On August 13, the Consumer Financial Protection Bureau (CFPB) issued an Advisory Opinion to remind all of us that contracts for deed (also called bonds for title, installment land contracts, land contracts, land sales contracts) on residential property are subject to the Truth in Lending Act (TILA), in the same manner as mortgage loans.

You can read the Advisory Opinion here and the accompanying press release here.  

The press release touts the action is intended to stop investors from setting borrowers up to fail. It states that the deals often have little oversight, and investment groups and other sellers can set a series of traps that leave buyers in unlivable homes, on the hook for tax liens and extensive repairs, and at risk for losing their down payments and homes.

 The press release further argues that predatory lenders use contracts for deed to target low-income borrowers, particularly those in religious communities, and set them up to fail so the sellers can kick them out and repeat the process with a new family.

The houses are often sold at inflated prices, with high interest rates and balloon payments. The transactions often occur without the benefit of inspections required by mainstream lenders.

TILA applies only to creditors who make five or more loans per year, unless a particular loan is considered “high cost” credit. In that case, a single loan can trigger TILA. If TILA applies to a contract for deed:

• The seller has a duty to access the buyer’s ability to repay;
• The seller must provide interest rate and other disclosures required by TILA; and
• In most cases, balloon payments are prohibited.

South Carolina real estate lawyers familiar with these issues have advised clients for years to avoid buying and selling residential real estate using contracts for deed. And the same lawyers have advised their fellow practitioners to avoid closing these transactions.

Be careful out there!