In a significant step toward protecting low-income borrowers from predatory lending practices, the Consumer Financial Protection Bureau (CFPB) has issued an advisory opinion and a research report addressing the increasing use of contract-for-deed agreements. This type of home financing, often used by investment groups and sellers, has been found to set up borrowers for failure by trapping them in unsustainable financial arrangements.
What Are Contract-for-Deed Agreements?
Contract-for-deed, also known as land contracts or installment land contracts, is a form of seller financing. In these agreements, the seller retains ownership of the home until the buyer has completed all payments. However, unlike traditional home loans, these contracts often lack proper oversight and consumer protections. Buyers are responsible for property taxes, repairs, and maintenance, but without the benefits of traditional mortgage safeguards such as inspections or reasonable loan terms.
The CFPB’s advisory opinion affirms that federal lending laws, including the Truth in Lending Act (TILA), apply to contract-for-deed agreements. The report highlights how sellers, often investment groups, have used these contracts to target vulnerable populations, including low-income, Black, Hispanic, immigrant, and religious communities, with loan terms designed to benefit the sellers at the borrowers’ expense.
The Predatory Nature of Contract-for-Deed Financing
Many sellers offering contract-for-deed financing inflate the prices of homes, add high interest rates, and include balloon payments, making it almost impossible for buyers to obtain the legal title to the property. Because these agreements often bypass traditional mortgage regulations, borrowers may be left in homes with significant defects or face foreclosure for even a single missed payment. In some cases, sellers use these predatory tactics to cycle through multiple buyers, reselling the same home to new families after each default.
This practice has been particularly prevalent in the Twin Cities’ Somali Muslim community, where contracts for deed are marketed as a way to adhere to religious principles that forbid interest. However, many of these contracts still include hidden interest rates or financial traps disguised in other forms. CFPB Director Rohit Chopra noted that these predatory practices turn the dream of homeownership into a financial nightmare for families who are trying to improve
