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Dodd-Frank rollback adds regulation on PACE


President Donald Trump last week signed a reform bill that stripped away some of the Obama-era regulations in the Dodd-Frank Wall Street Reform and Consumer Protection Act. There was one notable exception to the spirit of deregulation, however.

The reform measure will subject providers of Residential Property Assessed Clean Energy (PACE) financing to federal oversight for the first time. 

PACEregThe Economic Growth, Regulatory Relief, and Consumer Protection Act, or S. 2155, directs the Consumer Financial Protection Bureau (CFPB) to establish rules on private PACE financiers that ensure that borrowers can repay the costs of the improvements.

Since 2010, PACE financiers have bankrolled billions of dollars in energy-efficiency projects in homes in California, Florida and Missouri, the three states with active residential PACE programs.

The largest mortgage trade group, the Mortgage Bankers Association (MBA), has been lobbying for tough rules on PACE loans, saying that consumers have been left unprotected. 

MBA issued a brief statement in support of PACE changes, but didn’t immediately respond to a request for further comment.  

Borrowers usually obtain the loans directly from contractors, who are not licensed as mortgage originators. This financing typically carries significantly higher interest rates than mortgages.

PACE financing doesn't work in the same way as a standard loan. Unlike a second mortgage or home equity line, the borrower pays off the loan as part of their tax bill. States have to pass legislation that enables local taxing authorities to include PACE assessments on their rolls. California is the overwhelming leader in residential PACE loans, passing the first enabling legislation in 2008. Since then, the program has expanding rapidly.

PACE has financed a total of $5.1 billion in improvements to 216,000 homes in the three states since 2010, according to its trade group PACENation. The program is bankrolling a boom in solar projects in California, for example. 

Consumer complaints 

PACE lending has drawn controversy over the lack of oversight and consumer protections, however. Major news outlets, such as Forbes and the Los Angeles Times, have reported several cases of contractors misrepresenting the terms.

The PACE industry has more recently established a comprehensive set of rules and standards that it says affords comprehensive consumer protections. Last year, the California Legislature passed legislation that requires PACE financiers to verify borrowers' income and to call borrowers to explain the costs and terms. The California law could potentially be used as the model for the federal rule to be written by the CFPB.

Although supported by the mortgage industry, the PACE language in the law signed by Trump last week didn’t go as far as an industry-supported PACE crackdown bill introduced last year by Sen. Tom Cotton, R-Arkansas.

Cotton’s bill would have extended all the same Dodd-Frank regulations imposed on mortgages to PACE financing. The PACE industry said Cotton’s bill would have had the practical effect of stamping out residential PACE lending.

The three major PACE financiers — Renovate America, Renew Financial and Ygrene Energy Fund — issued a joint statement in support of the PACE provision in the Dodd-Frank reform bill. Greg Frost, spokesperson for Renovate America, said the language is narrowly focused, and the PACE regulations will be limited to income verification and cost disclosures under the federal ability-to-repay rule. Not covered are the entire range of regulations on mortgages under the Truth and Lending Act that would require, for example, all PACE contractors to be licensed as mortgage originators. The language in the law also recognizes PACE financing as separate and distinct from mortgage lending.

“The relevant text in S.2155 was the result of a compromise worked out last year by Senators [Michael Bennet, D-Colorado, and Mark Warner, D-Virginia],” Frost said. “We supported that compromise.” 


 

Questions? Contact at (425) 984-6017 or victorw@scotsmanguide.com.

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