Regulators

Pew Charitable Trusts on Land Contracts

The Pew Charitable Trusts has conducted extensive research on land contracts (also known as contracts for deed), finding that while they can be a path to homeownership, they are inherently riskier than mortgages. Instead of calling for a prohibition on these contracts, Pew and the legal experts it interviewed advocate for stronger consumer protections to make them safer, clearer, and more transparent for buyers.

The research indicates that buyers often turn to land contracts because small mortgages (under $150,000) are difficult to obtain, even for many well-qualified borrowers. Pew estimates that approximately 8 million Americans have used these contracts, which are most common in the South and Midwest.

Major Risks for Homebuyers

Risk  Details
Lack of Protections Buyers may lose their home and all the money they have paid if they default on a payment, as land contracts often lack foreclosure or eviction protections. The buyer does not receive the deed until the final payment is made.
Lack of Transparency Less than half of states have laws specifically regulating land contracts, and only about a dozen require them to be publicly recorded, which is a key protection for buyers. A 2022 Pew survey found that 22% of respondents said their contracts were not recorded or they didn’t know if they were.
Balloon Payments Pew’s research found that 14% of land contracts had a balloon payment, compared to less than 1% of mortgages. These large, one-time payments can put buyers at risk of losing their home and investment if they can’t secure new financing.
Undisclosed Repairs Since land contract sales often don’t require an inspection, homes are sometimes sold with major, undisclosed problems. Buyers also may unknowingly inherit unpaid property taxes from the seller.
Disparate Impact Pew’s research shows that a disproportionately high share of Black households use land contracts compared to their share of overall homeowners.

Policy Recommendations

To address these risks, Pew’s research indicates that policymakers should focus on two main areas: improving access to safer financing and strengthening land contract protections.

To improve access to safer financing:

  • Focus on improving the availability of small mortgages (under $150,000), which offer stronger protections than land contracts.

To improve land contracts themselves:

  • Establish baseline protections to address key risks.
  • Require that land contracts be publicly recorded.
  • Ensure that borrowers can retain their investments in the home.
  • Do not allow balloon payments.
  • Clearly outline the responsibilities of both the buyer and seller throughout the contract term.

The Pew Charitable Trust on Contract for Deed

The Pew Charitable Trusts has researched contract-for-deed (or land contracts) agreements, highlighting that they often leave buyers vulnerable to harm due to a lack of consumer protections, shifting the responsibility for repairs to the buyer, and the risk of losing the home and all payments if even one payment is missed. Despite these risks, these alternative financing options are common, especially for low-income homebuyers, and Pew research has supported recent federal guidance to extend consumer protections, such as those under the Truth in Lending Act (TILA), to these transactions.

Risks of contract-for-deed arrangements

  • Lack of ownership security: Buyers do not receive the deed until the loan is fully repaid, which can prevent them from building equity or showing proof of ownership.
  • High risk of foreclosure: Contracts often lack foreclosure protections, so a missed payment can result in losing the home and any money invested.
  • Shifting responsibilities: Buyers typically have to pay for property taxes, insurance, and all home repairs, despite not having legal title to the property.
  • Unprotected homes: Homes purchased through these agreements often do not require an inspection, which can lead to buyers acquiring properties with major, undisclosed problems.
  • Inflated costs: Contracts can have interest rates up to 50% higher than traditional mortgages and often don’t require appraisals, leading buyers to pay more for the home than it is worth.

Pew’s research and advocacy

  • Pew has conducted nationally representative surveys on contract-for-deed use, with a 2021 survey finding about 1.4 million Americans in 689,000 households used them.
  • Their research has identified that homebuyers of color, particularly Hispanic homebuyers, are more likely to use these alternative financing arrangements.
  • Pew has supported efforts to increase awareness of the risks and push for stronger regulations, partnering with organizations like the National Consumer Law Center (NCLC).
  • Pew’s research contributed to a recent advisory opinion from the Consumer Financial Protection Bureau (CFPB) that applies federal protections to contract-for-deed transactions.

The Pew Charitable Trust on Lease Purchase and Lease Option

The Pew Charitable Trusts researches lease-purchase agreements as a form of alternative home financing, which allows renters to have an option to buy a home at a future date.

Pew studies these agreements because they are often used by those who struggle to get a traditional mortgage, particularly lower-income households and minority groups.

Research by Pew Charitable Trusts focuses on both the potential benefits, like a pathway to homeownership, and the risks, such as a lack of consumer protection and financial instability, to inform policy on improving access to safe housing and mortgages. 

What is a lease-purchase agreement?

  • A lease-purchase agreement, sometimes called “rent-to-own,” combines a lease with an option to buy.
  • The tenant pays an option fee to secure the right to purchase the home at a predetermined price and date.
  • This arrangement can be a way for those who are not yet ready for a mortgage to work toward homeownership.

