Predatory Lending… it’s in the details?
By Matt Pfrommer, Princeton Mortgage Wholesale
Predatory lending, a term usually reserved for counties around Chicago, is popping up in New York of all places. New York has one of the highest costs of living in the country paired with high demand for property that makes the real estate market very competitive. Some homeowners may not be able to afford large down payments or the inflated real estate prices so may look to rent-to-own or lease-to-own contracts to make their dream of home ownership real. The New York Department of Financial Services (NYDFS), however, is cautioning consumers about possible predatory lending on rent-to-own or lease-to-own contracts as they may be misleading the borrower.
Many rent-to-own properties that the NYDFS are seeing have issues that need to be resolved in order to make them habitable. Investors are buying distressed properties and then entering into rent-to-own contracts with tenants who are the ones doing the actual work to improve the property. This is an easy sell to the tenant because they are building sweat equity into a property with the promise that they will be able to buy it from the landlord at a later time. The tenant fixes up the home, brings taxes current, gets permits resolved, and turns the dilapidated house into a home that allows them to achieve their goals. This all sounds great, but the issues come down to the specifics in the contracts that tenants are signing (or missing).
The main issue that the NYDFS is focusing on is the rights of the consumer. Many rent-to-own contracts leave out the basic consumer protections that are found in traditional leases or mortgage transactions. Companies are putting verbiage into their rent-to-own contracts that make it mandatory for the borrowers to complete the required updates on the home within a certain amount of time. During this time, they are collecting the rent while forcing the tenant to pour money into the house. If the tenant does not complete the work within the timeframe required in the contract, the tenant is evicted and the landlord can then put another tenant into the property to pick up where the last one left off and start the cycle all over again. The landlord has collected rent all this time while having someone else foot the bill for fixing up their dilapidated property and the NYDFS is warning consumers of these pitfalls and letting them know they have rights. Without the safeguards, this deceptive practice is causing some to lose not only their homes, but also their savings that they want to use to grow their family.
I know we talked about greed in a recent blog post, but it still blows my mind that there are so many schemes out there to prey on the naivety of homeowners and those aspiring to own their own home one day. The CFPB and Dodd-Frank have changed how we do everything in our industry, but there are always those out there trying to skirt the rules and stick it to the consumer for personal gain. We think about these rules as burdensome and tedious, but in the end, they are designed to be looking out for the best interest of the consumer. I may not like that we changed the HUD into the CD (just as I was getting to know it….) but if it creates an environment where the consumer is more knowledgeable and better protected from those trying to make a quick buck, I say bring on the rules.
Photo by Dimitar Belchev on Unsplash
The opinions expressed in this post are the sole view of the writer and do not reflect the opinion of Princeton Mortgage Corporation.