In August, the CFPB published an advisory opinion and research report on the contract-for-deed market, highlighting consumer harms that have occurred and how federal laws are already in place to help protect consumers from these non-traditional transactions. Specifically, the CFPB highlighted how such transactions can result in situations where a consumer is unable to afford outsized balloon payments and can lose their home for missing a single or balloon payment, even if the consumer has paid a significant amount toward the purchase price, and that federal laws require disclosure of these potential pitfalls to consumers who may be unaware of the extra risk these transactions pose. These transactions are often used by consumers who are otherwise unable to obtain a mainstream mortgage and who may be more susceptible to the financial risks posed by these transactions.
The CFPB is making clear that such loans are subject to TILA and its disclosure requirements, as well as the prohibitions against certain riskier provisions that pose the most harm to consumers. However, importantly, in order for these loans to be covered by TILA and Regulation Z and their relevant disclosure requirements, the person offering such credit must also be a “creditor”.
As stated in the CFPB’s advisory opinion, a standard contract-for-deed meets both the definition of credit being extended to a consumer as well as the placing of a security interest whereby the seller holds the deed until all payments are made by the consumer debtor. This is the case irrespective of state laws on such transactions. As the purpose is for the purchase of a property as a single transaction, it is closed-end consumer credit. Closed-end consumer credit transactions secured by real property are subject to the TRID disclosure rules at 12 C.F.R. § 1026.19(e)(1) and (f)(1), for example.
Many of these contract-for-deed transactions would also meet the Regulation Z definition for a high-cost mortgage according to the CFPB. High-cost mortgage loans are subject to additional disclosure requirements, and restrictions including those that prohibit balloon payments, which would impose additional limits on some contract-for-deed transactions that would be high cost. A person also can be a creditor under Regulation Z after originating one high-cost mortgage.
The CFPB also noted that in some cases these types of transactions are used in lieu of a mainstream mortgage because of religious restrictions such as the payment of interest by borrowers. In many cases these transactions still include the payment of interest, or may simply include a higher sale price, or other means, to offset the loss of interest. DocMagic currently supports the use of a LLC co-ownership structure for non-traditional mortgages used to comply with similar religious restrictions.
Persons engaging in contract-for-deed transactions appear to be under focus of the CFPB based on these recent actions, with the CFPB concerned about how these transactions have the high potential for causing certain consumer harms. In addition, the CFPB is concerned those persons may not be complying with relevant disclosure rules the CFPB is charged with enforcing, or even requirements to confirm a purchaser has an ability to repay the contract. It is unclear if these actions are a precursor to further enforcement or focus on these contract-for-deed transactions.
