On August 21, a Massachusetts superior court denied a motion to dismiss filed by a financial technology company offering a home equity investment (HEI) product. The financial technology company asserted that the HEI is an option to acquire a percentage ownership in property in exchange for a cash payment. It pays homeowners for the right to obtain a percentage possessory interest in the homeowner’s property in the future upon the occurrence of various contingencies, including the homeowner’s failure to repay (settle) the option payment (investment amount) within ten years. The Commonwealth, however, alleged that the company’s HEI product is effectively an illegal mortgage loan (count I), violated the criminal usury statute (count II), had been marketed deceptively (count III), was unaccompanied by required state and federal loan disclosures (count IV), and is an unfair, oppressive or otherwise unconscionable product (count V). The Commonwealth is seeking a declaration that all HEI contracts with Massachusetts consumers are unlawful mortgage loans and subject to the criminal usury statute, a permanent injunction barring further violations of the Commonwealth’s general laws, chapter 93A, reformation of the HEIs in the Commonwealth, an order requiring the financial technology company to pay restitution, and an award of civil penalties and costs.

The court found that the Commonwealth had plausibly alleged the HEI product is a loan. The court noted, as alleged by the Commonwealth, that the company provides funds to homeowners “with a requirement that it be repaid,” and that the HEI product’s structure “ensures there is no substantial risk” to the company’s principal. Repayment occurs either after ten years “with a substantial increase” or through foreclosure or sale. In explaining the option, the court stated “the Commonwealth alleges that all the value for the percentage possessory interest in the real property is paid as consideration for the alleged option and not when the option is exercised” and that “the mortgage does not secure the option” as the company argued, but as repayment because the company “has no intention of becoming a joint owner” of any homeowner’s property. Based on these alleged facts, the court held that the motion to dismiss counts I, II and IV are denied.

The court also allowed state claims of deceptive marketing and unfair practices (count III) to proceed, stating that whether the company’s conduct is unfair, oppressive or otherwise unconscionable, and whether its marketing was deceptive, are questions of fact that should be explored during discovery.

Finally, the court rejected arguments that the product’s “novel” structure exempts it from being an unfair, oppressive or unconscionable product (count V), concluding that it was appropriate to measure the HEI against existing consumer protections for homeowners “who seek to access their equity” through traditional or reverse mortgage products. The decision does not address the merits of the claims but permits the lawsuit to proceed to discovery.