Home Equity Contracts Under Scrutiny: Why Lenders Can’t Dodge the Law

Homeowners seeking financial flexibility often turn to home equity products, but not all options are created equal. The Consumer Financial Protection Bureau (CFPB) is cracking down on home equity contracts—often labeled as “investments”—to ensure they comply with lending laws. These contracts, while marketed as innovative alternatives to traditional home equity loans, can be costly, complex, and risky for consumers.

A recent CFPB report, along with a consumer advisory and legal action, highlights the dangers of these products and reinforces the agency’s commitment to preventing lenders from evading established consumer protection laws.

The Hidden Risks of Home Equity Contracts

Home equity contracts allow homeowners to access cash in exchange for a share of their home’s future value. While this may sound appealing, the reality is far more complicated. The CFPB warns that these agreements often:

a) Come with steep, unpredictable costs – Unlike conventional home equity loans, these contracts require a lump-sum repayment that can reach hundreds of thousands of dollars, depending on home appreciation.

b) Put homeowners at risk of losing their property – If borrowers cannot afford the repayment, they may be forced to sell their homes.

c) Lack transparency – Some lenders claim these contracts are “investments” rather than loans, bypassing important consumer protections.

CFPB’s Crackdown on Legal Loopholes

To prevent lenders from exploiting regulatory gaps, the CFPB is taking legal action. In a recent case, a company called Unlock argued that its home equity contract should not be subject to the Truth in Lending Act (TILA) because it is not a loan. The CFPB strongly disputes this claim, stating that relabeling a financial product does not exempt it from the law.

This action aligns with the CFPB’s broader efforts to enforce compliance across the mortgage industry. The agency has previously affirmed that:

a) Contracts for deed must follow home lending regulations.

b) “Buy Now, Pay Later” lenders must investigate disputes just like traditional credit card companies.

c) Consumer protection laws apply to all credit arrangements, regardless of their branding.

Why This Matters for Mortgage Lenders

Mortgage professionals must recognize that compliance isn’t optional. Regulators are actively targeting deceptive practices, and businesses attempting to sidestep lending laws risk severe penalties. Transparency and adherence to existing regulations ensure a level playing field while protecting consumers from predatory financial arrangements.

Final Thoughts

Home equity contracts may be evolving, but the laws governing them remain unchanged. The CFPB’s latest actions serve as a reminder: lenders must follow the rules, regardless of how they label their products. As mortgage professionals, staying informed and ensuring compliance is not just a legal requirement—it’s a commitment to ethical lending and consumer protection.

Source: https://www.consumerfinance.gov/about-us/blog/mortgage-lenders-must-comply-with-the-law-not-invent-loopholes/