land. A manufactured home RTO transaction has several differences from a typical RTO transaction involving an appliance, electronics, or furniture. For the latter transactions, a state RTO statute will explicitly exempt the transaction from state credit legislation and UCC Article 9. But these RTO statutes are usually not structured to apply to long-term manufactured home rental-purchase contracts, thus requiring the creditor to comply with state credit legislation and, in some cases, with Article 9 (with hefty statutory damages for failure to do so).

Another distinguishing factor of a manufactured home RTO transaction is that a larger amount of money may be at stake, adding urgency to the consumer’s litigation. A sizeable amount of built-up equity may be lost upon early termination of the transaction, which may lead courts to consider the RTO termination provisions in the manufactured home context to involve an unfair penalty.