While the industry is no stranger to predatory and/or unfair lending practices, new advisory opinion and research study on a type of home seller financing known as a “contract for deed” has been released by the Consumer Financial Protection Bureau (CFPB). Contract-for-deed agreements require the buyer to fulfill a number of payment obligations before the seller will transfer the deed to the residence.
Per the report, the transactions frequently lack regulation, and other sellers and investment groups may lay a number of traps that force homebuyers to live in unusable or inhabitable properties, pay for costly repairs and tax liens, and run the risk of losing both their down money and their residences.
The advisory judgment upholds the coverage of contracts for deed by federal home lending laws and regulations, which also offer important consumer protections. The study details how predatory lenders prey on low-income borrowers, especially those in religious communities, by using contracts for deeds to set them up for failure. This allows the sellers to evict the borrowers and start the process over with a new family.
The CFPB is had a field hearing in St. Paul, MN, and the advisory opinion is being made public concurrently with the hearing. Contract for deed loans are becoming more and more common among the Somali Muslim community in the Twin Cities. The loans are frequently promoted as a means for local residents to follow their religious beliefs, which forbid making interest payments or taking advantage of interest.
“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.”
Lenders Target Low-Income Borrowers in Religious Communities
Often used to purchase homes, contracts for deed are also known as “land contracts,” “installment land contracts,” “land sales contracts,” or “bonds for deed.” They are set up so that, until all payments are made by the borrower, the seller is still in possession of the home legally. The borrower frequently assumes homeownership duties during the contract period, like as maintenance, property taxes, and upgrades.
The CFPB examines the background of contract-for-deed financing in its report released today. According to the CFPB, Black, Hispanic, immigrant, and religious communities are frequently the target market for these products.
Homes are typically sold by several lenders who use contracts for deed at outrageous costs with balloon payments and excessive interest rates. Due to the lack of competition from banks or other mainstream mortgage lenders, as well as the lack of inspections linked to standard mortgage financing that would have revealed flaws in the property, the prices may be excessive.
Due to their ability to typically evict purchasers at the first sign of nonpayment and offer the home to the next family at an even higher price, contract-for-deed sellers frequently have no interest in whether borrowers can afford the loan in the long run.
A large number of deed contracts are full with catches, such as balloon payments, which greatly reduce the likelihood that the borrowers would ever obtain complete legal title to their properties. The information that is currently available indicates that deed contracts fail far more frequently than conventional mortgage loans.
The Truth in Lending Act of the federal government does, in fact, cover these contracts, even though many sellers have taken advantage of this financing structure to deceive purchasers and churn homes. Larger sellers, who are frequently investment organizations, are subject to specific criteria under this regulation, which oblige them to:
- Assess borrowers’ ability to repay loans: Determining a borrower’s ability to repay makes sure they can afford to repay loans, including contracts for deed. Many people who bought homes through contracts for deed—and were kicked out of their homes for missed payments—would have been protected against these predatory products had the seller assessed ability to repay.
- Provide informative and accurate disclosures: Sellers must provide the Truth in Lending Act’s required disclosures. These disclosures include the annual percentage rate and payment schedules. Predatory lenders will sometimes market contracts for deed to faith communities and lead buyers to believe that the contracts conform to religious bans on interest. However, the loans either do come with high, undisclosed interest rates or the interest rates are hidden through other means.
- Limit balloon payments: Many contracts for deed come with interest rates much higher than those commonly charged on traditional mortgages. Under the Truth in Lending Act, when an interest rate on a home loan is higher than certain published benchmarks, additional requirements and consumer protections are activated. One of those important protections is that most balloon payments are banned. Balloon payments can be especially harmful to contract-for-deed borrowers who stand to lose all the money they have previously paid if they cannot afford to pay a large lump sum all at once.
To read the full report on Contract for Deed Lending, including more information, click here.
To read the full advisory opinion, click here.
