“Loan Alternative” Program Challenged by State Attorneys General

The Attorneys General of Massachusetts, Florida, and Pennsylvania recently filed lawsuits under their states’ respective consumer protection statutes challenging a cash advance program marketed by a real estate brokerage as an alternative to a loan.

Under this program, the broker provides a homeowner a cash payment in exchange for an exclusive right to act as the homeowner’s broker in any sale of the home that occurs within 40 years.  The broker’s commission is set to the greater of: (1) ten-times the cash payment, or (2) 6% of the sale price if the buyer does not use a broker or 3% if the buyer does.  In the case of transfers of the home other than sales, such as those by operation of law, including divorce and inheritance, the receiving spouse or heir is required to execute a written assumption of the contract or pay 3% of the home value (as determined by the broker) at either the time of the original agreement or the time of the transfer, whichever is greater.  The agreement for the sales commission or payment upon other transfer of the home is secured by a mortgage, which is recorded in the property records.

The Attorneys General allege that this program is usurious and violates their respective consumer protection laws by concealing the true terms of the transaction from the homeowners and using false and misleading advertising, such as stating that it is not a loan and that the brokerage will not file a lien against the home.  The Attorneys General further allege that the mortgages securing the commissions or payments limit homeowners’ ability to refinance loans, obtain home equity lines of credit, and obtain reverse mortgages.

According to the complaints filed in these lawsuits, the brokerage operates this program in at least 33 states across the country.