WASHINGTON— The Consumer Financial Protection Bureau (CFPB) has proposed a rule it said is designed to implement a congressional mandate to establish consumer protections for residential Property Assessed Clean Energy loans, better known as 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 Bureau noted.
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.
In addition, the CFPB has 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.
As the CFPB explained, 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 Bureau added.
Obligation Remains
“The obligation of paying the loan back through higher property tax payments remains with the property even if the borrower sells the property,” the CFPB said.
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.
The 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.
What’s Being Proposed
According to the CFPB, 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
- Amend Regulation Z to address how the Truth in Lending Act applies to PACE transactions
- 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.
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