Homebuyers who use land contracts—also known as "contracts for deed" or "land installment contracts"—are entitled to many of the same protections as those who buy with traditional mortgages, according to a recently released advisory opinion from the Consumer Financial Protection Bureau (CFPB).
According to a nationally representative survey conducted by The Pew Charitable Trusts, about 1.4 million Americans living in 689,000 households were using a land contract in 2021. Despite their prevalence, it was unclear until this opinion whether these arrangements were covered by the Truth in Lending Act (TILA), a major federal lending law that establishes many of the consumer protections that apply to mortgages.
That legal ambiguity had meant that land contracts could be written in ways that protected the financial interests of sellers while offloading costs and risks onto buyers. For example, some sellers issue land contracts that contain predatory terms or lack basic safeguards that protect a buyer’s financial stake in their property. Many contracts also come with high interest rates and hidden costs that can imperil a buyer’s ability to make all of their payments.
Although the CFPB’s advisory opinion helps address several common problems in the land contract market, it applies to only a small number of sellers. To further curb harmful practices, federal and state policymakers should consider additional steps that would increase protections and reduce costs for land contract homebuyers.
CFPB clarifies that federal protections apply to land contract homebuyers
Originally passed in 1968, TILA requires creditors—including mortgage lenders and those engaged in seller-financed transactions such as land contracts—to provide written disclosures to homebuyers detailing their arrangement’s costs and terms. Updates to TILA in 1994 and 2010 further protected homebuyers, reducing the incentives for creditors to issue financing with high costs and predatory terms and requiring them to verify buyers’ income, assets, and debt levels before originating loans.
More specifically, TILA offers four major benefits to land contract homebuyers who are covered by the law. Those are:
- Safeguards to ensure that buyers can afford financing. Creditors are required under TILA to consider a buyer’s ability to repay the arrangement. In practice, this means that sellers must independently verify a buyer’s income, assets, and debt levels before originating a loan. And, in some instances, sellers are required to obtain an appraisal of the property’s fair market value as part of the loan origination process. These provisions help ensure that buyers don’t enter into arrangements that threaten their financial and housing security.
- Restrictions on unsafe terms and fees. TILA removes legal protections for creditors whose arrangements include predatory terms, such as balloon payments, negative amortization, and interest-only payments. This has helped curb how often these unsafe terms are used in the mortgage market and could also reduce how often they are used in the land contract market.
- Improvements to contract recording. TILA requires creditors to issue written disclosures to borrowers detailing the amount being financed, annual percentage rates, payment schedules, finance charges, and any nonstandard loan features. In 2022, Pew conducted a nationally representative survey of land contract buyers and found that 8% did not receive a written copy of their arrangement. TILA disclosures can help these buyers better understand the details of their agreements.
- More information about safe, affordable loan options. Under TILA, loan originators are responsible for presenting homebuyers with multiple loan options, including those with the lowest interest rates and origination fees. Loan originators are also barred from steering homebuyers toward financing products that benefit the seller financially but are not in the buyer’s best interest. These provisions help ensure that buyers can make informed decisions when shopping for financing.
Gaps in coverage remain, but state action can help
Although TILA has made mortgage lending substantially safer for lenders and borrowers alike, its impact on the land contract market will be more limited because of the types of creditors who offer these arrangements. TILA protections apply primarily to sellers who extend credit more than five times per year, a threshold that captures nearly all mortgage lenders but only a fraction of land contract sellers. That’s because the latter tend to be individuals extending credit no more than once per year. In 2022, for example, Pew estimates that just 73 sellers, accounting for 8% of the national residential land contract market, would have been covered by TILA rules.
Methodology
Pew’s estimate of the number of land contract sellers covered by the revised Truth in Lending Act rules is based on recorded land contracts compiled by ATTOM Data Solutions. For this analysis, Pew assumed that lenders meeting one of the following criteria in 2022 would be covered by TILA rules: 1) The seller originated more than 25 land contracts, 2) the seller originated more than five land contracts for residential properties, or 3) the seller originated more than one residential contract that qualified as a “high-cost mortgage.” Because it is a common practice for companies to create multiple limited liability corporations to facilitate land contract sales, Pew aggregated transactions based on the seller’s mailing address rather than by seller name. This methodology identified 6,006 unique sellers responsible for 13,027 residential land contracts issued to noncorporate buyers in 2022.
Although the CFPB’s advisory opinion covers just a subset of the market, it is an example of how policymakers can improve protections for land contract buyers. The new guidance will help ensure that large land contract sellers are held to the same standard as mortgage lenders, improving consumer information and limiting sellers’ ability to issue contracts that buyers are unable to repay. Future policies should focus on applying these principles to a broader set of land contract sellers so that homebuyers are protected, regardless of whom they buy from.
In addition to the federal government, states are well positioned to ensure that land contract buyers and sellers operate in a fair and well-protected market. For example, 13 states have laws that require land contract sellers to publicly record their arrangements with local governments—a step that helps preserve both the buyer and the seller’s ownership stake in the property. Further, just six states have laws that offer foreclosure protection to land contract homebuyers who cannot make all required payments. Everywhere else, land contract buyers can face eviction proceedings, leaving them vulnerable to losing their homes and their financial investments.
Coordinated state and federal action is critical to ensuring a well-functioning home financing market. The CFPB’s advisory opinion is an important step that improves protections for land contract buyers and builds upon recent laws passed in Minnesota and Kansas. In addition, legislation introduced in Congress earlier this year could also address some of the risks in this market, further strengthening the patchwork of protections. Policymakers should still do more to ensure that all homebuyers—regardless of their financing method—have access to safe and affordable credit.
Adam Staveski works on The Pew Charitable Trusts’ housing policy initiative.