Credit union trade group backs proposed CFPB rules on PACE loans

The Credit Union National Association (CUNA) late last week released two comment letters expressing the association’s agreement with proposed rules on bolstering borrower protections for Property Assessed Clean Energy (PACE) financing for home renovations.

A CUNA letter was aimed at expressing its support to financial services companies, with an additional letter adding its individual comments to the Bureau’s rule proposal. The CFPB unveiled its proposal in May to implement a Congressional mandate establishing consumer protections for residential PACE loans under Regulation Z, which implements the Truth in Lending Act (TILA).

“In the proposed rule, the Bureau correctly recognizes that PACE financing fundamentally acts as mortgage credit, yet is provided by underregulated or unsupervised entities that often exploit the lien priority granted to tax assessments,” one of the letters said. “As a result, residential PACE financing should be subject to the same regulations that apply to first-lien mortgages. The rule, if enacted, will significantly limit the well-documented abuses that have occurred in states with active residential PACE programs.”

PACE loan obligations are added to a borrower’s property tax bill and immediately assume senior-lien status, displacing any existing mortgage loans and potentially putting borrowers who are in unaffordable PACE loan situations at risk of foreclosure, CUNA said.

“Despite this, federal mortgage underwriting regulations have not previously applied to PACE, and that lack of robust consumer protections has led to an avalanche of PACE abuses,” CUNA said in its letter.

CUNA also supports the application of TILA-Real Estate Settlement Procedures Act (RESPA) integrated disclosure requirements to PACE loans, as well as the requirement for creditors to notify mortgage servicers of PACE transactions “promptly after consummation,” CUNA said.

“There is no guidance in the commentary about how the PACE financing company should guestimate the timing for when the servicer ‘is expected to learn’ of the transaction,” CUNA said in its individual comments letter.

CUNA did not include the topic of lien proritization in its comments, noting that changing such order is not within the scope of CFPB’s authority. However, CUNA is urging CFPB to work with lenders to “limit the harmful effects” of placing a PACE loan in senior-lien position, according to the association.

PACE loans are often used to finance environmentally-minded renovations, like the addition of solar panels, but have led to financial instability for some borrowers according to the Bureau. Its proposed rule would implement a Congressional mandate establishing consumer protections for residential PACE loans considering the unique nature of the balance being added to a borrower’s property tax bill.

“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 in May. “We are proposing new rules that would require sensible safeguards on these clean energy loans.”