Today, the Consumer Financial Protection Bureau (CFPB) issued a report, consumer advisory, and filed an amicus brief addressing the risks associated with home equity contracts (HECs)—financial products often marketed as home equity “investments.” The Bureau highlighted the high costs, complexity, and risks these products pose to homeowners, including the potential for financial distress and forced home sales if repayment obligations become unmanageable. The Bureau’s amicus brief, filed in a lawsuit currently ongoing in the United States District Court for the District of New Jersey, is discussed in detail below.
CFPB Amicus Brief
In its amicus brief the Bureau argued that HECs are traditional mortgage loans subject to the Truth in Lending Act (“TILA”). Under TILA, a “residential mortgage loan” is “any consumer credit transaction that is secured by a mortgage, deed of trust, or other equivalent consensual security interest on a dwelling or on a residential property that includes a dwelling.” 15 U.S.C. § 1602(dd)(5). The Bureau disagreed with the defendant home equity loan provider’s argument that its product is an investment contract, not a credit product (and thus not subject to TILA), on the grounds that:
- Defendant’s HEC Satisfies the Statutory Definition of Credit. Under the HEC, the plaintiff has an obligation to pay defendant either 70% of the value of the home, or the initial payment she received, plus 18% interest. Accordingly, the plaintiff incurred a debt and payment of the debt is deferred, making the product credit.
- Defendant’s Product Is Not “Credit” Under Reg Z. Reg Z states that “credit” does not include “[i]nvestment plans in which the party extending capital to the consumer risks the loss of the capital advanced.” 12 C.F.R. Pt. 1026, Supp. I, cmt. 2(a)(14)-1.viii. The Bureau contended that this exception does not cover defendant’s product because it does not meaningfully risk the loss of its capital due to its structure. Plaintiff was paid a lumpsum equivalent to only 44% of the value of their home but was required to repay 70% of their home’s value; unless the home value depreciates by more than 39%, the company will profit.
Issue Spotlight: Home Equity Contracts
- The Bureau’s Issue Spotlight was an overview of the home equity contract market. The Bureau found that the industry is small but has expanded in recent years, driven in part by an emerging secondary market for securitizations. In the first 10 months of 2024, the four largest HECs companies securitized approximately $1.1 billion backed by about 11,000 HECs.
- Consumers primarily used HECs for debt consolidation and home improvements, though some consumers have reported that they use the funds for real estate investing or savings for or during retirement.
- The Bureau found that HECs are often marketed as an alternative to a cash-out refinance, home equity line of credit (HELOC), or traditional reverse mortgage loans but in their view are more expensive than those offerings. Moreover, they noted that advertisements for home equity contracts tout large upfront payments, with “no monthly payments,” and “no interest,” and also claim that HECs are not debt, a contention they disagree with.
- Finally, according to the Bureau, HECs are complex financial contracts that can be difficult to understand or compare to other options, and companies currently provide non-standardized disclosures. The Bureau pointed to consumer complaints that highlighted how difficult they were to understand.
Consumer Advisory
Many of these criticisms were later highlighted on the Bureau’s consumer advisory. The Bureau noted that HECs companies may not give standard loan disclosures, conduct ability to re-pay underwriting, may contain arbitration clauses, and may be more expensive than traditional loan products.
Putting It Into Practice: Assuming the Bureau’s provision prevails in the litigation, this will have a dramatic impact on the small but growing HEC market. HECs will need to be restructured to comply with TILAs requirements, including having standard disclosures, and no arbitration provisions which are currently in many agreements. In addition, HEC providers will need to conduct ability-to-repay underwriting, and provide loss mitigation options for consumers. Finally, assuming the Bureau reverses its position in a new administration, litigants will likely not be deterred. Advocacy groups such as the National Consumer Law Center, and state regulators such as the Washington Department of Financial Institutions have been active in this space. See DFI Issues Report on Home Equity Sharing Agreement Inquiry