Presentation on Home Equity Sharing Agreements to the Washington State Senate, December 4, 2025

Summary

A slide presentation on Home Equity Sharing Agreements to the Washington State Senate Business, Financial Services & Trade Committee, dated December 4, 2025, from the Coalition for Home Equity Partnership (CHEP), described as the HESA industry group. It explains that a HESA is a form of equity financing in which a homeowner receives a lump sum in exchange for an investor's economic interest in the home, with no interest or monthly payments over a typical term of 10 or 30 years. The deck states that CHEP seeks regulation through the Department of Financial Institutions, including disclosures, caps on costs and licensing. It argues that mortgage rules such as TILA cost disclosures, ability to repay rules, high-cost home loan rules and MCR reporting do not fit HESAs, and asks the Legislature to clarify that HESAs are not reverse mortgages, citing Olson v. Unison.

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Presentation on Home Equity Sharing
Agreements to the Washington State Senate
Business, Financial Services & Trade
Committee
December 4, 2025
           1. Background
Table of   2. What is a HESA?

Contents   3. How to Regulate HESAs
                                      2
Background


             3
● There is a new type of home finance product available to
  Washington homeowners seeking access to their home’s
  equity. It’s called a Home Equity Sharing Agreement or
  HESA.

● HESA originators want to be regulated, and this regulation
  should:
   ○   protect consumers,
   ○   exclude bad actors, and
   ○   be clear and compatible with the structure of HESAs.


                                                               4
● At first glance, HESAs appear similar to mortgage loans,
  making sense to regulate it under existing mortgage laws.

● However, structurally HESAs are very different from
  traditional mortgage loans, making it impossible to fully
  comply. It’s a classic “square peg in a round hole.”



                                                              5
● The Coalition for Home Equity Partnership (CHEP), the
  HESA industry group, is seeking regulations that are similar
  in scope and spirit to existing mortgage regulations, such
  as:
   ○   Required disclosures
   ○   Consumer education
   ○   Caps on costs & fees
   ○   Licensing, reporting, examination and enforcement
       authority with the Department of Financial Institutions
       (DFI).
                                                                 6
● The DFI has begun drafting regulations for HESAs, and
  CHEP members have been engaged in providing feedback,
  sample disclosures and financial information to the
  Department.




                                                          7
What is a HESA?


                  8
● A HESA is a fundamentally different approach to providing
  home equity. It is a form of equity financing, as opposed to
  a traditional mortgage, which is a form of debt financing.

● Although relatively new to residential real estate, equity
  financing is widely used in the rest of the economy.



                                                                 9
● Debt Financing
   ○   Capital in exchange for periodic principal and interest payments
   ○   Absolute promise to repay the principal amount
   ○   Primarily underwritten based on creditworthiness and ability to service debt
       payments.


● Equity Financing
   ○   Capital in exchange for an economic interest in an asset
   ○   No periodic payments, no promise to repay the investment amount
   ○   Investment return is deferred to a future settlement event
   ○   Primarily underwritten based on asset characteristics and future value.
                                                                                      10
● How a HESA works:
   ○   The homeowner receives a lump sum of cash from the HESA originator,
       funded by an investor.
   ○   The investor receives an economic interest in the property (either a
       percentage of the home’s final value or change in value). The homeowner
       remains the sole owner of the home. The HESA originator records a lien,
       but does not appear on title and has no right of occupancy.
   ○   The homeowner can use the funds for the full term of the HESA (typically
       10 or 30 years) without any interest charges or monthly payments.
   ○   During the term, the homeowner can settle the contract at a time of their
       choosing, usually upon sale of the home or upon a refinance.

                                                                                   11
● How a HESA works:
   ○   In exchange for the cash investment, at settlement the investor will receive a return.
       There are currently two basic product types in the market, so the return will be either:
        ■   The initial invested amount plus a percentage of the home’s change in value (up
            or down)
        ■   A percentage of the home’s entire value
   ○   Some “change in value” products apply a discount to the starting home value. Most
       products have a built-in cost cap.
   ○   The homeowner pays an origination fee and transaction expenses at closing. The
       homeowner pays transaction expenses when they exit from the agreement.
   ○   In general, if the home value increases, the settlement payment increases, and if the
       home value decreases, the settlement decreases.

