Consumer Finance Insights
May 5, 2023

Tougher Standards for Certain Home Improvement Loans

On May 1, 2023, the Consumer Financial Protection Bureau (CFPB) issued a report and a proposed rule to clarify and strengthen its regulation of so-called Property Assessed Clean Energy (PACE) financing.

PACE.  PACE financing is home improvement financing secured by a tax lien, rather than a mortgage.  See 15 U.S.C. 1639C(b)(3)(C)(i). Despite the “clean” in the title, PACE loans are more frequently used for natural disaster preparedness than for clean energy improvements such as solar panels.  The defining feature of PACE loans is that they are repaid via a tax assessment on the improved real property.  The obligation to repay the loan through higher property tax payments remains with the property even if the property is sold to a new owner.  Like any tax lien, a lien that secures a PACE loan is usually senior in priority to any private mortgage liens.  PACE loans are made between the consumer and the consumer’s local government, or a government entity operating with the authority of several local governments.  Although some local governments operate PACE financing programs directly, most contract with private PACE companies to operate the programs.

The Report.  The CFPB report examined data from the four PACE companies that were engaged in PACE loan applications and originations between July 2014 and June 2020, comprising information on over 200,000 PACE loan applicants over that period.  It concluded that borrowers of PACE loans saw increased mortgage delinquencies, higher property taxes, higher interest rates, and increased credit card balances.  According to the CFPB, the data also suggested problematic lending practices.  A little more than 13 percent of PACE borrowers received multiple PACE loans, many originated simultaneously or within a few months of each other.  Of the four PACE companies that provided the data, FortiFi Financial, Home Run Financing, Renew Financial, and Ygrene Energy Fund, one was sued in October 2022 by the FTC and State of California to enjoin deceptive, coercive, and fraudulent sales practices.

The Proposed Rule.  Based on the findings in its report, and as directed by Congress (per the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018), the CFPB proposed a rule to better regulate residential PACE lending.  Specifically, the rule would clarify, contrary to some arguments by PACE lenders, that certain provisions of Regulation Z (Reg. Z) of the Truth in Lending Act (TILA) apply to residential PACE loans.  Also, the rule would require residential PACE lenders to follow a version of TILA’s “ability-to-repay” rule (“ATR Rule”), which ensures no loan is made to a borrower who cannot afford it, amended to account for the unique nature of PACE transactions.

A summary of the proposed rule’s provisions follows:


To be codified at:

Amend commentary to clarify that tax liens and assessments are excluded from Reg. Z’s definition of “credit” only if they are “involuntary”.  A PACE loan results in a tax lien, but it is a voluntary lien.  This change would make clear that TILA applies to PACE loan credit.

12 CFR 1026.2(a)(14); Comment 2(a)(14)-1.ii

Add a definition of “PACE company” and “PACE transaction” for purposes of the ATR Rule and in Reg Z generally.  

12 CFR 1026.43(b)(14) and (15)

Apply the existing ATR Rule standard to PACE transactions, but also amend it to account for PACE loans.

12 CFR 1026.43(i)

Exclude PACE transactions from the ATR Rule’s “qualified mortgage” categories.

12 CFR 1026.43(i)(2)

Clarify a comment to the definition of “mortgage-related obligation” to make clear that pre-existing PACE transaction payments are considered property taxes.

12 CFR 1026.43 Comment 43(b)(8)-2

Ensure PACE transactions obey the ATR Rule, via additional clarifications, e.g.,

  • that a PACE creditor, when checking a borrower’s other “payment obligations,” is deemed to know of a customer’s simultaneous PACE loans if the creditor has access to any existing database or registry of PACE transactions which includes those loans,
  • that a creditor with reason to know about a consumer’s existing PACE transaction cannot, in complying with “third-party verification” requirements, rely solely on government information that does not reflect the PACE transaction.

12 CFR 1026.43 Comment 43(c)(2)(iv)-4; Comment 43(c)(3)-5

Seek comment on whether application of the High-Cost Mortgage Rule of the Home Ownership and Equity Protection Act (HOEPA) to PACE transactions needs clarification.  (The current version of the proposed rule makes no change to HOEPA rules.)

12 CFR 1026.32; 12 CFR 1026.34

Exempt PACE transactions from the Higher-Priced Mortgage Loans Escrow Rule, which prohibits extending certain loans unless an escrow account is established before consummation.

12 CFR 1026.35 (b)(2)(i)(E)

Exempt PACE transactions from the periodic statement requirements of the Mortgage Servicing Rule.

12 CFR 1026.41 (e)(7)

Provide a model Loan Estimate form and model Closing Disclosure form for PACE transactions.

12 CFR 1026 Appendix H (proposed forms at pp. 162-177 of the proposed rule

Modify existing Loan Estimate and Closing Disclosure rules (the TILA-RESPA Integrated Disclosure Rule) to account for the unique nature of PACE transactions.

12 CFR 1026.37(p); 12 CFR 1026.38(u); 12 CFR 1026 Appendix H

Public comments are due 30 days after the proposed rule is published in the Federal Register, or, if later, July 26, 2023.

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