CFPB moves one step closer to regulating clean energy loans

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The Consumer Financial Protection Bureau plans to issue a proposal on green energy loans that finance home upgrades such as solar panels or cooling and heating systems, the agency said Monday.

In an advance notice of proposed rulemaking, the CFPB solicited public feedback on Property Assessed Clean Energy — or PACE — loans, which have been deemed risky by the Federal Housing Administration and have created problems for some borrowers.

Last year, Congress directed the CFPB to enact regulations that deal with “the unique nature” of 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,” CFPB Director Kathy Kraninger said in a press release. “I look forward to reviewing the comments in response to the questions we are asking to facilitate the required rulemaking.”

Repayment of PACE loans is attached to the property, not the homeowner, through an assessment on a borrower’s property tax bill, with installments typically paid over 15 to 20 years. As a result, PACE loans have a senior lien position ahead of a mortgage.

In 2017, the Federal Housing Administration stopped approving mortgages on properties associated with PACE loans because in the event of a default, the portion of these loans that is in arrears gets repaid before the FHA. Housing and Urban Development Secretary Ben Carson called the loans “potentially dangerous” to the FHA insurance fund.

In addition, financing of PACE loans typically is based on a borrower’s equity in the home.

Some homeowners have alleged that they had trouble selling their homes because of the loans. Others claim contractors misrepresented how the loans work. In 2017, California passed legislation barring kickbacks to contractors and setting underwriting requirements.

The law enacted by Congress last year requires PACE loans to be subject to the ability-to-repay requirements under the Truth in Lending Act. That potentially opens the door to the CFPB holding PACE lenders liable for TILA violations.

TILA requires that residential mortgages to borrowers be made “on terms that reasonably reflect their ability to repay,” and that the loans are “understandable and not unfair, deceptive, or abusive,” the CFPB said.

The bureau listed 34 questions for comment. The questions address current standards and practices in PACE financings, borrower delinquencies and defaults, and information consumers receive before signing a PACE financing agreement.

The public will have 60 days to comment on the proposal after it is published in the Federal Register.

PACENation, an industry trade group, said it looked forward to working with the CFPB. "We view this is a critical step toward making residential PACE financing available to property owners in every American community where state and local officials choose to authorize it," co-executive director Colin Bishopp said in an emailed statement.

Consumer advocates also welcome the rulemaking. John Rao, staff attorney at the National Consumer Law Center, said that CFPB regulation “is important to reform the PACE loan program and adopt sorely needed consumer protections.”

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Property Assessed Clean Energy Mortgages Regulatory reform Kathy Kraninger CFPB