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Excerpted From: Caelin Moriarity Miltko, “What Shall I Give My Children?”: Installment Land Contracts, Homeownership, and the Unexamined Costs of the American Dream, 87 University of Chicago Law Review 2273 (November 2020) (Comment) (256 Footnotes) (Full Document)
A white picket fence. A house in the suburbs. 2.5 kids. There may be nothing more central to the modern conception of the American Dream than homeownership. John Locke theorized that everyone has the right to life, liberty, and property, and the protection of those rights is at the core of the US Constitution. The ability to own a home is considered a fundamental part of being American--not merely for the psychological benefits of a stable housing situation but also as a long-term investment for wealth building. The pursuit of that dream, and the need to present that dream as universally attainable, has justified various policies that ultimately strip wealth from low-income and minority neighborhoods. In particular, the purported benefits of homeownership have justified loose regulation of predatory contracts that offer low-income households an elusive promise of homeownership while extracting profit from those same households. One alternative form of financing for homeownership is the installment land contract, a popular financing tool for low-income homeowners which has a long history of predation, especially in low-income and minority communities. This Comment explores the historical and current uses of the installment land contract and the best ways to effectively protect buyers from this contract's most predatory qualities.
This Comment uses the term “installment land contract,” , but the terminology varies across states. The Installment Land Contract is what is colloquially known as a rent-to-own housing contract; that is, a seller-financed agreement wherein the buyer pays a relatively small down payment and then pays off the remainder of the purchase price plus interest in installments, while the seller retains title until the loan is repaid in full. The many terms used to refer to the Installment Land Contract rarely reflect a substantive legal difference. However, there are two types of contracts which sometimes fall under the umbrella of rent-to-own contracts and may look like Installment Land Contracts but include legal provisions that make them functionally distinct from the Installment Land Contract. While the terminology varies here as well, I refer to these contracts as “lease-purchase” and “lease-option” contracts. A lease-option contract functions as a typical lease with an option to buy the property at the end of a period of years--a lease-purchase contract functions similarly, but requires the buyer to purchase after the lease term expires. Under these agreements, the tenant-buyer should receive all attendant landlord-tenant protections during the period of the lease. However, some contracts labeled as lease-purchase are functionally indistinguishable from the typical understanding of an Installment Land Contract. The scope of this Comment, as well as relevant legislation, should be interpreted to extend to agreements that function as Installment Land Contracts--no matter what label is used.
Installment Land Contracts are unique agreements for those seeking stable housing. Unlike mortgages, as buyers pay installments, they do not become part owners of the property--that is, they do not build equity in their home. Unlike leases, the sellers have no duty to provide habitable housing and no duty to make repairs while the buyers live there. Thus, if buyers default, sellers can remove them from the home, keep all the payments that have been made, and reap the benefits of any repairs made while the buyers lived there.
This Comment argues that the interplay of “as is” deeds and forfeiture clauses is the core of what makes the Installment Land Contract intolerable as a financing tool, and explains that this interplay should shape how legislatures regulate Installment Land Contracts.
Part I provides a brief introduction to the Installment Land Contract and its most pertinent characteristics.
Part II explores the history of the Installment Land Contract, focusing specifically on its use in majority Black neighborhoods in Chicago, Illinois, during the 1950s and '60s. I focus on the history in Chicago for two reasons: (1) the largest litigation effort challenging the use of the Installment Land Contract was based in Chicago; and (2) Illinois historically had some of the weakest Installment Land Contract protections in the country, but in 2018 implemented a new statute strengthening protections for Installment Land Contract buyers.
Part III surveys recent legislation reforming Installment Land Contracts in the wake of their resurgence in popularity after the 2008 subprime mortgage crisis. Part III also explores the effect of aggressive regulation on the Installment Land Contract market in Texas, where the strongest regulations have been in place since 2000.
Part IV explores why these measures either have failed or are likely to fail, with a focus on the exploitative nature of the Installment Land Contract market.
Finally, Part V suggests that legislatures and courts should seek to regulate the Installment Land Contract by: (1) requiring sellers to provide prepurchase counseling in the mold of the Home Ownership and Equity Protection Act of 1994 (HOEPA); (2) mandating that Installment Land Contract cases are heard in the same courts that typically hear mortgage cases, not the courts that typically hear eviction cases; and (3) finding per se unconscionable any Installment Land Contract that includes both a forfeiture clause and sells the property “as is.” Ideally, these actions would be taken in conjunction with the Consumer Financial Protection Bureau (CFPB), ensuring that buyers in all states receive appropriate protection.
[. . .]
This Comment proposes a fundamental shift in how lawmakers view Installment Land Contracts. When making laws regarding regulation of Installment Land Contracts, lawmakers should consider strong buyer protections like those created by the Dodd-Frank Act and the CFPB in the wake of the subprime mortgage crisis. Unlike the current statutory schemes, lawmakers should cease relying on mandatory disclosures and complex legal schemes that require legal counsel to fully protect buyers. Lawmakers should consider every provision from the perspective of the low-income buyers most likely to enter into Installment Land Contracts, and should not hesitate to create powerful protections that limit the number of disadvantageous provisions a seller may include in a standard Installment Land Contract.
This Comment focuses on the forfeiture clause, “as is” deeds, and enforcement mechanisms. It suggests a path for maintaining the forfeiture clause, while combatting the detrimental combination of being forced to spend money on substantial repairs and failing to build equity in the home. Considering the Installment Land Contract as a whole, there are compelling arguments for stronger habitability protections, venue changes, and the complete elimination of certain especially predatory Installment Land Contracts. Habitability protections would ensure that if Installment Land Contract buyers still choose to enter into riskier contracts, their chosen home would be--at the very least--in compliance with housing codes. Lawmakers, judges, and scholars should not continue to support the Installment Land Contract and all its potentially predatory provisions. To the extent that sellers are only interested in offering Installment Land Contracts if the law allows them predatory terms--“as is” clauses justifying substandard housing, uniquely high interest rates, and forfeiture clauses which deny the ability to build equity--the Installment Land Contract should not continue to exist.
However, modified Installment Land Contracts could be a beneficial tool to provide low-income households with access to affordable, habitable housing. Thus, this Comment proposes three reforms for Installment Land Contract legislation that take into account the realities of the low-income housing market. First, following the HOEPA example, legislatures should mandate that all Installment Land Contract purchasers have access to pre-purchase counseling. Second, legislatures should ensure that Installment Land Contract disputes are heard in the courts that deal with mortgages, not the courts that deal with evictions. Third, and most important, Installment Land Contracts that include both a forfeiture clause and an “as is” deed must be deemed per se unconscionable to ensure buyers receive adequate protection from predatory sellers. As it stands now, the Installment Land Contract exists as a uniquely exploitative tool for sellers. Lawmakers should not--and the research indicates they cannot--rely on vague defenses of homeownership in the abstract to defend its continued use.
BA 2017, University of Notre Dame; JD Candidate 2021, The University of Chicago Law School.
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