Predatory contract for deed home sales on the rise in communities of color, feds say

A federal agency says contract for deed home sales are subject to existing federal regulations aimed at preventing customers from entering mortgages they can’t afford.

The federal Consumer Financial Protection Bureau said in an opinion released Tuesday that contract for deed sales fall under the Truth in Lending Act, which also applies to conventional mortgages obtained through a bank. Contract for deed sales are struck directly between the seller and the homebuyer without the intervention of a bank. They often involve inflated home prices that must be paid to the seller in a shorter amount of time than allotted in a conventional bank mortgage.

The opinion comes after the agency looked into contract for deed sales, said Rohit Chopra, the bureau’s director. Chopra said such sales are especially prevalent in the Twin Cities metro area, and are on the rise elsewhere in the country.

Many contracts for deed “set people up to fail,” because sellers can kick out homebuyers once they are no longer able to afford monthly payments, he said, adding that sellers then “repeat the whole thing over again with a new family.”

“That’s what makes it particularly dangerous,” Chopra said.

But, he argued, the Truth in Lending Act requires sellers to make “a clear assessment of the borrower’s ability to repay.”

Advisory opinions, which federal and state agencies issue as guidance on complex legal matters, are not legally binding. But Chopra emphasized that his agency, which Congress created in wake of the 2008 subprime mortgage crisis, enforces the Truth in Lending Act and would use this analysis if it decided to sue a contract for deed seller.

“We are planning to enforce these rules,” he said. “If we find illegal contract for deed scams, we have the tools and legal authority to take those bad actors to court.”

Chopra added that his agency is working with state attorneys general and other regulators “to make sure that this type of predatory lending doesn’t spread.”

The Truth in Lending Act requires lenders to exercise due diligence in assessing a buyer’s income, credit history and existing financial burdens. It also prevents sellers from selling homes to clients who would be paying about 41 percent or more of their income toward home payments.

The act also requires sellers to properly disclose a contract’s financial terms so buyers can compare them to other potential loans in order to make an informed decision on their purchase.

The advisory opinion is the latest development in state and federal attempts to add oversight to contract for deed sales since Sahan Journal and ProPublica published a joint investigation into the matter in 2022.

Earlier this year, Governor Tim Walz signed a bill that adds more protection for homebuyers who purchase their house through a contract for deed. The bill limits sellers from “churning” properties, or buying and selling homes to multiple buyers in a short period of time following evictions.

Additionally, Democratic U.S. Senator Tina Smith is currently carrying a bill to tighten contract for deed regulations nationally. Minnesota Attorney General Keith Ellison conducted an investigation into contract for deed sales and filed a lawsuit earlier this year against Chad Banken, a predominant contract for deed seller in Minnesota.

Chopra said Smith and Ellison have been working with his office on the issue.

The Sahan Journal/ProPublica investigation found a rising market in Minnesota contract for deed sales, particularly in the Somali community. Many follow Islamic religious practices that discourage lenders from profiting from interest payments, disqualifying them from taking out a conventional home loan.

Investors promoted contracts for deed to Somali buyers as a way to avoid interest, because buyers pay sellers directly without taking out a bank loan. Additionally, contracts for deed are available to homebuyers with poor credit who don’t qualify for conventional mortgages through bank loans.

But contract for deed sales in the U.S. are not subject to many of the same state regulations as traditional mortgages.

Many buyers mistakenly believe that if they make the monthly payment stipulated in their contracts, they will successfully pay off the home by the end of the contract term. But those payments may only add up to a fraction of the price of the home, and the buyer is expected to make up the difference with a lump-sum payment, known as a balloon payment, at the end of their contract or renew their contract with the seller.

Typically, contracts for deed allow five years to pay off a house compared to the 20 or 30 years allotted in a conventional bank loan.

In contracts for deed, the seller can also cancel the contract at any time if the buyer falls behind on their monthly payments. Sellers can evict the homebuyer in as little as 60 days, unlike the yearlong foreclosure process for homebuyers who have traditional mortgages.

The Sahan Journal/ProPublica investigation also found that despite being marketed as interest free, many home sales through contracts for deed ultimately included interest payments at rates higher than the market.

Several homebuyers who purchased houses through contract for deed told Sahan Journal and Propublica that they were misled into bad contracts that they couldn’t afford. Among them was Abdinoor Igal, who purchased a newly built, five-bedroom Lakeville home in 2022 for more than $727,000 for himself, his wife and their six children.

It wasn’t long before Abdinoor, a trucker, couldn’t afford the $4,000-plus monthly payments on his home. He walked away from his home last fall, losing an estimated $170,000.

A separate report on contracts for deed released Tuesday by the Consumer Financial Protection Bureau lists four areas in the United States where contract for deed sales have recently grown: Minneapolis/St. Paul, Atlanta, and parts of Texas near the Mexican border. Chopra added that the practice is also occurring in parts of Florida, Alabama and Louisiana.

In addition to Muslim homebuyers, Chopra said sellers have targeted bad contracts for deed, including misleading sales of undeveloped land in Texas, at Black and Spanish-speaking Latino communities across the nation.

The recent rise of contract for deed sales is reminiscent of predatory lending in the 2000s that led the Great Recession, Chopra said, adding that recent action from his office and others are trying to prevent history from repeating itself.

“We all learned a very hard lesson as a country when the federal government just watched from the sideline as predatory mortgage lending spread in the 2000s,” he said. “We want to make sure that we are doing something before a lot of investors put big money behind [contracts for deed].”

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