CFPB Report Examines Risks of Home Equity Contracts

The Consumer Financial Protection Bureau (CFPB) on Jan. 15 issued a report analyzing the risks associated with home equity contracts.

These contracts—often called home equity “investments” (HEIs)—are relatively new financial products in which homeowners get an upfront payment from a company and, in exchange, must repay a single lump sum repayment in the future that is based, in part, on the home’s value. The homeowner retains the right to occupy the home and assumes all ongoing financial obligations for the home. They must repay by the end of the contract term, often 10 to 30 years, or when a triggering event such as a home sale occurs. The repayment amount can be in the hundreds of thousands of dollars and is based on a formula that considers the home’s value and generally ensures that the repayment amount is significantly larger than the upfront payment under most home price scenarios, according to the CFPB.

Key findings:

• Consumers primarily use home equity contracts for debt consolidation and home improvements, though some consumers have reported that they use the funds for real estate investing or savings for or during retirement. The median home equity contract customer was in their 50s when they signed the contract and roughly 90% or more had mortgages that took a senior lien position to the home equity contract, according to a review of recent home equity contract securitizations.
• Home equity contracts are often marketed as an alternative to a cash-out refinance, home equity line of credit (HELOC), or traditional reverse mortgage loan, like a federally insured home equity conversion mortgage (HECM). Advertisements for home equity contracts tout large upfront payments and claim home equity contracts are not debt. Marketing websites state that home equity contracts have “no monthly payments” and “no interest,” and are available to homeowners who have no income and low credit scores.
• The industry is small but has expanded in recent years, driven in part by an emerging secondary market for securitizations. The first home equity contract company was founded in 2006 and competitors joined the market starting in 2015. The market got a boost in 2023 when Morningstar DBRS started rating securitizations with home equity contracts. In the first 10 months of 2024, the four largest home equity contract companies securitized approximately $1.1 billion backed by about 11,000 home equity contracts. Despite the expansion, home equity contracts are still a niche product in comparison to the 1.2 million HELOCs originated during the four quarters ending 2024 Q2.
• Homeowners must repay a home equity contract with a single payment—the amount of which can be difficult to predict and can run in the hundreds of thousands of dollars. Each home equity contract company has its own methodology for calculating the repayment amount, but all generally require full repayment by the end of the term, typically 10 to 30 years, or upon a trigger event such as the sale of the home. The repayment amount is based, in part, on the home’s value at the time of the settlement, which makes the total financing cost uncertain.
• Home equity contracts are expensive compared to other home-secured financing options. Home equity contracts often carry features that boost the settlement amount due from the consumer and insulate home equity contract providers from losses in all but extreme home price declines. Under many contracts, the settlement amount grows at a rate of 19.5-22% per year in the early years, which is substantially higher than interest rates on most home-secured credit, and somewhat less than interest rates on unsecured debt like credit cards.
• Home equity contracts are complex financial contracts that can be difficult to understand or compare to other options, and companies currently provide non-standardized disclosures. The final repayment amount depends on a complex interplay of numerous factors, some of which won’t be known prior to settlement. For example, some home equity contract companies credit the homeowner for renovations or improvements that increase the value of the home, while others do not. As another example, some home equity contract companies place an upper limit on the total settlement amount a consumer could owe them, while others have no limit to the amount a consumer might end up paying.
• Consumer complaints are limited so far but provide a preview of consumers’ issues with home equity contracts. A review of complaints shows homeowners that felt frustrated or even misled about various aspects of home equity contracts—including confusion about the financing terms, surprise at the size of the repayment amounts, disputes about appraisal values, difficulty with refinancing due to the existence of the home equity contract, and frustration that they felt their only option to get out of the contract was to sell their home.
• Consumers could be forced to sell their homes to pay off the contracts. These contracts generally require that consumers repay the full settlement amount by the end of the term or upon a triggering event. Those who want to stay in their homes must either liquidate other assets or qualify for enough financing to repay the home equity contract in full. Homeowners who cannot pay the full settlement amount at the end of term risk having to sell their home or face foreclosure.

