Discussion on TILA, RESPA, Regulation Z, and the Dodd-Frank Act – and How They Relate to a Contract for Deed

By: Joseph E. Seagle, Esq.

Today, the Consumer Financial Protection Bureau (CFPB) issued an Advisory Opinion for Consumer Protections for Home Sales Financed Under Contracts for Deed. Many real estate investors and regular property owners have sold properties to new buyers, using the contract for deed, agreement for deed, installment land contract, or bond for deed agreement as their financing instrument of choice.

Under Florida law, such agreements are the same as deeding the property to the buyer and then taking a mortgage from the buyer back to the seller to secure the seller’s interest in the property. In legal terms, in Florida and many other states (North Carolina and South Carolina, for instance), contracts for deed are deemed to transfer equitable title to the purchaser-borrower, giving them the equitable right of redemption that must be foreclosed through court or other legally supervised due process that provides the purchaser-borrower the possibility of saving their equity they’ve built in the property over time.

CFPB apparently did not take these state-law interpretations and treatments of agreements for deed into account when making this advisory opinion. The opinion requires that the consumer credit provided, using an agreement for deed, must comply with the Truth-in-Lending Act (TILA) and the Real Estate Settlement Procedures Act, Regulation Z. Typically, under the 2010 Dodd-Frank Act, at least the first seller-financed loan made in a calendar year is exempt from these laws. But the CFPB advises that – since “title remains with the seller until the loan is paid in full under a contract for deed” – these agreements are not exempt under the Dodd-Frank Act.

Below is a more robust explanation and discussion of the Acts, how they interplay with each other, and a summary of the CFPB’s rationale in its opinion.

1. Interaction Between TILA, RESPA Regulation Z, and the Dodd-Frank Act

The Truth in Lending Act (TILA), RESPA Regulation Z, and the Dodd-Frank Act are all key pieces of legislation that interact to regulate the mortgage and lending industries in the

United States. Here’s how they interconnect: Truth in Lending Act (TILA) The Truth in Lending Act, enacted in 1968, aims to promote informed use of consumer credit by requiring clear disclosure of key terms and costs of the lending arrangements. It primarily affects lenders by ensuring they provide borrowers with clear and standardized information about the cost of credit, including the annual percentage rate (APR), finance charges, amount financed, and total payments. RESPA Regulation Z Regulation Z is part of the TILA and implements its provisions. It governs a wide range of disclosures and requirements for lenders, focusing on the credit terms and costs associated with mortgage loans. Regulation Z also addresses issues like advertising, rescission rights, and high-cost mortgages. It ensures consumers receive meaningful information about the costs of their mortgages and are protected from misleading practices.

Regulation Z interacts with the Real Estate Settlement Procedures Act (RESPA), which was enacted to provide homebuyers and sellers with information about the costs of the real estate settlement process and to protect them from unnecessarily high settlement charges. RESPA prohibits certain practices, such as kickbacks, and requires disclosures, like the Good Faith Estimate (GFE) and the HUD-1 Settlement Statement.

Dodd-Frank Wall Street Reform and Consumer Protection Act The Dodd-Frank Act, passed in 2010 in response to the 2008 financial crisis, introduced sweeping reforms across the financial industry. One of its key provisions was the creation of the Consumer Financial Protection Bureau (CFPB), which consolidated and strengthened consumer protection regulations, including those under TILA and RESPA.

The Dodd-Frank Act significantly amended TILA and RESPA, merging certain disclosures required under both into a single integrated disclosure regime to simplify and clarify the information provided to consumers. This resulted in the creation of the Loan Estimate (replacing the GFE and the initial TILA disclosures) and the Closing Disclosure (replacing the HUD-1 and the final TILA disclosure). These integrated disclosures help consumers better understand the key features, costs, and risks of the mortgage loan for which they are applying.

Interaction Between the Acts

• Disclosure Requirements: The Dodd-Frank Act’s amendments led to the integration of TILA and RESPA disclosures, which are now implemented and enforced under Regulation Z by the CFPB. This integration streamlines the process and ensures consumers receive clearer, more comprehensible information about their mortgage loans.

• Consumer Protections: TILA and RESPA, both reinforced by Dodd-Frank, provide strong consumer protections against abusive lending practices, such as predatory lending, undisclosed fees, and misleading advertisements. The Dodd-Frank Act also introduced new protections, such as the ability to repay rule and the qualified mortgage rule, which are now part of Regulation Z.