                                                                                              12
● How a HESA works:
   ○   Initial home values are established by an appraisal, identical to those used
       in traditional mortgage transactions.
   ○   Generally, if the home is sold, the ending home value is the sales price.
       Otherwise, the value is established by a third-party appraisal.




                                                                                      13
● Homeowner Benefits:
   ○   Access to home equity without incurring interest charges or needing to
       make periodic payments. HESAs are also not reported as debt to credit
       agencies.
   ○   For most homeowners, home equity is their largest but least accessible
       source of wealth. HESAs allow easier access to meet important financial
       needs like paying down expensive debt, medical or college expenses, or
       funding a small business.
   ○   HESAs are generally available to more homeowners than HELOCs or other
       mortgage products, especially those with lower credit.


                                                                                 14
HESAs

550-500




          15
Regulating HESAs


                   16
● Key Differences Between HESAs and Mortgage Loans:
   ○   No interest rate or principal balance, no periodic payments
   ○   No promissory note, no promise to repay an absolute amount
   ○   Amount of future repayment unknown at origination and based on the
       home’s future value
   ○   Shared risk and reward between homeowner and investor
   ○   Non-recourse, the investor cannot look to the homeowner to recover any
       deficiency
   ○   No reporting to credit agencies
   ○   Asset-based underwriting versus credit-based
                                                                                17
● Existing mortgage regulations were designed for loans,
  which assume product features absent in HESAs like an
  interest rate and set periodic payments.
● Regulating HESAs under these provisions can create
  unintended consequences, consumer confusion, and
  significant regulatory uncertainty.



                                                           18
19
● Examples of Regulatory Incompatibility
   ○   Basic Cost Disclosures
   ○   Ability to Repay (ATR) Rules
   ○   High-Cost Home Loan Rules
   ○   MCR Reporting




                                           20
● Basic Cost Disclosures:
   ○   Under TILA, mortgage loans disclose a singular interest rate & APR to
       consumers up front.
   ○   HESAs don’t charge interest and because the amount of repayment will
       depend upon the home’s future value, it is impossible to provide a single
       annualized cost value.
   ○   We suggest allowing disclosures be made in tables showing multiple
       specific scenarios for given home appreciation and term length.



                                                                                   21
● Ability to Repay Rules:
   ○   Under TILA, mortgage lenders are required to analyze a homeowner’s
       ability to make their monthly payment. This analysis assumes there is a
       periodic payment to be made, which HESAs do not have.
   ○   HESA underwriting is focused on ensuring there is enough equity in the
       home. In addition, typical HESA term lengths are 10 or 30 years, and it is
       not possible to predict a homeowner’s ability to repay that far into the
       future.
   ○   Like HELOCs and reverse mortgages, HESAs should be exempted from
       traditional ATR rules.


                                                                                    22
● High-Cost Home Loan Rules:
   ○   Under state and federal law, mortgages with interest rates above a certain
       threshold are considered “high-cost” and subject to additional regulation.
       As HESAs have no interest rate, there is no way to make this
       determination.
● MCR Reporting
   ○ Reporting in accordance with required fields, especially as it relates to
       payments and delinquencies, is impossible for the HESA product.



                                                                                    23
● Classification as a Reverse Mortgage
   ○   Earlier this year, the 9th Circuit released an unpublished opinion in Olson v.
       Unison, which held that HESAs could be considered a reverse mortgage
       under Washington law. Although this decision was vacated upon
       settlement, it can still cause confusion to Washington homeowners.
   ○   Neither the HESA industry nor the DFI agree with this conclusion, and the
       DFI does not regulate HESAs as reverse mortgages.
   ○   However else the Legislature wishes to address HESAs, we ask you to
       clarify that HESAs are distinct from reverse mortgages and should not be
       regulated as such.


                                                                                    24


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