According to the CFPB, home equity contracts carry features that echo some of the risky loan structures that were common in the lead up to the 2008 housing crisis. Home equity contracts advertise “zero monthly payments,” require consumers to assume all costs for property taxes, hazard insurance and property maintenance, and require a large settlement payment, similar to the loans originated in the early 2000s that were negative amortizing and required a balloon payment at the end of the loan term. Home equity contracts also tout loose underwriting requirements, enabling them to reach homeowners with low credit scores or little to no income.

The bureau reported that home equity contract offerings have primarily targeted existing homeowners. However, as of late 2024, at least two companies have announced new home equity contracts aimed at homebuyers. Product details are limited, but these home equity contracts appear to be in second-lien position behind a more traditional mortgage and would replace part of the homebuyer’s down payment.

In the report, the CFPB analyzes the cost of these contracts to consumers versus other home-secured finance options.

In the example, a consumer gets a mainstream $50,000 HELOC with a 9% interest rate and interest-only payments for 10 years. Their payments would be $375 per month for the first 10 years. After three years, they would have paid $13,500 in interest. At 10 years, they would have paid $45,000 in interest and still owe the original $50,000. In comparison, using the example home equity contract the CFPB detailed in the report with a $50,000 upfront payment, the consumer would have to pay between $94,074 to $215,892 under the home price appreciation scenarios discussed in the report. The home equity contract would be more expensive overall than the HELOC if the home appreciates. It would be less expensive overall only if the home value falls by at least 5% from its starting value 10 years earlier. However, under the strongest home price appreciation scenarios, the consumer would repay more than twice as much overall for the home equity contract than for the HELOC.

ALTA Policy Forms Update

The ALTA Board of Governors in October approved a recommendation to adopt revisions to the 2021 ALTA Forms Collection, as well as the approval of two new Collateral Assignment endorsements. The forms are now final and went into effect Jan. 2 after going through a comment period.

The new or revised endorsements include:

• ALTA 48.0 Endorsement - Tribal Limited Waiver and Consent (Revised Endorsement with a modified name to reflect changes): When determining the scope of coverage under a title insurance policy, it is sometimes advisable to seek judicial guidance through a declaratory relief action. Because Native American tribes enjoy sovereign immunity, filing a declaratory relief action may be unavailable without a waiver of sovereign immunity. The original 48 Endorsement, issued in 2022, was designed to address these situations by providing a limited waiver of sovereign immunity as part of the policy. This new revision of the 48 Endorsement (2021 v. 02.00 01-02-2025) addresses questions that have been raised as to purpose and scope of the original 01.00 version of the endorsement. 
• ALTA 48.1 Endorsement - Tribal Limited Waiver and Consent Agreement (New Endorsement): While the ALTA 48 Endorsement mentioned above provides for a limited waiver of sovereign immunity for a particular transaction, some tribes and tribal entities have their own form of sovereign waiver that they prefer, and in some cases would prefer to provide a waiver for a series of transactions. The ALTA 48.1 Endorsement will provide the option of entering into separate sovereign immunity waiver agreements between an underwriter and the tribal. This sovereign immunity waiver agreement would then be referenced and incorporated into the policy by the ALTA 48.1 on each transaction, avoiding the need to require tribal authorization and execution for each and every transaction. 
• ALTA 36.9 Endorsement - Energy Project – Minerals and Other Subsurface Substances – Land Under Development (New Endorsement): This endorsement will provide coverage for removal or alterations of an electric facility that is built according to endorsement defined plans, where the loss or damage results from the later use of the surface to extract (or otherwise develop) subsurface substances, including minerals.
• ALTA 22.2 Endorsement – Land Address (New Endorsement): This new ALTA Endorsement will provide coverage for loss or damage if the unimproved land is not known by a specific stated address within the records of a specified entity. These entities could be, for example, the assessor’s office or post office, for a given endorsement issuance.

