On May 1, 2023, the CFPB issued a proposed rule to implement a Congressional mandate to establish consumer protections for residential Property Assessed Clean Energy (PACE) loans. 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.
Property Assessed Clean Energy or PACE loans are secured by a property tax lien on the borrower’s home and are often promoted as a way to finance clean energy improvements. Eligible upgrades can include energy and water efficiency projects, or projects to prepare homes for natural disasters. The CFPB conducted research on residential PACE loans and found that the loans cause an increase in borrowers falling behind on their mortgage payments, along with other negative credit outcomes. 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.
In October 2022, the FTC and State of California sued Ygrene Energy Fund Inc., a private PACE administrator, to force it to stop deceptive, coercive, and fraudulent sales practices. 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. Public comments on the proposal will be accepted until July 26, 2023, or 30 days after publication in the Federal Register, whichever is later.
Read the CFPB’s press release here.
The proposed rule can be found here.
The PACE Financing report can be found here.