CFPB Proposes New Rules for PACE Financing
The agency says “unscrupulous companies bait homeowners.” It’s taking comments on new proposed rules that make sure homeowners have the ability to repay.
WASHINGTON – The Consumer Financial Protection Bureau (CFPB) proposed a rule – based on a congressional mandate – to establish consumer protections for residential Property Assessed Clean Energy (PACE) loans.
PACE loans attach to a home rather than a person. They’re secured by a property tax lien on the borrower’s home and often promoted as a way to finance clean energy improvements, such as solar panels. However, CFPB wants to make it easier for homeowners to understand how a PACE loan works.
“When unscrupulous companies bait homeowners into unaffordable loans with exaggerated promises of energy bill savings, this can lead to serious financial distress,” says CFPB Director Rohit Chopra. “We are proposing new rules that would require sensible safeguards on these clean energy loans.”
Under the proposed rule, lenders must assess a borrower’s ability to repay a PACE loan. The change would also provide a framework for how PACE loans are treated under the Truth in Lending Act.
According to a report published by CFPB – Property Assessed Clean Energy (PACE) Financing and Consumer Financial Outcomes – PACE loans cause an increase in the number of borrowers who fall behind on mortgage payments, in addition to other negative credit outcomes.
How PACE loans work
Residential PACE loans finance home improvements, and borrowers pay back the loans over time through increased property tax payments. Eligible upgrades can include energy and water efficiency projects, or projects to prepare homes for natural disasters. From 2014-2020, a majority of PACE loans were for home improvements for natural disaster preparedness.
Since the obligation to pay back the loan via higher property tax payments remains with the property, it gets transferred to a new homeowner if the borrower sells the property, providing the home sellers doesn’t pay off any remaining amount. In the past, that has created some problems during the home sale process.
Although PACE lending is authorized by local governments, private companies typically administer the programs, which can include marketing of the loans, managing originations, and making lending decisions.
CFPB’s newly proposed rule comes five years after President Trump signed the Economic Growth, Regulatory Relief and Consumer Protection Act of 2018, which directed CFPB to create ability-to-repay rules for PACE financing and to apply the civil liability provisions of the Truth in Lending Act for violations.
On Thursday, the proposed rule was published in the Federal Register, which includes details on proposed rule changes and information on how to submit comments for consideration. Public comments are due by July 26, 2023, or 30 days after publication in the Federal Register, whichever is later.
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