PACE lending programs face mounting complaints that many homeowners using property assessments to fund energy-efficiency upgrades can neither afford, nor understand, the terms of their deals.
Renovate America, the biggest player in Property Assessed Clean Energy, is looking to address the criticism by doing more to understand borrowers. In September 2016 , the company launched more formal disclosure policies; now it’s going a step further and preparing to take borrower income into account in its underwriting.
While that may not seem revolutionary, standard PACE loans are underwritten to the value of the property, rather than the borrower’s income. They are repaid via annual assessments on an owner’s local property tax bill. The lien that’s created is superior to that of even a mortgage, and stays with the property if it changes hands.
Patrick Moore, Renovate America’s newly appointed chief lending officer, told Asset Securitization Report that borrower income data will be used in underwriting both PACE loans and an unsecured program funding through local government entities and unsecured loans to finance a wider range of home improvement projects. It will help determine approvals as well as potential loan sizes. The company has been collecting income data for its unsecured lending product, Benji, since 2016.
“Logically and analytically, it makes more sense to take a look at property owners’ household income relative to the size of the PACE assessment,” said Moore, who was elevated to his new post this week. He was originally hired to spearhead an unsecured home improvement project lending platform launched in the second half of 2016.
The move is being made in anticipation of proposed state legislation in California that would mandate “good faith” underwriting standards on PACE loans, including obtaining credit reports and “in some cases, verifying income, assets, and debt obligations,” according to Senate Bill 242.
Renovate America believes that the new arrangement will help better assess a borrower's ability to repay the twice-annual property assessments, which in its recent asset-backed collateral averaged over $23,000, to be paid out over 20 years. The income data will also help expand Renovate's financing options for well-qualified borrowers who would rather opt in for an unsecured loan arrangement instead of a PACE levy.
Many of those prime borrowers already have unsecured loan and lease options with solar installation firms like Solar City or emerging green lenders such as EnerBank.
“There’s a market you don’t fully service through PACE alone,” Moore said. “The incorporation of income into underwriting will get PACE as an asset class closer to other lending and more traditional banking products."
The move reflects a recent toward PACE industry in adopting the wider use of disclosures and additional consumer protections. A national PACE industry trade group (PACENation) last year, for instance, adopted new truth-in-lending and settlement procedures to guide PACE finance issuers.
Those changes were in reaction to criticism from consumer advocates, banking industry lobbyists and even members of Congress that PACE loans were taking on characteristics of predatory lending: being pushed on fixed-income elderly homeowners and low-income communities by independent contractors that did not fully disclose costs or risks associated with the assessments.
The nonprofit National Consumer Law Center has expressed concerns that PACE lenders also lacked accountability for whether or not the promised energy savings from the expensive installations were achievable. (Renovate America projects that borrowers in its HERO PACE program will see $3.5 billion in cost savings over the life of the assessments).
The ability-to-pay issue earned additional scrutiny earlier this year when Renovate America confirmed to The Wall Street Journal it covered full or partial payments on behalf of borrowers unable to pay their initial assessment levies. The company says it no longer makes such payments, which totaled about $150,000, on behalf of customers.
Moore said Renovate's PACE funding criteria has previously used borrower criteria such as mortgage payment and tax payment history in evaluating an application that “would be indicative of a borrower’s ability to pay the PACE assessment,” he said.