• Enforcement: The CFPB, established by the Dodd-Frank Act, has broad authority to enforce TILA, RESPA, and other consumer protection laws. It can issue regulations, take enforcement actions, and oversee compliance to ensure that financial institutions adhere to these laws.

In summary, TILA, RESPA Regulation Z, and the Dodd-Frank Act work together to ensure that consumers receive clear, accurate, and timely information when taking out mortgage loans and are protected from abusive practices in the mortgage and lending industries. The Dodd-Frank Act strengthened and unified the regulatory framework provided by TILA and RESPA, with the CFPB playing a central role in enforcement and oversight.

2. The Dodd-Frank Act Exemptions from RESPA Reg. Z and TILA

The Dodd-Frank Act does provide certain exemptions for seller-financed transactions from TILA and Regulation Z requirements, but these exemptions are specific and limited. Here’s how it works:

Seller-Financed Loans under the Dodd-Frank Act

Under the Dodd-Frank Act, particularly in the context of the TILA and Regulation Z, there are two key exemptions for seller-financed transactions:

1. One Property per Year Exemption (1-Property Rule):

• Exemption Criteria: A person (or entity) who finances the sale of a single property in a 12-month period is generally exempt from the TILA and Regulation Z requirements, provided they meet certain conditions:

• The seller is not a builder or a contractor.

• The financing does not involve a negative amortization schedule (where the loan balance increases over time).

• The seller does not use a mortgage broker or loan originator to negotiate the terms of the loan.

• The loan has a fixed rate or an adjustable rate with reasonable annual and lifetime limits.

• Purpose: This exemption is meant to allow individuals who are not in the business of lending to occasionally finance the sale of their own property without being subject to the full regulatory burden of TILA and Regulation Z.

2. Three Properties per Year Exemption (3-Property Rule):

• Exemption Criteria: A person (or entity) who finances the sale of up to three properties in a 12-month period can be exempt from some, but not all, of the TILA and Regulation Z requirements, provided certain conditions are met:

• The seller is not a builder or a contractor.

• The financing is fully amortizing (no negative amortization).

• The loan has a fixed rate for at least five years, after which the rate can adjust, but must follow reasonable limits.

• The seller must determine in good faith that the buyer has the reasonable ability to repay the loan.

• Purpose: This exemption allows individuals who occasionally sell and finance a small number of properties to avoid the full burden of the Dodd-Frank Act’s requirements but still provides some consumer protections.

Important Considerations:

• Ability to Repay (ATR) Rule: Even under the 3-property exemption, the seller must make a good faith effort to determine the buyer’s ability to repay the loan. This is a key consumer protection feature under the Dodd-Frank Act that is intended to prevent lending to borrowers who cannot afford the loan.

• Compliance: Sellers who provide financing for more than the exempted number of properties or do not meet the specified conditions must comply fully with TILA, Regulation Z, and the associated Dodd-Frank requirements. This includes providing standard disclosures, adhering to the ATR rule, and possibly being subject to regulation as a mortgage originator.

Summary:

The Dodd-Frank Act does provide specific exemptions for seller-financed loans from TILA and Regulation Z, particularly for those who finance one or up to three properties in a 12-month period, provided they meet certain conditions. These exemptions are designed to reduce the regulatory burden on non-professional lenders while still offering protections to buyers. However, sellers exceeding these thresholds or not meeting the conditions must fully comply with TILA and Regulation Z, including all associated requirements under the Dodd-Frank Act.

3. CFPB Advises that Contracts for Deed are not exempt under the Dodd-Frank Act

The Consumer Financial Protection Bureau (CFPB) has recently proposed an advisory opinion clarifying that the Truth in Lending Act (TILA) and Regulation Z apply to all seller-

financed contracts for deed. This move is significant because it addresses the gap in consumer protection for buyers involved in these types of transactions, which have often been used to finance home purchases outside the scope of traditional mortgages.

Why Contracts for Deed Are Not Exempt:

1. Nature of the Transaction: A contract for deed, also known as a land contract, involves a buyer purchasing a home directly from the seller, with the buyer agreeing to make payments over time. Unlike traditional mortgages, the legal title remains with the seller until the full payment is made. However, these contracts often resemble credit transactions since they involve deferred payments over a significant period, similar to a mortgage. As a result, they fall under the definition of “credit” as outlined in TILA and Regulation Z.

