True Lender Developments — Home Equity — Senate Committee on Business, Financial Services, Gaming & Trade (November 30, 2023)

Summary

A slide deck titled Home Equity Share Agreements and True Lender Developments, given to the Senate Committee on Business, Financial Services, Gaming & Trade on November 30, 2023 by two directors of the Department of Financial Institutions. The first part compares home equity share agreements with home equity lines of credit and lists their termination terms, consumer benefits, consumer concerns and regulatory treatment, noting that Connecticut and Maryland have passed legislation to treat them as residential mortgage loans. The second part addresses the true lender question in FinTech and bank loan programs and reports results of an inquiry report issued September 1, 2023, including at least $18.9 million loans to 6,763 consumers. It closes with options such as litigation, opting out of DIDMCA, and legislation.

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Home Equity Share Agreements
and True Lender Developments

Senate Committee on Business,
Financial Services, Gaming & Trade
                                      November 30, 2023

  Drew Bouton, Director of Policy and Legislative Relations
                 Ali Higgs, Director of Consumer Services
Home Equity Sharing Agreement
 May also be known as shared appreciation agreements or home
  equity investment options.

 Contract between a homeowner and an investor.
    Homeowner receives a sum of money in exchange for granting a
     percentage of equity interest in the home to the payer.


 Different than a home equity loan.
Home Equity Line of Credit                Home Equity Share Agreement

                                             Requires regular installment
   Requires regular installment              payments toward repayment of
    payments toward repayment of              principal and interest.
    principal and interest.
                                             May or may not entail monthly
   Market value appraisal or valuation       payments by homeowner to payer.
    used to determine loan eligibility.
                                             Appraisal is discounted from
   Payments may be fixed or variable         current market value to create a
    with respect to interest amount.          risk adjustment for payer.

   Amount to be repaid over time is         Payment of equity share due at
                                              termination or event in contract,
    set in the loan agreement.
                                              such as home sale.
   Secured by a deed of trust.              Upfront payment that the
                                              consumer receives is usually less
                                              than the value of the percentage
                                              equity consigned to the payer.
                                             Secured by a lien.
HESA
Contract Termination

 Termination occurs if:
    Homeowner notifies Investor that they wish to repurchase the
     option; or
    Homeowner sells home.

 Determine Homeowner’s Final Payment to Investor:
    Equals the Final Home Value * Investor Percentage and fees.

    Can be a costly outcome for homeowners.
HESA
Consumer Benefits


   Access to home equity liquidity if consumers cannot find
    conventional home loans.

   No monthly payments.
HESA
Consumer Concerns

   Agreements structured as option contracts:
       Exempt from mortgage loan disclosure requirements.

       No foreclosure protections.

       Home improvements must be approved by payer.

       Payment received by homeowner not equal to present value of
        equity consigned in the agreement.
       Contracts are complex lengthy.

   Clouds title, making conventional refinancing difficult or
    impossible.
   Consumers have complained that they thought they were taking
    out a loan, rather than selling their equity.
HESA
Regulatory Treatment

 HESA is modeled as a real estate options contract.
    Courts tend not to view option contracts as loans.

    Recent ruling in an active case in Western Washington District
      Federal Court found that the agreement is not a loan.
 Connecticut and Maryland have passed legislation to treat
  HESAs as residential mortgage loans.
 California limits use of HESAs only to curing of deficient
  mortgages by primary mortgage lender in loan modifications.
The True Lender Question
Why is the true lender question important?


 The lending partnership between a non-depository loan
  company (FinTech) and a depository institution (a bank or
  credit union) can make it difficult to determine who is the
  “true lender” of a loan.

 Non-depository loan companies (FinTechs) and depository
  institutions (banks and credit unions) are subject to different
  regulations and interest rate limits.
The True Lender Question
Lifecycle of Loans made through FinTech and Bank Loan Programs




                    Submits
                loan application

Consumer
                     online         FinTech’s                    Bank
                                     website
The True Lender Question
Lifecycle of Loans made through FinTech and Bank Loan Programs




                Approve/deny


    Consumer
                                    FinTech’s                    Bank
                                     website
                Execute loan
                documents

                Disburses loan
The True Lender Question
Lifecycle of Loans Made through FinTech and Bank Loan Programs




                 Makes loan
                 payments
                                    FinTech’s
                                     website
   Consumer                                                     Bank
                                   FinTech acts as
                                     servicer or
                                     subservicer
The True Lender Question
 Who is the “True Lender”?
    The Bank?

    Or the FinTech?



 What is the Concern?
    The FinTech is not necessarily licensed or regulated as it is connected
     to the depository.
    The depository is permitted to “export” its home state’s interest rate.

    Lending partnerships may result in higher interest rates charged to
     Washington consumers.
The True Lender Question
Inquiry Report issued September 1, 2023
The True Lender Question
Inquiry Report issued September 1, 2023


 Results of the Inquiry
     Partner banks are primarily located in Utah.

     FinTech (or affiliate) will generally purchase a 95-99% interest of
      the loan receivables from the partner bank.
     FinTech will generally act as servicer for the loan.

     Exact data for Washington could not be ascertained.
         At least $18.9 million loans

         6,763 consumers

        **Based on YE 2022 from three companies.
The True Lender Question
Options to address the issue


 Engage in litigation
       California

 Opt-out of the Depository Institutions Deregulation and
   Monetary Control Act (DIDMCA)
       Iowa - 1980
       Colorado (HB23-1229) - 2023

 Pass legislation
       Hawaii, Georgia, Illinois, Maine, Maryland, Minnesota, Nebraska, New Mexico,
        Nevada, New Hampshire, and Wyoming
The True Lender Question
Legislative Option – General Features



 Anti-evasion principles

 Predominant economic interest of the loan

 Other factors to determine who the true lender is
     Who markets, brokers, facilitates, or services the loan?

     Who holds the right to acquire the loan?

 Totality of the circumstances indicates the person is the lender
Questions

Drew Bouton
Director of Policy and Legislative Relations
Department of Financial Institutions
Drew.Bouton@dfi.wa.gov



Ali Higgs
Director of Consumer Services
Department of Financial Institutions
Ali.Higgs@dfi.wa.gov


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