United States: Keeping "Apace" With The Issues

In 2018, Congress instructed the Consumer Financial Protection Bureau (CFPB) to issue ability-to-repay regulations for property assessed clean energy (PACE) financing. Some state governments offer PACE programs to encourage homeowners to make energy conservation or disaster preparedness improvements to their homes. The jurisdictions provide financing for those improvements through a property tax assessment on the homeowner. The repayment obligation is generally secured by a superior lien on the property. The programs are typically administered through a government contract with private companies that market the programs and enlist the participation of home improvement contractors. Homeowners typically obtain PACE financing through the contractors' sales efforts, and the transactions are often originated quickly at the point of sale.

In accordance with the Congressional mandate, the CFPB's proposed rule would require a determination — similar to that for a mortgage loan — that the borrower will be able to repay the PACE transaction, considering the borrower's income, assets, employment status, monthly payments on the transaction and other obligations, debt-to-income ratio or residual income, and credit history. The borrower's income would have to be verified based on third-party documentation. Also, if a borrower has a preexisting PACE transaction, the mortgage lender would have to consider the payments on that transaction in its abilityto-repay determination for the new mortgage loan. The proposal would not provide for any Qualified Mortgage-like safe harbor protection for PACE transactions.

DEADLINES FOR DISCLOSURES APPLY

The CFPB's proposal also would require the provision of Loan Estimates and Closing Disclosures (i.e., TRID disclosures) for the PACE transactions. The proposal would modify the content of those disclosures as applicable to the unique transactions, but it would not modify the timing requirements. In other words, the deadlines for providing the disclosures and the waiting periods prior to consummation would apply. In addition, it appears that the tolerance restrictions for amounts disclosed in the Loan Estimate also would apply.

The CFPB also indicates that a PACE administration company or a home improvement contractor may, in connection with a transaction, operate as a "loan originator." Under those circumstances, the proposal would impose on those persons Regulation Z's compensation and anti-steering restrictions, as well as qualification requirements, including licensing and/or criminal background checks.

POSSIBLE PROBLEMS FOR LENDERS AND SERVICERS

While PACE programs are laudable in encouraging energy conservation or disaster preparedness, they may cause several struggles for mortgage lenders and servicers. As mentioned above, the property tax lien generally takes priority over a mortgage, even a first-lien mortgage loan recorded prior to the PACE financing. In addition, the CFPB asserts that PACE financing increases mortgage delinquency rates. Since payments on the PACE transactions often are due only annually or semi-annually, the payments can create a sharp, delayed payment shock, temporarily increasing the borrower's escrow payments on an applicable loan by as much as two or three times. Under those circumstances, a servicer may have to advance funds to cover a disbursement or an escrow shortage or deficiency (assuming the servicer is even aware of the PACE obligation).

PROTECTING CONSUMERS

Of course, the CFPB is primarily concerned about protecting consumers. The agency reports accusations of aggressive sales tactics and targets on vulnerable populations in the PACE arena. The parties responsible for originating PACE transactions arguably have little financial incentive to ensure the borrower understands the transaction and can afford to make the tax payments. The CFPB also described tactics like loan splitting or stacking that burden borrowers with multiple PACE transactions. Although the industry has taken steps to self-regulate by promoting best practices, the CFPB seeks to ensure that borrowers receive information about the transactions' costs and terms and have time to consider that information in advance. Additionally, the proposed rule would clarify (consistent with Congressional mandate) that PACE companies substantially involved in making the credit decision would face penalties for a failure to comply with the ability-to-repay requirements.

The CFPB recognizes that imposing an ability-to-repay requirement, along with a TRID-like disclosure regime, may have a significant impact on the PACE marketplace, and may decrease the availability of PACE financing. Certainly, the proposed requirements will slow the origination of the transactions, as PACE companies may be required to gather income documentation, conduct underwriting, provide a waiting period prior to consummation, and allow for a three-day right to rescind the transaction. Imposing those compliance obligations and delays could fundamentally change the way the product is offered.

Originally published by Pipeline Magazine

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