By: Lizbeth Cordova
Contract for deed sales, also known as installment land contracts, is an alternative way to purchase a home. Like the traditional home loan, buyers make a down payment and promise to pay the purchase price in installments; they are also responsible for making (and paying for) any necessary repairs and insurance. The buyer takes possession of the home, but under this method of purchase, the seller keeps the title to the property until all payments are made. This contract almost always includes a provision allowing the seller to evict the buyer immediately if even one payment is missed. Meaning that the buyer immediately loses all the money they paid into the house. Currently, there are no federal protections to prevent these types of sales. The Consumer Financial Protection Bureau (CFPB) must enact federal protections to prevent deceptive buyers from making themselves rich at the expense of the American Dream.
A New York Times article estimates that a lot of these homes were purchased by investment firms at prices under $10,000 and then sold to buyers for four times the original purchase price with interest rates sometimes double the rate of a standard federally-backed home loan. Additionally, the properties usually always require extensive repairs to make the property livable and compliant with city regulations.
After making the costly, but required, repairs, buyers quickly fall behind on their payments and face eviction. These contracts are made to fail. The seller makes more money when people default because he or she can evict them and “sell” the property to another innocent buyer. As a National Consumer Law Center report puts it, “unchecked installment land contracts are an unfair, deceptive, predatory lending product.”
Contract for deed sellers typically target low-income would-be buyers who do not have the credit rating necessary for a traditional loan. This is the same group of people that were the most affected by the subprime loan industry, the lending of money to individuals who did not have the necessary means to pay for them. Low-income communities have been victims of predatory lending practices for way too long.
States are slowly taking steps to protect inspiring homebuyers from predatory sellers. Some states are creating laws that will make terms of the contract for deed illegal. Others are suing the investment firms responsible for most of the selling through contract for deeds. Additionally, in May Fannie Mae announced that it would stop selling foreclosed houses to firms that engage in sales through contract for deeds.
While these protections are a step in the right direction, they are only protections for sales going forward, and only protect against big investment firms. They fail to protect would-be buyers who have already fallen victim to this predatory lending practice or future buyers who buy from smaller companies. Considering that in some cities, contract for deed sales are outpacing mortgage sales, federal protections need to be enacted to prevent deceptive buyers from making themselves rich at the expense of the American Dream.
The CFPB has the authority to create federal protections for these would-be homeowners and penalize sellers to compensate victims. Last year the CFPB began investigating firms who sell homes through contracts for deeds. However, Richard Cordray, the current director of the CFPB will leave the agency at the end of the month. The resignation may result in no regulation for contract for deed sellers as the CFPB has been seen as a “rogue agency” by many Republican senators and the Trump administration.
If the CFTB chooses not to enact federal regulation to protect these would-be homebuyers, contract for deed should be subject to the basic lending regulations like the Truth in Lending Act. TILA would require lenders to explain the amount of interest they are charging and the number of payments buyers must make before they own the house.
If these sellers want to insist that they are not lenders and do not have to face federal compliance laws, then they must agree to be landlords and be responsible for all traditional landlord responsibilities. This would include making sure that the property is in a condition for human living. The Consumer Financial Protection Bureau (CFPB) must enact federal protections to prevent deceptive buyers from making themselves rich at the expense of the American Dream. They cannot sell their house and keep it too. Federal regulation must be in place to help everyone achieve the American Dream.