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ABS East: Did consumer protections stall PACE demand, or lender interest?

Stricter underwriting regulations in California are often cited as the reason that property assessed clean energy (PACE) financing has fallen off the map in the last two years.

But Shawn Rose, a director with Deutsche Bank, doesn’t think the decline in financing home energy improvements (including solar panel installations) was because the underwriting squeezed out would-be borrowers from approvals.

Rather, the ability-to-repay rules that California began requiring for PACE financing in 2018 may have done more to deter lenders, he told a Tuesday panel discussion that wrapped up the three-day ABS East industry conference show in Miami.

“Clearly,” stated Rose on the panel, the ability-to-pay rules did “result in material reduction in origination volume, but why is that?”

“From the outside looking in, it might appear that all these people have been rejected and the ability-to-pay measure is working,” he said. “But dig a little bit deeper, you’ll find that a lot of the originators report that a relatively small percentage of the applicants actually are declined or rejected due to the ability-to-pay test.”

What may have been the biggest casualty of the PACE origination market, he said, were the end to aggressive, fast closings on assessment loans that were underwritten to property values – rather than the credit standing of a borrower -- prior to California’s adoption of consumer protection standards in 2018.

For contractors for PACE finance companies, approvals would no longer just take minutes, but instead “could take days or even weeks for the homeowner to supply the [documents] for income, for instance,” said Rose.

To Rose, that means borrower demand for PACE financing didn’t really sour, and leaves him optimistic demand could return in California and in other states with PACE programs in place.

“I do think the ability-to-pay theory is a good check, but perhaps there are ways to streamline that process such that PACE is more and more attractive relative to other unsecured financing sources.”

PACE financing, which peaked at $1.7 billion in 2016, was less than half that in 2018, and only two publicly rated deals totaling have priced this year.

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