Proposed Rule2023-09468
Residential Property Assessed Clean Energy Financing (Regulation Z)
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
May 11, 2023
Issuing agencies
Consumer Financial Protection Bureau
Abstract
Section 307 of the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA) directs the Consumer Financial Protection Bureau (CFPB or Bureau) to prescribe ability-to-repay rules for Property Assessed Clean Energy (PACE) financing and to apply the civil liability provisions of the Truth in Lending Act (TILA) for violations. PACE financing is financing to cover the costs of home improvements that results in a tax assessment on the real property of the consumer. In this notice of proposed rulemaking, the Bureau proposes to implement EGRRCPA section 307 and to amend Regulation Z to address how TILA applies to PACE transactions to account for the unique nature of PACE.
Full Text
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<title>Federal Register, Volume 88 Issue 91 (Thursday, May 11, 2023)</title>
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[Federal Register Volume 88, Number 91 (Thursday, May 11, 2023)]
[Proposed Rules]
[Pages 30388-30440]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-09468]
[[Page 30387]]
Vol. 88
Thursday,
No. 91
May 11, 2023
Part II
Consumer Financial Protection Bureau
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12 CFR Part 1026
Residential Property Assessed Clean Energy Financing (Regulation Z);
Proposed Rule
Federal Register / Vol. 88 , No. 91 / Thursday, May 11, 2023 /
Proposed Rules
[[Page 30388]]
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CONSUMER FINANCIAL PROTECTION BUREAU
12 CFR Part 1026
[Docket No. CFPB-2023-0029]
RIN 3170-AA84
Residential Property Assessed Clean Energy Financing (Regulation
Z)
AGENCY: Consumer Financial Protection Bureau.
ACTION: Proposed rule; request for public comment.
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SUMMARY: Section 307 of the Economic Growth, Regulatory Relief, and
Consumer Protection Act (EGRRCPA) directs the Consumer Financial
Protection Bureau (CFPB or Bureau) to prescribe ability-to-repay rules
for Property Assessed Clean Energy (PACE) financing and to apply the
civil liability provisions of the Truth in Lending Act (TILA) for
violations. PACE financing is financing to cover the costs of home
improvements that results in a tax assessment on the real property of
the consumer. In this notice of proposed rulemaking, the Bureau
proposes to implement EGRRCPA section 307 and to amend Regulation Z to
address how TILA applies to PACE transactions to account for the unique
nature of PACE.
DATES: Comments must be received on or before July 26, 2023.
ADDRESSES: You may submit comments, identified by Docket No. CFPB-2023-
0029 or RIN 3170-AA84, by any of the following methods:
<bullet> Federal eRulemaking Portal: <a href="https://www.regulations.gov">https://www.regulations.gov</a>.
Follow the instructions for submitting comments.
<bullet> Email: <a href="/cdn-cgi/l/email-protection#e4d6d4d6d7c9aab4b6a9c9b4a5a7a1a487829486ca838b92"><span class="__cf_email__" data-cfemail="02303230312f4c52504f2f5243414742616472602c656d74">[email protected]</span></a>. Include Docket No. CFPB-
2023-0029 or RIN 3170-AA84 in the subject line of the message.
<bullet> Mail/Hand Delivery/Courier: Comment Intake--PACE, c/o
Legal Division Docket Manager, Consumer Financial Protection Bureau,
1700 G Street NW, Washington, DC 20552.
Instructions: The CFPB encourages the early submission of comments.
All submissions should include the agency name and docket number or
Regulatory Information Number (RIN) for this rulemaking. Because paper
mail in the Washington, DC area and at the CFPB is subject to delay,
commenters are encouraged to submit comments electronically. In
general, all comments received will be posted without change to <a href="https://www.regulations.gov">https://www.regulations.gov</a>.
All submissions, including attachments and other supporting
materials, will become part of the public record and subject to public
disclosure. Proprietary information or sensitive personal information,
such as account numbers or Social Security numbers, or names of other
individuals, should not be included. Submissions will not be edited to
remove any identifying or contact information.
FOR FURTHER INFORMATION CONTACT: Luke Diamond, Daniel Tingley,
Counsels; Kristin McPartland, Amanda Quester, Alexa Reimelt, or Joel
Singerman, Senior Counsels, Office of Regulations, at 202-435-7700. If
you require this document in an alternative electronic format, please
contact <a href="/cdn-cgi/l/email-protection#4a090c1a08150b29292f393923282326233e330a292c3a28642d253c"><span class="__cf_email__" data-cfemail="9cdfdaccdec3ddfffff9efeff5fef5f0f5e8e5dcfffaecfeb2fbf3ea">[email protected]</span></a>.
SUPPLEMENTARY INFORMATION:
I. Summary of the Proposed Rule
Section 307 of the Economic Growth, Regulatory Relief, and Consumer
Protection Act (EGRRCPA) directs the Bureau to prescribe ability-to-
repay (ATR) rules for Property Assessed Clean Energy (PACE) financing
and to apply the civil liability provisions of the Truth in Lending Act
(TILA) for violations.\1\ In this notice of proposed rulemaking, the
Bureau proposes to implement EGRRCPA section 307 and to amend
Regulation Z to address the application of TILA to ``PACE
transactions'' as defined in proposed Sec. 1026.43(b)(15).
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\1\ 15 U.S.C. 1639c(b)(3)(C).
