Federal agency cracks down on predatory lending practice that often harms Somali Muslims
For years, Fartun Weli has been frustrated by the way low-income Somali Muslims in Minnesota are targeted by shady home salesmen who infiltrate the community — exploiting a tenet of Islam that is supposed to protect the poor.
Many of them are refugee immigrants who don’t know much about the formal home-buying process and often have poor or bad credit, Weli said. Even when they qualify for a traditional mortgage, they are uncomfortable with conventional financing options because Islamic law prohibits interest on loans.
A private seller comes along and offers them low-cost homes with no interest. In this type of sale, both parties agree on a price, with a hefty down payment and monthly payments. The seller claims there is no interest to pay because there is no bank involved. But the absence of a bank also means no appraisal, which allows the seller to inflate prices without asking questions about the condition of the home.
Typically, the seller legally owns the home until the loan is paid in full and all seller conditions are met, while the buyer assumes ownership responsibilities such as paying property taxes, cleaning up the property, and all routine maintenance.
“This is a community that has been cheated,” said Weli, who runs Isuroon, a community nonprofit that supports Somali refugee immigrant women and their families settling in Minnesota. “There are so many who have disappeared under the radar. Most of our families don’t even talk about it.”
The Consumer Financial Protection Bureau is now committed to scrutinizing bad deals in this form, known as sales contracts, and urging individuals to report these deceptive and predatory loans.
Sales contracts are a form of alternative financing or seller financing in which a private seller or group of investors enters into a loan agreement with a buyer without most of the usual banking and mortgage regulations and protections. But the federal watchdog agency said earlier this month that they must now follow the rules, putting private sellers on notice that they too are subject to the Truth in Lending Act, just like banks, lenders and brokers.
At a field hearing in St. Paul, Minnesota, on August 13, CFPB Director Rohit Chopra highlighted how predatory lending has particularly affected Minnesota’s Somali Muslim community, where many people have resettled following Somalia’s civil war in recent decades, describing how families’ housing situations could be disrupted by hidden blanket payments and uninhabitable properties.
Chopra said it has become a trap-and-flip system, in which buyers are doomed to fail and sellers can resell the home on their terms to another family.
“We actually need to make sure that when people are struggling financially, they can sometimes know who to turn to for help, when to report and what we can do to make them feel comfortable and safe in speaking up,” Chopra said.
According to the Pew Charitable Trusts, about 1.4 million Americans used sales contracts to buy a home in 2022. Tara Roche, who directs Pew’s housing policy initiative, said part of the problem with trying to regulate these contracts is that some states view them as contract law rather than housing law, and some lawmakers view these home sales as simply private contracts between two people with no need for government oversight.
“In reality, the seller has all the power over the requirements and terms of the contract,” Roche said. “That’s not balanced by a legal framework.”
The National Association of Realtors said that while it appreciates the crackdown on predatory lending, it wants to ensure that buyers who have traditionally used sales contracts — also known as land contracts — will not be affected.
“For a small niche of home buyers, particularly in rural and agricultural communities, land contracts have worked. The CFPB should ensure that safe alternative products are available to this community if land contracts become more limited,” the real estate trade group said in a statement.
Others called on state lawmakers to enact more regulations to help vulnerable, low-income and immigrant communities.
“We’ve long known that communities of color and immigrants are being targeted, but the additional targeting based on religious beliefs is particularly troubling,” said Sarah Bolling Mancini, co-director of advocacy at the National Consumer Law Center, which is calling for policy reforms, including requiring these sales to be recorded in deeds. “The most important thing is to not allow these contracts to be in a gray area without any of the protections of a buyer or renter.”
In the case of Somali Muslims in Minnesota, the sales contracts are attractive because traditional Islamic law considers the concept of paying or receiving money as interest on a loan to be a greedy sin, said Yasir Qadhi, a Muslim scholar and president of the Fiqh Council of North America.
“We believe that interest is an unfair tool, that rich people can use their wealth to become even richer by taking advantage of the poor,” Qadhi said. “In our faith, giving someone a loan is an act of charity, it is not a commercial activity.”
Weli said she hopes the CFPB’s latest initiative will lead to greater awareness within the Somali refugee community and also lead to more resources for immigrants to learn financial skills to help them be less vulnerable.
“There’s something special about being an immigrant and a refugee. You plan things very carefully and you put in the effort,” Weli said. “Home ownership is the ultimate destination. It’s part of the feeling of total security.”