Pew’s research on lease-purchase agreements

  • Who uses them: Pew research indicates that lease-purchase agreements are disproportionately used by households with incomes below

$50,000

and by households led by Black or Hispanic individuals.

  • Potential risks: The Pew Charitable Trusts notes that these agreements often have similar pitfalls to other alternative financing, including a lack of transparency, unclear consumer protections, and unclear responsibilities for taxes and maintenance.
  • Market trends: A growing number of fintech companies and other investors are entering the lease-purchase market, which Pew has studied to understand its current practices.
  • Pew’s goals: Through its research, the organization aims to provide information to policymakers about market practices, evaluate the experiences of borrowers, and help modernize regulations to make these agreements safer and to encourage better access to traditional mortgages for low-cost homes.

 

NCLC

  • Policy Recommendations: Ways to Prevent Built-to-Fail Land Contracts and Lease-Options From Hijacking the American Dream of Homeownership 

    A significant number of Americans have attempted to become homeowners through “rent-to-own” transactions – either a land contract or a lease with option to buy. Often, these contracts are built to fail. In this issue brief, we provide policy recommendations to prevent harmful practices and incentivize success.

    Read Moreabout Policy Recommendations: Ways to Prevent Built-to-Fail Land Contracts and Lease-Options From Hijacking the American Dream of Homeownership 

  • Toxic Transactions: How Land Installment Contracts Once Again Threaten Communities of Color

     

    This NCLC report documents a new wave of predatory real estate lending, previously peddled to African-Americans during the 1930s to 1960s, as Wall Street investment companies move to profit off foreclosed homes. The report urges the CFPB to issue rules to protect vulnerable consumers across the nation.

    Read Moreabout Toxic Transactions: How Land Installment Contracts Once Again Threaten Communities of Color

  • Exploiting the American Dream: NCLC Co-Director of Advocacy to Testify Before Senate Banking on Abusive Land Contracts

    Sarah B. Mancini will join hybrid hearing on “rent-to-own” home financing arrangements that exploit vulnerable homebuyers The hearing is scheduled to begin at 2:30 p.m. ET on Tuesday, July 11, 2023. Livestream. Full Testimony (available after the hearing) WASHINGTON – Today, Sarah Bolling Mancini, co-director of advocacy at the National Consumer Law Center, will testify…

    Read More about Exploiting the American Dream: NCLC Co-Director of Advocacy to Testify Before Senate Banking on Abusive Land Contracts

    CFPB Land Contracts

    CFPB Guidance on Land Contracts

     

    In an August 2024 advisory opinion and report, the Consumer Financial Protection Bureau (CFPB) stated that land contracts and contracts for deeds are “residential mortgage loans” under the federal Truth in Lending Act (TILA) and its Regulation Z. This means that sellers who are considered “creditors” under the law are subject to federal consumer protection rules.
    Key Requirements for Sellers
    Requirement Details
    Ability to Repay Sellers must assess a buyer’s ability to repay the loan to ensure they can afford it.
    Disclosures Sellers must provide disclosures required by TILA, such as the annual percentage rate and payment schedule.
    Balloon Payments The CFPB has put restrictions on balloon payments, which are often used in these contracts. These can be banned if the interest rate is higher than certain benchmarks.

    What the CFPB Says About Land Contracts

    In August 2024, the Consumer Financial Protection Bureau (CFPB) issued significant guidance clarifying that land contracts (also known as contracts for deed) are a form of credit and are generally considered “residential mortgage loans” under federal law. This means sellers offering these contracts must now comply with key consumer protection rules.

    The Core Ruling: Land Contracts are Mortgage Loans

    The CFPB’s advisory opinion states that land contracts and contracts for deed are a form of credit and are generally considered “residential mortgage loans” under the federal Truth in Lending Act (TILA) and its implementing Regulation Z.

    • What this means: Sellers who extend credit through these contracts are now considered “creditors.”

    • The consequence: These seller-creditors must follow federal mortgage rules, which provide significant consumer protections that were not previously guaranteed in many land contract agreements.

    Key Protections and Seller Obligations

    Under the new guidance, sellers must now provide the following protections:

    Protection Description
    Ability-to-Repay Assessment Sellers must make a reasonable, good faith determination that a buyer has the ability to repay the loan. This involves verifying the buyer’s income, assets, employment, and debt obligations.
    Required Disclosures Sellers must provide standard TILA disclosures, including the annual percentage rate (APR), finance charge, amount financed, and a total payment schedule. This gives buyers a clear picture of the loan’s true cost.
    Restrictions on Balloon Payments The use of large, lump-sum “balloon payments” may be limited or prohibited, especially for higher-priced mortgage loans, preventing sudden unaffordable payment shocks.

