A Massachusetts lawsuit is challenging the use of home equity contracts, a relatively new way for homeowners to get cash out of their properties.
The state government alleges that Hometap, one of the largest U.S. companies promoting this financial tool, has used “predatory practices” that put homeowners at risk of losing their homes. A judge in Suffolk County Superior Court in Boston said last month that the state’s case against the company can go forward, though Hometap said in a court filing that its product is not a loan and therefore not subject to existing regulations.
With home equity contracts, a homeowner gets an upfront infusion of cash in exchange for a commitment to pay an amount tied to the home's value at a specified point in the future, according to a U.S. Consumer Financial Protection Bureau report in January. The amount the owner must pay later is based, in part, on the home’s value. Hometap’s contract typically has a 10-year term, the Massachusetts attorney general’s office said in a February statement when it filed the court case.
These contracts are predatory for several reasons, the state claimed in the statement. First, Hometap is collecting an unfair amount of interest, putting consumers at an unreasonably high risk of foreclosure.
"Hometap pays homeowners as little as half the value of the equity it takes," according to the statement.
The state further alleges that the company makes loans "without adequate financial assessments or underwriting" and "deceptively" conceals the true cost of the product to owners.
The lawsuit also says the contracts are effectively reverse mortgages, a type of loan often used by older homeowners to pull cash out of their homes. These loans are limited in Massachusetts to owners who are over age 60, and are due only when a borrower moves out, sells their home, defaults or dies, according to the statement. The state also noted that reverse mortgage lenders are supposed to assess whether an owner is likely to be able to handle the terms of the loan. But Hometap isn't doing that, the state says, and is signing contracts with younger homeowners who are financially vulnerable, not just senior citizens.
“Hometap deliberately preyed upon financially vulnerable homeowners for profit, stripping them of their hard-earned home equity and putting them at unreasonably high risk of foreclosure,” Massachusetts attorney general Andrea Campbell said in the statement.
Campbell’s office told Homes.com in an email Thursday that she is pleased with the judge’s decision to deny Hometap’s motion to dismiss the case.
Hometap and its legal team could not be immediately reached for comment. Responding to the lawsuit in court, the company said the contracts are “options,” not loans. In exchange for the upfront cash payment, an owner sells the company an option to acquire a share of the owner’s property in the future.
The company added in its court filing that state officials had previously agreed that its product was not a loan, and not subject to the same rules that govern reverse mortgages.
Hometap has entered into 563 home equity contracts in Massachusetts since the company launched in 2018, according to the state’s lawsuit. The CFPB said in its report that Hometap and the three other large companies with this product arranged about 11,000 such contracts in the first 10 months of 2024.
Massachusetts is one of several states grappling with how to regulate home equity contracts. Lawmakers in Washington state are working with Washington State University to study the issue, according to a university bulletin in April.
In denying Hometap’s motion to dismiss the lawsuit in an Aug. 21 order, Superior Court Judge Debra Squires-Lee said she needs to consider whether the contracts actually are loans and whether the product is unfair to homeowners.
