Tennessee could be the next state to approve a lending program that has bankers fuming.
Two bills recently introduced in the state’s legislature would promote energy efficiency by letting local governments lend to property owners who want to finance conservation-related improvements.
Tennessee bankers are determined to keep those bills from becoming law, in part because in the event of foreclosure, the loans would be first in line to be repaid, ahead of any bank's mortgage.
“I think things would be a lot better if government would stick to its job and stay out of lending,” said Gordon Majors, president and CEO of the $443 million-asset Hardin County Bank in Savannah, Tenn., and chairman of the Tennessee Bankers Association.
If proponents are successful, Tennessee would become the 33rd state to authorize a property-assessed clean energy, or PACE, program. Local PACE programs are up and running in 18 states, while 14 others have passed laws that would allow them to be created.
Programs implemented so far have financed more than $3 billion for energy efficiency projects, according to PACENation, a trade group that promotes the effort.
PACE loans got their start in the early 2000s, when the city of Berkeley, Calif., proposed the formation of a sustainable energy financing district to let property owners finance the installation of solar panels.
Despite its green intentions, the program has been criticized in banking circles and in government. Critics have zeroed in on provisions that give PACE loans the same “super-priority” accorded to tax liens.
The Federal Housing Finance Agency, for instance, has serious doubts about the program. Alfred Pollard, the agency’s general counsel, said during June testimony before the California legislature. He noted that his agency had directed Fannie Mae and Freddie Mac to avoid buying or refinancing mortgages with PACE loans attached.
PACE loans are “the only type of home improvement loans that jump over the main loans” in lien priority, said Tim Amos, general counsel for the Tennessee Bankers Association.
The bills introduced in Tennessee are similar to legislation introduced in 2015 that also drew the ire of the Tennessee Bankers Association.
“The more we looked at it and talked to folks around the country, we just didn’t like the way the program worked,” Amos said.
The Tennessee bills would let local governments establish districts where PACE loans could be made, issue bonds to pay for them, and contract with nonprofit third parties to administer the programs. Borrowers would pay via an assessment added to their property tax bills.
Due to that unusual structure, critics claim that PACE credits lack typical consumer protections and disclosure rules that are standard with conventional loans.
The bills' sponsors did not return phone calls seeking comment.
The Mortgage Bankers Association has vowed to push the Trump administration and the Consumer Financial Protection Bureau to take a closer look at PACE programs.
“There’s a significant void in consumer protections under the PACE program,” Pete Mills, the association’s senior vice president for residential policy, said last year.