Banking and Finance Law Daily Wrap Up, TRUTH IN LENDING—CFPB wants consumers to know their rights regarding home equity contracts, (Jan 16, 2025)

By Sherri M. Schroeder, J.D.

The agency released a blog post, report, consumer advisory, and amicus brief about these “relatively new financial products” and wants consumers to understand that home equity contracts can be “costly, risky and complex.”

The Consumer Financial Protection Bureau (CFPB) wants consumers to know the ins and outs of home equity contracts, which are often called home equity “investments.” In a home equity contract, homeowners get an upfront payment from a company; in exchange, they must repay a simple lump sum repayment in the future based, in part, on the home’s value. According to the CFPB, these “relatively new financial products” can be “costly, risky and complex.” In a blog post, “Issue Spotlight” report, consumer advisory, and amicus brief published or filed on the same day, the agency explains how such contracts work, gives a market overview of the products, highlights some of the problems with the product, and ensures that lenders comply with the law and “not invent loopholes.”

According to the CFPB’s report, U.S. homeowners have over $35 trillion in home equity, which makes it “a significant source of household wealth.” However, because such wealth is not easy to use for spending, homeowners are looking for options. Therefore, “some consumers are turning to complex financial contracts that are offered by financial companies and backed by Wall Street firms that are interested in their high returns,” i.e., home equity contracts. This type of financial product offers homeowners an upfront payment from a company; in exchange, the homeowner must repay a simple lump sum payment in the future—often 10 to 30 years later or when a triggering event such as the selling of the home occurs. This repayment considers the home’s value, generally ensuring that the repayment amount is significantly larger than the upfront payment under most home price scenarios, according to the CFPB.

Some of the key findings in the CFPB’s report show:

• This type of contract is primarily used for debt consolidation and home improvements, with the median home equity contract customer being in their 50s when they sign the contract. Roughly 90 percent of the homeowners had mortgages that took a senior lien position to the home equity contract.

• Home equity contracts are often marketed as an alternative to cash-out refinances, home equity lines of credit, or traditional reverse mortgage loans.

• The industry is small but has expanded in recent years.

• Home equity contracts are expensive compared to other home-secured financing options. According to the CFPB, the settlement amount that must be paid back often grows at a rate of 19.5 to 22 percent per year in the early years.

• Home equity contracts are “complex financial contracts that can be difficult to understand.”

• Consumers could be forced to sell their homes to pay off the contracts. Those who want to stay in their homes must liquidate other assets or qualify for enough financing to repay the home equity contract in full.

According to the CFPB’s consumer advisory, some of the problems facing homeowners who take out home equity contracts include the following:

• Expense: Even though monthly payments are not required, home equity contracts require thousands of dollars for closing costs. In addition, the balloon payment required at the end of the contract can often be two to three times as much money as the homeowner was given in the beginning. In most cases, homeowners will often pay tens of thousands of dollars more than they would have for most loans against their homes.

• Forced sale: If homeowners cannot borrow enough money to pay off their contracts at the end of their terms, they could be forced to sell.

• Lien: Generally, the company holding the home equity contract will put a lien on the house, which means homeowners might face trouble taking out a new loan or financing an existing loan without paying off the home equity contract. If the homeowner does not keep up the terms of the contract or pay the contract in full and on time, the company could foreclose.

• Lack of protection: Home equity contract companies may not give standard loan disclosures that let homeowners see how much they will pay and compare options or may not follow other home-loan protection laws. The companies may not be ensuring that homeowners can pay back the money they are given. The companies also may be unwilling to work with homeowners if there is a disagreement or if the homeowners have difficulty paying back the balloon payment. In addition, the contracts often have arbitration clauses.

Some home equity contract companies say that they do not have to follow laws such as the Truth in Lending Act (TILA), according to the CFPB. In fact, in one such case, the agency has filed an amicus brief in support of neither party in the case (Roberts v. Unlock Partnership Solutions AO1, Inc., No. 1:24-cv-1374-CPO-AMD (D.N.J. Jan. 15, 2025)). In this case, a company called Unlock contends that a home equity contract called “risky” and “complicated” by the CFPB is not covered by TILA, arguing that the product is an investment, not a loan, and is therefore not credit. The CFPB contends, however, that this argument is not valid because Unlock’s product satisfies the statutory definition of “credit” and does not qualify for the regulatory exception applicable to investment plans.

“The CFPB is committed to preventing companies from evading the law by trying to exploit legal loopholes or crafting misguided arguments about why the law does not apply to them,” said the CFPB in its blog post, adding later in the post, “Congress constructed TILA to ensure that companies can’t evade the law by simply slapping a different label on a loan.”

Companies: Unlock Partnership Solutions AO1, Inc.

RegulatoryActivity: CFPB ConsumerCredit DoddFrankAct GCNNews Loans Mortgages SecuritiesDerivatives TruthInLending UDAAP