HEIs face identity debate as lawsuits mount, state regulators close in

Allen Price will quickly correct you if you call home equity investment (HEI) customers “borrowers” or the product a “loan.”

“These are not borrowers because they are not borrowing money. This is not a loan but a contract,” said Price, head of sales at BSI Financial Services, which services HEI portfolios for top originators in the space.

That distinction sits at the center of a growing identity debate for HEIs — one now spilling into lawsuits, regulatory scrutiny and broader questions about where the product fits in the housing finance ecosystem. In some cases, it has led companies to pull back from certain markets or avoid the product altogether.

Under an HEI, a homeowner receives upfront cash in exchange for a share of the home’s future value. They remain in the property, cover taxes, insurance and maintenance, and either settle when the home is sold or buy back the investor’s stake. 

The pitch is simple — no monthly payments. That makes the product appealing to homeowners who can’t or don’t want to take on new debt, particularly those shut out of traditional credit markets.

Data from the Urban Institute on shared equity products (SEPs) helps to explain the demand. In 2024, roughly 35% of applications for cash-out refinances, home improvement loans and home equity lines of credit (HELOCs) were denied, compared to just 9.8% of home purchase loans. About one in four HEI users had credit scores below 600 — levels that typically preclude mortgage financing.

Homeowners who utilize HEIs typically tap about 15% of their home value, and more than 40% of these consumers are 55 or older. While still a niche product, the market has scaled as the three largest providers — Point, Hometap and Unlock — originated roughly 54,000 agreements between 2015 and 2025, according to the research.

“The products are becoming more popular for a lot of homeowners. The market is scaling and, as such, that necessarily is going to raise regulatory attention,” said Cliff Andrews, president of the Coalition for Home Equity Partnership (CHEP), a trade group founded in 2024 by Hometap, Point and Unlock that was later joined by Splitero. “We welcome the regulatory attention.” 

Litigation is also building across states.

In Colorado, a lawsuit filed in April alleges homeowners were “trapped” in contracts that could require up to $278,000 to exit after receiving about $87,000 upfront. The plaintiffs claim the product was marketed as a “simple, debt-free alternative.” And a class-action suit filed in California in March alleges a $97,000 payout in 2017 grew to $375,000 after eight years, implying an effective interest rate near 35%.

As early HEI vintages reach maturity, homeowners are starting to confront the reality of repaying a share of their home’s appreciation. That dynamic is already fueling disputes, although Price said cases remain limited relative to the total number of originations.

“Consumers are now realizing in real time, my house appreciated X percent over the past five, six, seven, eight years, and I need to give the originator 20% or 30% of that,” Price said. “Companies understand that once that redemption period begins, there’s going to be some angst around giving up that share of appreciation. The lawsuits are expected.”

Non-interest-based product?

There’s an ongoing, unsettled debate about whether HEI products carry an implicit rate and could be characterized as a loan. 

“It is absolutely accurate to market and describe shared-equity products as non-interest-based products,” said Jim Riccitelli, CEO at Unlock. “But it is critically important to understand the distinction between an interest rate, which applies to a loan, and an investment rate of return, which applies to a shared-equity product.

“That said, no interest rate doesn’t mean no cost or ‘no payment obligation,’ and shared-equity products are never marketed that way.”

For Andrews, the legal challenges are increasingly less about how HEIs function and more about how they’re disclosed. Some disputes, he said, may stem from earlier vintages or uncapped structures. Today, most originators include homeowner protection caps — typically limiting investor returns to 18% to 20% annually — to mitigate extreme outcomes.

“We’ve heard that this [the product] is going to lead to forced sales and this is equity stripping,” Andrews said. “The present value benefit of these products is almost dismissed.”

Riccitelli said that none of the originator members of the CHEP has ever initiated a foreclosure.

But consumer attorneys take a different view.

Thomas Scott-Railton of Gupta Wessler LLP, who has represented consumers in several recent lawsuits, argues the products fit within the definition of a mortgage. He said some legal challenges center on disclosure rules, but they also raise issues around state interest rate limits and federal prohibitions on mandatory arbitration agreements. Viewed through a mortgage lens, he said, the products are illegal. 

“Courts have said — and this principle goes back hundreds of years — that when you’re evaluating loan products, you have to look at substance over form,” Scott-Railton said. “When it comes to predatory lending, ever since there was the first law capping interest rates, there’s been a product designed to make loans look like something else.”

