Mortgage lenders offering home equity contracts must comply with laws like the Truth in Lending Act, according to the Consumer Financial Protection Bureau.
The regulator issued a report, consumer advisory and amicus brief having to do with home equity contracts, according to a said Wednesday (Jan. 15) blog post.
Describing these relatively new financial products as “costly, risky and complex,” the CFPB said in the post that it is working to ensure that consumers receive critical protections and that companies offering these products do not evade the law by using legal loopholes or claiming the law does not apply to them.
In its report issued Wednesday, the regulator said the home equity contract industry has grown in recent years, with the industry’s four largest companies securitizing $1.1 billion backed by 11,000 home equity contracts in the first 10 months of 2024.
The report added that home equity contracts are expensive compared to other home-secured financing options, they can be difficult to understand, and they could require consumers to sell their homes to pay off the contracts.
In the consumer advisory, the CFPB cautioned that home equity contract companies may not follow home loan protection laws, such as those requiring standard loan disclosures, because some argue that they don’t have to do so.
“Home equity contract companies may not be willing to work with you if there’s a disagreement about how much you owe them or if you have trouble making the large balloon payment at the end,” the consumer advisory said.
The CFPB’s amicus brief was filed in the case of Roberts vs. Unlock Partnership Solutions AOI. In it, the regulator argued against the contention of Unlock that its home equity contract is not covered by the Truth in Lending Act because it is an investment, not a loan.
The regulator said in its blog post that its efforts around home equity contracts are part of its drive to ensure that companies can’t claim that existing rules don’t apply to new products.
The CFPB pointed to its ruling in May that some key legal protections and rights delivered by conventional credit cards apply to buy now, pay later (BNPL) products.