The Real Deal New York

Regulators seek to rein in energy-efficient home improvement loans

Rapid growth in PACE loans has sparked concerns of another debt crisis
March 05, 2019 10:30AM

The Consumer Financial Protection Bureau is seeking public comments to prepare for PACE (Credit: iStock and Freepik)

Amid concerns over a looming debt crisis, federal regulators are preparing new rules to rein in the popular Property Assessed Clean Energy (PACE) home improvement loan program, which homeowners use to finance solar panels and other energy-efficient upgrades.

Following a rare collective effort from bipartisan lawmakers, banking groups and consumer advocates, the Consumer Financial Protection Bureau said on Monday that it is seeking public comments to prepare for a new regulation for the government-supported program, which would treat private PACE lenders more like traditional mortgage lenders.

“PACE home improvements for many homeowners, especially low and moderate-income families, are far from affordable, and homeowners lack proper disclosures that reflect the true cost of the improvements,” Senators Catherine Cortez Masto (D-NV) and Tom Cotton (R-AR) said in a letter to the CFPB last week, according to the Wall Street Journal. “We urge the Bureau to prioritize issuing this rulemaking.”

Local governments across the country have set up PACE loans to encourage homeowners to make energy-efficient home improvements and to stimulate local business. The practice has grown rapidly in recent years, with homeowners taking out 220,000 PACE loans between 2010 and 2017 to finance projects worth $5.17 billion, according to PACENation, an industry group.

The program’s growth has been fueled in part by a peculiar marketing practice, whereby plumbers and repairmen can earn referral fees from lenders by essentially acting as loan brokers, despite limited knowledge of financing.

PACE lenders are not currently required to ensure that the borrowers are able to repay the loans, which the new CFPB regulation would aim to change. The unique financing structure of PACE loans requires no initial payment, but is reflected in a property tax lien, which can result in unexpected payments on tax bills for many borrowers.

Major players in the PACE lending space include Renovate America Inc., Renew Financial Group LLC and Ygrene Energy Fund Inc. [WSJ] — Kevin Sun