U.S. Senators Tina Smith, Cynthia Lummis Introduce Bipartisan Legislation to Protect Prospective Homebuyers from Predatory Financing Agreements

WASHINGTON, D.C. – Today, U.S. Senators Tina Smith (D-MN) and Cynthia Lummis (R-WY) introduced the Preserving Pathways to Homeownership Act, bipartisan legislation to establish basic protections for consumers who seek to purchase a home using a land contract, or contract for deed.

Land contracts are an alternative form of seller financing for real estate transactions, often marketed as a way for people who can’t get a conventional mortgage to realize the dream of owning a home. However, land contracts can lack many of the consumer protections available in mortgage lending: full disclosure of costs and fees, protections if a homeowner misses payments or falls on hard times, and protections in the case of fraud. Unscrupulous sellers have used these arrangements to take advantage of unsuspecting buyers. They design the land contract to fail and move to evict when the buyer inevitably breaches it. Buyers typically lose their home and everything they’ve invested in it, and the seller can repeat this process with other buyers. It is estimated that across the country, more than 8 million homes have been sold with land contracts, underscoring the widespread nature of this issue.

“Without a safe, decent place to call home, nothing in your life works – not your job, your health, your education, or your family. It is appalling that some Minnesota families trying to pursue the dream of home ownership, who are struggling to receive traditional mortgages, whether due to their credit rating, or because the tenets of their faith preclude them from paying and profiting off interest, are being taken advantage of by unscrupulous sellers offering exploitative land contracts,” said Smith. “I’ve heard heartbreaking stories from Minnesota Somali families who have had their religious beliefs used against them through real estate contracts promising ‘interest free’ home purchases, only to find themselves in contracts that seemed designed to fail so the seller can profit. This bill accomplishes a simple goal: it protects the people who have turned to land contracts to try and purchase a home through establishing a basic set of consumer protections. I’m grateful for the partnership of my colleague Senator Lummis in introducing bipartisan legislation that would provide these essential guardrails around land contract purchases, so residents don’t have to live in fear of having the rug pulled out from under them and their families.”

“Homeownership is still a pillar of the American Dream, yet for far too many people in Wyoming, it has become unobtainable,” said Lummis. “While land contracts appear to be an attractive alternative for those who do not qualify for a conventional mortgage, they come with very different consumer protections that vary by state, sometimes leaving vulnerable consumers losing not only the home they purchased, but their entire investment. Homeownership cannot fall farther out of reach, which is why I have partnered with Senator Smith to introduce legislation that empowers states to impose two commonsense requirements for transactions that protect consumers and help them realize their dream of home ownership.” 

“This bill represents a significant step towards bringing land installment contracts out of the shadow lending system and preventing the loss of home equity for contract buyers,” said Sarah Mancini, co-director of advocacy at the National Consumer Law Center. “More steps are needed to expand access to homeownership, especially in communities of color; but the basic fairness required by this bill is essential.” 

Specifically, the Preserving Pathways to Homeownership Act would require states to enact legislation imposing two simple, commonsense requirements for transactions that involve the use of a land contract for the purchase of a home:

  • Recording: Sellers would be required to record the contract within five days of execution. Currently, many states do not require land contracts to be registered with the local office responsible for maintaining public land records. This can give rise to title issues and leave a buyer unprotected if other claims to the home arise.
  • Foreclosure: A distinct feature of land contracts is the forfeiture remedy, which allows the seller to move swiftly to evict the buyer. Buyers typically lose everything, including any equity they’ve built in the home. Forfeiture can create a perverse incentive for sellers to churn buyers through a home, pocketing the down payment and any appreciation in its value each time. Under the bill, if the buyer defaults, the seller seeking to take back a home would be required to use the state’s foreclosure process. The foreclosure process – which is widely used for traditional mortgages – would allow the buyer to recover their equity in the home and provides basic protections for homebuyers, while still providing a clear pathway for legitimate recoveries by a seller in cases of non-payment.

In July 2023, Senator Smith and Senator Lummis led a Housing, Transportation, and Community Development Subcommittee Hearing highlighting this issue that included testimony from witnesses supporting the urgency of this challenge and the need for Congressional action.

Text of the legislation is available here

A one-pager summary of the legislation is available here.