Technical Corrections

A technical correction was made to the ALTA JR1 Endorsement following a review by ALTA Forms Committee. The technical corrections include:  

1. Changing the format on a drafting instruction to comply with current standards (Paragraph 3);
2. Adding two additional drafting instructions for clarity (Paragraph sections 4.a. and 4.b.);
3. Removing an extra period on two different romanettes (Paragraph sections 4.a.ii. and 4.b.ii.).

ALTA Forms Development Process

As always, new and revised forms have been developed by the ALTA Forms Committee and approved by the ALTA Board. An opportunity to review and comment for new and revised ALTA forms was extended to ALTA members, policy forms licensees and industry customers before final publication. 

Technical corrections, designed to address smaller non-substantive changes to existing ALTA forms, are published upon the recommendation of the ALTA Forms Committee.   

Purpose and Use of ALTA Forms Collection

The forms, in general, are made available for customer convenience. The parties are free in each case to agree to different terms and the use of these forms is voluntary unless required by law. The forms are copyrighted. Use is restricted to ALTA policy forms licensees (including ALTA members) in good standing as of the date of use. Permission to reprint may be requested by contacting [email protected].  Policy forms are available at https://alta.org/policy-forms.

Alert: Spoofed Membership Email Appears to Come from ALTA

ALTA is alerting members to delete a phishing email with the subject line “Your ALTA Membership."

Like title and settlement companies, email from ALTA can be spoofed. In the latest scheme, a phishing email appears to come from ALTA regarding payment for membership renewal.

Note the fraudulent email address in the image. This is a phishing email.

Do not open the attachment, respond or click any links in the email. In addition, you should contact your IT department and block the domain of the email or the IP address that it is coming from. Once the scammers catch on, they will likely switch email domains.

It's recommended to take extra precaution when reviewing email on smart phones as it can be difficult to see the actual email address behind the sender's name.

ALTA will never contact you and ask for login/passwords, credentials, credit card information, or payments by phone or via email. If an ALTA member is ever concerned about whether a person contacting them by phone or email for any reason is employed by ALTA, they should end the communication or conversation and call ALTA at 800-787-2582 or email [email protected] for confirmation.

Tips to Protect Yourself

ALTA understands that phishing attempts can be very clever, but we encourage everyone to slow down. It’s always a good idea to:

1. Carefully review all email headers to be sure that messages are coming from people or companies who are known to them; when in doubt, forward the message to the intended recipient to be sure that a reply does not end up in the wrong hands.
2. Hover over any links in a message and see where a click will go – even links which appear to be a complete URL spelled out. Anything could be lurking beneath the that link.

What if You Fell for the Scam?

1. Call your credit card company using the phone number on the actual card or on the card-issuer’s website.
• Report fraud and review recent charges with a card-issuer representative.
• Have the credit card canceled/replaced.
• Consider freezing your credit if you provided additional non-public personal information while making the payment.
2. Report the incident to your IT department.
• Consider a scan of your computer for viruses or vulnerabilities if you used the computer to reply to the email or clicked on the URL in the body of the message.
• Consider changing your login/password information, especially if it’s stored for ease of use.

Fresh Phish: Fake SharePoint Fax

Breaking Down the FinCEN Anti-Money Laundering Rule: What Is Considered Residential Property?

The U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) issued a notice of proposed rulemaking that would require certain people involved in real estate closings and settlements to report information to the agency about all-cash residential transactions nationwide involving legal entities and trusts. You can read a summary of the proposed rule's requirements here.

ALTA analyzes various parts of the proposal to help title and settlement professionals understand the impact it will have on their operation.

Here’s a look at what FinCEN considers residential property. Since FinCEN’s proposed real estate rule only requires reporting for residential transactions and not commercial, it’s important to understand the distinction which may be different than the way you think about it in your business landscape.

For the sake of this rule, FinCEN defines “residential property” in three ways: 

1. real property designed for one- to four-family occupancy
2. vacant or unimproved land zoned (or permitted) for construction for 1-4 family occupancy
3. shares in a cooperative housing corporation

To determine if one of these three factors apply to a property, consider the following questions:

• Can I infer that a property is residential from its purchase contract?
• If the property is vacant land, is it zoned as residential or commercial?
• Hint: This can be obtained from the county or city’s zoning office
• Does the property’s tax assessor data indicate a “building type?”
• Does the building appear to be designed for a family of four or less?

It's important to note, however, that just because a property meets one of these above indicators, does not necessarily mean it needs to be reported to FinCEN. If the property meets one of these indicators AND is purchased via an all-cash transaction, then it must be reported to FinCEN.

Additional Articles

• When Do you Have to Report a Transaction
• Who is in Charge of Reporting?

FBI Reports Cybercrime Losses Hit $12.5B, Record Number of Complaints Filed in 2023

Source: FBI Internet Crime Report

Cybercrime losses rose to $12.5 billion and and reported incidents reached all-time highs last year, according to the 2023 FBI Internet Crime Report.

The FBI reported it received a record 880,418 complaints in 2023. This is nearly a 10% increase in complaints received, and represents a 22% increase in losses suffered, compared to 2022. The FBI said that incidents continue to be underreported.

“The cyber landscape is threatened by a multitude of malicious actors who have the tools to conduct large-scale fraud schemes, hold our money and data for ransom, and endanger our national security,” said Timothy Langan, executive assistant director for the FBI. “Profit-driven cybercriminals and nation-state adversaries alike have the capability to paralyze entire school systems, police departments, healthcare facilities, and individual private sector entities. The FBI continues to combat this evolving cyber threat. Our strategy focuses on building strong partnerships with the private sector, removing threats from U.S. networks, pulling back the cloak of anonymity many of these actors hide behind and hitting cybercriminals where it hurts: their wallets, including their virtual wallets.”

In one incident involving a real estate transaction last year in Stamford, Conn., an individual was in the process of purchasing a home. The victim received a spoofed email from their supposed attorney instructing them to wire $426,000 to a financial institution to finalize the closing. Two days after the wire was initiated, it was realized the instructions came from a spoofed email. Upon notification, the IC3 Recovery Asset Team (RAT) immediately initiated the Financial Fraud Kill Chain (FFKC) process to freeze the fraudulent recipient financial bank account. Collaboration with the domestic recipient financial institution and the local police department confirmed $425,000 was frozen and returned to the individual, which enabled them to complete the real estate transaction.

In 2023, the FBI initiated the FFKC on 3,008 incidents with potential losses of $758 million.

FBI Guidance for Sending Wire Transfers

• Contact the originating financial institution as soon as fraud is recognized to request a recall or reversal and a Hold Harmless Letter or Letter of Indemnity.
• File a detailed complaint with gov. It is vital the complaint contain all required data in provided fields, including banking information.
• Never make any payment changes without verifying the change with the intended recipient; verify email addresses are accurate when checking email on a cell phone or other mobile device.

Last year, ALTA released an update to its Best Practices, which included a recommendation to use a wire verification service when sending money.

Report Incidents to IC3

Reporting incidents to the FBI’s Internet Crime Complaint Center (IC3) is important to helping law enforcement fight cybercrime. Click here to report a complaint.

ALTA Resources

• ALTA Outgoing Wire Preparation Checklist: Use this checklist as a best practice for verifying outgoing wire information.
• ALTA Rapid Response Plan for Wire Fraud Incidents: Use this tool to customize your action plan when a wire fraud attempt occurs.

Fresh Phish: U.S. Post Office Text Phishing Message

Alert: Spoofed Email Appears to Come from ALTA President

ALTA is alerting its members of phishing emails with "ALTA" and the company name in the subject line.

Like title and settlement companies, email from ALTA leadership and staff can be spoofed. In the latest scheme, a phishing email appears to come from ALTA President Don Kennedy telling recipients that ALTA's regulatory department has made multiple attempts to contact them to deliver a notice that requires attention. Note the fraudulent email address in the image. This is a phishing email. ALTA’s system was not breached. Your information is safe.

Do not open the attachment, respond or click any links in the email. In addition, you should contact your IT department and block the domain of the email or the IP address that it is coming from. Once the scammers catch on, they will likely switch email domains.

It's recommended to take extra precaution when reviewing email on smart phones as it can be difficult to see the actual email address behind the sender's name.

ALTA will never contact you and ask for login/passwords, credentials, credit card information, or payments by phone or via email. If an ALTA member is ever concerned about whether a person contacting them by phone or email for any reason is employed by ALTA, they should end the communication or conversation and call ALTA at 800-787-2582 or email [email protected] for confirmation.

Tips to Protect Yourself

ALTA understands that phishing attempts can be very clever, but we encourage everyone to slow down. It’s always a good idea to:

1. Carefully review all email headers to be sure that messages are coming from people or companies who are known to them; when in doubt, forward the message to the intended recipient to be sure that a reply does not end up in the wrong hands.
2. Hover over any links in a message and see where a click will go – even links which appear to be a complete URL spelled out. Anything could be lurking beneath the that link.

What if You Fell for the Scam?

1. Call your credit card company using the phone number on the actual card or on the card-issuer’s website.
• Report fraud and review recent charges with a card-issuer representative.
• Have the credit card canceled/replaced.
• Consider freezing your credit if you provided additional non-public personal information while making the payment.
2. Report the incident to your IT department.
• Consider a scan of your computer for viruses or vulnerabilities if you used the computer to reply to the email or clicked on the URL in the body of the message.
• Consider changing your login/password information, especially if it’s stored for ease of use.

ALTA SPRINGBOARD: Getting Started With an Artificial Intelligence Strategy

ALTA President Don Kennedy and Argun Kilic, CEO and co-founder of Areal.ai, during a panel discussion at ALTA SPRINGBOARD on artificial intelligence.

By Megan Hernandez

Seeing a new technology like artificial intelligence (AI) catch fire often is exciting and intimidating. ALTA President Don Kennedy sat down with ALTA members Argun Kilic, CEO and co-founder of Areal.ai; Hoyt Mann, president and co-founder of Alanna.ai; and Matthew Younkle, CEO and co-founder of Pythonic Corp., during the 2024 ALTA SPRINGBOARD to discuss the benefits and challenges of incorporating an AI technology into a title insurance operation.

AI is an umbrella term that in its simplest form refers to the science of making machines that are focused on mimicking human tasks. Branches of AI include machine learning, which allows a system to learn from experience rather than being explicitly programmed to do a task; deep learning, a more complex type of AI involving neural networks that allows computers to observe, learn and react; and natural language processing, which is used to understand and process human language, such as in speech recognition and text analysis applications.

But knowing what AI is and knowing how to utilize it are two different things. Start small, Mann suggests. “We probably each could think of a few daily tasks that don’t use a lot of brain power that AI could take on for us,” he said.

“Pick a few small tasks and use AI to solve them,” Younkle said. “If you had an army of interns at your agency, what would you have them do?”

Running a business is time consuming, but you can get started by tasking AI with managing your calendar, building an email list or transcribing meeting notes, giving you more time to focus on your customers—or your next big idea.

Once you are aware of the tasks you’d like to hand off, you can begin to look for appropriate AI vendors. Finding the right vendor that fits your business can be a project in itself. “Look for success stories,” Kilic said. “Has the vendor done this before? Do they have references? What does success look like? Make sure your vendor can answer that question.”   

Security is another issue you need to be aware of when interviewing vendors. “Ask for a copy of their information security policy and proof of insurance,” Younkle said. “Get written confirmation that they’re not sending your data to a third party to train other AI models.”                                                                          

Of course, once you’ve selected a vendor, deployment challenges remain. Most of the time, the major obstacle is your internal team’s attitude about the technology. “I think it’s psychological,” Mann said. “There is a high amount of fear that there is something not human inserting itself between you and your customer.”

No AI application is perfect, and there are still plenty of bugs to work out. For example, ChatGPT is a popular generative AI application that is trained to follow a user’s instructions in a prompt and provide a detailed response. However, because ChatGPT has been directed to provide a response, “occasionally, it will hallucinate” if it can’t find the correct answer on the internet, Kennedy said.

“That’s a major problem that we see,” Kilic said. ChatGPT “will force itself to give you an answer” and confidently provide incorrect information.

Mann said there’s no need to be afraid that AI will take your job. “AI is not perfect, nor will it be. AI is not going to be (human) and never will be,” he added.

“A lot of those good conversations you’re having with customers are already becoming fewer and fewer because your workload is so great,” Mann continued. Humans “are under pressure to be more productive: We’re trying to answer more email, more phone calls, and a lot of time that’s after hours. To have AI take on some of those tasks—some of that pressure—is something we all need to get our heads around. I don’t want our industry to be the one with its head stuck in the sand because we’re afraid.”

ALTA Policy Forms Update

The ALTA Board of Governors on Feb. 9 approved a recommendation to adopt revisions to the 2021 ALTA Forms Collection, as well as the approval of two new Collateral Assignment endorsements. The forms went into effect April 2 after going through a comment period.

2021 ALTA Forms Collection: Revisions to Forms and Endorsements

• Short Form ECRLP Policies (Assessment Priority and Current Assessments versions): The revision will resolve problems with incorporating a state statute as an exception, by reference to Schedule B in the updated versions. The revised version enables incorporation of the appropriate state statutes directly by incorporating Endorsement 8.1 (Environmental Protection Lien).  A redline of the change is as follows:

• Endorsement 3.3 (Zoning – Completed Improvement – Non-Conforming Use): This revision is designed to address coverage for a permitted non-conforming improvement, coverage for specified zoning classification, and to allow for the checkbox selection of the specific zoning matters that will be covered if removal or alteration results, rather than automatic inclusion of a blanket list of covered zoning matters.
• Endorsement 42 (Commercial Lender Group): The revision is needed for alignment with the 2021 Forms Collection.  It replaces what is now an incorrect reference to a base policy provision in the 2021 collection with the new defined term “Obligor.” A redline of the change is as follows:

2021 New ALTA Endorsements

• Endorsement 10.2 (Collateral Assignment) and Endorsement 10.3 (Collateral Assignment and Date Down): The new Endorsements 10.2 and 10.3 are designed to address collateral assignments of an insured mortgage.

These forms may be downloaded at alta.org/policy-forms in the section titled “For Public Comment | Recently Adopted Forms – Not Published” and comments may be submitted to [email protected].

As always, the forms have been developed by the ALTA Forms Committee and approved by the ALTA Board. An opportunity to review and comment is extended to ALTA Members, Policy Forms Licensees, and industry customers before final publication.

Technical Corrections

The following technical corrections to the ALTA Forms Collection have also been made:

• Endorsement 14.0, 14.1, 14.2, 14.3: Opinions from industry expressed that the ALTA 2021 14-series endorsements with the current wording in their definition of “Advances” could be interpreted to limit interest to only amounts expended to prevent deterioration of the property. The Forms Committee decided to clarify the language by replacing two semi-colons with commas to clarify that the application of the interest is not limited to the single item, but to all advances. A redline of the change is as follows:

The pending technical corrections to the ALTA 14-series endorsements are available at alta.org/policy-forms in the “Technical Corrections – Effective April 2, 2024” section, along with a single redline document reflecting the change being made to the four endorsements.

Purpose and Use of ALTA Forms Collection

The forms, in general, are made available for customer convenience. The parties are free in each case to agree to different terms and the use of these forms is voluntary unless required by law. The forms are copyrighted, and use is restricted to ALTA Policy Forms Licensees (including ALTA members) in good standing as of the date of use. Permission to reprint may be requested by contacting [email protected]. 

Questions or Comments?

If you have comments or concerns, contact Steve Gold at [email protected].