If there was any doubt about how the Consumer Financial Protection Bureau (“CFPB”) (under current leadership) feels about what it calls “home equity contracts” (also known as shared appreciation agreements, shared equity agreements, home equity investments, among other names) its actions recently make it clear.
Among the flurry of issuances, enforcement actions and guidance coming out of the CFPB in the lead up to January 20, the bureau took aim at home contracts with i) the issuance of a Consumer Advisory warning consumers about the risks of these types of agreements, ii) the issuance of an Issue Spotlight, which similarly addressed potential risks to homeowners and provided a detailed summary of how these types of products typically work and how their features compare other home equity products, and iii) the filing of an amicus brief in Roberts v. Unlock Partnership Solutions AOI, Inc. (No. 1:24-cv-1374 (D.N.J.) wherein the CFPB argues that the particular product at issue is a residential mortgage loan subject to TILA because the homeowner had the right to defer payment and because the product is not an investment plan (which the Commentary to Regulation Z excludes from the definition of credit) because the issuer of the contract does not have a meaningful risk of loss.
Interestingly and, perhaps surprisingly, neither the Consumer Advisory nor the Issue Spotlight take on the issue of whether these products are, or should be treated as, loans, although the CFPB (under its current leadership) appears to have signaled its general position in its amicus filing.
It is unclear what impact these efforts will have on how investors view or value these products, or how state regulators decide to treat these products, although we note that several states, including Connecticut, Maryland and Washington, already have amended their statutes and/or issued regulations making clear that these types of products are considered residential mortgage loans. Regardless of how the CFPB ultimately may come out on treatment of these products, we can expect state regulators to continue to focus on these products and expect some number of them to follow the lead of Connecticut, Maryland and Washington and regulate these types of products as residential mortgage loans.
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