PACE Financing Puts California Homeowners at Serious Risk

Craig Borner
By Craig Borner
2017 OCR President

But recently proposed federal legislation may provide much-needed disclosure and consumer protection.

Property Assessed Clean Energy (PACE) financing is a controversial program that circumvents the traditional loanand- refinance process to fund energy-efficient upgrades to homes and businesses through property tax assessments. While the authors of California’s original PACE legislation probably had good intentions, the program as it is practiced today puts homeowners in the Golden State at serious risk.

“Those who cannot remember the past,” wrote George Santayana in The Life of Reason (1905), “are condemned to repeat it.” Although many factors contributed to the 2008 mortgage crisis, chief among them was predatory lending.

PACE financing is marketed by contractors’ sales representatives who possess no financial expertise. Borrowers are approved without consideration of their ability to repay. And although this financing is secured by a super-priority tax lien, borrowers are charged unjustifiably high interest rates and origination fees. Without any regulation to restrict these predatory practices, PACE financing eats deeply into the home equity of those who need it most.

Because PACE financing is repaid through an assessment added to the property tax bill, a city council must agree to participate in a PACE Joint Powers Authority (JPA) before this form of financing can be made available to city residents. Other financing options, such as home equity loans, are regulated by federal law and do not require approval from a local city council.

Council members are often told that they are simply making it possible for their residents to take advantage of a financing option. The truth is that when a city agrees to be part of a PACE JPA, that city allows use of its tax-levying authority but cannot exercise any oversight. Talk about a bad deal!

Because PACE liens are attached to the property itself rather than to the property owner, these loans can make it impossible for an owner to refinance or to obtain a second mortgage and can obstruct transfer of the property from one owner to another. In this way, PACE financing can diminish equity and put the American Dream of homeownership at risk.

Fortunately, two local Members of Congress recognize this problem and are taking the lead on this issue. U.S. Representatives Ed Royce (a Republican who represents the 39th District) and Brad Sherman (a Democrat who represents the 30th District) have co-sponsored H.R. 1958. This bipartisan bill—which is known as the Protecting Americans from Credit Entanglements Act of 2017 or, more simply, as the PACE Act of 2017—would make PACE financing subject to the federal Truth in Lending Act.

The Orange County Association of REALTORS® believes that PACE financing should be subject to the same regulations and oversight as other financing alternatives and that consumers should be protected by adequate upfront disclosure of interest rates, loan costs, and associated fees. If you agree, please join Orange County REALTORS® in opposing what PACE financing has become by expressing your support for H.R. 1958 to your Member of Congress.

This opinion piece by OCAR President Craig Borner appeared on page 9 in the Local section of the Orange County Register on May 26, 2017. It is OCAR’s studied and endorsed response to this issue.