In one of his cases, a homeowner in New Jersey received just under 44% of her home’s value but was required to repay 70%, with a capped annual return rate of 18%.

“The caps are set so high that they don’t meaningfully protect consumers compared to traditional mortgage products,” he said. “They don’t shield borrowers from the biggest risk, which is a large balloon payment that often forces a home sale to repay it.”

Product under scrutiny

Federal oversight of HEIs remains limited, with the Consumer Financial Protection Bureau (CFPB) largely leaving enforcement to states. 

According to the Urban Institute research, the products fall under a mix of federal and state laws — including the Fair Credit Reporting Act, Federal Trade Commission Act and Fair Housing Act — as well as broader prohibitions on unfair, deceptive or abusive acts and practices. But they are not classified as “credit” under the Truth in Lending Act.

The result is a patchwork of interpretations, with some states moving to regulate HEIs under mortgage frameworks. States including Colorado, Connecticut, Georgia, Illinois, Maryland, North Carolina, Oregon, Washington and Wisconsin have taken steps in that direction, according to the Urban Institute. 

In Washington, a federal appeals court ruled that Unison’s flagship product meets the definition of a reverse mortgage under state law.  The company did not reply to HousingWire‘s request for comment on this story.

The most high-profile case is in Massachusetts, where Attorney General Andrea Joy Campbell sued Hometap, alleging the product functions as an illegal reverse mortgage. The case is now in discovery, with an October 2026 deadline.

Campbell alleges the company “deliberately markets” to “house-rich, cash-poor” homeowners, including older borrowers and those with low credit scores, while Hometap has previously called the lawsuit “unfounded” and “meritless.” Hometap deferred to CHEP for this story.

In Maine, meanwhile, Gov. Janet Mills recently signed legislation to adopt a comprehensive statewide HEI framework, defining the products as “shared appreciation mortgage loans.” The law targets features that advocates like the National Consumer Law Center say can lead to large, unpredictable lump-sum payments and forced home sales.

Andrews said the outcome in Maine was “rushed,” not “evidence-based,” and imposed mortgage-style requirements that the product cannot easily meet. “When you can’t comply, you can’t operate. So, it functionally becomes, unfortunately, a de facto ban.”

CHEP says it is working with states including Maryland, Connecticut, Illinois, Washington and Oregon on legal frameworks. It defends licensing, supervision, enhanced disclosures, counseling, cost caps, rescission periods and foreclosure protections.

Because HEIs are structured as equity investments rather than traditional credit, the lack of a tailored regulatory framework continues to create uncertainty, the Urban Institute said. Unlike mortgages, HEIs have no amortization, stated interest rate or monthly payments (making APR disclosures difficult), and underwriting is based on the amount of home equity rather than income or credit.

“A clearer, standardized regulatory framework designed to fit the unique structure of SEPs would improve consumer protections while lowering the cost of capital and, ultimately, the cost of these products to homeowners,” Urban Institute researchers Laurie Goodman and Katie Visalli wrote.

Capital markets adjust

Regulatory uncertainty is rippling into the secondary market for HEIs. Credit rating agencies are factoring uncertainty into their ratings, which directly affects securitization structure and costs. Because of this risk, lower-risk tranches are smaller than they otherwise might be, raising funding costs.

Securitization in the space is still relatively new. Unlock executed the first deal in 2021 that included HEI assets, while Point completed the first all-SEP securitization that same year. Unlock followed with the first rated SEP securitization in 2023. Today, Unlock, Hometap, Point, Splitero and Unison all have outstanding deals, with most of these companies contributing collateral to 2025 issuances.

“From an investor’s perspective, the appetite for the product is still very strong,” Price said. “It has always been understood and always been expected that as the shared equity product continues to mature, that the regulatory and the compliance landscape would catch up.”

Still, not all players are staying the course. Redwood Trust, which entered the space in early 2025, exited a few months ago as part of a broader shift toward a more capital-efficient model.

“We are actively reallocating both capital and human resources away from more balance sheet-intensive activities and toward our core mortgage banking platforms, where we see stronger near-term growth, more consistent returns, and the ability to better leverage third-party capital at scale,” a Redwood spokesperson said. “We continue to believe in the long-term relevance of HEI as a product.” 

Traditional reverse mortgage players are also watching from the sidelines.

Longbridge Financial said that until the regulatory framework is clearer, broader participation from the reverse mortgage sector is unlikely — even as the product addresses a similar borrower need, according to Tim Wilkinson, the firm’s vice president of capital markets.