As HEI regulations expand, states debate loan classification

As states take varying approaches to regulating home equity investment (HEI) products, the industry faces an increasingly fragmented legal landscape shaped by consumer protection concerns and uncertainty over whether the products should be treated as mortgage loans.

Under an HEI, homeowners receive upfront cash in exchange for a share of the home’s future value, typically repaying the investment when the home is sold or buying it out before the term ends.

While shared equity and home equity investment products have gained traction as homeowners seek alternatives to traditional debt amid higher interest rates, there are concerns about whether borrowers fully understand their terms and costs. As a result, HEI providers like Unison have faced class-action lawsuits over allegedly deceptive practices.

Definitions and oversight

Holly Spencer Bunting, a partner at law firm Mayer Brown, said states are moving in different directions as lawmakers and regulators attempt to define and oversee HEIs.

“It’s almost sort of like we have two sides of the coin right now,” Bunting said in an interview with HousingWire. “Some state legislation that’s pending is quite restrictive, and then other states recognize that the product is a viable product.”

Maine recently joined the short list of states to formally address the products, Bunting said. Before legislation was enacted there, the state’s mortgage regulator issued guidance that treated HEIs as mortgages and requiring licensing, an approach that was later incorporated into state law.

Other states are considering similar measures. Bunting pointed out that Pennsylvania and North Carolina have pending legislation related to HEIs, although the proposals differ in scope.

Bunting said North Carolina’s proposal is particularly extensive and would classify HEIs as loans while imposing mortgage licensing requirements and additional restrictions. Pennsylvania’s bill began as a narrow amendment to state usury laws but has since expanded to include consumer protection provisions similar to those adopted in Maine.

Bunting’s comments come just days after Illinois finalized a comprehensive regulatory framework for shared equity products under its Residential Mortgage License Act.

“I think the industry is relatively pleased with the regulatory framework that has evolved in Illinois,” she said, adding that for many HEI providers, “it’s not been a secret that they’re happy to be regulated … as long as the regulations make sense for the product.”

A central focus of state legislation has been consumer protection, particularly around disclosures and ensuring borrowers understand the long-term implications of the agreements. Bunting said regulators have been influenced by stories of borrowers who say they were surprised by the contractual consequences of certain events, such as a sale or refinance.

“My impression is that there’s been enough consumer stories of surprise when an event happens under the terms of the contract, and the consumer claims to be surprised at what the results are,” she said.

Could the CFPB get involved?

States are also increasingly requiring counseling before consumers enter into HEI agreements. Maine mandates counseling, while similar requirements appear in pending legislation in Pennsylvania and North Carolina.

Another emerging proposal would require consumers to have legal representation during the transaction process. That requirement appears in Maine’s enacted law and North Carolina’s pending legislation.

“I think that’s intended to provide consumer protection in the course of origination of the product,” Bunting said.

At the same time, states are grappling with broader regulatory questions, including whether HEIs should fall under existing mortgage laws or operate under separate licensing systems.

Connecticut and Illinois amended existing mortgage licensing laws to incorporate HEI-related provisions. Massachusetts lawmakers have introduced competing bills, one of which would create a separate regulatory framework specifically tailored to HEI companies. In Washington state, the Ninth Circuit Court of Appeals ruled in October that HEIs are reverse mortgages under state law

Beyond formal legislation, many states are informally evaluating the products through conversations with lenders and regulators. Federal oversight remains uncertain, with Bunting noting that under the Trump administration, the Consumer Financial Protection Bureau (CFPB) withdrew interpretive guidance on HEIs issued during the Biden administration, leaving states to drive most regulatory activity for now.

“It’s not clear and it’s not consistent, and it’s definitely still evolving,” she said.

Still, she said, increased consumer complaints or continued inconsistency among states could eventually draw additional federal attention.

“It’s certainly possible that the federal agency could become involved,” Bunting said, adding that any federal action would likely come through guidance or interpretive rules rather than direct licensing authority.