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On May 1, 2023, the Consumer Financial Protection Bureau (CFPB)
issued a report and a proposed rule to clarify and strengthen its
regulation of so-called Property Assessed Clean Energy (PACE)
financing.
PACE. PACE financing is home improvement financing
secured by a tax lien, rather than a mortgage. See 15 U.S.C. 1639C(b)(3)(C)(i). Despite the
“clean” in the title, PACE loans are more frequently used
for natural disaster preparedness than for clean energy
improvements such as solar panels. The defining feature of PACE
loans is that they are repaid via a tax assessment on the improved
real property. The obligation to repay the loan through higher
property tax payments remains with the property even if the
property is sold to a new owner. Like any tax lien, a lien that
secures a PACE loan is usually senior in priority to any private
mortgage liens. PACE loans are made between the consumer and the
consumer’s local government, or a government entity operating
with the authority of several local governments. Although some
local governments operate PACE financing programs directly, most
contract with private PACE companies to operate the programs.
The Report. The CFPB report examined data from the four
PACE companies that were engaged in PACE loan applications and
originations between July 2014 and June 2020, comprising
information on over 200,000 PACE loan applicants over that period.
It concluded that borrowers of PACE loans saw increased mortgage
delinquencies, higher property taxes, higher interest rates, and
increased credit card balances. According to the CFPB, the data
also suggested problematic lending practices. A little more than 13
percent of PACE borrowers received multiple PACE loans, many
originated simultaneously or within a few months of each other. Of
the four PACE companies that provided the data, FortiFi Financial,
Home Run Financing, Renew Financial, and Ygrene Energy Fund, one was sued in October 2022 by the FTC and
State of California to enjoin deceptive, coercive, and fraudulent
sales practices.
The Proposed Rule. Based on the findings in its report,
and as directed by Congress (per the Economic Growth, Regulatory Relief, and Consumer
Protection Act of 2018), the CFPB proposed a rule to better
regulate residential PACE lending. Specifically, the rule would
clarify, contrary to some arguments by PACE lenders, that certain
provisions of Regulation Z (Reg. Z) of the Truth in Lending Act
(TILA) apply to residential PACE loans. Also, the rule would
require residential PACE lenders to follow a version of TILA’s
“ability-to-repay” rule (“ATR Rule”), which ensures no loan is made
to a borrower who cannot afford it, amended to account for the
unique nature of PACE transactions.
A summary of the proposed rule’s provisions follows:
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Proposal:
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To be codified at:
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Amend commentary to clarify that tax liens and assessments are
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12 CFR 1026.2(a)(14); Comment 2(a)(14)-1.ii
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Add a definition of “PACE company” and “PACE
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12 CFR 1026.43(b)(14) and (15)
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Apply the existing ATR Rule standard to PACE transactions, but
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12 CFR 1026.43(i)
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Exclude PACE transactions from the ATR Rule’s
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12 CFR 1026.43(i)(2)
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Clarify a comment to the definition of “mortgage-related
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12 CFR 1026.43 Comment 43(b)(8)-2
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Ensure PACE transactions obey the ATR Rule, via additional
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12 CFR 1026.43 Comment 43(c)(2)(iv)-4; Comment 43(c)(3)-5
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Seek comment on whether application of the High-Cost Mortgage
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12 CFR 1026.32; 12 CFR 1026.34
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Exempt PACE transactions from the Higher-Priced Mortgage Loans
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12 CFR 1026.35 (b)(2)(i)(E)
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Exempt PACE transactions from the periodic statement
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12 CFR 1026.41 (e)(7)
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Provide a model Loan Estimate form and model Closing Disclosure
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12 CFR 1026 Appendix H (proposed forms at pp. 162-177 of the proposed rule)
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Modify existing Loan Estimate and Closing Disclosure rules (the
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12 CFR 1026.37(p); 12 CFR 1026.38(u); 12 CFR 1026 Appendix H
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Public comments are due 30 days after the proposed rule is
published in the Federal Register, or, if later, July 26,
2023.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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