this Consumer Financial Protection Bureau (CFPB) issued an advisory opinion Tuesday stating that covenant contracts comply with federal home loan rules and should provide consumer protections.
In these contracts, also known as “land contracts” or “deed bonds,” the seller retains legal title to the home until the borrower makes all payments, leading to some “gotchas,” the CFPB said.
Home prices are often inflated, inspections are not performed, loan rates are high, and payments are excessive. The CFPB added that buyers who assume homeownership responsibilities end up with homes that are uninhabitable and subject to tax liens and costly repairs, all of which result in the buyer losing their down payment and their home.
“The CFPB found that investors targeted predatory mortgage products that drove borrowers into bankruptcy,” CFPB Director Rohit Chopra said in a statement. “The government is taking action to ensure these products do not turn the dream of homeownership into a A nightmare.”
Sellers often target low-income borrowers, particularly black, Hispanic, immigrant and religious communities, according to the CFPB.
The CFPB noted in a report released Tuesday that “some experts estimate that more than 50 percent of all deed-to-contract contracts result in the loss of a home.”
For example, University of Texas at Austin Researchers found that 45 percent of borrowers in Texas’ frontier colonies failed to fulfill their land contracts within 21 years, and fewer than 20 percent obtained deeds to their homes. By comparison, during the Great Recession, the foreclosure rate for subprime loans was 15.6%.
The CFPB noted that while many sellers abuse this financing structure, they should evaluate the borrower’s ability to repay the loan and provide disclosures required by the Truth in Lending Act, such as annual percentage rates and payment schedules. Additionally, under the same law, consumer protection measures kick in when interest rates rise above the benchmark, including a ban on large payments.
“Land contracts and lease options create the illusion of homeownership, drain wealth from low-income communities and communities of color, and increasingly target immigrant communities,” said Sarah Bolling, the organization’s advocacy co-director. Sarah Bolling Mancini said. National Consumer Law Center (NCLC) said in a statement.
Mancini, who testified Tuesday at a CFPB land contract field hearing in St. Paul, Minn., added that NCLC urges the CFPB and Federal Trade Commission (FTC) issues regulatory guidance to take enforcement action against this abuse and make small mortgage loans more accessible.
“Low-income families get sucked into predatory deals precisely because they feel they have no other way to become homeowners,” Mancini said.
according to a The Pew Charitable Trusts Research shows that more than 8 million Americans have used land contracts, with approximately 1.4 million still active as of 2022.
“Homebuyers should not have different levels of protection simply because of the type of financing they use to purchase their home. Today’s announcement from the CFPB is an important step in providing a fair market for homebuyers and making land contracts more accessible to the millions who cannot obtain mortgages and live in Tara Roche, director of the Housing Policy Initiative at the Pew Charitable Trusts, said in a statement.
