On March 4, 2019, the Consumer Finance Protection Bureau ("CFPB" or "Bureau") issued an Advance Notice of Proposed Rulemaking seeking comments related to Property Assessed Clean Energy ("PACE") financing.1 Specifically, the Bureau is contemplating regulations for PACE financing under the ability-to-repay ("ATR") requirements under section 129C(a) of the Truth in Lending Act ("TILA"), which are currently in place for residential mortgage loans, and is soliciting information to better understand the PACE financing market. The Bureau will consider such information in implementing section 307 of the Economic Growth, Regulatory Relief, and Consumer Protection Act ("EGRRCPA"), enacted in May 2018. EGRRCPA amended TILA by directing the CFPB to prescribe regulations that account for the unique nature of PACE financing by (1) carrying out the purposes of TILA section 129C(a) and (2) applying TILA section 130 to violations under TILA section 129C(a) with respect to PACE financing. TILA's ATR provisions require a creditor to consider specific factors about a consumer's finances, including income, assets, and debt obligations.2
PACE programs are an alternative financing option for energy-efficient home improvements such as solar panels, water conservation projects, insulation, and new doors or windows. The borrower pays for the home improvements through special property tax assessments instead of traditional loans. More than 20 states and municipalities have passed legislation enabling PACE programs and establishing their own terms and conditions. Homeowners voluntarily subscribe to PACE programs through private companies and solar dealers. A PACE loan is secured by a property tax lien that takes priority over both existing and future mortgages on the borrower's real property.
While PACE programs may promote the growth of clean energy projects,3 some trade groups have characterized PACE loans as problematic because PACE loan underwriting is not subject to consumer financial protection laws such as TILA or the Home Ownership and Equity Protection Act.4 Trade groups argue that PACE borrowers do not receive the federal protections and detailed disclosures required of other mortgage products despite the priority lien on a borrower's real property. Borrowers may pay more in financing through a PACE program than they would through traditional financing, according to critics, and the private companies marketing the PACE program are not obligated to analyze borrowers' ability to repay as they would a mortgage loan. Equally, PACE supporters highlight benefits of the PACE program and note that the underwriting of PACE financing is focused on the related property value rather than a borrower's creditworthiness.
The CFPB is soliciting five categories of information in its Advance Notice of Proposed Rulemaking.
- Written materials associated with PACE financing transactions. This includes samples of purchase agreements, other consumer-facing materials provided before a borrower signs a PACE financing agreement, and periodic billing statements.
- Descriptions of current standards and practices in PACE originations. This includes information such as documentation required from consumers or third parties in the PACE program application process, underwriting standards, and the role of state or local governments in PACE financing.
- Information related to civil liability under TILA for violations of ATR requirements in connection with PACE financing, including rescission and borrower delinquency and default. The existing ATR requirements for mortgages permits recovery of all finance charges and fees paid by the consumer and provides borrowers a foreclosure defense. The CFPB would like to determine which parties should bear the risk of liability in the PACE program context.
- Information about the unique aspects of PACE financing, such as the structure, funding, repayment of PACE transactions, and the relationship to local property tax systems.
- Comments concerning the potential implications of regulating PACE financing under TILA.
TILA includes very prescriptive requirements for determining a consumer's ability to repay. The application of such requirements to PACE financing appears to be inconsistent with current origination practices, and the requirements may be difficult to comply with. EGRRCPA requires regulations to account for the unique nature of PACE financing. Consistent with this requirement, the Bureau asks detailed questions about how the Bureau should address the unique features of PACE financing and the potential implications of regulating PACE financing under TILA, including information regarding which ATR requirements would be inconsistent with current practices and state and local requirements. There is much to be digested and interested parties should consider submitting comments.
Comments to the CFPB's Advanced Notice of Proposed Rulemaking are due 60 days after publication in the Federal Register.
3 An earlier Mayer Brown blog post summarizes the Obama administration's 2016 measures to promote solar energy, https://www.mayerbrown.com/en/perspectives-events/publications/2016/07/obama-administration-picks-up-the-pace-property-as.
4 An earlier Mayer Brown blog post summarizes a trade group's response to an earlier Housing and Urban Development Mortgage Letter 2016-11, https://www.cfsreview.com/2017/12/fha-changes-course-on-pace-obligations/.
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