The Consumer Financial Protection Bureau (CFPB) recently issued an advisory opinion indicating that contracts for deed fall within federal home lending regulations and should incorporate essential consumer protections. These agreements, alternatively known as “land contracts” or “bond for deed,” involve sellers retaining legal ownership of a property until buyers fulfill all payments.
In such arrangements, home prices are often artificially inflated, inspections are frequently omitted, and loans come with exorbitant interest rates and balloon payments. Consequently, buyers, burdened with the obligations of homeownership, may find themselves in uninhabitable homes, grappling with tax liens, costly repairs, and ultimately facing the loss of their down payments and homes, as highlighted by the CFPB.
Director Rohit Chopra of the CFPB emphasized that certain investors target vulnerable populations, particularly low-income individuals within Black, Hispanic, immigrant, and religious communities, by offering predatory mortgage products designed to ensure the borrower’s failure.
The CFPB’s report sheds light on the grim reality that a significant portion of contracts for deed culminate in the loss of homes, with some experts estimating a loss rate exceeding 50%. For example, research conducted by the University of Texas-Austin revealed that almost half of borrowers in Texas border colonias failed in their land contracts over a span of 21 years, with less than 20% successfully obtaining ownership of their homes. This foreclosure rate among subprime loans during the Great Recession stood at 15.6%.
To address these concerning practices, the CFPB advocates for sellers to conduct thorough assessments of borrowers’ repayment capabilities and provide crucial disclosures mandated by the Truth in Lending Act (TILA). These disclosures should encompass vital information such as annual interest rates and payment schedules. Furthermore, when interest rates surpass specified thresholds, consumer protections stipulated by the same law, including the prohibition of balloon payments, should be enforced.
Prominent advocates, including Sarah Bolling Mancini from the National Consumer Law Center (NCLC), have strongly criticized land contracts and lease options, branding them as deceptive practices that drain wealth from marginalized communities. Mancini has urged the CFPB and the Federal Trade Commission (FTC) to issue regulatory guidance, take decisive enforcement actions against exploitative practices, and enhance accessibility to small-dollar mortgage loans.
A comprehensive study by The Pew Charitable Trusts revealed that over 8 million Americans have engaged in land contracts, with approximately 1.4 million of these contracts still active as of 2022. Tara Roche from The Pew Charitable Trusts underscored the importance of ensuring uniform consumer protections across various home financing mechanisms. She commended the CFPB’s efforts to fortify safeguards for individuals relying on land contracts to achieve homeownership in a challenging market landscape.
