The Consumer Financial Protection Bureau (CFPB) announced on Monday a proposed rule that seeks to bolster consumer protections for borrowers seeking Property Assessed Clean Energy (PACE) financing for home renovations.
These loans, which are often used to finance environmentally-minded renovations, like the addition of solar panels, have led to financial instability for some borrowers. The proposed rule would implement a Congressional mandate establishing consumer protections for the residential PACE loans.
“When unscrupulous companies bait homeowners into unaffordable loans with exaggerated promises of energy bill savings, this can lead to serious financial distress,” CFPB Director Rohit Chopra said in a statement. “We are proposing new rules that would require sensible safeguards on these clean energy loans.”
With a residential PACE loan, renovations are financed and are then paid back by the borrower as property tax payments to their local government, resulting in higher property tax payments for borrowers. Eligible renovations can include property preparation for natural disasters or modernization to a home’s electrical or water systems. Between 2014-2020, the majority of PACE loans were used for natural disaster preparedness.
However, some borrowers have fallen behind in recent years, according to the CFPB — and the newer, higher tax payments are tied to the property rather than the borrower.
“The obligation of paying the loan back through higher property tax payments remains with the property even if the borrower sells the property,” the CFPB said. “Although PACE lending is authorized by local governments, private companies typically administer the programs, which can include marketing of the loans, managing originations, and making the lending decisions.”
The Federal Trade Commission (FTC) and the State of California sued a private company called Ygrene Energy Fund in 2022 for “deceiving consumers about the potential financial impact of its financing, and for unfairly recording liens on consumers’ homes without their consent” in regard to PACE financing.
The FTC and California alleged that Ygrene deceived consumers regarding PACE’s impact on home sales; misled consumers about PACE’s impact on refinancing; and trapped consumers in PACE liens without clear consent.
The rule’s announcement also comes five years after the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 was signed into law. The Act charged the CFPB with handing down ability-to-repay rules for PACE financing while also applying the civil liability provisions of the Truth in Lending Act (TILA) for violations.
“If finalized, the proposed rule would require PACE creditors and PACE companies to consider a consumer’s ability to repay when issuing a new PACE loan, and it would amend Regulation Z to address how the Truth in Lending Act applies to PACE transactions,” the CFPB said. “Among other amendments, the proposed rule would adjust disclosure requirements to better fit PACE loans and to help consumers understand the loans’ impact on their property tax payments.”
Public comments on the proposal are due by July 26, 2023, or 30 days after publication of the proposed rule in the Federal Register.
The CFPB also published a report about PACE financing, which found that PACE financing increased a homeowner’s property taxes by roughly 88% on average. The report found that PACE loans are generally tied to higher interest rates — at 7.6% on average — compared to the average interest rates for home purchase or home equity loans.
Consumers with mortgages and PACE loans are also more likely to face mortgage delinquency, and those without pre-existing mortgages are more likely to have higher levels of credit card debt, according to the report.
The impact of PACE financing also disproportionately impacts borrowers of color, the report said.
“PACE borrowers were more likely to reside in census tracts with higher percentages of Black and Hispanic residents relative to the average for their states,” the CFPB said. “Reforms and regulation of PACE loans in California appear to have substantially reduced the volume of delinquencies compared to the trend in Florida over the same period.”