Tennessee could be the next state to approve a lending program that has bankers fuming.

Two bills recently introduced in the state’s legislature would promote energy efficiency by letting local governments lend to property owners who want to finance conservation-related improvements such as solar-panel installations.

Tennessee bankers are determined to keep those bills from becoming law, in part because in the event of foreclosure, the loans – which are repaid through local property tax assessments – would be first in line to be repaid, ahead of any bank's mortgage.

“I think things would be a lot better if government would stick to its job and stay out of lending,” said Gordon Majors, president and CEO of the $443 million-asset Hardin County Bank in Savannah, Tenn., and chairman of the Tennessee Bankers Association.

If proponents are successful, Tennessee would become the 33rd state to authorize a property-assessed clean energy, or PACE, program. Local PACE programs are up and running in 18 states, while 14 others have passed laws that would allow them to be created.

Programs implemented so far have financed more than $3 billion for energy efficiency projects, according to PACENation, a trade group that promotes the effort. Many such programs are administered by private-capital firms like Renovate America and Ygrene Energy Fund working in partnership with local government authorities to provide the funds to homeowners; these firms in turn securitize the assessments.

The loans are tethered to the property rather than the homeowner, and are either prepaid or transferred upon a home sale to new owners.

PACE loans got their start in the early 2000s, when the city of Berkeley, Calif., proposed the formation of a sustainable energy financing district to let property owners finance the installation of solar panels. The programs across the country include other types of energy conservation efforts, including HVAC upgrades, and are used in single-family homes as well as multi-family and commercial buildings.

Despite its green intentions, the program has been criticized in banking circles and in government. Critics have zeroed in on provisions that give PACE loan assessments the same “super-priority” accorded to tax liens.

The Federal Housing Finance Agency, for instance, has opposed PACE programs since 2010 on the basis that the terms of a PACE financing violate Freddie Mac and Fannie Mae policies by having a first-lien position over a guaranteed GSE mortgage. In 2015, the FHFA reiterated that it will not purchase or refinance loans for PACE-assessed properties. That does not prohibit homeowners from taking out PACE loans, but can complicate a subsequent sale or refinancing of the property.  

But not all federal agencies involved in home financing are opposed. The U.S. Department of Housing and Urban Development issued guidance last year allowing homes with PACE liens to be insured or purchased through Federal Housing Authority programs. The U.S. Department of Veterans Affairs has done the same with VA-insured mortgages.

PACE loans are “the only type of home improvement loans that jump over the main loans” in lien priority, said Tim Amos, general counsel for the Tennessee Bankers Association.

The bills introduced in Tennessee are similar to legislation introduced in 2015 that also drew the ire of the Tennessee Bankers Association.

“The more we looked at it and talked to folks around the country, we just didn’t like the way the program worked,” Amos said.

The Tennessee bills would let local governments establish districts where PACE loans could be made, issue bonds to pay for them, and contract with nonprofit third parties to administer the programs. Borrowers would pay via an assessment added to their property tax bills.

Due to that unusual structure, critics claim that PACE credits lack typical consumer protections and disclosure rules that are standard with conventional loans.

The bills' sponsors did not return phone calls seeking comment.

The Mortgage Bankers Association has vowed to push the Trump administration and the Consumer Financial Protection Bureau to take a closer look at PACE programs.

“There’s a significant void in consumer protections under the PACE program,” Pete Mills, the association’s senior vice president for residential policy, said last year.

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