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As states take varying approaches to regulating home equity investment (HEI) products, the industry faces an increasingly fragmented legal landscape shaped by consumer protection concerns and uncertainty over whether the products should be treated as mortgage loans.
Under an HEI, homeowners receive upfront cash in exchange for a share of the home’s future value, typically repaying the investment when the home is sold or buying it out before the term ends.
While shared equity and home equity investment products have gained traction as homeowners seek alternatives to traditional debt amid higher interest rates, there are concerns about whether borrowers fully understand their terms and costs. As a result, HEI providers like Unison have faced class-action lawsuits over allegedly deceptive practices.
Definitions and oversight
Holly Spencer Bunting, a partner at law firm Mayer Brown, said states are moving in different directions as lawmakers and regulators attempt to define and oversee HEIs.
“It’s almost sort of like we have two sides of the coin right now,” Bunting said in an interview with HousingWire. “Some state legislation that’s pending is quite restrictive, and then other states recognize that the product is a viable product.”
Maine recently joined the short list of states to formally address the products, Bunting said. Before legislation was enacted there, the state’s mortgage regulator issued guidance that treated HEIs as mortgages and requiring licensing, an approach that was later incorporated into state law.
Other states are considering similar measures. Bunting pointed out that Pennsylvania and North Carolina have pending legislation related to HEIs, although the proposals differ in scope.
Bunting said North Carolina’s proposal is particularly extensive and would classify HEIs as loans while imposing mortgage licensing requirements and additional restrictions. Pennsylvania’s bill began as a narrow amendment to state usury laws but has since expanded to include consumer protection provisions similar to those adopted in Maine.
Bunting’s comments come just days after Illinois finalized a comprehensive regulatory framework for shared equity products under its Residential Mortgage License Act.
“I think the industry is relatively pleased with the regulatory framework that has evolved in Illinois,” she said, adding that for many HEI providers, “it’s not been a secret that they’re happy to be regulated … as long as the regulations make sense for the product.”
A central focus of state legislation has been consumer protection, particularly around disclosures and ensuring borrowers understand the long-term implications of the agreements. Bunting said regulators have been influenced by stories of borrowers who say they were surprised by the contractual consequences of certain events, such as a sale or refinance.
“My impression is that there’s been enough consumer stories of surprise when an event happens under the terms of the contract, and the consumer claims to be surprised at what the results are,” she said.
Could the CFPB get involved?
States are also increasingly requiring counseling before consumers enter into HEI agreements. Maine mandates counseling, while similar requirements appear in pending legislation in Pennsylvania and North Carolina.
Another emerging proposal would require consumers to have legal representation during the transaction process. That requirement appears in Maine’s enacted law and North Carolina’s pending legislation.
“I think that’s intended to provide consumer protection in the course of origination of the product,” Bunting said.
At the same time, states are grappling with broader regulatory questions, including whether HEIs should fall under existing mortgage laws or operate under separate licensing systems.
Connecticut and Illinois amended existing mortgage licensing laws to incorporate HEI-related provisions. Massachusetts lawmakers have introduced competing bills, one of which would create a separate regulatory framework specifically tailored to HEI companies. In Washington state, the Ninth Circuit Court of Appeals ruled in October that HEIs are reverse mortgages under state law
Beyond formal legislation, many states are informally evaluating the products through conversations with lenders and regulators. Federal oversight remains uncertain, with Bunting noting that under the Trump administration, the Consumer Financial Protection Bureau (CFPB) withdrew interpretive guidance on HEIs issued during the Biden administration, leaving states to drive most regulatory activity for now.
“It’s not clear and it’s not consistent, and it’s definitely still evolving,” she said.
Still, she said, increased consumer complaints or continued inconsistency among states could eventually draw additional federal attention.
“It’s certainly possible that the federal agency could become involved,” Bunting said, adding that any federal action would likely come through guidance or interpretive rules rather than direct licensing authority.
