Judge denies motion to dismiss case against HEI platform

A Massachusetts judge denied a home equity investment platform's request to dismiss a state lawsuit filed against it in a case that could provide clues to how products from such companies might ultimately be defined. 

State Attorney General Andrea Joy Campbell originally sued HEI platform Hometap in February, putting forth multiple claims, including allegations that the company's products were disguised as "illegal" loans with excessively high interest rates. Campbell also called Hometap's marketing practices deceptive, citing lack of appropriate disclosures, and described HEI contracts generally as "unfair, oppressive or otherwise unconscionable."

In its motion to dismiss, Boston-based Hometap pushed back, describing its products as options contracts that do not meet the definition of a loan and claimed the state had failed to prove any deception or unfair actions occurred.  

But Massachusetts Superior Court Judge Debra A. Squires-Lee threw out Hometap's assertions, writing in her decision last week that the state sufficiently alleged HEIs could be described as loans.  

"Hometap never intended to be a joint equity owner with any homeowner. Those allegations make the HEI — in substance — more akin to a loan than an option to purchase real estate," Squires-Lee stated. 

Critics of HEI businesses regularly point to instances where customers in Massachusetts and elsewhere found themselves under serious financial distress or threat of foreclosure. In several consumer lawsuits involving other providers brought to court, customers claimed they were caught unaware of risks and penalties if unable to comply with terms in HEI contracts.  

With HEI contracts, homeowners are able to draw upon a share of their available equity, with repayment to include any appreciation in value due at the end of the term or early termination. With lower thresholds for qualification compared to refinances or home equity loans and no monthly payments required, HEI products have been touted as options for certain consumers with credit scores traditional lenders may find risky.  

The judge found flaws, though, in Hometap's claim the agreements are not equivalent to mortgage loans.

"The money is either repaid in ten years, with a substantial increase, which the commonwealth alleges constitutes interest, or Hometap exercises its option and its right to foreclose or force a sale," she wrote.

The opposing parties react

In response, Hometap reaffirmed the value of its home equity investment contracts and pointed to the need for them in the current housing market.

"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. We look forward to the discovery process, which we are confident will introduce facts that further reinforce the strength of our position," the company said in a statement provided to National Mortgage News

On the other side, Massachusetts officials celebrated the judge's reasoning to proceed. 

"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," noted Attorney General Campbell.

While the community of home equity investment providers is still in its early years of development, leaders within the space emphasize they seek a regulatory framework to provide clear guidelines for both companies and consumers. 

Earlier this year, Hometap, alongside peers Unlock Technologies and Point, helped found the Coalition for Home Equity Partnership, which said it hopes to work with state officials to come up with clear consumer-protection laws that differentiate their offerings from mortgage loans. 

The growth of HEI businesses gained momentum in the past decade, with the arrival of several new fintech providers, including Hometap, which was founded in 2017. As a result, most HEI originations, which usually come with 10-year terms, have not yet reached a stage to fully gauge customer performance and ability to repay.