Last month The Seattle Times and The Center for Public Integrity published an investigation of Berkshire Hathaway’s mobile-home business Clayton Homes. The article highlighted several serious problems in the management and operations of Clayton Homes, including practices that essentially force mobile home purchasers to sign up for a loan from Clayton’s own financing division. The investigation also noted that in some cases, borrowers with very low credit scores received loans whose payments represented a large majority of their monthly incomes. Not surprisingly, many of these loans ended up in default.
Clayton Homes published a rebuttal of CPI’s investigation a few weeks later as an article in the Omaha World Herald, but the article was full of half-truths and omissions. Moreover, it did not factually rebut a single fact presented by CPI in regard to its investigation.
The truth about Clayton Homes
CPI’s Daniel Wagner and and Mike Baker highlight the many deceptions in Clayton Homes rebuttal of their investigation.
CLAIM: “Clayton Homes’ policies, procedures and training are designed to ensure that customers have a choice of lenders. A list of all available lenders is posted and provided in company-owned retail locations.”
FACTS: The facts are that customers have not historically been given a choice of lenders, according to interviews with numerous customers. In early 2015, a reporter went to several Clayton-owned and -affiliated dealerships in Tennessee, and saw huge banners promoting Clayton loan products. There were no comparable signs for other lenders. The only promotional materials from other lenders at one dealership was a small display of brochures located on a side table in waiting a room.
CLAIM: “Customers are encouraged to select more than one lender so they can compare options – and select the loan program that best serves their needs.”
FACTS: Many customers interviewed as a part of the investigation said they were told that Clayton lenders were their only option or the best option, but offered no proof. Numerous customers did not realize and were not told, that the home dealers and lenders were part of the same company. Most said they were not encouraged to explore alternatives.
CLAIM: “The retailer selling the home receives no financial incentives from the lender the customer chooses.”
FACTS: Two former Clayton dealers interviewed as a part of the investigation noted they received financial incentives, which they called “kickbacks,” for financing buyers through Clayton lenders or adding on Clayton insurance products. A third former manager, who worked for the firm until late 2013, described constant pressure from his supervisor to make sure at least 80% of borrowers used Clayton financing.
CLAIM: The New York Times recently wrote that Clayton’s financing division was distinguished by a lack of predatory or exploitative consumer practices and that its collections activities were “cited as best practices.”
FACTS: The article in question was not written by a New York Times staffer. It was a guest blog labeled “Another View,” and was written by George Washington University Professor Lawrence Cunningham. A former corporate lawyer, Cunningham is a well-known Buffett supporter whose most recent book was called “Berkshire Beyond Buffett: The Enduring Value of Values.” The arguments in the blog post were derived from that book.
CLAIM: “Our lending policy and procedures help ensure that we evaluate each customer’s reasonable ability to repay the loan for which they have applied.”
FACTS: A number of loan documents examined as a part of the investigation showed that borrowers with low credit scores were given loans whose payments represented most of their monthly incomes. Several of these borrowers noted that their incomes had not been verified.
CLAIM: “Appraisals are ordered from an unaffiliated third party on all loans secured by land that we finance, and a copy is provided to the customer prior to closing of the loan.”
FACTS: In 2014, 65% of Clayton’s loans were not secured by land, and therefore would not be subject to the procedure described. Furthermore, Clayton has successfully pressured federal financial regulators against proposals to mandate appraisals on more transactions. Of note, the firm also succeeded in preventing new rules requiring full appraisals, including inspections, on loans for new homes that were secured by land.
CLAIM: Loans over the past year had an “average total down payment of just under 19 percent.”
FACTS: This one is pretty much a flat out lie in that Clayton is not referring to down payments in the traditional sense. The company has long advertised “$0 CASH DOWN” loans where customers put up land that they own instead of cash. Obviously, land collateral is very different from a cash down payment, because it does not reduce the balance of the loan or increase the borrower’s equity in the asset being bought.
Wagner and Baker point out the “just under 19 percent” actually means a combination of cash down payments and the value of land. The investigation examined more than 20 loans originated by Clayton since the Berkshire merger that included no cash down payment, and one from 2010 that included a $1 down payment.