‘Contracts for deed’ – often used where interest on loans banned – subject to protections, agency rules

So-called “contracts for deed” must comply with longstanding federal mortgage protections, such as the Truth in Lending Act (TILA), the federal consumer financial protection agency said Aug. 13 in an advisory opinion.

The Consumer Financial Protection Bureau (CFPB) asserted that its opinion essentially stops “contract for deed” investors from “setting borrowers up to fail” and “do not turn the dream of homeownership into a nightmare.”

The bureau, in a release, described “contract for deed” as a deal in which the seller agrees to turn over a home’s deed only after the buyer completes a series of payments. They are also known “land contracts,” “installment land contracts,” “land sales contracts,” or “bonds for deed. The deals typically cover the purchase of homes.

CFPB asserted that the deals often have little oversight; investment groups and other sellers can set a series of traps that leave buyers in unlivable homes, on the hook for tax liens and expensive repairs, and at risk of losing their down payments and homes.

“The advisory opinion affirms that federal home lending rules and laws cover contracts for deed and provide key consumer protections,” the agency said. “The report describes how predatory lenders use contracts for deed to target low-income borrowers, particularly in religious communities, and set them up to fail so the sellers can kick them out and repeat the process with a new family.”

According to the bureau, the loans have become increasingly prevalent in the Somali Muslim community in the Minneapolis/St. Paul area. The loans, the agency said, are often marketed as a way for community members to abide by the principles of their faith that prohibit paying or profiting from interest.

“Many contracts for deed come laden with traps like balloon payments that make it highly unlikely the borrowers will ever get full legal title to their homes,” CFPB claimed. “Available data shows that contracts for deed have much higher failure rates than mainstream mortgage loans.”

The advisory opinion, CFPB said, requires larger sellers – such as investment groups – to assess borrowers’ ability to repay loans, provide informative and accurate disclosures, and limit balloon payments.

CFPB Takes Action to Stop Contract-for-Deed Investors from Setting Borrowers Up to Fail