The rapid growth of the home equity investment industry has triggered a complex and often contradictory wave of state-level regulations, creating a fragmented legal environment that leaves both providers and homeowners navigating a maze of varying compliance standards. As traditional borrowing costs remain elevated due to high interest rates, home equity investments (HEIs) have emerged as a popular alternative for liquidity-strained homeowners. However, this surge in popularity has been met with increasing scrutiny from state lawmakers and consumer advocacy groups, who are concerned about the transparency of these products and whether they should be legally classified as mortgage loans.
Understanding the Home Equity Investment Model
A home equity investment is a financial arrangement where a homeowner receives a lump-sum cash payment from an investor in exchange for a percentage of the home’s future value. Unlike a traditional home equity loan or a home equity line of credit (HELOC), an HEI typically does not require monthly payments or interest accrual. Instead, the investor’s return is realized when the homeowner sells the property or chooses to buy out the investor’s share at the end of a predetermined term, which usually spans 10 to 30 years.
If the home appreciates in value, the investor receives their initial investment back plus a predetermined share of the appreciation. If the home depreciates, the investor may receive less than their initial outlay, theoretically sharing the risk of a market downturn with the homeowner. While this "debt-free" approach is attractive to those who do not qualify for traditional financing or wish to avoid monthly payments, the lack of a standardized regulatory framework has led to significant legal and ethical debates regarding consumer protection.
The Rise of Shared Equity Amidst Market Volatility
The demand for HEIs has scaled alongside the massive accumulation of home equity in the United States. According to recent data from the Federal Reserve and industry analysts, total U.S. home equity reached a record high of approximately $32.7 trillion in 2024. Simultaneously, the average interest rate for a 30-year fixed mortgage has fluctuated between 6% and 8% over the last two years, making traditional cash-out refinances prohibitively expensive for many.
In this environment, companies like Unison, Hometap, and Point have positioned HEIs as a way for homeowners to "unlock" their wealth without adding to their monthly debt burden. However, the complexity of these contracts—specifically how the investor’s share is calculated—has led to allegations of predatory behavior. In some instances, homeowners have claimed that the effective cost of capital in an HEI can far exceed the interest rates of traditional subprime loans, particularly in rapidly appreciating real estate markets.
Chronology of Recent Regulatory Actions
The shift toward formal regulation has accelerated significantly since 2023. Previously, HEIs operated in a "gray area" of the law, often escaping the strict disclosure requirements mandated by the Truth in Lending Act (TILA) and other federal mortgage regulations.
In late 2023 and early 2024, several states began to assert authority over the sector. Maine became a pioneer in this regard, with its mortgage regulator issuing guidance that classified HEIs as mortgage loans. This move required HEI providers to obtain lending licenses and adhere to the same transparency standards as traditional banks. This guidance was eventually codified into state law, setting a precedent for other jurisdictions.
By mid-2024, Illinois followed suit, finalizing a comprehensive regulatory framework under its Residential Mortgage License Act. Unlike some more restrictive proposals, the Illinois framework was viewed by many in the industry as a balanced approach, providing clear rules of the road that allowed for product innovation while protecting consumers from hidden fees and deceptive marketing.
In October 2024, a landmark ruling by the Ninth Circuit Court of Appeals further complicated the landscape. The court ruled that in the state of Washington, HEIs must be treated as "reverse mortgages" under state law. This ruling has profound implications, as it subjects HEI providers to the stringent requirements associated with products typically reserved for seniors, including specific disclosure and counseling mandates.
A Tale of Two Approaches: State-by-State Variances
Holly Spencer Bunting, a partner at the law firm Mayer Brown, notes that the current state of regulation is characterized by two distinct philosophies. "It’s almost sort of like we have two sides of the coin right now," Bunting said in a recent interview. "Some state legislation that’s pending is quite restrictive, and then other states recognize that the product is a viable product."
In North Carolina, proposed legislation is among the most aggressive in the country. The bill would officially classify HEIs as loans, imposing strict mortgage licensing requirements and potentially capping the returns investors can earn—a move the industry warns could stifle the availability of the product in the state.
Pennsylvania is pursuing a similar but slightly different path. What began as a narrow amendment to state usury laws has expanded into a broader consumer protection bill. The Pennsylvania proposal includes provisions for mandatory disclosures and "cooling-off" periods, intended to ensure homeowners are not pressured into agreements they do not fully understand.
In Massachusetts, the legal battle has taken a more litigious turn. The state’s Attorney General has been active in investigating HEI providers, and competing bills in the state legislature are currently debating whether to create a bespoke regulatory framework for "alternative equity products" or simply fold them into existing mortgage statutes.
Consumer Protection and the "Surprise" Factor
A central driver for these legislative efforts is the "surprise" factor often experienced by homeowners at the time of settlement. Because HEI contracts are based on future valuations, many consumers fail to realize how much equity they are actually giving up until they attempt to sell their home or refinance their primary mortgage.
"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," Bunting observed. These surprises often occur during a "trigger event," such as the death of the homeowner, a transfer of title, or a desire to take out a second mortgage.
To mitigate this, states are increasingly mandating third-party counseling. In Maine, and in pending bills in North Carolina and Pennsylvania, homeowners must undergo a counseling session with a HUD-approved counselor before signing an HEI agreement. This ensures that a neutral party explains the long-term financial implications and explores whether other, less expensive financial products might be more suitable.
Furthermore, some states are now requiring that consumers have independent legal representation during the transaction. This is a significant shift, as it moves the HEI process away from a simple digital "click-through" agreement toward a more formal real estate closing process.
The Federal Vacuum and the Role of the CFPB
While states are driving the current wave of regulation, the role of federal agencies remains a point of uncertainty. Under the Biden administration, the Consumer Financial Protection Bureau (CFPB) issued interpretive guidance that suggested HEIs could be viewed as "credit" under federal law, which would subject them to a host of national regulations.
However, following shifts in the political landscape and administrative priorities, some of this guidance has been withdrawn or remains in a state of flux. "It’s not clear and it’s not consistent, and it’s definitely still evolving," Bunting remarked regarding federal oversight.
Industry analysts suggest that if consumer complaints continue to rise or if a major HEI provider fails, the CFPB may feel compelled to step in with more permanent rules. Any federal action would likely focus on standardized disclosures—similar to the "Know Before You Owe" forms used in traditional mortgages—rather than a direct licensing system, which is traditionally the domain of the states.
Implications for the Industry and Homeowners
The fragmentation of the legal landscape presents a significant challenge for the HEI industry. For providers, the cost of compliance is rising as they must tailor their contracts and operations to meet the unique requirements of each state. This could lead to some companies exiting more restrictive markets, reducing the options available to homeowners in those areas.
Conversely, for the industry to achieve long-term stability and attract institutional investors, many argue that clear regulation is necessary. "It’s not been a secret that [providers] are happy to be regulated… as long as the regulations make sense for the product," Bunting added. Clear rules provide the certainty needed for the securitization of HEI assets, which is essential for the industry to scale.
For homeowners, the evolving regulatory environment is a net positive for safety but may lead to higher costs or more rigorous qualification standards. As HEIs become more like mortgages in the eyes of the law, the "easy access" that initially defined the product may diminish, replaced by a more disciplined and transparent financial instrument.
As the 2025 legislative sessions approach, the industry will be watching closely to see if a "model law" emerges that other states might adopt, or if the current patchwork of regulations will continue to expand, further complicating the future of home equity sharing in America.
