On August 13, the CFPB announced an advisory opinion on the applicability of the Truth in Lending Act (TILA) and Regulation Z to “contracts for deed.” A contract for deed is an arrangement in which a consumer purchases a home from a seller subject to the purchaser paying for the home over time. The purchaser moves into the home and assumes responsibility for taxes, insurance, home maintenance and repairs, but does not take title to the home until all payments due are made to the seller. The arrangement is also known by other names, such as “land sales contract,” “land installment contract,” and “agreement for deed.” The arrangement is very similar in many respects to an installment sales contract for the purchase of goods.
Payment terms vary but often range from 5 to 30 years and may include balloon payments. According to the CFPB, these properties are often purchased “as is,” without inspection or appraisal, and may have property condition issues that prevent them from being suitable for rental or qualifying for mainstream mortgage financing. Additionally, the CFPB maintains that because the sales price of the home may not be tied to appraisal or other typical market measures, the sales price may be inflated.
The contract for deed also typically includes a forfeiture clause that can be triggered if the borrower fails to meet the terms of the contract, resulting in the contract being canceled, the seller retaking possession of the property, and the buyer generally forfeiting their entire investment—including their down payment, principal payments, and any increase in home equity. This includes home equity that the buyer generated by making property improvements. In some cases this can be triggered by a single missed payment or by breaches unrelated to payment status, such as when a buyer fails to pay taxes or is unable to obtain or maintain insurance.
In order to address these issues, the CFPB’s advisory opinion affirms that a contract for deed constitutes credit under TILA. Furthermore, the advisory opinion also concludes that the contract for deed is a residential mortgage loan under TILA, that is, a loan secured by a dwelling or real property. This classification entitles the buyer (or borrower, since the CFPB is characterizing the contract for deed as a loan) to greater protections.
The CFPB states that the seller must fall within the definition of “creditor” in order for TILA to apply to the contract for deed. To be considered a creditor, the seller must “regularly extend credit.” Whether a person regularly extends credit will depend on the frequency with which the person extends credit, as well as the specific nature of those credit transactions. Regulation Z may require as many as 25 transactions or as few as one (for high-cost loans) for a person to be deemed a person who regularly extends credit.
Putting It Into Practice: The CFPB has been on a campaign as of late to characterize as credit, transactions that one might ordinarily not consider to be credit, such as earned wage access products (discussed here) and bank overdraft products. It now continues with this advisory opinion. It is not at all certain that the contract for deed create a “debt,” and if there is no debt, there is no credit. Putting that aside, unless a seller under a contract for deed opts to legally challenge the CFPB’s interpretation, the seller will need to determine whether TILA and Regulation Z apply to the seller’s particular transaction. If so, they need to make the disclosures to the buyer/borrower required by law and comply with other potentially applicable requirements under TILA and Regulation Z. In addition, while the advisory opinion applies only to TILA and Regulation Z, other federal laws, including the Equal Credit Opportunity Act (ECOA) and the Fair Credit Reporting Act (FCRA), have definitions of credit similar to that found in TILA. Thus the CFPB may well be considering expanding the coverage of contracts for deed to these laws, as well, which would cause federal and state fair lending laws to apply. The CFPB issued a report on contracts for deed in conjunction with the advisory opinion that discusses how such products can be “predatory,” and have been targeted at, and disproportionately affect, certain minority groups, so reverse redlining claims could be forthcoming.
The Bureau has received pushback in its efforts to expand the scope of what constitutes “credit.” On August 1, a federal district court dismissed the CFPB’s lawsuit against a lease-to-own contract on allegations that its product was “credit.” The company’s product was for the leasing of personal property that automatically transferred ownership to the consumer upon completion of a contract (similar to a contract for deed). The Bureau alleged violations under the Consumer Financial Protection Act, TILA and the Electronic Funds Transfer Act. The court found that the leases did not meet the statutory definition of “credit” under those statutes.