A LAWSUIT LEVELED by the state attorney general against a Boston-based financial technology company for allegedly predatory loan practices is allowed to move forward, after a Suffolk County Superior Court judge denied the company’s motion to dismiss the complaint.  

Hometap, founded in 2017, is part of a growing wave of home equity investment (HEI) products, which work by giving homeowners cash in exchange for a share of their home’s value. When the owner sells the house, refinances, or hits the end of the investment term, they owe the company the original investment plus a portion of the appreciation in home value.  

In Hometap’s view, their product exists “to make homeownership more accessible and less stressful” and is offered by a company comprised of “good owners and good neighbors.” 

To Attorney General Andrew Campbell, the company targets financially vulnerable homeowners with illegal reverse mortgages, marketed deceptively in violation of the state’s consumer protection laws.  

“In reality, this product is vastly more expensive than any common mortgage product on the market — and when consumers cannot pay, Hometap will sell their homes,” the attorney general’s office claimed in its first-in-the-nation suit against Hometap filed in February. 

Hometap moved to dismiss the complaint in May. HEIs cannot be illegal mortgage loans, Hometap argued, because they are not loans at all – rather they are option contracts that are not bound by the same regulations. Option contracts give investors, like Hometap, the option but not the obligation to buy or sell an asset.  

But Suffolk Superior Court Justice Debra Squires-Lee in an August 21 decision determined that the products could be considered loans and these arguments should be tested in the courts. Also needing further exploration, the judge wrote, are questions of whether the company was being deceptive, if its products are unfair or oppressive to homeowners, and if there are possible penalties under the state’s consumer protection statute. 

In reverse mortgages, the owner’s debt increases over time, and the lender is paid back when a property is sold voluntarily or through foreclosure. They are usually aimed at people who have home equity but not enough assets to cover expenses, so Massachusetts limits these mortgages to people over 60 who receive counseling and are permitted a seven-day period to back out. 

The HEI structure, according to the attorney general’s complaint, includes four separate features: an upfront cash payment to the homeowner regardless of the owner’s assets or income, a percentage interest in the home equity twice the value of that cash payment, a return to Hometap that can exceed a 20 percent annual interest rate, and a 10-year balloon payment.  

Hometap can also take possession of the property and force a foreclosure sale if the owner defaults, according to court documents. These provisions, all together, form the shape of a reverse mortgage structure, according to the attorney general. 

Because Hometap does not assess a homeowner’s financial status, the owner can “get money quickly, and without documentation, and may lead them to choose an HEI over loans that cost less and have safeguards,” Squires-Lee wrote. “Hometap can only provide cash quickly if the HEI product is not governed by the regulations put in place with respect to reverse and subprime mortgages. Thus, in marketing the HEl, Hometap neither ensures that it provides money only to homeowners with the ability to repay, as with traditional mortgages, nor complies with the strict regulatory limits on reverse mortgages.” 

Campbell’s office claims the company does not adequately disclose the mechanics of the agreement, with sales representatives suggesting the company would share in the loss if property values depreciate. Instead, the attorney general argues, Hometap’s investment is insulated, and homeowners will pay back more than they receive from the company. 

Hometap attorneys argue that their home equity products are just option contracts, rather than loans. The attorney general’s interpretation of terms of the contract as creating a reverse mortgage, Hometap wrote, is “nonsensical.” 

There is no required repayment in the HEI contract, Hometap notes. This contract gives Hometap a right to purchase a percentage stake in the property under certain conditions, the company’s attorneys wrote in the motion to dismiss. If the company exercises that option, according to the motion, it becomes partial owner of the property and is then entitled to proportionate proceeds from the home’s sale.  

The attorney general’s claims depend on the Hometap agreements counting as loans, because Campbell’s office is arguing that they violate regulations to make sure that loans are fair and marketed honestly. But because Hometap argues that the product is merely an option, its attorneys say holding them to standards meant for loans would be inappropriate.  

“Hometap firmly stands by the integrity of our products, which provide Massachusetts homeowners with alternative and flexible financial products and further our mission of making homeownership more accessible,” a spokesperson for the company said in an emailed statement. “We look forward to the discovery process, which we are confident will introduce facts that further reinforce the strength of our position.” 

Campbell’s office cheered the opportunity to press forward with the case. 

“My team and I are pleased by the court’s decision and look forward to continuing this critical litigation to protect Massachusetts homeowners from Hometap’s harmful practices,” Campbell said in an emailed statement.  

Though some states like Massachusetts – and HEI companies themselves – are exploring what regulations might look like for these products, HEIs are essentially unregulated, Squires-Lee noted in her decision, regardless of any pending legislation. Without a HEI-specific regulatory framework, she wrote, the state can use what it has as a metric. “It is not inappropriate to measure the HEI against statutes and regulations protecting homeowner mortgagees or other consumer borrowers,” she wrote. 

Washington state has commissioned a formal study on the products, while Connecticut, Illinois, and Maryland have recently passed laws that regulate HEIs like typical mortgages.  

In Massaachsetts, state Rep. Daniel Cahill of Lynn and state Sen. John Cronin of Fitchburg have filed bills this session requiring a licensing system for shared equity investors of residential property. 

The bills define a “shared equity investment” as a transaction in which a sum of money is granted to a homeowner in exchange for an equity stake in the homeowner’s residential property or a future obligation to pay back the sum plus interest. Broadly, private companies could not act as a shared equity investor in more than 12 residential properties in one year without a license from the Massachusetts commissioner of banks.  

The commissioner would be tasked with assessing each license applicant, to make sure that the business operate “honestly, fairly, soundly and efficiently in the public interest.”  

Both the House and Senate bills were referred to the financial services committee in February, with no hearings scheduled or held. And both seek to settle one core question in the burgeoning industry: that HEIs are “not a mortgage loan or other form of loan.”