Pew Applauds CFPB’s Move to Protect Americans Who Use Risky Home Financing

WASHINGTON—The Pew Charitable Trusts today applauded the Consumer Financial Protection Bureau (CFPB) for issuing guidance affirming that federal home financing rules also cover land contracts, an arrangement in which a buyer pays the seller in installments and receives full legal ownership of a property only after making the final payment.

The announcement by the CFPB reinforces that sellers who originate multiple land contracts per year must follow the federal Truth in Lending Act, including assessing a borrower’s ability to repay, and, in some instances, must also follow additional mortgage requirements—moves that, taken together, improve protections for American families facing difficulties accessing a tight mortgage market for low-cost homes.

Land contracts, also known as contracts for deed and land installment contracts, have come under scrutiny from state and federal policymakers following reports about harmful practices affecting communities across the Midwest, such as Minnesota’s Somali American community. While many homebuyers report successful experiences with land contracts, the arrangement lacks many of the basic consumer protections that come standard with mortgages and thus can put buyers at higher risk of losing their homes and investments.

A weak patchwork of federal and state laws currently governs land contracts; only 21 states have substantive land contract laws, and enforcement varies widely. But momentum for change is growing. Kansas and Minnesota passed legislation earlier this year to allow recording of land contracts and to strengthen protections, respectively. Additionally, Congress is considering legislation aimed at establishing minimum protections for land contract buyers nationwide. A study from The Pew Charitable Trusts released last month helped shed light on the size of the land contract market and provides a set of policy recommendations that lawmakers can use to make these arrangements safer.

Tara Roche, project director of Pew’s housing policy initiative, issued the following statement:

“Today’s housing challenges make it difficult for many families to own homes, especially first-time buyers looking for low-cost homes, and have contributed to millions of Americans pursuing riskier financing options to purchase their homes. Land contracts can be a pathway to homeownership when mortgages aren’t available, but the reality is that these arrangements are risky, and some homebuyers who use land contracts never achieve their goal of owning the home they’ve invested so much money in.

“Homebuyers shouldn’t receive different levels of protection just because of the type of financing they use to purchase their homes. Today’s announcement by the CFPB is a major step toward leveling the field for homebuyers by making land contracts safer for the millions of Americans who don’t have access to mortgages and are struggling to achieve their goal of homeownership in a tight market. Yet even after the CFPB’s move, some families will continue without protections. New federal and state laws are key to ensure that all land contract homeowners have access to safe and affordable financing.” 

Founded in 1948, The Pew Charitable Trusts uses data to make a difference. Pew addresses the challenges of a changing world by illuminating issues, creating common ground, and advancing ambitious projects that lead to tangible progress.