Real Estate

NYDFS investigating whether rent-to-own is actually predatory lending

Issues warning on risks of rent-to-own contracts

The New York Department of Financial Services is investigating whether rent-to-own programs actually amount to predatory lending.

New York’s top financial regulator revealed its investigation as part of a consumer warning about the risks of rent-to-own contracts, wherein a company will buy a property, rent it to a resident to allow the resident to build equity, and then eventually sell it to the resident.

This isn’t the first time that rent-to-own operators have caught the eye of a state regulator.

Last year, the Wisconsin Department of Justice sued Vision Property Management and its various affiliates for using “misleading and deceiving business practices to induce Wisconsin consumers to lease, rent, or purchase uninhabitable properties,” in violation of the state’s landlord-tenant and mortgage banking laws.

VPM, one of the nation’s largest operators of rent-to-own homes, was accused of inducing consumers into leasing dilapidated properties by offering them the chance to buy the house in the future.

Wisconsin’s lawsuit claimed that VPM requires the tenants to front the costs to rehabilitate the property, pay all the overdue taxes, and resolve any outstanding building code violations associated with the property.

But, the Wisconsin DOJ claimed that if the tenant does not remedy those issues within a short period of time, VPM evicts the tenant and “repeats the cycle by renting the uninhabitable property to yet another Wisconsin consumer.”

Now, rent-to-own and its risks for consumers are squarely on the radar of the NYDFS, one of the country’s most powerful state financial regulators.

According to the NYDFS, it is currently investigating whether alternative home purchase agreements, such as rent-to-own, lease-to-own or land installment contracts, currently being offered in New York are actually “unlicensed, predatory mortgage lending.”

While its investigation is ongoing, the NYDFS is warning consumers to be wary of rent-to-own and other similar programs.

“Alternative home purchase agreements often are being marketed to financially distressed consumers, promising a path to homeownership, but putting consumers at risk without the protections of a mortgage,” NYDFS Superintendent Maria Vullo said.

“As the state regulator of financial institutions in New York, DFS takes very seriously its obligation to protect consumers from predatory lenders,” Vullo continued. “This alert is being issued to create awareness among consumers and to let them know that lease-to-own, rent-to-own and land installment contracts must be carefully considered under New York laws and regulations.”

At issue is whether rent-to-own operators are “targeting vulnerable consumers, playing on their desire to achieve homeownership to get them to sign onerous and illegal home finance agreements that often do not lead to homeownership.”

According to the NYDFS, by offering a “hybrid agreement” that is neither a mortgage nor a lease, some rent-to-own operators are offering contracts that don’t carry the traditional consumer protections of a mortgage or a lease.

“Residential leases and mortgage agreements are required to provide basic consumer protections,” the NYDFS said in its bulletin. “Although a lease-to-own or other alternative home purchase agreement appears to offer a path to homeownership, these agreements may impose harsh terms with little or no consumer safeguards.”

As Wisconsin previously did, the NYDFS expresses concerns about companies imposing extensive maintenance obligations on unwitting consumers.

“Companies engaged in the rent-to-own or lease-to-own business tend to deal in severely distressed properties – homes that have been vacant for a long time and often require a substantial amount of work,” the NYDFS said. 

“The rent-to-own agreements impose all of the obligation to repair the properties, and the substantial cost of the repair work, on the consumer, whereas New York law would impose such obligations on the landlord,” the NYDFS continued. “And, if the arrangement is similar to homeownership, then the homeowner has protection under New York foreclosure law.”

The NYDFS also warns consumers to “be careful” of companies that offer a “false sense of transparency” about a rent-to-own deal.

From the NYDFS bulletin:

For instance, a company may provide consumers with lockbox codes allowing them to freely tour a property to assess what work it may need. While a tour might suggest an opportunity to identify issues with a property, consumers typically conduct these inspections at a disadvantage. For example, property tours are typically conducted when the utility services are not turned on, depriving consumers of the opportunity to test whether the property has basic services.

Consumers are further advised to learn what a company offering a lease-to-own or other alternative agreement knows about a property. Although companies may tell you that they do not have any information about a particular property, some companies hire contractors to conduct inspections of properties after they have been acquired. These reports identify issues such as black mold, termites, asbestos and other health and safety hazards before a consumer has even had a chance to tour the property. 

The NYDFS also advises residents who are currently living in a rent-to-own property that they have certain legal rights as well, including eviction protections.

“In New York, under the common-law doctrine of ‘equitable mortgage,’ residents in single-family homes making lease payments while improving the condition of the home, over time, accumulate equity in the home,” the NYDFS said. “One consequence of that equity is that the company cannot just evict you if you fall behind on making payments.”

The NYDFS suggests that people in a similar situation should pursue legal representation and provides the names of several companies that offer free legal counsel.

For the full NYDFS bulletin, click here.

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