    CFPB’s Concerns with Land Contracts

    The CFPB has identified several predatory practices often associated with land contracts, noting they frequently target low-income and minority communities.

    • Inflated Prices & High Interest: Properties are often sold at inflated prices with high interest rates, without the benefit of an independent appraisal.

    • Harsh Forfeiture Clauses: Contracts may include clauses that allow the seller to evict the buyer and keep all prior payments and equity for a single missed payment or failure to make a repair.

    • “As-Is” Sales: Buyers are often forced to purchase properties “as-is,” without inspections, potentially leaving them responsible for major, undiscovered defects.

    • Title Issues: The seller may not have a clear title to the property, or may fail to pay the underlying mortgage, property taxes, or insurance with the money provided by the buyer, putting the buyer’s investment at risk.

    Advice for Consumers from the CFPB

    The CFPB has issued advice for consumers who are in, or considering, a land contract:

    1. File the Contract: Buyers can file their land contract with the local county land records office. This can help ensure they receive official notices about the property, such as tax liens or foreclosure actions against the seller.

    2. File a Complaint: The CFPB encourages consumers facing problems with a land contract to file a complaint.

      • Product Type: Select “Mortgage”

      • Description: Clearly state that the issue involves a “contract for deed” or “land contract.”

    Related Resources

    CFPB guidance on contract for deed

    The Consumer Financial Protection Bureau (CFPB) has issued an advisory opinion and reports stating that contracts for deed are generally a form of “credit” and a “residential mortgage loan,” making them subject to federal consumer protection laws. This means that sellers and investors who use these contracts must comply with the Truth in Lending Act (TILA) and its implementing Regulation Z, which require certain protections for consumers.
    The CFPB’s guidance is based on its view that these contracts can be harmful to consumers and have been linked to predatory practices.
    According to the CFPB, sellers of contracts for deed must meet certain requirements, such as:
    • Assessing a borrower’s ability to repay the loan to ensure they can afford the payments.
    • Providing informative and accurate disclosures, including the annual percentage rate (APR) and a payment schedule.
    • Limiting or banning balloon payments in certain cases where interest rates are higher than a specific benchmark.
    The CFPB has highlighted several risks associated with contracts for deed, including:
    • Forfeiture provisions that allow sellers to immediately evict buyers for missed payments or failing to make repairs.
    • The potential for buyers to lose their down payment and all other payments made on the home if they are evicted.
    • Sellers may not have a clear title to the property or might fail to pay for taxes and insurance with the buyer’s money, leaving the buyer with large bills later.
    • Contracts can come with inflated home prices and above-average interest rates.
    The CFPB encourages consumers who have issues with a contract for deed to submit a complaint directly to them.

    CFPB on lease-to-own agreements

    The Consumer Financial Protection Bureau (CFPB) has challenged some lease-to-own companies for deceptive and abusive practices, but federal regulation of residential rent-to-own agreements is not as explicit as for other financial products.

    The CFPB has historically pursued enforcement actions against companies that allegedly mislead consumers or fail to provide required disclosures, but it has also dropped lawsuits that attempted to classify lease-to-own agreements as “credit” under federal law. 

    In general, the CFPB’s guidance on leasing focuses heavily on clear and accurate disclosures.

    According to its regulations, lessors must provide disclosures that are accurate, clear, and conspicuous. 

    Disclosure Topic  CFPB Guidance
    Purchase Option If a purchase option exists, it must be clearly disclosed. If there is no purchase option, the lessor must affirmatively state this.
    Purchase-Option Price The price must be a “sum certain” or determined by a “readily available independent source.” The use of vague terms like “negotiated price” or “fair market value” is not compliant.
    Fees and Taxes Fees and taxes associated with exercising the purchase option must be disclosed. This can be done by itemizing them or including them as part of the purchase-option price.
    Other Charges Any charges anticipated as part of the normal operation of the lease must be disclosed. This includes disposition and “pick-up” charges.

    Key Distinctions and Additional Context

    Search results highlight a crucial distinction between two types of agreements that are often confused:

    • Lease-option: Gives the tenant the right (but not the obligation) to purchase the property at the end of the lease. If they decide not to buy, they typically forfeit the upfront “option fee”.
    • Lease-purchase: Obligates the tenant to purchase the property once the lease ends. This is a more rigid contract.

    It is important to note that federal law does not currently regulate residential rent-to-own transactions, though some proposed legislation exists.

    Most states have their own specific laws that apply to these agreements.

    The FTC recommends contacting your state attorney general or local consumer protection agencies for information on your rights.