Attention: Comments/RIN 3170-AA84, Residential Property Assessed Clean Energy Financing (Regulation Z)
Dear Director Chopra:
The American Bankers Association appreciates the opportunity to comment on the Consumer Financial Protection Bureau's (CFPB) Notice of Proposed Rulemaking on Residential Property Assessed Clean Energy (PACE) Financing.
Residential PACE programs have become moderately popular in recent years as a method of financing energy efficient, disaster preparedness, and other related home improvements. While the goals of these programs are laudatory, the financing arrangements employed by many PACE programs, as they are currently authorized by state and local governments, present significant consumer protection concerns for borrowers as well as safety and soundness concerns for both primary and secondary mortgage market participants. These concerns stem from the unique treatment of these loans as tax assessments rather than debt secured by collateral like traditional mortgage financing.
PACE assessments are secured by a lien on the consumer's real property, which takes precedence over any first lien mortgage and attaches to the property, not the borrower. These super priority liens make the property harder to sell or refinance and undermine the value of the collateral used to secure the mortgage, with deleterious effects on the entire mortgage market.
Concerns over the lien priority of residential PACE loans have been so significant that the Federal Housing Finance Agency (FHFA) has barred Fannie Mae and Freddie Mac from purchasing loans secured by a property encumbered by a PACE loan with a super priority lien. While FHFA's efforts address some of the concerns posed to lenders, prior to the CFPB proposal, risks to the borrower have not been addressed.
We are pleased that the CFPB has issued this proposal to address the fact that the residential PACE financing and repayment structure are inadequately disclosed and understood by borrowers. This makes them susceptible to financing arrangements that are unsafe and may not be affordable by borrowers, which increases risk to both the consumer and the broader community.
The CFPB's proposal addresses these concerns by subjecting PACE loans to federal mortgage regulatory obligations including Ability-to-Repay (ATR) determinations, TILA (Truth in Lending Act) requirements and "Know Before You Owe" disclosures. We strongly support these proposals and address each element in greater detail below:
1. Ability to Repay - Currently, PACE loans are based upon the tax valuation of the property, not on the borrower's ability to repay. This approach has the potential to allow borrowers to qualify for an obligation that dramatically increases their property tax payments even if they do not have the financial capacity to pay, increasing the likelihood that they will default on their mortgage. Subjecting PACE loans to ability to repay requirements consistent with other mortgage related financing allows for an assessment of the borrower's income, credit history, indebtedness, and expected monthly payments. Doing so will offer borrowers significantly greater protections more in line with more traditional financing and decrease their susceptibility to predatory practices which increase their risk of falling into foreclosure. Truth In Lending – By requiring Truth in Lending Act disclosures on PACE loans, including Annual Percentage Rate disclosures, the proposal will allow borrowers to compare the cost of a PACE loan to more conventional alternatives such as home equity loans and to shop for the best product to fit their needs and ability to pay.
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