Simon PLC Attorneys & Counselors – September 2024 Memorandum
CFPB DEEMS LAND CONTRACTS “CREDIT” SUBJECT TO FEDERAL MORTGAGE PROTECTIONS
Troy, MI. On August 13, 2024, the Consumer Financial Protection Bureau (CFPB) released a research report and advisory opinion stating that contracts for deed also known as land contracts are under federal home lending rules and therefore, should be provided consumer protections. That is, homebuyers should not receive different levels of protection just because of the type of financing they use to purchase their homes.
Land contracts are a form of seller financing, where the seller retains legal title of a home until the borrower completes the payments. During the contract term, the borrower typically assumes the responsibilities of homeownership, including repairs, payment of property taxes, and improvements. The contracts usually provide for forfeiture in event of any default in the contract terms, such as missed payments, failure to pay taxes or maintain insurance. Upon forfeiture, the seller may repossess the home and retain all accumulated equity and payments, including the buyer’s downpayment and improvements made to the property. The CFPB found such arrangements as potentially risky and harmful to consumers because they often “include inflated home prices and higher interest rates than mainstream mortgages”. The CFPB Director described such products as “predatory mortgage products that set the borrower up to fail.” Therefore, CFPB found that government intervention was necessary to ensure that such arrangements do not turn the “dream of homeownership” for the consumer into a nightmare.
In its advisory opinion, the CFPB states that land contracts offered by a seller “generally meet TILA and Regulation Z’s definition of credit.” TILA and Regulation Z define credit as “the right granted [by a creditor to a debtor] to defer payment of debt or to incur debt and defer its payment” and that “debt” is not defined. However, the advisory opinion states that “debt” in “ordinary usage” means simply ‘something owed,’ without any obvious limitation,” and also refers to legal dictionaries that define debt, in part, as a “sum of money due by certain and express agreement.” Land contracts are such agreements in that “a debt is created by the buyer in receiving exclusive possession of the property, along with certain ownership obligations, at the outset of the contract in exchange for the obligation to repay the agreed-upon value of that property over time.” Thus, when a buyer purchases a personal dwelling from a creditor under a land contract, that transaction typically meets the definition of credit under TILA and Regulation Z, and is therefore, subject to the statute’s applicable requirements, such as providing TILA required disclosures.
Further, the CFPB found that “where the transaction is secured by the buyer’s dwelling, the buyer will also generally be entitled to the protections associated with residential mortgage loans under TILA.” In its advisory opinion, the CFPB discussed whether land contracts are “residential mortgage loans” or loans secured by a dwelling or real property under TILA and Regulation Z, which are afforded greater protections. CFPB recognized that many States define mortgages separately from land contracts. However, in its advisory opinion, CFPB was quick to point out that in TILA, Congress defined “residential mortgage loans” to include “any consumer credit transaction that is secured by a mortgage, a deed of trust, or other equivalent consensual security interest on a dwelling or on residential real property that includes a dwelling” (see 15 USC 1602(dd)(5)). The advisory opinion concluded that under TILA it is not whether a State law regards a land contract as a mortgage but only whether the land contract is secured by a mortgage, a deed of trust, or other equivalent consensual security interest on a dwelling or on residential real property that includes a dwelling. Therefore, the CFPB found that the typical land contract would be considered a “residential mortgage loan” under TILA, and that it expects that such contracts would be considered secured by a dwelling or real property. The CFPB then notes that other specific provisions under TILA apply and provide further protections to loans “secured by” a dwelling, a principal dwelling, or real property. The CFPB concluded that while it does not opine on any specific state law, it “expect[s] that contracts for deed will generally trigger Regulation Z’s thresholds for such mortgage transaction protections based on the security interest in the buyer’s home.”
While the recent CFPB advisory opinion appear to focus primarily on the applicability of TILA and Regulation Z to land contracts, the opinion specifically points out (or otherwise warns) that while it “does not analyze the application of other laws, the CFPB expects that under other consumer financial laws with similar definitions of credit, the same considerations will apply” (i.e. Equal Credit Opportunity Act), thereby triggering other requirements for land contract sellers under other federal laws.
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