Co-Authored by: Anne Regan & Molly Rapp
In Minnesota, as elsewhere, homeownership is the primary means to obtain housing stability and financial mobility. And after years of rising home values, many homeowners think about accessing the home equity they have spent years building to pay unexpected medical bills, consolidate credit card debt, or simply keep up with rising household and home repair costs.
A growing number of companies—Unlock Technologies, Unison Agreement Corporation, and Hometap Equity Partners— have been marketing home equity investments or agreements (“HEIs” or “HEAs”) to homeowners as an alternative to traditional mortgage loans, offering upfront cash in exchange for contractual rights to a percentage of their home’s future value. For many homeowners facing financial pressure or even desperation, that pitch can sound exactly like the solution they need. But lawsuits brought by private plaintiffs and state attorneys general have shed new light on these complex financial agreements, which were deceptively marketed as anything but. As litigation grows and federal and state regulators take a closer look, courts are increasingly being asked whether these agreements should be treated more like traditional mortgage loans.
Hellmuth & Johnson represents homeowners in litigation involving home equity agreements.
What is a Home Equity Agreement or HEI?
A home equity agreement, or HEI, is marketed as a way for homeowners to receive a lump-sum cash payment in exchange for giving a company contractual rights to a percentage of their home’s future value. Homeowners generally do not make monthly payments, although nothing should prevent them from doing so. Instead, repayment is typically due when the home is sold, refinanced, or when the agreement reaches the end of its term. The agreements often state—falsely—that the amount due at the end is not a loan.
At first glance, that may sound appealing, but the balloon amount a homeowner will ultimately repay is usually impossible to know when the agreement is signed. Unlike a traditional loan, where borrowers know how much they will repay over time, repayment under an HEI depends largely on how much the home’s value increases. If the home’s value rises significantly, the amount owed may increase dramatically as well—at an effective interest rate that costs more than some credit cards.
The Consumer Financial Protection Bureau (CFPB) described one example in which a homeowner who received $50,000 upfront could ultimately owe more than $800,000 after 30 years under one company’s repayment formula.
Even the advertised lump-sum payment is rarely what homeowners actually receive. Origination fees, appraisal costs, title fees, recording fees, and other closing costs may be deducted before the funds are disbursed.
And that is just the beginning. Homeowners must repay the agreement when the term comes due. Some homeowners may be able to repay through savings or refinancing, while others may have little choice but to sell their homes—or face foreclosure. Depending on the terms of the agreement, homeowners may also need the company’s consent before refinancing, transferring ownership, or even renting their homes.
Why Are Homeowners Suing Now and What Do the Lawsuits Allege?
Homeowners have brought suit under state consumer protection and lending laws, asserting that home equity agreements in fact are an extremely costly and effectively charge an illegal form of interest that well exceeds the cost of typical mortgage loans. Companies have structured these agreements to avoid complying with state and federal lending and consumer protection laws that apply to traditional mortgage lending, including standardized disclosures required under laws such as the federal Truth in Lending Act and state lending laws, as well as interest rate caps.
If you have signed a home equity agreement and have questions or would like more information, we encourage you to contact us.
Contact Anne Regan directly at [email protected] or Molly Rapp at [email protected].
