Residential Property Assessed Clean Energy (R-PACE) loans appear to be popular financing vehicles for homeowners who want to make improvements that are designed to lower their utility bills. As of this past October, more than $5.6 billion in cumulative investments have been made to some 235,000 homes since 2009, according to data from PACENation, a nonprofit advocacy organization.
The numbers are impressive considering only three states — California, Florida and Missouri — have active R-PACE financing programs. Ohio is set to become the fourth in the near future after a small pilot program was launched in the Toledo area in 2015. PACE programs for commercial real estate owners have been more broadly adopted, with 26 states and the District of Columbia either operating or developing commercial loan programs, according to PACENation.
PACE financing is similar to traditional mortgages by offering a repayment period of up to 30 years. Eligible projects include energy-efficiency upgrades such as lighting, heating and cooling systems; renewable- energy upgrades such as solar panels, microgrids and electric-vehicle charging stations; and improvements that make a property more resilient to seismic, storm and fire hazards. The financing is repaid by the property owner through their tax assessments.
It hasn’t always been smooth sailing, however, for these programs. In Missouri, Greene County and the city of Springfield dropped their residential and commercial PACE offerings earlier this year due to “concerns about transparency and a perceived lack of consumer protections,” the Springfield News-Leader reported.
This past June, lawmakers in Collier County, Florida, terminated their residential program while reinstating their commercial program. The Naples Daily News reported concerns about the PACE loan’s status as a “superior lien,” which allows the PACE provider to re- coup its losses ahead of mortgage lenders if a home is repossessed. Seniors, disabled veterans and people with limited English-language skills also reportedly took out loans “they didn’t understand and couldn’t afford.”
Qualifying for a PACE loan is just based on your equity that you built up in your house. And that can lead to some bad situations in which bad actors take advantage.
For mortgage originators and their referral partners, it can be difficult to close deals on properties with attached PACE liens. Lacy Robertson, an Orange County, California-based mortgage loan consultant and Realtor with Equity Smart Home Loans, says she is no longer recommending PACE loans to her clients and has publicly spoken to oppose them at local government meetings.
“Most of the time, the people that were getting this product, they really couldn’t afford it,” Robertson says. “It really should have been a ‘no option’ rather than a ‘last option.’”
Robertson provides an example of a client who overleveraged their property by signing two PACE agreements in 2017 that totaled more than $185,000. The assessments, which each had interest rates exceeding 8%, paid for multiple solar-power systems and a turf replacement. They increased the annual property taxes from $5,294 in 2016 to $23,753 in 2018. As of this past October, the home was severely underwater, with a first-mortgage balance of $476,000, and Robertson was attempting to sell it for $495,000.
“There is no way this property should have been leveraged like this,” she says. “[It is] price gouging at its finest with no regulatory checks and balances.”
PACE financing has declined in California in recent years. Data from the state treasurer’s office shows that loan volumes shrank by 56% year over year in the last six months of 2018. The trend is likely due to new laws that have taken effect in recent years. The state’s Department of Business Oversight now regulates PACE programs. Lenders are required to verify a borrower’s ability to repay and train contractors who utilize their financing, and they are prohibited from giving kickbacks to contractors, among other rules.
This past March, the Consumer Financial Protection Bureau (CFPB) announced proposed rules for R-PACE financing programs across the nation. Notably, the CFPB is looking to treat R-PACE financing the same as residential mortgage loans when it comes to ability- to-repay standards under the Truth in Lending Act. The public comment period for the proposal ended this past May and the bureau hasn’t announced a time- line for a decision.
David Kent, vice president of legislative and advocacy programming for the Missouri Bankers Association, says his organization supports the CFPB’s efforts. “I think it’s an important measure to help protect consumers and provide some additional safeguards to PACE financing,” Kent says. “Qualifying for a PACE loan is just based on your equity that you built up in your house. And that can lead to some bad situations in which bad actors take advantage.”
Missouri doesn’t have income-verification standards for its R-PACE programs but does require the projected value of energy savings to exceed loan amounts. Missouri lawmakers attempted, but didn’t succeed, in tightening operations this year with two bills that would’ve put the programs under state control, rather than the city- and county-level control that currently exists. The bills also would’ve required licenses for PACE administrators, and would’ve limited the marketing of these products to contractors who are licensed, bonded and insured.
Kent feels there’s a “lack of oversight” by local PACE districts, something that was cited in the city of Springfield’s decision to end its programs. He also says his organization is pushing for a mandatory notification to mortgage lenders when a PACE assessment is placed on a home. Often, he says, lenders don’t receive this information for a year or more.
“If the individual, the consumer, is not saving up what he or she might owe toward the end of that assessment year, they could be really far behind,” Kent says. “So, we think a notification is really important, mainly just [because] we’d like to get the escrow [account] started with a customer.”
Robertson also notes the priority-lien status of PACE financing in California, which she says is contributing to diminished interest in these homes. The Federal Housing Administration, for example, does not insure new mortgages for homes with PACE liens.
“In fact,” she says, “many homeowners are later shocked when they go to sell their property and find out their buyer pool is significantly reduced, if the PACE loan will not be paid off by [the seller] during the sale of the proper