MA Attorney General Sues Home Equity Lender for Allegedly Non-Compliant Reverse Mortgage Product

On February 20, the Massachusetts Attorney General sued a home equity investment company, alleging that its home equity investment product amounts to a non-compliant reverse mortgage and that its claim of no interest is misleading because borrowers could lose their homes if they do not repay over double the amount that they borrowed within ten years.

According to the complaint, the company offers a homeowner cash upfront in exchange for an equity interest in the borrower’s home that is up to twice the home’s initial value, without requiring any documentation of the borrower’s job, income, or assets (other than the home itself).  Additionally, the complaint notes that the borrower need not make any payment for ten years, at which point a single balloon payment becomes due.  The form “Option Purchase Agreement” attached to the complaint describes the arrangement as providing the company with an option, in exchange for the upfront cash payment, under which it is entitled to payment based on a percentage of the home’s value at the end of the ten-year term or on the occurrence of another enumerated event (such as failure to pay property taxes or insurance).

The attorney general claims, among other allegations of deceptive and unfair practices, that the product is effectively a reverse mortgage loan because it is a non-recourse, negative amortization loan that provides cash upfront (the difference between the amount repaid and the cash paid upfront represents the interest), is secured by the homeowner’s principal dwelling (the contract requires this), and requires no payment until the end of the term.  Notwithstanding this characterization, the company allegedly offers its products to borrowers under the age of 60, does not provide a seven-day rescission period, and does not make the specified disclosures, as the Massachusetts statute regulating reverse mortgages requires.