New State Law Protects People from Predatory Contracts for Deed and Installment Sales Contracts
As of January 1, 2018, would-be homeowners are protected from predatory rent-to-own contracts by a new state law that creates some of the strongest consumer safeguards in the nation when it comes to these contracts. Housing Action Illinois drafted and advocated for Senate Bill 885, which passed the Illinois General Assembly on May 31, 2017 and was then signed into law by Governor Rauner.
In the aftermath of the foreclosure crisis, there has been a resurgence in predatory rent-to own contracts (a.k.a. contracts for deed or installment sales contracts) from largely unregulated companies that falsely promise homeownership to people with low incomes. Too often these contracts result in people agreeing to buy houses in extremely poor condition at highly inflated purchase prices and high loan interest rates. For predatory sellers, their business model is based on the buyer defaulting on the contract, so the home can be resold in the same predatory manner.
SB 885 was also advocated for by Attorney General Lisa Madigan and others. Senator David Koehler (D-Peoria) was the bill’s chief sponsor in the Senate, while Representative Jehan Gordon-Booth (D-Peoria) was the chief sponsor in the House.
“The consumer protections in SB 885 will help people make an informed decision about whether or not to enter into a rent-to-own contract to buy a home,” said Bob Palmer, Policy Director for Housing Action Illinois. “For people who do enter into contracts after the bill becomes law, there will be additional protections from predatory contract terms.”
Key consumer protection provisions in SB 885:
- Creation of Installment Sales Contract Act regulating sellers of 1-4 unit residential properties who enter into contracts more than 3 times in any 12-month period.
- Requires a written contract for these sales that must include certain information, including any balloon payments due on the property and defining who is responsible for repairs, taxes and insurance. Buyers are generally responsible for these items, but that that may not be clear to the purchaser.
- Requires the buyer to receive an amortization schedule prior to closing, so they understand how much of their monthly payment will be applied to principal and interest and how long it will take to pay off the loan.
- Requires disclosure of building code violations and fair cash value, as reflected on tax bills, so that prospective buyers have some sense of the condition and value of the home.
- Creates a 3-day “cooling off period” after the seller has presented the contract to the buyer in its full and final form. During this time, parties cannot be bound to sign the contract and can review an educational disclosure document provided by the seller and prepared by Office of the Attorney General that will describe issues to consider, such as having the property appraised and inspected, before signing the contract.
- Mandates the seller create a public record of the sale to protect the buyer’s ability to obtain a clear title to the home.
- Allows buyers 90 days to cure defaults before the seller can try to evict them if the buyer misses a payment.
- Bans certain predatory loan terms, such as putting the buyer in default of the contract for failure to repair preexisting conditions and penalties for prepaying the loan.
SB 885 also expands foreclosure protections for people entering into installment sales contracts by eliminating the current requirement under state law that contracts be five years in length to require a foreclosure, as opposed to an eviction, in the case of default on the contract. SB 885 leaves in place the existing requirement that 20 percent of the contract be paid to require a foreclosure proceeding. Predatory sellers can structure contracts so that they are just shorter than five years to avoid ever having to go through the foreclosure process, even if the buyer has paid much more than 20 percent of the contract, and just evict the buyer as if they are a renter. The eviction procedure is generally much quicker and less expensive for seller, but offers far fewer legal protections for the buyer.
“Many people in Illinois still struggling to rebuild their lives from the foreclosure crisis have been misled and misinformed by predatory companies in contract-for-deed sales,” Attorney General Madigan said. “This bill will better protect the dream of owning your own home from hidden problems and inflated costs.”
Predatory rent-to-own contracts have been making headlines lately; last year, the Chicago Reader published an investigative report on how contract-for-deed sales can be “immensely profitable” for investors but “rarely pan out for would-be home buyers,” offering unrealistic promises to families in neighborhoods that generally have high poverty rates and are racially segregated. The Chicago Sun-Times Editorial Board called on policymakers in Illinois to protect would-be-homeowners by passing SB 885. The problem has also grabbed national attention; the New York Times profiled a company undergoing legislative scrutiny for predatory rent-to-own contracts.
In September 2017, the Metropolitan Planning Council, Woods Fund Chicago, and Polk Bros. Foundation, hosted a forum bringing together civic, government and community leaders to discuss contract buying as it exists today. Sharon Legenza, Executive Director of Housing Action Illinois, joined to share information about the new legislation and discuss education and implementation of the new law.
“Illinois is leading by example by establishing some of the strongest protections in the nation for homeowners against predatory rent-to-own contracts,” says Palmer.
Housing Action Illinois
Housing Action Illinois is a statewide coalition that has been fighting to protect and expand the availability of quality, affordable housing for three decades. Our members include housing counseling agencies, homeless service providers, developers of affordable housing, and policymakers.