WASHINGTON -- It's true. Changes made by Congress to tighten control of the banking industry earlier this year may just squeeze full-time RVers out of the lending market.
Ken Rishell, a principal partner at Captive Financing, a company helping RV and manufactured home dealers develop lending alternatives, told RV Daily Report today than an unintended consequence of the 2010 Financial Reform Bill may be problematic for the RV industry.
The law is nothing new, he explained. Congress passed it in 2003. But it has taken seven years for the federal government to write and implement rules to crack down on the way mortgage loans are managed. New rules for mortgage lending took effect Oct. 1, 2009; and the new rules for chattel loans (those involving movable property) take effect Oct. 1 of this year.
An RV dealer told RV Daily Report earlier this week that Bank of the West, Bank of America, BBT and US Bank have either stopped making loans will stop making those loans by Oct. 1 to full-time RVers who use their RVs as their primary residence.
The new lending laws imposed by Regulation Z Section 226.35 requires banks to escrow property taxes and insurance on any RV or boat that is the borrower's primary residence. Since full-time RVers don't have a "permanent residence," the banks may have difficulty determining what taxes to withhold an in what amount.
Although a vehicle may be licensed in a particular state, various counties and even cities within those counties have different property tax rates. Without an actual location upon which to base the tax, banks won't be able to escrow the payments, and would thus be in violation of the law, said Rishel.
An additional complication may arise as cash-strapped states seek to tax RV owners that spend significant time within a particular state. For example, Maine may want to tax RVers who register their units in that state, but Florida may want a cut of the action because the RVers spend six months living there.
The confusion lies in the law itself, said Rishel, and the fact it delegates enforcement authority to an agency that is not yet fully established.
"RV owners pay some type of privilege or personal property tax in addition to vehicle registration fees in states where the RV is licensed," said Rishel. "It is that tax that banks are required to escrow."
Banks can avoid escrow
Banks may be able to get around the escrow requirement by collecting a year's worth of taxes at the time of sale and remitting it in advance to the appropriate taxing authority, Rishel explained. The same holds true with RV insurance, which would also have to be collected a year in advance at loan closing and submitted by the bank to the insurance company.
"The big question is do banks want to do it?" Rishel asked. "There are a lot of complications that must be worked out. If they don't want to go to that trouble, they won't approve those types of loans."
A quirk in the law allows RVers to opt out of escrowing taxes and insurance, but only after the first year of the loan, Rishel explained. For the first year, banks have full responsibility for ensuring the payments are collected and made.
Another quirk in the law is based on how banks, or the government for that matter, will know that an RV owner is really a full-time RVer.
"I suspect that RV owners will eventually have to sign affidavits stating that they are only going to use their RVs for recreational purposes, not as full-time housing units," said Rishel.
The whole process imposes a burden on banks to determine if the RV buyer intends to use the RV as a home, or as a short-term getaway. Banks may be forced to loan only to true recreational users, and require a signed statement from the borrowers that they will not live in the RV on a full-time basis.
"Banks making loans to full-time RVers will likely need attorneys who fully understand the law and how to write contracts to comply with the letter of that law," said Rishel. "There are only about five law firms in the entire country who have a full grasp of what these new financial regulations involve when it comes to retail installment lending or direct lending to consumers."
Broad federal powers
The newly created Consumer Financial Protection Bureau has a much broader scope for regulating housing loans than the Housing and Urban Development agency ever did, Rishel explained. The new agency absorbed much of HUD's responsibility and added regulation of pay day lenders, credit card companies and just about anything that requires a regular payment to be made.
To complicate matters more, part of the law allows regulation and control by the Federal Reserve Board. Rishel said that the Fed is likely to be more bank-friendly in its approach to the law.
But, on Sept. 17, President Barrack Obama appointed Elizabeth Warren to head the new agency. Warren is a Harvard law professor who heads the congressional oversight panel over the Troubled Asset Relief Program (TARP). Warren is part of the problem, said Rishel.
"With Liz Warren, banks have a tiger by the tail and they know it," he explained. "She hates business, hates lending and hates anyone who makes any money."
Under new federal law, Warren will also assume enforcement authority for the SAFE Act, which regulates who can even fill out and submit a credit application. If an RV salesperson even hands an application to a consumer, or advises a buyer on how to fill out the application, the salesperson must be licensed, and so must the dealership.
"I am not sure the RV industry is out of the woods on the SAFE Act," said Rishel. "The new consumer protection bureau will be much more aggressive than HUD ever was. For example, HUD didn't want to deal with boats or RVs -- only houses. The new agency will look right down the shoulders of RV and boat dealers, and will likely look down the shoulders of car dealers, too.
"A whole new body of law has developed that addresses the issue of lending money for someone's dwelling, and the law claims those loans need more protection than any other type of lending," he added.
Is it tax deductible?
The key test of whether the loan will come under the scope of the new law rests in this measure -- If the interest paid for the RV can be deducted as a first or second home loan, then the item being purchased is a dwelling. If it is considered a dwelling by the IRS, then the new agency will consider it a dwelling as well, said Rishel.
Oct. 1 is just the beginning of a host of new regulations steaming their way toward the RV market, he added. Starting Jan. 1, 2011, RV dealers will be required to disclose the interest rates on loans and give buyers three days to cancel the loan.
"They may not be able to cancel the sales contract, but they could cancel the loan that funds that contract," Rishel explained.
"This is not the time for the RV industry to bury its head and pretend that these rules aren't taking effect or don't apply to RV loans," said Rishel. "The industry has to face it and decide what it is going to do about it. There is so much uncertainty coming down the pike that the RV industry's trade associations had best get its ducks in a row legislatively and work to get the help and protection RV dealers and buyers need."
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