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Congress takes on “predatory” PACE loans

Bills introduced to change rules for energy improvement loans

The rules surrounding energy retrofit loans, which have engendered a great deal of divisiveness over the last few years, could be about to change, as both houses of Congress are set to consider changes to the rule for loans created by the Property Assessed Clean Energy program.

The loans, also called PACE loans, allow homeowners to obtain financing to make improvements to their homes to increase the home’s energy efficiency. PACE loans are often used to add solar panels to a home.

Under programs like PACE, single-family energy retrofit financing programs can be structured to make loans through the homeowner’s property tax assessment and require that borrowers repay their loans as part of their property tax bill.

But the program is shrouded in controversy because in some states, the PACE liens are given super priority status above the home’s mortgage, which many in the mortgage business take serious issue with.

And beyond that, some, including prominent members of Congress, consider the PACE program to be “predatory,” and say that some PACE lenders “trick” homeowners into taking out the loans.

And now, some of those same members of Congress are pushing for changes to the rules for PACE loans to ensure that the homeowner is fully aware of the nature of the program before agreeing to the loan.

In a seemingly rare moment of bipartisanship, a group of three Republican senators, one Republican congressman, and one Democratic congressman introduced companion bills in both houses that would bring PACE loans under the Truth in Lending Act.

Specifically, the bill would amend the Truth in Lending Act to require a full TILA disclosure of the loan details and terms, as is required now with mortgage loans.

The bill, titled the Protecting Americans from Credit Exploitation Act (or PACE Act), was introduced this week in the Senate by Sens. Tom Cotton, R-Ark.; Marco Rubio, R-Florida; and John Boozman, R-Ark.; and in the House of Representatives by Reps. Brad Sherman, D-Calif.; and Ed Royce, R-Calif.

As Sherman’s office notes, the bill would ensure that ensure PACE lenders are subject to the “same basic disclosure requirements that apply to traditional lenders, including providing to consumers the annual percentage rate, a schedule of payments, and the total cost of the loan.”

Under the bill’s stipulations, homeowners will also be notified that they are taking a lien on their home.

PACE loans gained in popularity under the Obama administration, which oversaw various changes to Federal Housing Administration rules designed to make PACE loans more appealing to borrowers and lenders.

Unsurprisingly, Sherman speaks of the PACE program in slightly more positive terms than his Republican counterparts.

“PACE programs provide an important source of financing for consumers looking to make energy-efficient changes to their homes,” Sherman said in a statement about the bill. 

“But the current process presents homeowners with many challenges and can result in homeowners being misled about the terms of their loan,” Sherman continued. “We must ensure that homeowners concerned with promoting energy efficiency, conservation, and a cleaner environment are given the tools to be successful.”

But the Republicans that joined Sherman in introducing the bill have a different view.

“Residential PACE loans are a scam,” Cotton said.

“Predatory green-energy lenders are changing state and local laws to trick seniors into taking out high-interest rate loans for 20 years, along with liens on their homes, for technology that could be obsolete in a few years,” Cotton continued.

“Today, these loans are exempt from the same disclosure forms required for other home loans,” Cotton added. “Our bill will fix this. Requiring disclosure will reduce the advantage that PACE loan sharks have over hard-working Americans. It's just the accountability we need.”

Rubio and Boozman also said that PACE bill is necessary, but not in quite the colorful terms that Cotton used.

“Residential PACE loans should have to play by the same rules as other forms of home financing,” Rubio said.

“Americans deserve clear, straightforward policies from their government, not hidden political favors,” Rubio continued. Our legislation would address this and help provide the transparency necessary to create real consumer choice.”

Boozman said that the bill will help protect homeowners.

“We must provide homeowners with the information they need to protect themselves so they don’t risk financial ruin because of their participation in the PACE loan program,” Boozman said. “I’m proud to support this legislation to prevent borrowers from being taken advantage of.”

The bill received support from both the Mortgage Bankers Association and the California Association of Realtors.

“Senators Cotton, Rubio and Boozman and Congressmen Sherman and Royce are to be lauded for introducing legislation that will protect low-income and elderly Americans from risky financial products,” MBA President and CEO David Stevens said in a statement.

“While energy efficient home improvements can be beneficial for some homeowners, MBA has significant concerns with the Property Assessed Clean Energy program construct,” Stevens continued.

“PACE loans are, in substance, mortgage-related financing and should adhere to federal mortgage financing rules,” Stevens added. “This legislation will subject PACE loans to the same Truth in Lending Act consumer protections required of other applicable mortgage products. We look forward to continuing to work with Congress on this very important issue.”

CAR President Geoff McIntosh said that the bill is especially important in California, where PACE loans are more prevalent than in other states.

“The use of Property Assessed Clean Energy liens, which lacks industry oversight, has grown more in California than in any other state,” McIntosh said.

“Without federal regulatory oversight for these types of loans, unknowing homeowners are unable to compare costs, and terms and conditions, and are vulnerable to rates and fees that are in some cases predatory,” McIntosh continued. “We commend Reps. Sherman and Royce for introducing legislation that will allow the Consumer Financial Protection Bureau to regulate the companies selling PACE loans and protect consumers from hard sales tactics that often lead to abuse.”

To read the PACE Act in full, click here.

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