Keeping “Apace” With The Issues – Financial Services

In 2018, Congress instructed the Consumer Financial Protection
Bureau (CFPB) to issue ability-to-repay regulations for property
assessed clean energy (PACE) financing. Some state governments
offer PACE programs to encourage homeowners to make energy
conservation or disaster preparedness improvements to their homes.
The jurisdictions provide financing for those improvements through
a property tax assessment on the homeowner. The repayment
obligation is generally secured by a superior lien on the property.
The programs are typically administered through a government
contract with private companies that market the programs and enlist
the participation of home improvement contractors. Homeowners
typically obtain PACE financing through the contractors’ sales
efforts, and the transactions are often originated quickly at the
point of sale.

In accordance with the Congressional mandate, the CFPB’s
proposed rule would require a determination — similar to that
for a mortgage loan — that the borrower will be able to repay
the PACE transaction, considering the borrower’s income,
assets, employment status, monthly payments on the transaction and
other obligations, debt-to-income ratio or residual income, and
credit history. The borrower’s income would have to be verified
based on third-party documentation. Also, if a borrower has a
preexisting PACE transaction, the mortgage lender would have to
consider the payments on that transaction in its abilityto-repay
determination for the new mortgage loan. The proposal would not
provide for any Qualified Mortgage-like safe harbor protection for
PACE transactions.

DEADLINES FOR DISCLOSURES APPLY

The CFPB’s proposal also would require the provision of Loan
Estimates and Closing Disclosures (i.e., TRID disclosures) for the
PACE transactions. The proposal would modify the content of those
disclosures as applicable to the unique transactions, but it would
not modify the timing requirements. In other words, the deadlines
for providing the disclosures and the waiting periods prior to
consummation would apply. In addition, it appears that the
tolerance restrictions for amounts disclosed in the Loan Estimate
also would apply.

The CFPB also indicates that a PACE administration company or a
home improvement contractor may, in connection with a transaction,
operate as a “loan originator.” Under those
circumstances, the proposal would impose on those persons
Regulation Z’s compensation and anti-steering restrictions, as
well as qualification requirements, including licensing and/or
criminal background checks.

POSSIBLE PROBLEMS FOR LENDERS AND SERVICERS

While PACE programs are laudable in encouraging energy
conservation or disaster preparedness, they may cause several
struggles for mortgage lenders and servicers. As mentioned above,
the property tax lien generally takes priority over a mortgage,
even a first-lien mortgage loan recorded prior to the PACE
financing. In addition, the CFPB asserts that PACE financing
increases mortgage delinquency rates. Since payments on the PACE
transactions often are due only annually or semi-annually, the
payments can create a sharp, delayed payment shock, temporarily
increasing the borrower’s escrow payments on an applicable loan
by as much as two or three times. Under those circumstances, a
servicer may have to advance funds to cover a disbursement or an
escrow shortage or deficiency (assuming the servicer is even aware
of the PACE obligation).

PROTECTING CONSUMERS

Of course, the CFPB is primarily concerned about protecting
consumers. The agency reports accusations of aggressive sales
tactics and targets on vulnerable populations in the PACE arena.
The parties responsible for originating PACE transactions arguably
have little financial incentive to ensure the borrower understands
the transaction and can afford to make the tax payments. The CFPB
also described tactics like loan splitting or stacking that burden
borrowers with multiple PACE transactions. Although the industry
has taken steps to self-regulate by promoting best practices, the
CFPB seeks to ensure that borrowers receive information about the
transactions’ costs and terms and have time to consider that
information in advance. Additionally, the proposed rule would
clarify (consistent with Congressional mandate) that PACE companies
substantially involved in making the credit decision would face
penalties for a failure to comply with the ability-to-repay
requirements.

The CFPB recognizes that imposing an ability-to-repay
requirement, along with a TRID-like disclosure regime, may have a
significant impact on the PACE marketplace, and may decrease the
availability of PACE financing. Certainly, the proposed
requirements will slow the origination of the transactions, as PACE
companies may be required to gather income documentation, conduct
underwriting, provide a waiting period prior to consummation, and
allow for a three-day right to rescind the transaction. Imposing
those compliance obligations and delays could fundamentally change
the way the product is offered.

Originally published by Pipeline Magazine

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