Aug 19, 2016 15:35 ET - Victor Whitman- Scotsman Guide
Several progressive groups have now joined the banking industry in raising red flags about clean-energy (PACE) loans that are repaid via property-tax billing.
In a letter this week to the U.S. Department of Energy (DOE), the National Consumer Law Center (NCLC), on behalf of 15 other legal and consumer-facing organizations, said PACE loans should not be marketed to lower-income borrowers. The letter also advocated for tougher underwriting that would screen out people who can't afford the loans.
PACE loans are a special kind of financing sponsored by local governments and used to pay for energy-efficiency improvements, such as solar panels, energy-efficient appliances and windows.
The loans are available in states that have adopted legislation allowing local governments to fund the improvements. Structured as a tax assessment, the loan payments appear on the property’s tax bill for five to 20 years, and the payments can be structured in different ways.
DOE recently drafted a list of nonbinding best practices for states and localities that adopt PACE programs. The National Consumer Law Center’s letter said the guidelines don't adequately protect consumers, and PACE loans should be subject to the same rigorous federal disclosure and consumer protections as mortgages.
“We know that not giving disclosures and decent protections causes problems,” said Andrew Pizor, a NCLC staff attorney.
“That is what half of Dodd-Frank was about, to try and prevent people from making these horrible subprime loans again,” Pizor told Scotsman Guide News. “PACE lending could turn out to be a bad form of subprime lending, like we saw before the crisis.”
NCLC is especially concerned that the loans will put lower-income borrowers at a greater default and foreclosure risk. The NCLC's letter noted that PACE loans tend to carry significantly higher interest rates than second mortgages and are structure as assessments that can cause issues. PACE loans may also cause problems, for example, if the borrower wants to sell the home.The buyer may not accept the assessment at face value.
Pizor emphasized that the groups do not oppose energy-efficiency programs per se.
“Basically, we are not objecting to the concept,” Pizor said. “We just want to make sure that people who get the loans are the ones who can afford them, and the ones who don’t have better alternatives. Even if you have all the money in the world, the rates don’t seem to be particularly good. A lot of people may be better off just getting a home equity loan, and refinancing.”
Several states have enacted legislation that allows localities to set up PACE loan programs. Programs for commercial properties are far more common, but a select number of states, most notably California, have established programs for homeowners.
PACE loans could soon become a more mainstream option for energy improvements, however. In July, the Federal Housing Administration (FHA) and Veterans Administration (VA) provided a framework that would allow the agencies to insure FHA and VA loans with a PACE assessment attached to the home.
In response to that move, the Mortgage Bankers Association and several trade groups raised warnings about the programs.