This story was originally published by ProPublica.
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A U.S. Senate subcommittee on Tuesday heard warnings about alternative home financing deals that leave unwitting buyers financially devastated and unscrupulous sellers free to resell the properties.
“This gets to a point that I think all of you have made in one way or another, which is that these contracts are designed to fail, because that’s how the seller makes more money,” said U.S. Sen. Tina Smith, D-Minn., at a hearing of the Subcommittee on Housing, Transportation and Community Development, which she chairs. “The incentives are perverse.”
In an interview, Smith said an investigation by ProPublica and Sahan Journal about contract for deed practices in Minnesota prompted the hearing. The investigation examined the impact on Somali Muslim families in the Twin Cities area who said they signed deals they didn’t understand for homes with inflated prices and large down payments.
The subcommittee members discussed whether federal or state laws ought to apply to these deals and how consumers can be better protected.
“Are there appropriate protections states can make to make sure that the market works without a bunch of folks who should have a special place in hell?” asked Montana Sen. Jon Tester, a Democrat.
The hearing concerned several alternative home purchase methods, including contracts for deed, which are sometimes known as land contracts, as well as rent-to-own housing programs. Witnesses testified that low-income buyers, often people from communities of color who have been denied traditional mortgages or, because of their faith, choose not to use them, instead opt for these products.
Sarah Mancini, co-director of advocacy at the National Consumer Law Center, told senators these financial products are a “costly and harmful detour from homeownership.”
“NCLC estimates that the failure rate for these transactions is well above 50%,” Mancini said. “And this is a conservative estimate.”
The Sahan Journal-ProPublica investigation, published last year, discovered a rising market around the Twin Cities area for contracts for deed, which involve financing directly between a seller and buyer. Many members of the large East African Muslim community in Minnesota avoid paying or profiting from interest due to the principles of their faith, and investors have been offering them contracts for deed as a way to buy a house without paying traditional interest.
The investigation found that Somali Muslim buyers often did not understand that the contracts lack many of the consumer protections of a mortgage and contain large balloon payments. Until the final payment is made, which can be hundreds of thousands of dollars, the seller holds the ownership of the property, and a missed payment can result in an eviction in as few as 60 days.
Contract sellers say that they provide a needed alternate path to homeownership and that when used properly, they are a legitimate financial instrument. But Beth Goodell, supervising attorney at Mid-Minnesota Legal Aid, told senators that because state law offers so few protections, buyers are at risk of losing everything.
“My clients tend to have trusted the sellers,” Goodell said. “One of my clients said to me, ‘Why would this seller sell me a house that he knew I couldn’t afford?’ And the answer, ‘The seller would make a lot of money if you fail,’ was beyond her understanding.”
Mancini testified that she believes that contract for deed agreements fall under federal laws like the Truth in Lending Act, but that they are “being violated left and right, and no one is enforcing it.” She said that the Consumer Financial Protection Bureau and state attorneys general should be tasked with enforcement.
Last month, CFPB director Rohit Chopra testified in his semiannual report to Congress that he was also aware that contract sellers were “targeting certain immigrant groups” in Minnesota as well as elsewhere.
Smith said that she has spoken to the Minnesota attorney general’s office about possible enforcement actions and is interested in exploring changes in state law to better protect buyers.
“The Twin Cities has the worst racial homeownership gap between white families and Black families of any place in the country,” Smith said. “To see that legacy play out with these exploitative contracts that make it worse and not better is a terrible thing to see.”