CFPB Issues Advance Notice of Proposed Rulemaking on PACE Financing

The Consumer Financial Protection Bureau yesterday issued an Advance Notice of Proposed Rulemaking on residential Property Assessed Clean Energy (PACE) financing.

“Today’s action is the next step in the Bureau’s efforts to implement the Economic Growth, Regulatory Relief and Consumer Protection Act as expeditiously as possible,” said CFPB Director Kathleen Kraninger.

The Economic Growth, Regulatory Relief and Consumer Protection Act (S.2155), signed into law last May, directed the Bureau to prescribe certain regulations for PACE financing.

For members of the Mortgage Bankers Association, PACE loans have proven problematic. While MBA believes energy efficient home improvements can be beneficial for homeowners, significant concerns exist when these improvements are financed with PACE loans, a financing structure lacking vital consumer protections and presenting lien priority risks to lenders, investors and guarantors.

MBA strongly supported S.2155, which enacted federal legislation to provide the Bureau authority to subject residential PACE loans to Truth in Lending Act consumer protections.

MBA also urged Congress to introduce legislation requiring PACE loan subordination in accordance with long-established lien priority standards. MBA supports the principle of “first in time, first in right,” that any private lien added after origination of a property’s first lien mortgage should not take priority over the mortgage in foreclosure, or have the ability to extinguish its interests.

“PACE programs do not follow traditional underwriting,” MBA said. “There is no standardized review of a borrower’s income, credit history, outstanding credit obligations or expected monthly payments when a PACE loan is originated. Instead, PACE financing is often based on a borrower’s equity in their property and their mortgage and property tax payment history.

MBA pointed out PACE loans are typically initiated by the private companies approving home improvement contractors to make these improvements with 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-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.

In December 2017, at MBA’s urging, HUD reversed previous Federal Housing Administration policy by stating in Mortgagee Letter ML2017-18 that the FHA would no longer insure mortgages that also carry PACE liens. In July 2018 the Department of Veterans Affairs (VA) allowed its guidance (Circular 26-16-18) permitting financing for the purchase or refinance of properties encumbered by a PACE loan holding first lien position to sunset.

More than 20 states have enacted legislation enabling the development of residential PACE programs, and residential PACE programs are operational in California, Florida and Missouri.

The Bureau said it will consider the information it receives in response to the ANPR to develop a Notice of Proposed Rulemaking. The public will have 60 days to comment after publication of the ANPR in the Federal Register.

The ANPR is available at: