9th Circuit Holds that Home Equity Investment Product Constitutes Reverse Mortgage Under WA State Law

In a recent opinion, the U.S. Court of Appeals for the Ninth Circuit held that a California real estate company’s “shared investment” product constitutes a reverse mortgage under Washington state law.

According to the plaintiffs-homeowners, they received a flyer in the mail from the company advertising cash in exchange for home equity with no interest charges, no monthly payments, and no added debt. Subsequently, the homeowners entered into an agreement, as part of which the company advanced about $65,000 in exchange for “an option to purchase” a 70% ownership interest in their home secured by a deed of trust.

When later contemplating selling their home, the homeowners claimed that paying out the company’s option, in addition to a conventional mortgage, would leave them with negligible sale proceeds.  Consequently, the homeowners sued the company, alleging that the “shared investment” was effectively a reverse mortgage that failed to comply with the statutes regulating such mortgages. The district court dismissed the case, holding that the arrangement did not constitute a “loan” under the relevant statutes.  WBK previously discussed the district court’s order here.  The Ninth Circuit reversed the dismissal and remanded the case for further proceedings.

Under Washington state law, a reverse mortgage loan is a non-recourse consumer credit obligation with certain specified features.  Relying on the ordinary meaning of “credit” as an initial advance of funds or goods with a future payment obligation to the provider of that advance, the Ninth Circuit determined that the company’s product involved a “consumer credit obligation.”  The court also observed that the relevant statute describes a secured obligation to pay over “shared appreciation or equity” as an example of a “consumer credit obligation.”

Further, the court held that the homeowners had plausibly alleged that the company’s marketing was deceptive.  Because the court concluded that the transaction did involve an obligation (debt), the homeowners had plausibly alleged that the claim of no added debt was deceptive.  And because the relevant statutes define “interest” as including payment “contingent on the value of the property upon execution of the loan or at maturity,” the homeowners had plausibly alleged that the claim of no monthly interest payments was deceptive.  By contrast, the court concluded that the homeowners had pleaded no facts showing that the claim of no monthly payments was deceptive.