This week, the Consumer Financial Protection Bureau (CFPB or Bureau) issued an advisory opinion and a research report addressing contract-for-deed home financing, also known as a “land contract,” “land installment contract,” “land sales contract,” “bond for deed,” “agreement for deed,” or “buying on contract.” The advisory opinion concludes that form of seller financing, where the seller retains the deed until the buyer completes the payments, generally is “consumer credit” under the Truth-in-Lending Act and Regulation Z and, therefore, that many providers of the financing must comply with the Ability to Repay and other rules in Regulation Z governing consumer mortgages. The CFPB also asserts that contract-for-deed home financing can trap buyers in unlivable homes and financial hardship.
The CFPB claims that many lenders using contracts for deed sell the homes at inflated prices, with high interest rates and balloon payments, and that the homes often come without the benefit of inspections to uncover defects. Contract-for-deed sellers also often have no stake in whether borrowers can afford the loan over the long term because the sellers can generally evict if the buyers miss even a single payment, and then resell the home at an even higher price. The CFPB’s data shows that contracts for deed have much higher failure rates than mainstream mortgage loans.
The Bureau’s research also focused on how some lenders target low-income and religious communities, particularly focusing on the Twin Cities’ Somali Muslim community, with these contracts.
