CFPB sets record straight on contract-for-deed deals

To help rid the market of predatory and exclusionary home lending practices, the Consumer Financial Protection Bureau (CFPB) today released an advisory opinion and research report on contract-for-deed deals.

“The CFPB has found that investors are targeting people of faith with predatory mortgage products that set the borrower up to fail,” said CFPB Director Rohit Chopra. “The government is taking action to ensure that these products do not turn the dream of homeownership into a nightmare.”

Contract-for-deed deals — also called “land contracts,” “installment land contracts,” “land sales contracts,” or “bonds for deed” — are a form of home seller financing that typically cover the purchase of homes.

Under such deals, the seller agrees to turn over a home’s deed only after the buyer completes a series of payments. The deals often have little oversight, according to the CFPB, and investment groups and other sellers can set a “series of traps” that leave buyers in unlivable homes, on the hook for tax liens and expensive repairs, and at risk of losing their down payments and homes.

In its advisory opinion, the CFPB affirms that federal home lending rules and laws cover contracts for deeds and provide key consumer protections.

Released in conjunction with a field hearing the CFPB is holding today in St. Paul, Minn., the opinion points out that contract-for-deed loans have become increasingly prevalent in the Twin Cities’ Somali Muslim community, where the loans are often marketed as a way for community members to abide by the principles of their faith that prohibit paying or profiting from interest.

In fact, according to the bureau’s research report, which traces the history of contract-for-deed lending, the CFPB determined that these products often target black, Hispanic, immigrant, and some religious communities.

Other key findings in the report include:

• Substandard housing, title defects, and inflated prices can create problems for homebuyers.
• Contracts-for-deed loans were long marketed to black borrowers.
• Driven by investors, contracts-for-deed loans surged during the Great Recession.
• Contracts for deed can harm housing markets by causing or perpetuating substandard housing stock, inflated home prices, and less access to mainstream mortgage credit.

For instance, many lenders using contracts for deed generally sell homes at inflated prices, with high interest rates and balloon payments, according to the CFPB, which says that the prices may be high because sellers are not competing against banks or other mainstream mortgage lenders, and home inspections aren’t required to identify any defects.

Contract-for-deed sellers also have no stake in whether borrowers can afford the loan over the long term because they can generally kick buyers out immediately if the buyers miss a single payment and then resell the home at an even higher price to the next family, the bureau says.

However, while many sellers have abused this financing structure, these contracts are covered by the federal Truth in Lending Act (TILA), which imposes certain requirements on larger sellers, usually investment groups.

For instance, they must assess a borrowers’ ability to repay loans; provide informative and accurate disclosures; and limit balloon payments, according to the CFPB.

“When a creditor sells a home to a buyer under a contract for deed, that transaction will generally meet TILA and Regulation Z’s definition of credit,” according to the bureau’s advisory opinion. “Where the transaction is secured by the buyer’s dwelling, the buyer will also generally be entitled to the protections associated with residential mortgage loans under TILA.”

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