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California moves to regulate PACE industry

The California Legislature has passed a regulatory framework for the fast-growing, but controversial, residential Property Assessed Clean Energy (PACE) loan market.

On Friday, the state Legislature approved a PACE-industry supported bill, AB 1284, that would require mandatory licensing of residential PACE lenders. The PACE industry also would be regulated by the California Department of Business Oversight (DBO), which oversees other state-licensed financial companies in California. Lenders also will be required to verify the borrower’s income and ability to repay a PACE loan, a requirement similar to one placed on mortgage lenders when originating most home loans.

PaceregulationThe Legislature also recently passed a companion bill, SB 242, that will require PACE lenders to call the borrowers and explain the terms of the loan prior to the closing, among other consumer protections.

California Gov. Jerry Brown is expected to sign both bills into law later this fall. Last year, Brown signed into law a bill that defined what had to be disclosed in writing to PACE borrowers, and also established a three-day right to cancel a PACE loan.

Residential PACE was born in California in 2008 when the state passed enabling legislation, and began to take hold after 2010 as a way for homeowners to finance home-efficiency projects. The state is one of the just three states with developed residential PACE programs. Missouri and Florida are the other two. 

AB 1284 and SB 242 passed with near unanimous bipartisan support in the California Legislature. Of the two bills, AB 1284, which established the regulatory framework, was more controversial. Three large lenders finance almost all of the nation’s PACE loans. One lender, Ygrene, initially opposed the bill on narrow technical points, but has since changed its position to “neutral,” a spokesman said.

The other two national lenders — Renovate America and Renew Financial — supported the bill. The bills also were supported by a large coalition of clean-energy and business trade associations, including the California Chamber of Commerce and the California Mortgage Bankers Association. Some consumer advocacy groups were seeking stronger protections. 

Will federal regulation be next? 

Residential PACE has been a magnet for controversy. Borrowers often obtain the loans directly from contractors. PACE loans typically carry higher interest rates than mortgages, and there have been complaints that the contractors misrepresent the terms.

Unlike a second mortgage or home equity line, the PACE borrower usually pays the loan with their property-tax bill. Taxing authorities must pass enabling legislation that enables a PACE loan to be tied to the tax assessment. Typically, a PACE loan takes a first-lien position ahead of the mortgage, which has been one of the central complaints of the banking lobby.

PACE loans also are not regulated on the federal level. Unlike mortgages, the consumer protections established under the Dodd-Frank Wall Street Reform and Consumer Protection Act do not apply to PACE.

In just six years, residential PACE financing has grown from nothing to a billion-dollar annual industry. The PACE product also has faced a backlash of criticism from banking groups and from lawmakers, mostly Republicans, on Capitol Hill. In introducing a bill this spring, for example, Sen. Tom Cotton, R-Ark., called residential PACE loans “a scam.”

Bills have been introduced in the U.S. Senate and House of Representatives that would extend the Truth in Lending Act’s disclosure rules to PACE. The PACE industry has strongly opposed these bills. 

“As a successful state policy, PACE financing is best controlled at the state level,” Greg Frost, a spokesman for Renovate America told Scotsman Guide News. “We strongly believe this legislation can serve as a model for other states on how to offer PACE to homeowners without reservation.”

Banking groups are unlikely to stop advocating for federal legislation on PACE.

“If it looks and quacks like a duck, it is a duck,” said Pete Mills, senior vice president with the Mortgage Bankers Association. “We think the PACE loan product should be covered by all of the same regulations that cover mortgages — disclosures, in particular.”


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