Rent to Own Model under Regulatory Scrutiny

Close up of lease agreement empty document with pen on it

The rent-to-own model, in which tenants have an option to purchase the home they’re renting from their landlord is now under scrutiny by New York’s top financial regulator.

The New York Department of Financial Services (NYDFS) is investigating whether rent-to-own programs constitute predatory lending and has issued a consumer alert to create awareness that lease-to-own, rent-to-own and land installment contracts must be carefully considered under New York laws and regulations.

New York isn’t the only state looking into this model. According to Ben Lane, the Senior Financial Reporter for HousingWire,  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.

MortgageOrb’s staff writer Nora Caley reports other companies in the REO rent-to-own space have been accused of unscrupulous activities. In April (2017), the City of Cincinnati filed a lawsuit against Harbour Portfolio Advisors LLC claiming that Harbour had purchased distressed, foreclosed properties and resold them to consumers through “predatory and unconscionable land sale contracts.” The suit charges that Harbour failed to register or maintain its properties located in Cincinnati and sold or rented the properties without disclosing the known defects. The homes have city code violations, the suit noted, and other nuisances, and Harbour failed to abate these.

Regulators are concerned that consumers who want to achieve homeownership might be vulnerable to signing “onerous and illegal” financing agreements – agreements that often don’t lead to homeownership.

In a 2006 report, the National Consumer Law Center recommended that the Consumer Financial Protection Bureau impose new regulations on the industry, such as an independent inspection by a licensed or certified home inspector or a governmental authority, third-party appraisals, consumer finance disclosures including the annual percentage rate (APR).

Rent-to-own is billed as an alternative path forward for those who want to buy houses but can’t qualify for conventional mortgages.  That may be true, but buyer and landlord beware.

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