ONTARIO, Calif.–The Federal Housing Administration has issued a policy statement on Property Assessed Clean Energy (PACE) that calls for avoiding the use of super priority liens in any policy consideration of PACE loans.
Any policy should be consistent with the Federal Housing Finance Agency’s existing policy on PACE loans, the policy statement says.
That statement is consistent with comments made earlier this year by the California and Nevada Credit Union Leagues, which was joined in its letter by the California Bankers Association, California Mortgage Bankers Association, and California Land Title Association.
In their comment letter, the leagues had called for the points outlined below (the commentary that follows each point is from the leagues):
- Proper consumer protection should be implemented on PACE loans. These loans are not subject to the same consumer protection laws or regulations governing loans administered through credit unions, banks, and other traditional mortgage lenders. PACE loans are offered under the guise of energy efficiency, water conservation, or earthquake retrofits and run the risk of being unnecessarily more costly than a traditional home-equity loan. The potential for higher interest rates, fees, and lack of consumer protection lending safeguards leave credit union members and other California residents at risk for financial abuse. Additionally, PACE borrowers are often discovering in escrow that they must pay off their PACE loan in full before they can refinance, sell, or transfer their real property.
- There is a lack of state or federal regulatory oversight of PACE loans. Many PACE programs do not have the very basic consumer protections required by agencies such as the Consumer Financial Protection Bureau. A lack of standard underwriting to determine a borrower’s eligibility to repay potentially puts consumers at risk of default and lenders at risk. It appears that PACE loans are created every day without adequate disclosures and other protections required of traditional lenders by the CFPB or California Department of Business Oversight.
- Regulated lenders in California are put at great risk. In the event of default, the PACE lien takes super priority over existing liens on the property, including the first mortgage, thus adding significant risk to lenders. If the increases in property tax obligations puts a consumer at risk of not being able to make their mortgage payment, a PACE-type loan might very well result in foreclosure. Fannie May and Freddie Mac, who are regulated by FHFA, provide a secondary market for lenders allowing for liquidity, stability and affordability in the mortgage market. The FHFA policy against purchasing mortgages with a first-lien PACE loan attached to it means PACE lending further impacts consumers looking to purchase or refinance their homes. If Fannie and Freddie are not able to purchase mortgages from lenders and free enough capital to ensure the lenders continue lending, there would be a chilling effect on the availability of mortgage credit for consumers.
“I applaud this important step from the FHA in protecting consumers and ensuring that their most valued asset, their home, is not unnecessarily put at risk,” said CNCUL CEO Diana Dykstra in a statement.