Top 10 of 2017: PACE industry embraces consumer protection

Editor's note: This is the fifth in a series of 10 articles revisiting some of our most-read stories of the past year.

Facing increasing concerns about consumer protections, the Property Assessed Clean Energy industry is embracing the kinds of underwriting and disclosure standards more commonly associated with residential mortgages.

PACE programs financing the retrofitting of homes and businesses to make them more energy efficient have been around since 2007, but the securitization market for these assets dates back only three years. Approximately $1.5 billion in residential PACE securitizations were completed in the first 11 months of 2017, according to PACENation, an industry trade group. The first offering of bonds backed by commercial PACE assessments was also completed, in September.

The industry attracted considerable scrutiny during the past year amid complaints that some homeowners didn’t understand the terms of their debt, which is repaid through a line item on their tax bills and is typically underwritten to the value of the property, not the homeowner’s income.

Carolyn Franks - stock.adobe.com

And there are additional regulatory headwinds. In December, the Department of Housing and Urban Development reversed a short-lived policy, saying the Federal Housing Administration would no longer insure mortgages on homes encumbered by PACE liens. (The move put the FHA back in sync with Fannie Mae and Freddie Mac, which do not endorse PACE.)

So the PACE industry has welcomed some legislative initiatives that require more stringent credit standards and improved disclosures. Most recently, a broad regulatory relief bill introduced by Sen. Mike Crapo (R-Idaho) in November includes measures that would create uniform national underwriting standards of PACE financing. The legislation, if passed, revises the Truth-in-Lending Act authorizing the Consumer Financial Protection Bureau to apply TIL rules on ability-to-repay and financial disclosures on PACE lenders.

Importantly, it enjoys the support of not just the PACE industry, but the banking and real estate trade groups, which object to the senior lien created by PACE assessments.

And it was less onerous than a bill introduced earlier in 2017 by Sen. Tom Cotton (R-Ark.) that, according to Morningstar Credit Ratings, would complicate the collection of assessments by local governments and potentially require providers to register as mortgage lenders.

Ultimately, Morningstar believes that focusing on consumer protections is both good for the industry and a credit positive for the quality of the underwriting.

PACE financing, which can be used for retrofits 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.