Proposed rule would guard against unscrupulous practices and prevent unnecessary mortgage foreclosures
The Consumer Financial Protection Bureau (CFPB) proposed a rule to implement a Congressional mandate to establish consumer protections for residential Property Assessed Clean Energy (PACE) loans. PACE loans, secured by a property tax lien on the borrower’s home, are often promoted as a way to finance clean energy improvements such as solar panels. The proposed rule would require lenders to assess a borrower’s ability to repay a PACE loan and would provide a framework for how these loans will be treated under the Truth in Lending Act. The CFPB also published a report on residential PACE loans, which found that the loans cause an increase in borrowers falling behind on their mortgage payments, along with other negative credit outcomes.
“When unscrupulous companies bait homeowners into unaffordable loans with exaggerated promises of energy bill savings, this can lead to serious financial distress,” said CFPB Director Rohit Chopra. “We are proposing new rules that would require sensible safeguards on these clean energy loans.”
Residential PACE loans finance home improvements for borrowers, who pay back the loans through increased property tax payments over time. Eligible upgrades can include energy and water efficiency projects, or projects to prepare homes for natural disasters. From 2014-2020, a majority of PACE loans were for home improvements for natural disaster preparedness. The obligation of paying the loan back through higher property tax payments remains with the property even if the borrower sells the property. Although PACE lending is authorized by local governments, private companies typically administer the programs, which can include marketing of the loans, managing originations, and making the lending decisions.
In October 2022, the FTC and State of California sued one of these private PACE administrators , Ygrene Energy Fund Inc., to force it to stop deceptive, coercive, and fraudulent sales practices.
Today’s proposed rule comes five years after President Trump signed the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018, which directed the CFPB to prescribe ability-to-repay rules for PACE financing and to apply the civil liability provisions of the Truth in Lending Act for violations.
If finalized, the proposed rule would require PACE creditors and PACE companies to consider a consumer’s ability to repay when issuing a new PACE loan, and it would amend Regulation Z to address how the Truth in Lending Act applies to PACE transactions. Among other amendments, the proposed rule would adjust disclosure requirements to better fit PACE loans and to help consumers understand the loans’ impact on their property tax payments.
Public comments on the proposal are due by July 26, 2023, or 30 days after publication in the Federal Register, whichever is later.
PACE Financing Report
The new CFPB report on the PACE loans highlights the impact these loans have on borrowers’ credit outcomes. The report focused on California and Florida as these are the two states where almost all PACE loan activity has occurred to date.
Some of the risks to consumers identified in the report include:
- Higher property taxes: PACE loans increased a homeowner’s property taxes by about $2,700 per year on average – an increase of about 88%.
- Higher interest rates: The average PACE loan had a 7.6% interest rate, which is much higher than average interest rates for home purchase or home equity loans.
- Increased mortgage delinquencies: In the two years following PACE loan origination, the mortgage delinquency rate for PACE loan borrowers with a pre-existing mortgage increased by 2.5 percentage points.
- Increased credit card balances: Consumers without a pre-existing mortgage increased their credit card balances in response to acquiring a PACE loan, perhaps accumulating credit card debt in order to make the PACE loan payments.
PACE borrowers were more likely to reside in census tracts with higher percentages of Black and Hispanic residents relative to the average for their states. Reforms and regulation of PACE loans in California appear to have substantially reduced the volume of delinquencies compared to the trend in Florida over the same period.
Read today’s report, Property Assessed Clean Energy (PACE) Financing and Consumer Financial Outcomes
Implementing Rules Mandated by Congress
The CFPB is taking action to implement statutes and activate authorities enacted by Congress. Recent actions include:
- The CFPB recently met a court deadline to finalize rules implementing a required small business lending data collection provision under Section 1071 of the Consumer Financial Protection Act.
- The CFPB has also started a rulemaking process on personal financial data rights, using a dormant authority under Section 1033 of the Consumer Financial Protection Act that will accelerate the shift to “open banking” in the United States.
- In June 2022, the CFPB finalized a rule implementing the Debt Bondage Repair Act to mitigate financial consequences for survivors of human trafficking.
- In February 2022, the CFPB published its outline of a proposal to implement a 2010 law to prevent algorithmic bias in home valuations, and is working closely with other agencies to issue the proposed rule.
Consumers can submit complaints about financial products and services by visiting the CFPB’s website or by calling (855) 411-CFPB (2372).
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