The Consumer Financial Protection Bureau (CFPB) on Tuesday released an advisory opinion stating that contracts for deed are under federal home lending rules and should provide consumer protections.
In these contracts – also known as “land contracts” or “bond for deed” –the seller retains the legal title to a home until the borrower completes all the payments, leading to some “traps,” according to the CFPB.
Home prices are usually inflated, inspections are not made, and loans have high interest rates and balloon payments. Carrying the responsibility of homeownership, buyers end up in unlivable homes and paying tax liens and expensive repairs, all of which lead the buyers to lose their down payments and their homes, the CFPB added.
“The CFPB has found that investors are targeting people of faith with predatory mortgage products that set the borrower up to fail,” CFPB Director Rohit Chopra said in a statement. “The government is taking action to ensure that these products do not turn the dream of homeownership into a nightmare.”
According to a CFPB, sellers typically target low-income borrowers, particularly in Black, Hispanic, immigrant, and religious communities.
In a report published on Tuesday, the CFPB mentioned that “some experts estimate that more than 50% of contracts for deed result in loss of the home.”
For example, University of Texas-Austin researchers found that 45% of borrowers in the Texas border colonias failed their land contracts over 21 years – and fewer than 20% obtained a deed to their home. To compare, during the Great Recession, the foreclosure rate was 15.6% among subprime loans.
The CFPB states that, while many sellers have abused this financing structure, they should assess borrowers’ ability to repay loans and provide the Truth in Lending Act’s required disclosures with information such as the annual interest rate and payment schedules. In addition, under the same law, when interest rates are higher than benchmarks, consumer protections are activated, including banning balloon payments.
“Land contracts and lease options create a mirage of homeownership that drains wealth from low-income neighborhoods and communities of color and increasingly targets immigrant communities,” Sarah Bolling Mancini, co-director of advocacy at the National Consumer Law Center (NCLC), said in a statement.
Mancini – who is testifying during a CFPB field hearing on land contracts on Tuesday in St. Paul, Minnesota – added that the NCLC urges the CFPB and the Federal Trade Commission (FTC) to issue regulatory guidance, take enforcement actions against this abusive practice and make small-dollar mortgage loans more accessible.
“Low-income households are drawn into predatory transactions precisely because they feel they have no other pathway to becoming a homeowner,” Mancini said.
According to a The Pew Charitable Trusts study, over 8 million Americans have used land contracts and, as of 2022, about 1.4 million were still active.
“Homebuyers shouldn’t receive different levels of protection just because of the type of financing they use to purchase their homes. Today’s announcement by the CFPB is a major step toward leveling the field for homebuyers by making land contracts safer for the millions of Americans who don’t have access to mortgages and are struggling to achieve their goal of homeownership in a tight market,” Tara Roche, project director with The Pew Charitable Trusts’ housing policy initiative, said in a statement.
