CFPB Says Contracts for Deed Fall Under Federal Mortgage Protections
In an advisory opinion, the CFPB affirmed the applicability of federal home lending rules and Truth in Lending Act ("TILA") creditor obligations to consumer purchases of a home under a "contract for deed."
The CFPB described a "contract for deed" as a type of home loan in which "a homebuyer agrees to make periodic payments to the home seller, and the seller retains the deed to the property until the loan is fully repaid." The CFPB warned that a contract for deed include "traps" such as inflated home prices, lack of inspections and high interest rates and balloon payments. The CFPB clarified that these transactions generally meet the definition of "credit" under TILA and Regulation Z, and, as such, are subject to the relevant consumer protection regulations, including disclosures and obligations that apply to residential mortgage loans.
In an accompanying Report, the CFPB explained that it was issuing the advisory to address how substandard housing and title defects pose significant risks to homebuyers. The CFPB highlighted several concerns including, among them, that (i) contracts for deed are disproportionately "marketed to traditionally underserved and underinvested communities;" and (ii) contracts for deed can harm housing markets by perpetuating substandard housing stock, inflating home prices and reducing access to mainstream mortgage credit.
Commentary
This guidance is part of the CFPB's efforts as "part of an all-of-government effort to lower the costs of housing and reduce the barriers to homeownership." It also follows a recent lawsuit filed by the Minnesota Attorney General against a lender in connection with "contracts for deed."
Lenders should take note that although this advisory opinion concerns TILA and Regulation Z, the CFPB is likely of the view that "contracts for deed" constitute credit for purposes of other federal laws and regulations as well, including the Electronic Fund Transfer Act, Equal Credit Opportunity Act and Fair Credit Reporting Act, as these laws and regulations have the same or very similar definitions of credit. This may also mean that state fair lending laws apply.
The advisory opinion and the accompanying Report may also indicate that the CFPB is laying the groundwork for future reverse redlining claims. Alternative products including "contracts for deed," lease-to-own agreements and sale-leaseback agreements are also of active agency interest. This latest CFPB scrutiny highlights the importance of actively monitoring and staying closely attuned to federal and state law compliance obligations, both for those launching and operating such products and those investing in providers of such products.