Home Equity Firm Hometap Sued Over ‘Predatory’ Contracts

Rapidly growing home equity investment (HEI) company Hometap is facing a cascade of class-action lawsuits accusing it of misrepresenting its products by describing them as “purchase options contracts” instead of mortgage loans to skirt federal and state borrower protections.  

Civil complaints filed against the Boston-based financial technology firm in multiple states over the past five months allege that Hometap introduced a “predatory and abusive mortgage loan product” to “peddle to financially struggling homeowners,” according to a recent California suit reviewed by Realtor.com®.  

Separately from the class-action lawsuits, Hometap was sued in February by the Massachusetts attorney general, who accused the company of violating state consumer protection and mortgage laws, putting vulnerable homeowners at “unreasonably high risk of losing their homes.”

In a statement to Realtor.com, Hometap denied the allegations, saying its offerings are not subject to conventional mortgage rules and are clearly marketed to consumers.

“We stand behind the transparency of our product and the education we provide to homeowners before signing,” the company said.

The legal firestorm has not stopped Hometap from growing its business footprint. The firm announced on Tuesday that it was entering five new states—Georgia, Montana, Tennessee, Idaho, and Delaware—ostensibly in response to public demand “for flexible, homeowner-first financial solutions.” 

“The demand we see every time we enter a new market is a signal that traditional products have fallen short for too many homeowners,” Hometap CEO Jeffrey Glass said in a statement. “Over the past two years, nearly 10,000 homeowners from these states came to us looking for a flexible solution, and they’re not alone. There are still millions of people who have equity in their homes but haven’t found a way to access it that meets them where they are. We’re focused on reaching them, one market at a time.”

Founded in 2017, Hometap currently operates in 21 states and has helped over 26,000 homeowners access their home equity, according to its website.

The ‘no monthly payment’ pitch

Hometap specializes in home equity investments (HEIs)—private contracts that allow homeowners to secure a lump sum of cash in exchange for a percentage of their home’s future value.  

Unlike other types of home equity loans and home equity lines of credit (HELOCs), HEIs do not require monthly payments, making them particularly appealing to financially distressed individuals with a low credit score who are in urgent need of cash. 

Under an HEI contract, known as an “option purchase agreement,” the homeowner essentially agrees to let Hometap purchase a chunk of their home equity in exchange for an immediate payout.

As part of the agreement, the company stipulates how long its stake lasts—usually 10 to 30 years—and how much the homeowner will be required to pay back at the end of the agreement term. 

In most cases, homeowners must settle the original lump sum plus a share of the home’s appreciation over the term of the contract, often requiring them to sell their property to fund the repayment.

If the home appreciates at a high rate, the payback amount can be double or triple the lump sum, although the contract typically caps the annualized rate of return. 

“The ‘no payments’ pitch is the hook, and this works very effectively with homeowners,” Chad Cummings, Certified Public Accountant and attorney with Cummings & Cummings Law who has handled cases involving HEIs, tells Realtor.com. “What homeowners overlook is the settlement obligation at the end of the 10-year term. If the home has appreciated, the homeowner owes Hometap its share of that appreciation plus the amount it invested. Most homeowners cannot write that check, so they must refinance or sell.”

Multistate class-action lawsuits

In the case of Vacaville, CA, homeowner Marlene Crawford, who is now suing Hometap, she says in 2020 her home was appraised for just over $305,000 and the firm bought a 13% stake in her equity, giving her a lump sum of $44,000 to pay off bills while she was unemployed. However, the lawsuit claims she received only a little over $40,000 due to various fees and deductions. 

According to the complaint, the “complex and confusing” contract was underwritten without regard for Crawford’s income, assets, creditworthiness, or future ability to repay the lump sum.

“Because Hometap targets homeowners who cannot qualify for or afford a traditional mortgage—a significant subset of homeowners are at risk of being forced out of their homes by the Hometap loan when their ten-year contracts mature,” according to the filing. 

Similarly, plaintiffs Ryan Billey and Keicha Greenidge from New Jersey claimed in their February lawsuit against Hometap that they received a $98,000 lump sum from the company based on 13% of the value of their home, which was appraised at $802,000. 

Like Crawford, the New Jersey couple said their 10-year option contract was underwritten by Hometap without regard for their income, assets, or future ability to settle. 

According to their complaint, if Hometap were to exercise their option contract now, they would be on the hook for $177,000, nearly $80,000 more than what they were paid, and well above what they can afford.

Hometap’s agreement stipulates that if any of their clients cannot make the required payment, the company can foreclose on their property or force a sale to collect the owed amount.

In court filings, Hometap has denied the legal basis for the claims against its products, saying they are not residential mortgage loans subject to federal regulations on mortgages.

Is an HEI a mortgage loan?

At the heart of the legal dispute is whether the product offered by Hometap constitutes a mortgage loan.

The company insists it does not, but plaintiffs’ attorneys argue that it is a loan in everything but name, deliberately misbranded to circumvent federal and state lending laws and protections afforded to traditional borrowers.

The Truth in Lending Act (TILA), passed by Congress in 1968, requires that “consumers are offered and receive residential mortgage loans on terms that reasonably reflect their ability to repay the loans and that are understandable and not unfair, deceptive or abusive.”

Crawford’s class-action lawsuit alleges that Hometap violated TILA, alongside California laws requiring disclosures and protections for mortgages and consumer contracts. 

In Massachusetts, Attorney General Andrea Joy Campbell sued Hometap on nearly identical grounds, alleging that the firm engaged in “unlawful and predatory practices” that targeted distressed homeowners for profits in violation of state consumer protection laws.

“Amidst a growing affordability crisis, our lawsuit alleges that Hometap deliberately preyed upon financially vulnerable homeowners for profit, stripping them of their hard-earned home equity and putting them at unreasonably high risk of foreclosure,” said Campbell in February.

Hometap strongly denies the allegations

Hometap strongly pushed back against efforts to equate its products with traditional mortgages.

“We stand behind the transparency of our product and the education we provide to homeowners before signing,” a company representative tells Realtor.com. “States like Maryland and Illinois have codified specific exemptions, including ability-to-repay, or tailored rules for HEIs while regulating the products under their mortgage frameworks. They have done so because they recognize that these products are fundamentally different from mortgage loans. At Hometap, we remain committed to our mission of providing a combination of financial innovation and best-in-class customer service that enables people to get more from homeownership.”

Echoing the lawsuits, Cummings contends that Hometap and its competitors market their products as “not a loan” to avoid the disclosure requirements that protect borrowers under TILA.

“The Hometap lawsuits allege that the product functions as a loan in substance, regardless of what the contract calls it,” says Cummings. “If courts agree, and I expect they will, every HEI provider faces potential liability for years of noncompliance in origination.”

Still, Cummings stresses that the takeaway is not that HEIs are “universally bad” or that innovative financial vehicles are to be automatically avoided, but rather that stronger guardrails are needed to protect consumers.

“The affordability crisis means that new approaches to financing single-family homes are desperately needed,” says the lawyer. “Unfortunately, the only idea the federal government has offered to date is the 50-year mortgage, which makes no sense for most would-be homebuyers, which is why the private market has stepped in to address the need. What is needed is transparency when it comes to how these products are sold to consumers in terms consumers can actually understand and clarity on tax treatment.”