Reg relief bill proposes national PACE underwriting standards
The banking regulatory relief bill introduced last week would apply federal ability-to-pay standards to Property Assessed Clean Energy financing.
The bipartisan legislative agreement announced Nov. 13 by Sen. Mike Crapo, R-Idaho, assigns the Consumer Financial Protection Bureau the task of developing regulations ensuring that PACE lenders corroborate a homeowners’ ability to pay assessments levied on their homes to finance energy and water efficiency retrofits.
The measure has the support of both the PACE industry as well as mortgage bankers and Realtors, two groups that have been raising concerns about risks to consumers.
PACE loans, which can be used for purposes such as solar-panel installations, HVAC upgrades, and flood mitigation efforts, are provided through local programs in partnership with municipal or regional governments that issue bonds backed by twice-annual assessments on borrower properties. More than $4 billion has been issued primarily to homeowners in California, Florida and Missouri; all told, 20 states have approved legislation permitting the use of PACE.
Three leading firms in PACE financing – Renovate America, Renew Financial and Ygrene Energy Fund – issued a joint statement on Thursday applauding the passage of the new Senate compromise bill.
Mike Lemyre, a senior vice president of government affairs for Ygrene, said the measure “absolutely” represents a compromise the industry has long sought with banks, Congress and consumer advocacy groups “to come up with something that basically offers consumer protections, but also allows PACE to continue to flourish and do what we do best.”
A spokesman for the American Bankers Association also expressed support for the measure.
“In this instance, at least, we agree with the PACE issuers that it is positive for consumers because it’s going to – for the first time at the federal level – provide them with underwriting that accounts for ability to repay,” said Joe Pigg, a senior vice president in mortgage finance. “The PACE liens, the PACE loans, to this point have not met those standards.”
To date, PACE loans have been underwritten to a home’s value, and not the borrower’s income, since the loans are tied to a property through local ad valorem tax levies that carry a first-lien position over a mortgage. This lien does not travel with the borrower when a property changes hands, instead it can be assumed by the new owner or paid off when the property is sold.
This puts the PACE industry at odds with many lenders, who would otherwise have the first lien on a property. The Mortgage Bankers Association states that the existence of a PACE lien “undermines the lender's (and the government's) collateral position-disrupting the very nature of secured lending.”
Realtors have also lobbied against PACE, saying the liens can make it more difficult to finance homes, delaying sales.
In April, Sen. Tom Cotton, R-Ark., filed a bill that would treat PACE loans as mortgages under TILA. That bill was opposed by the PACE industry, which claimed it would effectively kill PACE programs nationwide by burdening local governments with TILA restrictions on the use of assessment and bond proceeds that would discourage their participation.
That bill has languished in committee, during which time a federal judge dismissed claims in a lawsuit against Renovate America that PACE loans are consumer-credit products subject to Respa guidelines – which would include being governed by TILA or HOEPA.
While the measure in the reg reform bill would also apply TILA standards to PACE loans, the PACE industry is backing it because the new measure does not further the Cotton bill’s intent to apply residential-mortgage disclosure standards on PACE loans.
The CFPB under the measure would assure that borrowers are underwritten to ability-to-repay standards, similar to new consumer-protection statutes on PACE loans unanimously approved by the California General assembly this summer and signed into law by Gov. Jerry Brown in September.
Both Lemyre and Pigg say Cotton and the other senators behind the PACE Act were on board with adding the provision to the Crapo bill.
“Sen. Cotton’s office has been closely involved with putting this bill together,” Pigg said. “I think basically this provision in the regulatory relief bill sort of subsumes his original bill. I know it’s not the same language, but it achieves the same end.
“While we still have concerns about PACE loans,” Pigg said, “this is a decided improvement by subjecting them to similar underwriting as all other mortgage based lending is required to meet.”
A spokesperson for Cotton could not be reached in either the senator’s Washington or Little Rock, Ark., offices on Friday.