WASHINGTON, D.C. — The Consumer Financial Protection Bureau (CFPB) recently released a critical advisory opinion and research report concerning contract-for-deed home financing. This form of seller financing has gained notoriety for its lack of oversight and predatory practices, particularly targeting low-income and religious communities.
In a contract for deed, the seller retains the deed to the property until the buyer completes all payments. This arrangement often leaves buyers responsible for repairs, property taxes, and other homeownership costs while providing them little security. If buyers miss even one payment, they risk losing both their home and any money invested in it.
“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.”
The report highlights how these contracts are marketed to vulnerable communities, including the Somali Muslim population in the Twin Cities. The loans are often pitched as Sharia-compliant alternatives to traditional mortgages, which are forbidden by Islamic law because they involve interest. However, these contracts frequently include hidden interest rates and other financial traps.
Contract-for-deed agreements, also known as land contracts or bonds for deed, generally feature inflated home prices and high interest rates. Unlike traditional mortgages, these agreements lack the protections of property inspections, which can reveal critical home defects before purchase. Sellers, often investment groups, have little incentive to ensure buyers can afford the payments, leading to high failure rates.
Despite these predatory practices, contracts for deed are covered by federal laws like the Truth in Lending Act. This law mandates that larger sellers, such as investment groups, assess borrowers’ ability to repay, provide clear and accurate disclosures, and limit the use of balloon payments. These protections are designed to prevent lenders from exploiting borrowers.
The CFPB’s advisory opinion affirms that contracts for deed must comply with these regulations. Sellers must disclose the annual percentage rate and payment schedules, ensuring borrowers understand the financial commitments they are making. The law also bans many balloon payments, which force buyers to make large lump-sum payments that can lead to immediate foreclosure if they are unable to pay.
Director Chopra elaborated on these issues during a field hearing in St. Paul, Minnesota. He stressed the challenges faced by families in the housing market, including high rents, limited housing inventory, and unfair lending practices. “For many, there are other barriers. Some families may not have a long credit history, especially younger households and recent immigrants. Others are forced to compete with private equity and real estate investors paying cash,” Chopra noted.
The CFPB’s report details the history of contract-for-deed lending and its resurgence in communities like the Somali Muslim population in the Twin Cities. These contracts are often marketed as interest-free but come with high initial payments and hidden balloon payments. This practice not only exploits the buyers but also destabilizes neighborhoods by reducing the quality of housing stock.
Minnesota Attorney General Keith Ellison and local leaders have uncovered various tricks used by predatory lenders. These include hidden balloon payments, inflated home prices, and high initial payments that immediately put buyers underwater. Federal law is supposed to protect against these abusive practices, yet they persist due to inadequate enforcement.
The CFPB’s advisory opinion and report are part of a broader effort to eliminate predatory and exclusionary home lending practices. This includes actions against redlining, reverse redlining, digital redlining, and zombie mortgages. The CFPB has also collaborated with federal partners to ensure automated valuation models do not engage in discriminatory practices.
Chopra emphasized the importance of consumer complaints in identifying and addressing these issues. “Our actions today are just a first step, and I encourage consumers to tell us when they are victims of illegal activity,” he stated. The CFPB has received numerous complaints about contract-for-deed agreements, including cases where buyers were misled about homeownership and faced unexpected balloon payments.
Beyond contracts for deed, the CFPB is taking multiple steps to improve the housing market. This includes actions against tenant screening companies, reinvigorating efforts against redlining, and proposing rules to help homeowners avoid foreclosure. The CFPB is also working to lower closing costs and make it easier for buyers to transfer low-rate mortgages.
The CFPB’s efforts aim to protect consumers and ensure fair access to housing. By addressing the predatory practices associated with contracts for deed, the agency hopes to turn the tide in favor of vulnerable communities and uphold the promise of homeownership for all Americans.
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