Council of State Governments (CSG) Resolution Supporting State Polices to Advance Residential Property Assessed Clean Energy (PACE) Consumer Protection Policies

Representative Al Landis
Co-Chair
CSG Energy and Environmental Public Policy Committee

Senator Pat Spearman
Co-Chair
CSG Energy and Environmental and Public Policy Committee

Deputy Speaker Bob Godfrey
Co-Chair
CSG Intergovernmental Affairs Committee

Senator Douglas Overbey
Co-Chair
CSG Intergovernmental Affairs Committee

Dear Honorable Committee Co-Chairs:

The American Bankers Association (ABA), the Credit Union National Association (CUNA) and the Mortgage Bankers Association (MBA)write to express strong concerns and opposition to this proposed CSG resolution as written. If adopted, the resolution would encourage states to incorporate consumer protections and regulation for PACE loans consistent with those enacted by California earlier this year. However, the California law does not fully address the long-standing and serious concerns of the real estate finance industry, consumer protection groups or the federal government’s housing enterprises, i.e. Fannie Mae and Freddie Mac. Moreover, by only addressing some, not all, of the well-founded and documented criticisms of PACE lending, the new California law creates a dangerous false presumption that all of these consumer protection issues have been addressed when they have not. Therefore, our organizations encourage you to withdraw this resolution and re-propose one that: supports bipartisan legislation (S. 2155) in Congress to provide borrowers federal Truth-in-Lending (TILA) and other Consumer Financial Protection Bureau (CFPB) protections; and, supports PACE obligations being recorded in proper lien priority – i.e. subordinate to all other prior recorded mortgages.

PACE loans are – in substance – consumer loans secured by real property and should be subject to federal consumer protection requirements, not dependent on a patchwork of limited or non-existent state and/or municipal laws that do not adequately protect homeowners. While we appreciate that the intent of this resolution is to try and create greater uniformity among state consumer protection requirements (and establish them where they do not currently exist), there is no guarantee that this will ever emerge and the result will be at best a piecemeal approach to standards to keep consumer safe from financial harm. That is why our organizations advocate applying to PACE loans the same Dodd-Frank TILA consumer protections required of other mortgage products.

PACE loans are typically initiated by private contractors working in conjunction with the companies that set up PACE financing programs in coordination with county governments. The PACE administrators approve home improvement contractors to make eligible home improvements loans funded by PACE financing. The PACE obligations are then purchased using proceeds raised by the issuance of municipal revenue bonds. These bonds are secured by payments on PACE loan obligations. The payments are added to the borrower's property tax bill as an assessment, paid through property tax installments – usually over 15 or 20 years – and the outstanding PACE loan obligation runs with the property and not the borrower-going forward. Because they have been added to the property tax rolls, PACE loans rest in a senior lien position to a mortgage. This structure seeks to avoid both consumer protection rules governing mortgages and longstanding principles of lien priority governing real property financing.

A growing body of consumer complaints is being reported in the national media. These reports discuss the sales practices of PACE lenders who often go door-to-door, offer loans worth tens of thousands of dollars with no money down while making fraudulent or misleading representations and sign up consumers who have no idea what they are agreeing to when potential consequences for non-payment of PACE loans can be foreclosure and loss of a home. We have attached a sample of these articles4 and would also suggest to you stories about PACE abuses compiled by National Consumer Law Center.

It is also important to consider the position on PACE loans of the Federal Housing Finance Agency (FHFA) – the federal government conservator to Fannie Mae and Freddie Mac (the GSEs). In 2012, FHFA prohibited the GSEs from purchasing mortgages where the residential property is encumbered by a PACE loan holding first lien position. The California law does not to address these concerns and creates saleability issues for consumers purchasing a home with a PACE lien, because they do not have access to affordable mortgage credit provided through GSE financing. Additionally, a seller who may have just invested in these improvements using a PACE loan could find themselves having to pay off the entire assessment (often consisting of tens of thousands of dollars) before they will be able to complete the sale. In fact, only this week, the Department of Housing and Urban Development announced that it would no longer allow the Federal Housing Administration to insure loans with PACE liens.

ABA, CUNA and MBA support responsible efforts to provide homeowners with affordable and accessible financing for energy efficient home improvements, but sounder alternatives to PACE loans already exist – which do not interfere with traditional lien priority and are accompanied by consumer protections. For example, home equity lines of credit (HELOC) and closed end second mortgages, are frequently used and are better suited for providing energy efficient home improvements. These options are generally more favorable for homeowners due to lower interest rates and Consumer Financial Protection Bureau (CFPB) disclosure and ability to repay standards intended to protect the consumer.

Again, while we appreciate your recognition of the need for straightforward, appropriate protections in this space, the approach offered by California falls short. This resolution will accelerate the development of divergent state consumer protections. Thus, a better approach would be to redraft this resolution to support the bi-partisan legislation which is moving forward in Congress that provides greater consumer protections than the California law. S. 2155 requires the CFPB to prescribe regulations to apply TILA’s ability to repay underwriting to PACE financing. This common-sense approach will ultimately provide greater consumer protections than a state-by-state patchwork as advocated in this resolution. Such a resolution should also call on states to support state and municipal rules that would require PACE obligations to be recorded in proper lien priority, subordinate to all prior-recorded mortgages.

Respectfully,

American Bankers Association
Credit Union National Association
Mortgage Bankers Assocaition