2. Consumer Protection Concerns: Contracts for deed have historically been associated with higher risks for buyers, such as the possibility of losing the property with minimal equity if they miss a payment. Given these risks and the lack of regulatory oversight, the CFPB is seeking to ensure that buyers in these transactions receive the same protections as those in more conventional mortgage agreements. This includes clear disclosures about the costs and terms of the agreement, as well as the buyer’s rights and obligations.

3. Avoidance of Regulatory Loopholes: The CFPB’s proposed rule is designed to close any loopholes that might allow sellers to structure transactions in ways that evade TILA and Regulation Z requirements. By affirming that these rules apply to all contracts for deed, the CFPB aims to ensure a level playing field and protect consumers from potentially predatory practices that might arise in less regulated environments.

In summary, the CFPB’s action reflects a broader effort to ensure that all home buyers, regardless of the financing method, are afforded the same consumer protections, particularly in transactions that closely resemble credit arrangements like traditional mortgages. This approach is consistent with the Bureau’s mandate to protect consumers in the financial marketplace, ensuring that all forms of home financing meet established legal standards.

4. Penalties for Violations

Violating the Truth in Lending Act (TILA) and Regulation Z can result in significant penalties, which can vary depending on the nature and severity of the violation. Here’s an overview of the potential penalties:

1. Civil Liability

• Statutory Damages: For individual actions, consumers can recover statutory damages ranging from $400 to $4,000 per violation. For certain specific violations, such as those related to high-cost mortgages, the penalties can be higher.

• Actual Damages: Consumers can sue for actual damages, which include the monetary loss suffered due to the violation.

• Attorney’s Fees and Costs: If a consumer wins a lawsuit, the creditor may be required to pay the consumer’s attorney’s fees and court costs.

2. Class Action Liability

• In class action lawsuits, the damages can be substantial. The total recovery for all members of the class is capped at the lesser of $1 million or 1% of the creditor’s net worth. However, this does not include the costs of attorney’s fees, which can be awarded separately.

3. Criminal Penalties

• Willful Violations: If the violation is willful and involves fraudulent or deceptive practices, it can lead to criminal penalties. This may include fines and, in severe cases, imprisonment.

4. Regulatory Enforcement

• Administrative Sanctions: The Consumer Financial Protection Bureau (CFPB) and other federal agencies can impose administrative penalties on creditors who violate TILA or Regulation Z. These penalties can include cease-and-desist orders, monetary fines, and other corrective actions.

• Consent Orders: In some cases, creditors may enter into consent orders with the CFPB, agreeing to pay fines and take corrective measures without admitting wrongdoing.

5. Rescission Rights

• Right to Rescind: For certain violations involving home equity loans or refinancings, consumers have the right to rescind (cancel) the transaction. This right can be exercised up to three years after the transaction if the lender fails to provide proper disclosures.

6. Reputational Damage

• Impact on Business: Beyond monetary penalties, violations of TILA and Regulation Z can damage a lender’s reputation, leading to loss of business, increased scrutiny from regulators, and potential long-term financial consequences.

These penalties underscore the importance for sellers using seller-financing to comply with TILA and Regulation Z requirements to avoid significant legal and financial repercussions. The exact penalty for a violation will depend on the specific circumstances, including the nature of the violation and whether it was a repeat or willful offense.

5. The Bottom Line

Considering this new advisory opinion, it is our recommendation that the contract for deed never be used for seller financing unless a licensed mortgage loan originator is engaged to ensure that the borrower and the loan “fit” well together. They can use software and their specialized training to determine whether the loan being made complies with the regulations and whether the borrower can repay the loan. Further, they – working with the closing agent – will prepare the appropriate written disclosures to give the borrower within the appropriate deadlines. Failure to meet these requirements could lead to the penalties outlined above.

Instead, we recommend that—depending on the size of the down payment the borrower makes for the purchase—sellers use leases coupled with an option to purchase the property later or a traditional deed and mortgage. Ensure that the down payment is large enough to cover a year or two of expenses related to carrying the property without any income and foreclosure legal costs.

While we have always given this advice related to downpayment size when a contract for deed is used to finance the sale of a property, we now couple it with additional advice to simply no longer use the agreement for deed financing mechanism in a seller-financed transaction.