Tougher Standards for Certain Home Improvement Loans | Goodwin

On May 1, 2023, the Consumer Financial Protection Bureau (CFPB) issued a report and a proposed rule to clarify and strengthen its regulation of so-called Property Assessed Clean Energy (PACE) financing.

PACE.  PACE financing is home improvement financing secured by a tax lien, rather than a mortgage.  See 15 U.S.C. 1639C(b)(3)(C)(i). Despite the “clean” in the title, PACE loans are more frequently used for natural disaster preparedness than for clean energy improvements such as solar panels.  The defining feature of PACE loans is that they are repaid via a tax assessment on the improved real property.  The obligation to repay the loan through higher property tax payments remains with the property even if the property is sold to a new owner.  Like any tax lien, a lien that secures a PACE loan is usually senior in priority to any private mortgage liens.  PACE loans are made between the consumer and the consumer’s local government, or a government entity operating with the authority of several local governments.  Although some local governments operate PACE financing programs directly, most contract with private PACE companies to operate the programs.

The Report.  The CFPB report examined data from the four PACE companies that were engaged in PACE loan applications and originations between July 2014 and June 2020, comprising information on over 200,000 PACE loan applicants over that period.  It concluded that borrowers of PACE loans saw increased mortgage delinquencies, higher property taxes, higher interest rates, and increased credit card balances.  According to the CFPB, the data also suggested problematic lending practices.  A little more than 13 percent of PACE borrowers received multiple PACE loans, many originated simultaneously or within a few months of each other.  Of the four PACE companies that provided the data, FortiFi Financial, Home Run Financing, Renew Financial, and Ygrene Energy Fund, one was sued in October 2022 by the FTC and State of California to enjoin deceptive, coercive, and fraudulent sales practices.

The Proposed Rule.  Based on the findings in its report, and as directed by Congress (per the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018), the CFPB proposed a rule to better regulate residential PACE lending.  Specifically, the rule would clarify, contrary to some arguments by PACE lenders, that certain provisions of Regulation Z (Reg. Z) of the Truth in Lending Act (TILA) apply to residential PACE loans.  Also, the rule would require residential PACE lenders to follow a version of TILA’s “ability-to-repay” rule (“ATR Rule”), which ensures no loan is made to a borrower who cannot afford it, amended to account for the unique nature of PACE transactions.

A summary of the proposed rule’s provisions follows:

Public comments are due 30 days after the proposed rule is published in the Federal Register, or, if later, July 26, 2023.

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