CFPB Advisory Opinion States Contracts For Deed Are Credit

On August 13, 2024, the CFPB issued an advisory opinion regarding the applicability of the Truth in Lending Act (“TILA”) to “contracts for deed.”  These are essentially contracts to purchase real estate in which a consumer will make periodic payments to possess the property during a term in which the property does not change hands, and at the end of which the consumer will obtain ownership.  These types of contracts are known by other names as well, such as land contracts or executory contracts for conveyance.  The advisory opinion states that such contracts “generally meet TILA and Regulation Z’s definition of credit,” and that “where the transaction is secured by the buyer’s dwelling, the buyer will also generally be entitled to the protections associated with residential mortgage loans under TILA.”  I summarize the CFPB’s advisory opinion and provide some of my thoughts below.

1.     Advisory Opinion

A.    Previous Settlement Involving Contracts for Deed

The CFPB notes in the introductory sections of its advisory opinion that in its previous 2020 settlement with Harbour Portfolio Advisors, LLC, the agency found that the contracts for deed in that case were “credit” under the Consumer Financial Protection Act (the part of the Dodd-Frank Act that created the CFPB).  In that settlement, the CFPB stated in the consent order that:

Harbour is a Texas limited-liability company that formerly entered into contracts for deed with consumers…. Under the terms of these contracts, consumers are obligated to pay a fixed principal over a term of years with an interest rate. These contracts therefore constitute “credit” under § 5481(7) of the CFPA. Harbour is therefore a “covered person” under the CFPA. 12 U.S.C. § 5481(5)(A), (6)(A), (7), (15)(A)(i).

Note that under the Consumer Financial Protection Act, “credit” is defined as, “the right granted by a person to a consumer to defer payment of a debt, incur debt and defer its payment, or purchase property or services and defer payment for such purchase.”  12 U.S.C. § 5481(7).  The CFPB states in the advisory opinion that this is a “substantially similar definition of credit” to TILA, and that its advisory opinion is “consistent with” this earlier interpretation of the Consumer Financial Protection Act.

B.    Terms of Contracts for Deed

The advisory opinion briefly describes the “typical” features of contracts for deed, which it states are that “a homebuyer agrees to make periodic payments to the home seller, and the seller retains the deed to the property until the loan is fully repaid.”

The CFPB then mentions some of the specific terms it sees as harmful to consumers, which include:

·      “Properties are often purchased ‘as is,’ without inspection or appraisal, and may have property condition issues that prevent them from being suitable for rental or qualifying for mainstream mortgage financing.

·      “[T]he sales price of the home may not be tied to appraisal or other typical market measures, the sales price may be inflated.”

·      “During the repayment period, the buyer has the exclusive right to occupy the home and often assumes many of the responsibilities of homeownership, including paying for taxes, insurance, home maintenance, and repairs.”

·      Forfeiture clauses that are triggered when the borrower fails to make a payment, fails to pay taxes or maintain insurance, or fails to make certain property improvements, under which “the contract is canceled, the seller retakes possession of the property, and the buyer generally forfeits their entire investment—including their downpayment, principal payments, and any increase in home equity, including home equity that the buyer generated by making property improvements.”

It is clear that the CFPB does not like these products.  In the press release announcing the advisory opinion, the CFPB Director described such products as “predatory mortgage products that set the borrower up to fail.”  The press release also alleged that providers of contracts for deed “generally sell homes at inflated prices, with high interest rates and balloon payments. The prices can be high because sellers are not competing against banks or other mainstream mortgage lenders.”  As I also note below, these types of statements presage claims based on federal or state laws prohibiting unfair, deceptive, or abusive acts or practices.

C.    Analysis of “Credit” under TILA and Regulation Z and Warning About Other Laws

The advisory opinion states quite plainly its conclusion that “TILA’s definition of ‘credit’ includes the typical contract for deed.”  The advisory notes that TILA and Regulation Z define credit as “the right granted [by a creditor to a debtor] to defer payment of debt or to incur debt and defer its payment,” and that “debt” is not defined.  The advisory opinion states that “debt” in “ordinary usage” means simply ‘something owed,’ without any obvious limitation,” and also refers to legal dictionaries that define debt, in part, as a “sum of money due by certain and express agreement.”

The CFPB states that the typical contract for deed creates debt, because the “buyer” receives possession of the property at the outset, along with certain ownership obligations, in exchange for an obligation to repay the agreed-upon value of the property over time.  The advisory opinion makes the point that this “constitutes a debt under TILA.”  The advisory opinion also states that the “purchaser agrees to complete payment on a deferred basis,” and that thus, the typical contract for deed on its face “grant[s] to the purchaser ‘the right…to defer’ payment of this debt,” which is the definition of “credit” under TILA.  The advisory opinion also makes the point that these are typically closed-end, rather than open-end, credit transactions under TILA.

Regarding the definition of “debt” and “credit” under TILA, the advisory opinion also states that it “affirms the consistency with which the CFPB views and applies these statutory definitions,” noting its previous 2020 settlement (described above).  The advisory opinion states that, although the opinion does not address other laws, “the CFPB expects that under other consumer financial laws with similar definitions of credit, the same considerations will apply.”

It also bears mentioning that the CFPB distinguishes from contracts for deed “lease-to-own” transactions or “lease-based rental arrangements, even those involving an eventual right to purchase.”  The CFPB notes that many such lease-to-own agreements “also require a separate agreement to effectuate a purchase option, allowing for complete performance of the original contract without necessarily transferring property ownership,” and contrasts that with a contract for deed for which complete performance typically “includes the transfer of full legal ownership.”  But the advisory opinion states that “depending on their terms, such leases, as well as contracts for deed, may be considered ‘credit sales’ covered under TILA and Regulation Z.”

