RSSContract for deed home purchase deals are covered under the Truth in Lending Act, according to a Consumer Financial Protection Bureau advisory opinion and research report.
Predatory lenders are using contract for deed arrangements to target low-income borrowers — especially 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 Aug. 13 report.
Some predatory lenders allegedly market contracts for deed to faith communities “and lead buyers to believe that the contracts conform to religious bans on interest,” according to the CFPB. “However, the loans either do come with high, undisclosed interest rates or the interest rates are hidden through other means,” according to the bureau.
Under a contract-for-deed deal, the seller agrees to turn over a home’s deed only after the buyer completes a series of payments. During the contract term, the borrower is frequently responsible for home repair, property taxes and improvements.
The Truth in Lending Act requires large sellers, often investment groups, to assess the ability of borrowers to repay loans. “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 the ability to repay,” according to the bureau.
Sellers must include the annual percentage rate and payment schedules as mandated under the Truth in Lending Act, according to the report. Also, the Truth in Lending Act bans most balloon payments when interest rates on a home loan are higher than published benchmarks. Balloon payments are especially detrimental to contract-for-deed borrowers who could lose all the money they previously paid if they can’t pay a large lump sum at once, according to the bureau.
Contracts for deeds usually sell homes at inflated prices because of a lack of competition with mainstream financial institutions, according to the CFPB, and have high interest rates and balloon payments. Contract-for-deed lending has often targeted Black, Hispanic, immigrant and religious communities, according to the bureau.
“Contract-for-deed sellers often also have no stake in whether borrowers can afford the loan over the long term because they can generally kick buyers out immediately if the buyers miss even a single payment, and then resell the home at an even higher price to the next family,” according to the CFPB.
The advisory opinion was released in conjunction with an Aug. 13 field hearing the CFPB held in St. Paul, Minn. Contract-for-deed loans have become increasingly common in the Twin Cities’ Somali Muslim community, according to the report. Such loans are frequently marketed for community members to follow religious principles that ban paying or profiting from 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.”
