Residential Property Assessed Clean Energy (PACE) programs have been an unqualified success story for consumers’ pocketbooks and the economy, helping to finance almost $4 billion in clean energy upgrades and create tens of thousands of jobs. Despite this success, some in Congress are advancing a bill that would undercut the future of these programs.
In early April, Senator Tom Cotton (R-AR) introduced legislation that aims to increase consumer protection for homeowners using PACE financing to upgrade their homes. ACEEE applauds Senator Cotton for his attempts to ensure that vulnerable consumers, particularly seniors, have the information they need to decide whether to use PACE financing.
We appreciate the good intentions behind S. 838. Unfortunately, instead of helping consumers make more informed choices, the bill could leave consumers unable to make any choice at all. The bill would force regulators to treat PACE financing as a mortgage, which it isn’t. Forcing PACE financing into a regulatory structure designed for a different industry would impose requirements that would be extremely difficult, or even impossible, to meet. The result might not be a safer residential PACE industry, but rather no residential PACE industry.
The bill seems innocuous enough: It would require that PACE financing be regulated under the Truth in Lending Act (TILA).
It’s hard to oppose something that sounds as virtuous as “Truth in Lending,” and TILA is a very important safeguard for people who want to take out mortgages and borrow money in other ways. As its name suggests, TILA requires lenders to be clear in disclosing the details of the loans’ terms. It offers additional protections for mortgages, triggering added requirements for anyone engaged in making mortgage loans.
Requiring PACE programs to disclose financial terms and details the same way mortgages and other loans do is a great idea. Markets function best when both lender and borrower understand what they are getting into, and some of the additional protections that TILA gives mortgage borrowers make sense for the PACE industry as well. In particular, giving prospective borrowers three days to change their minds for any reason and without penalty seems like a common sense addition and is one that the PACE industry supports.
However, regulating PACE as though it were a mortgage goes much further and has broader consequences. The Cotton bill would trigger other state and federal regulations intended specifically for the mortgage industry. The combination of regulations would require PACE financers to be licensed mortgage originators, which also doesn’t sound like a bad idea, until you realize that residential PACE programs require local governments to participate. The local governments would have to become licensed mortgage originators, something that would be practically impossible. It would also place restrictions on how the local governments could bill PACE recipients, which would impact their entire property tax collection system. These and related problems demonstrate the perils of trying to apply a regulatory system meant for one industry to another. It would be a shame if well-intended efforts to protect consumers resulted in the elimination of residential PACE.
As we noted in a previous blog post, the Department of Energy, PACE financers, and consumer advocates have been working together to develop guidelines that protect borrowers and still allow PACE to function. California, which is home to the vast majority of PACE activity, recently passed its own legislation to regulate the PACE industry, including the same kind of disclosure requirements and three-day right to cancel as in TILA. That bill had the support of California Realtors, mortgage bankers, and the PACE industry. Leaders in the PACE industry are actively asking Congress to regulate them in a way that offers security for homeowners and allows PACE to continue.
ACEEE is a strong proponent of energy efficiency – when it makes sense. We won’t support a program that takes advantage of consumers. We support efficiency in large part because of the benefits it provides them. Consumers deserve protection, but that doesn’t mean we should throw the baby out with the bathwater.
Rather than pursue a strategy to shoehorn PACE into a regulatory framework meant for something else, a better approach would be to create a new structure that fits the specific features of PACE financing. That would bring security to both sides of the equation and help make the benefits of PACE available to more consumers, not fewer.