A federal agency has announced a new rule aimed at protecting homeowners by ensuring that they are clearly informed of their obligations when signing up for Property Assessed Clean Energy (PACE) loans.

The Consumer Financial Protection Bureau (CFPB) announced Tuesday that the rule clarifies consumer rights when signing up for the PACE loans. Homeowners must be informed of the obligations they are agreeing to when taking out the loans and they also must be able to pay it back. The new rule is aimed at providing consumer protection for homeowners, improving mortgage performance and ensuring uniform rules for loans secured by the borrower’s home.

The controversial PACE program was developed to help consumers pay for home improvements that usually include energy-efficient upgrades, such as solar panels. The cost of the equipment and installation would then be added to the homeowner’s tax bill.

But many homeowners didn’t realize the cost of the program. Some who signed with PACE found later that they couldn’t afford the cost of the loans. According to the Mortgage Bankers Association (MBA), PACE loans are repaid by a property tax assessment on the home that has priority over the borrower’s first lien mortgage, putting both the borrower and mortgage holder at greater risk.

Homeowners who took out the loans, but were unable to pay, found themselves at risk of delinquency and foreclosure. The problem was more severe in low- to moderate-income neighborhoods. A CFPB report released last year found that PACE loans caused an increase in negative credit outcomes, particularly mortgage delinquencies when PACE loans were paid through borrower escrow accounts. 

A coalition of consumer protection groups and mortgage associations, including the MBA, supported the rule change, saying it is “a welcome culmination of a process that started in 2018 when President Donald Trump signed bipartisan legislation to regulate PACE loans…”

“We note, however, that the rule does not change the fact that PACE loans are provided as a ‘super lien priority’ through the tax assessment process, which is damaging to the housing market and to borrowers who may not be able to refinance or recoup their investment at the time of a sale due to the PACE obligation’s priority status,” wrote the coalition in a press release. “We will continue to work together to address such challenges as well as any that might arise during the implementation of the rule in states with PACE programs.”