D.    Analysis of Applicability of TILA’s Mortgage Provisions

The advisory opinion also discusses whether such products are “residential mortgage loans” or loans secured by a dwelling or real property under TILA and Regulation Z, which are afforded greater protections.  The advisory opinion concludes that typical contracts for deed are “residential mortgage loans” under TILA, and that it expects that they would be considered secured by a dwelling or real property.

Specifically, the CFPB notes that certain provisions under TILA apply to “residential mortgage loans,” and states that the relevant question under TILA’s definition of “residential mortgage loan” is whether the contract is secured by a “mortgage, deed of trust, or other equivalent consensual security interest on a dwelling or on residential real property that includes a dwelling.”  The CFPB also notes that other specific provisions under TILA apply to loans “secured by” a dwelling, a principal dwelling, or real property.  The advisory opinion notes that the definition of “security interest” under Regulation Z depends on state or federal law.  The advisory opinion states that, while it does not opine on any state law, it “expect[s] that contracts for deed will generally trigger Regulation Z’s thresholds for such mortgage transaction protections based on the security interest in the buyer’s home,” and “recogn[izes] that contracts for deed are often ‘residential mortgage loans.’”

E.     Analysis of TILA’s “Creditor” Definition and Protections under TILA

The advisory opinion also notes that the applicability of TILA and Regulation Z depend on whether the seller satisfies the definition of “creditor” under these laws.  The advisory opinion notes that, generally, to be a creditor, the person must regularly extend credit, and the transactions in question must satisfy certain tests (e.g., the transaction must either be subject to a finance charge or be payable in more than four installments to be subject to TILA).  The advisory opinion states that the contracts for deed will generally satisfy these transaction-based tests.  The advisory opinion then addresses the question of whether a seller “regularly extends credit” under the definition of “creditor.”  The advisory opinion notes that this depends on the “the frequency with which the person extends credit, as well as the specific nature of those credit transactions,” and then discusses the specific numeric tests in the rule for different types of transactions, including loans secured by a dwelling and high-cost mortgage loans.

The CFPB also notes in the advisory opinion and in its press release that TILA provides protections for credit products and mortgage loans such as requiring a creditor to assess the consumer’s ability to repay the loan, requiring disclosures to consumers, and restrictions on certain terms such as balloon payments.

2.     My Thoughts

First, while this advisory opinion is about TILA and Regulation Z, the CFPB is pretty clearly also finding that contracts for deed are credit under its other federal laws as well. Many of these federal laws have the same or nearly identical definitions of credit, such as EFTA, ECOA, and FCRA. Although the CFPB discusses disclosure and ability-to-repay requirements in this advisory opinion, one other significant effect of being considered “credit” under these laws, especially ECOA, is that federal and state fair lending laws would apply.  The CFPB issued a report on contracts for deed in conjunction with the advisory opinion that discusses how such products are “predatory,” have been targeted to certain demographic groups, and disproportionately affect minority consumers. It appears that the CFPB could also be setting up future reverse redlining claims with this research and advisory opinion.

Interestingly, this advisory opinion comes on the heels a federal district court dismissing the CFPB’s allegation, in a lawsuit against Snap Finance, that a lease-to-own contract involving personal property that (like contracts for deed) automatically transferred ownership of the personal property to the consumer upon completion, was “credit” under the Consumer Financial Protection Act, TILA, and the Electronic Funds Transfer Act.  The federal district court in that case issued a decision on August 1, 2024 finding that the leases did not meet the statutory definition of “credit” under those statutes (although the court did allow the CFPB’s claims that such leases were a “financial product or service” under the Consumer Financial Protection Act to move forward).  And the CFPB recently filed a lawsuit against a different “rent-to-own” company, Acima Holdings, alleging that such products are “credit.”  The CFPB may have issued this advisory opinion to support these existing and future enforcement actions in this area.

The CFPB has also recently moved to bring other products under the definition of “credit,” such as earned wage access products and bank overdraft products.  And the CFPB has had enforcement actions in the past (I have been involved in such a case), in which the agency attempted to expand the definition of “credit” to other non-credit products.  Unfortunately, the definition of “credit” is vague in some respects, and thus, subject to interpretation, giving the CFPB runway to try and expand its own jurisdiction.  But after the Supreme Court’s recent decision in Loper Bright (which I wrote about here), the CFPB will not have the advantage of judicial deference to its interpretation of this vague definition.  Courts may still give weight to the CFPB’s interpretation of these statutes, and as I noted above, that may be the CFPB’s goal for this advisory opinion.  Hopefully courts, like the court in the Snap Finance case, will be more willing after Loper Bright to stop such attempts by the CFPB to expand its own jurisdiction using the definition of “credit.”

Also, we have some more interest lately in these types of alternative products, including contracts for deed, lease-to-own agreements, sale-leaseback agreements, and others.  Keep in mind that federal law is not the only hurdle to successfully launching and operating such a product.  State laws may require state licensing, impose restrictions on certain terms, or treat such products as mortgage loans generally.  And the state law treatment of such products may not be statutory, but instead found in case law.  In addition, federal and state laws prohibiting unfair or deceptive acts or practices should also be a concern to companies, because such laws may not depend on whether the product is “credit” or not (as I noted above, the CFPB included in its advisory opinion a list of contract terms it does not like).  It would be prudent to conduct a thorough review of federal and state law compliance obligations before launching or investing in providers of such products, or to ensure the compliance of such products already being offered.  Our firm has conducted such reviews in the past and can assist you.

The CFPB’s advisory opinion can be accessed here.  The CFPB’s press release announcing the advisory opinion, report on contracts for deed, and a consumer advisory can be found here.

Please email me at rich@garrishorn.com if you would like to discuss any of the issues in this post.