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Groups representing mortgage lenders and consumers are welcoming a new federal rule intended to better protect homeowners who take out special loans to install solar panels, improve energy efficiency or ready their properties for disasters.
But the stronger consumer protections for residential Property Assessed Clean Energy (PACE) loans still give PACE lenders “super lien priority,” which can pose problems for homeowners if the loans haven’t been paid off when they want to sell or refinance their properties, the groups said.
The final rule announced by the Consumer Financial Protection Bureau (CFPB) Tuesday requires PACE lenders to evaluate borrowers’ ability to repay, and also provide more comprehensive disclosures to help homeowners compare the cost of PACE loans to other forms of financing.
Rohit Chopra
“Today’s rule stops unscrupulous companies and salespeople from luring homeowners into unaffordable loans based on false promises of energy savings,” CFPB Director Rohit Chopra said, in a statement. “Homeowners deserve to know just how much they are paying when they put their home and financial future on the line.”
The new rule, which won’t become effective until March 1, 2026, was mandated by Congress as part of the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018.
Rules issued by the CFPB and other federal agencies after the election could come under fire, with senior Republican members of the House Financial Services Committee on Wednesday warning against “finalizing partisan rulemaking” in the final weeks of the Biden administration.
In a Dec. 16 letter to the CFPB, House Financial Services Committee Chairman Patrick McHenry (R-North Carolina) and Vice Chairman French Hill (R-Arkansas) warned Chopra that the Congressional Review Act (CRA) “authorizes Congress to disapprove rulemakings, including those finalized toward the end of the Congress.”
“The financial system, its institutions, consumers, and the CFPB itself do not benefit from last-minute partisan rulemaking attempts,” the Republican lawmakers wrote.
In issuing a proposed rule governing PACE underwriting for public comment last year, the CFPB published a 91-page report detailing problems with PACE loan programs in states including California, Florida and Missouri.
PACE loans are paid back through the homeowner’s property taxes, and the CFPB’s report found borrowers pay interest rates that are “substantially higher” than typical rates for mortgages or home equity loans. The CFPB concluded that PACE loans increase homeowners’ property tax bills by about $2,700 per year, and heighten the risk that they’ll have trouble making their mortgage payments.
A trade association supporting PACE financing, PACENation, issued a statement saying it has “serious concerns” about the new rule. In addition to questioning the CFPB’s authority to regulate PACE loans, the group alleged the bureau “failed to adequately consider positive developments in the PACE industry that have occurred since the rule was drafted.”
A recent paper by researchers at the Yale School of Management and the University of North Carolina at Chapel Hill, for example, concluded that PACE lenders “expand mortgage credit access, indicating improved recovery values despite a PACE lien’s super seniority. Overall, PACE adoption increases local fiscal income while improving climate-proofing of the housing stock.”
PACE loans are typically funded by bond issues authorized by local governments but are often provided to homeowners by private lenders that may partner with home improvement contractors to market the loans to consumers.
Since most homeowners take out PACE loans with repayment terms of 20 years or more, the loans can interfere with selling a home or refinancing an existing mortgage.
That’s because PACE assessments are secured by liens that, depending on the state, are often superior to other mortgage liens on the property. Since PACE assessments are tied to the property, not the property owner, the obligation to repay them remains with the property when a property is foreclosed on or sold.
In a joint statement Tuesday, groups including the Mortgage Bankers Association (MBA), National Consumer Law Center (NCLC), and Housing Policy Council welcomed the CFPB’s new rule, but lamented that PACE liens will continue to be an issue for homeowners and lenders.
“The CFPB’s final rule is a significant step to protect consumers and reduce mortgage delinquencies by ensuring that consumers are both informed of the obligations they are signing up for when they take out a PACE loan and that they have the ability to repay the loan,” the groups said.
But the rule “does not change the fact that PACE loans are provided as a ‘super lien priority’ through the tax assessment process, which is damaging to the housing market and to borrowers who may not be able to refinance or recoup their investment at the time of a sale due to the PACE obligation’s priority status. We will continue to work together to address such challenges as well as any that might arise during the implementation of the rule in states with PACE programs.”
California was the first state to launch a PACE program in 2008, and from 2015 through 2023, $9.12 billion in PACE loans have helped fund 371,000 home upgrades, according to PACENation.
Editor’s note: This story was updated to note that senior Republican members of the House Financial Services Committee this week warned federal agencies against “finalizing partisan rulemaking” in the final weeks of the Biden administration.
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