The CFPB on Tuesday issued an advisory opinion and held a field hearing in St. Paul, Minnesota, where sellers of contracts for deed financing have targeted the Somali Muslim community. The private contracts often are marketed as a way for borrowers to abide by the principles of their faith that prohibit paying for or profiting from interest. 

Contracts for deed — also called "land contracts," "installment land contracts" or "bonds for deed" — are structured to allow a seller to retain the legal title of land until the buyer completes all the payments. Under such contracts, the seller is the source of financing and the borrower typically has the responsibility for repairs, property taxes and tax liens before actually owning the home. Because the contracts are made outside the mainstream mortgage system, borrowers typically have no legal protections and sellers can cancel a contract and evict the borrower after a missed payment — meanwhile pocketing all prior payments and starting over again with another buyer.

"These contracts are marketed as interest-free alternatives to traditional mortgage home loans and often target Muslim immigrants who, because of the tenants of their faith, look for alternatives to paying interest on a traditional mortgage," CFPB Director Rohit Chopra said at the hearing. "But in too many cases, these contracts are a scam and provide none of the traditional protections that mortgage lending offers."

Chopra said that under the advisory opinion, contracts for deed are covered by the Truth in Lending Act that requires that sellers disclose the purchase price of a property and gives the borrower the right to reconsider signing for a loan. The bureau also released a research report on Tuesday that found sellers of the contracts targeted Black, Hispanic, immigrant and religious minority communities.

Chopra referenced articles published in ProPublica and the Sahan Journal in 2022, describing how real estate investors were using land contracts to sell homes to Somalis in Minnesota at inflated prices with high interest rates and balloon payments. The New York Times first reported on the issue in 2016. The Pew Charitable Trust has found that seven million borrowers currently are in contract-for-deed deals and 36 million have used the risky home financing arrangement at least once.

Contract-for-deed deals can be subject to stiff sanctions by state and federal authorities, triggering federal regulations that apply to high-cost loans such as restrictions on balloon payments and splitting sales, Chopra said. 

Minnesota's legislature passed a law that went into effect on August 1 that prohibits investor-sellers from churning properties and requiring disclosures of balloon payments. Under the new state law, homebuyers also have the right to cancel the agreement, receive a refund of all payments and bring action against the seller. 

"This problem of predatory contracts for deed is a symptom of a larger problem of barriers to full and equal opportunity to prosperity for all Americans," Minnesota's Attorney General Keith Ellison said at the hearing. "They go after vulnerable Minnesotans, people with lower credit scores who couldn't qualify for a traditional mortgage or people who, because of the tenets of their faith, were looking to buy a home without traditional interest-based financing."

In February, Sens. Tina Smith, D-Minn., and Cynthia Lummis, R-Wyo., introduced bipartisan legislation to establish protections that would require full disclosure of costs and fees and fraud protections. Under the bill, sellers would be required to record the contract's title within five days and if a borrower defaults, the seller would have to use a state's foreclosure process rather than immediate forfeiture of the home. Currently, many states do not require that the contract for deed be recorded in public land records.

"This problem is rampant across the country," Smith said at the hearing. "These contracts are often designed to fail when a buyer can't meet the terms of the contract and with no legal protections, they lose everything: their down payment, the improvements that they made to their home, the money that they paid in and their home. And that seller takes the house back and starts the scam all over again with the next hopeful family."

The CFPB's advisory opinion states that sellers must assess a borrowers' ability to repay a loan and provide accurate disclosures, including the annual percentage rate and payment schedule. When interest rates on a mortgage contract are higher than what is typically charged for a traditional mortgage, the Truth in Lending Act triggers additional requirements and consumer protections including the banning of balloon payments. 

"We want to make sure that the very harmful effects of this product in this community stop and that they do not spread," Chopra said. "We're issuing a nationwide consumer advisory to warn people about the potential pitfalls with these loans."