This comment looks at the Unlock HEA, using the Unlock Product Guide which is linked to a question of its cost found in the online Q & A section of the Unlock website. The rest of this comment reflects my general understanding of the Unlock Product Guide and the HECM reverse mortgage, the only reverse mortgages insured by FHA. (Other companies offer HEAs which are different in financial structure and terms.) This comment is not intended to constitute legal, tax, or accounting advice. To obtain such advice, seek trusted, licensed, educated, and experienced individuals who are competent in providing such advice and are familiar with your facts and circumstances.
The principal example in the Unlock Product Guide shows the upfront net payment to the homeowner as 10% of the appraised value of the home at the start of the contract minus upfront costs (which are 4.9% of the gross payment to the homeowner plus approximately $2,000 or more in third party charges to process the contract). At termination, 20% of the then appraised value (or sales price) of the home is due from the homeowner subject to its specifically defined Annualized Cost Limit. The maximum term of the contract is 10 years.
The Annualized Cost Limit is basically a future value computation where the present value is the payment made to the homeowner without reduction for upfront costs using a rate of 19.9% compounded annually over the period starting with the date of payment to the homeowner to the Unlock HEA’s date of termination. For example, if the home had an appraised value of $600,000, the gross payout due the homeowner would be $60,000. The actual payout received by the borrower is actually closer to $55,000 after reduction for upfront costs of about $5,000.
The Annualized Cost Limit at the end of 4 years would be $124,002 and at the end of 9 years, $307,273. These are the maximum payment caps due the company at the end of the indicated periods.
1) Based on this information if the appraised value of the home is $360,000 (a loss in value of 40%) at termination, the amount due the company would be $72,000, giving the company a cash on cash profit of $12,000.
2) If the average effective appraised home appreciation rate (AHAR) is 10% for 4 years, the appraised value (AV) of the home would be $878,460 and 20% of that amount is $175,692 but since the maximum payment cap due the company is $124,002, only $124,002 is due the company at termination. The $124,002 would be about the same 20% of an estimated appraised value of $620,169 with an AHAR of approximately 0.82%. Since all that the borrower received at the start of the contract was $55,000, the monthly compounded percentage rate cost to the homeowner at the end of four years would be 20.50% or about the interest rate on some credit cards.
3) If the AHAR is again 10% but termination takes place at the end of 9 years, the payment due to the company based on 20% of the estimated appraised value (of $1,414,769 would be $282,954 (which is less than the maximum payment cap due the company of $307,273). So in this case, based on the homeowner receiving just $55,000 at the start of the contract, the monthly compounded cost rate to the homeowner owner would be about 18.34%.
4) Let us look at holding periods of 4 and 9 years, where the HAR is 5%. The payment due the company at the end of 4 years would be capped once again at $124,002 with a monthly compounded cost rate to the homeowner of 20.50%. At 9 years, the homeowner would owe $186,159 based on an estimated appraised value of $930,797. This results in a monthly compounded cost rate of 13.62% to the homeowner.
5) Now let us look at an adjustable rate HECM using an ongoing 0.5% Mortgage Insurance Premium (MIP) annual rate charged and compounded monthly with an arbitrarily selected compounded monthly and an average effective interest rate of 7.25% note interest rate also charged and compounded monthly with arbitrarily selected upfront costs totaling $22,000, consisting of 1) FHA upfront MIP of $12,000, 2) $6,000 origination fee, and 3) $4,000 in third party junk fees. With a lump sum payout of $55,000, the Unpaid Principal Balance (UPB) at closing is $77,000. At the end of 4 years, the UPB is $104,879 and at the end of 9 years, the UPB is $154,325.
Despite their upfront costs, HECMs can be very cost effective and in the right circumstances can provide some pleasantly surprising income tax benefits.
If the HECM started with a line of credit of say $140,000 in its growing line of credit (GLOC), its balance would be $190,689 at the end of 4 years and $280,591 at the end of 9 years. The starting GLOC on an adjustable rate HECM is generally the difference between the total loan available to the borrower minus its UPB. Interest and ongoing MIP are only charged on the outstanding UPB. HECMs are available to US citizens and qualified resident aliens who are no less than 62 years old. HECMs can be used in the purchase of a home. For more information on current interest rates, upfront costs, and other pertinent matters, speak to a NMLS mortgage originator specializing in reverse mortgages who is licensed in your state.