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The proposed rule would:
<bullet> Clarify an existing exclusion to Regulation Z's definition
of credit that relates to tax liens and tax assessments. Specifically,
the CFPB is proposing to clarify that the commentary's exclusion to
``credit,'' as defined in Sec. 1026.2(a)(14), for tax liens and tax
assessments applies only to involuntary tax liens and involuntary tax
assessments.
<bullet> Make a number of adjustments to the requirements for Loan
Estimates and Closing Disclosures under Sec. Sec. 1026.37 and 1026.38
that would apply when those disclosures are provided for PACE
transactions, including:
[cir] Eliminating certain fields relating to escrow account
information;
[cir] Requiring the PACE transaction and other property tax payment
obligations to be identified as separate components of estimated taxes,
insurance, and assessments;
[cir] Clarifying certain implications of the PACE transaction on
the property taxes;
[cir] Requiring disclosure of identifying information for the PACE
company;
[cir] Requiring various qualitative disclosures for PACE
transactions that would replace disclosures on the current forms,
including disclosures relating to assumption, late payment, servicing,
partial payment policy, and the consumer's liability after foreclosure;
and
[cir] Clarifying how unit-periods would be disclosed for PACE
transactions.
<bullet> Provide new model forms under H-24(H) and H-25(K) of
appendix H for the Loan Estimate and Closing Disclosure, respectively,
specifically designed for PACE transactions.
<bullet> Exempt PACE transactions from the requirement to establish
escrow accounts for certain higher-priced mortgage loans, under
proposed Sec. 1026.35(b)(2)(i)(E).
<bullet> Exempt PACE transactions from the requirement to provide
periodic statements, under proposed Sec. 1026.41(e)(7).
<bullet> Apply Regulation Z's ATR requirements in Sec. 1026.43 to
PACE transactions with a number of specific adjustments to account for
the unique nature of PACE financing, including requiring PACE creditors
to consider certain monthly payments that they know or have reason to
know the consumer will have to pay into the consumer's escrow account
as an additional factor when making a repayment ability determination
for PACE transactions extended to consumers who pay their property
taxes through an escrow account.
<bullet> Provide that a PACE transaction is not a qualified
mortgage (QM) as defined in Sec. 1026.43.
<bullet> Extend the ATR requirements and the liability provisions
of TILA section 130 to any ``PACE company,'' as defined in proposed
Sec. 1026.43(b)(14), that is substantially involved in making the
credit decision for a PACE transaction.
<bullet> Provide clarification regarding how PACE and non-PACE
mortgage creditors should consider pre-existing PACE transactions when
originating new mortgage loans.
The Bureau proposes that the final rule, if adopted, would take
effect at least one year after publication of the final rule in the
Federal Register, but no earlier than the October 1 which follows by at
least six months Federal Register publication. The Bureau requests
comment on all aspects of the proposed rule and on whether there are
any other provisions of TILA or Regulation Z that the Bureau should
address with respect to PACE transactions.
II. Background
A. PACE Market Overview
1. How does PACE financing work?
PACE financing is a mechanism that enables property owners to
finance certain upgrades to real property
[[Page 30389]]
through an assessment on their real property.\2\ Eligible upgrade types
vary by locality but often include upgrades to promote energy
efficiency or to help prepare for natural disasters. The voluntary
financing agreements (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,\3\ and they leverage the
property tax system for administration of payments. PACE financing is
repaid through the property tax system along with the consumer's other
property tax payment obligations. The assessments are typically
collected through the same process as real property taxes.\4\ Local
governments typically fund PACE transactions through bond issuance,
with these bonds in turn collateralized and sold as securitized
obligations.
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\2\ Some States authorize PACE financing for residential and
commercial property. In this proposal, the term PACE financing
refers only to residential PACE financing unless otherwise
indicated.
\3\ Although PACE financing programs may be sponsored by
individual local governments, many are sponsored by
intergovernmental organizations whose membership consists of
multiple local governments.
\4\ See, e.g., Cal. Sts. & Hwys. Code sec. 5898.30; Fla. Stat.
163.08; Fla. Stat. 197.3632(8)(a); Mo. Stat. 67.2815(5).
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PACE assessments are secured by a lien on the consumer's real
property. The liens securing PACE loans typically have priority under
State law similar to that of other real property tax liens, which are
superior to other mortgage liens on the property, including those that
predated the PACE lien.\5\ In a foreclosure sale, this superior lien
position means that any amount due on the PACE loan is paid with the
foreclosure sale proceeds before any proceeds will flow to other liens.
The PACE assessment is tied to the property, not the property owner. As
such, the repayment obligation remains with the property when property
ownership transfers unless paid off at the time of sale.
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\5\ See, e.g., Cal. Sts. & Hwys. Code sec. 5898.30 (providing
for ``the collection of assessments in the same manner and at the
same time as the general taxes of the city or county on real
property, unless another procedure has been authorized by the
legislative body or by statute . . . .''); Fla. Stat. 163.08(8)
(``The recorded agreement shall provide constructive notice that the
assessment to be levied on the property constitutes a lien of equal
dignity to county taxes and assessments from the date of
recordation.''). However, authorizing statutes in some PACE States
provide for subordinated-lien status for PACE financing. See, e.g.,
Minn. Stat. 216C.437(4); Me. Stat. tit. 35A 10156(3), (4); 24 V.S.A.
3255(b).
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Although some local governments operate PACE financing programs
directly, most contract with private PACE companies to operate the
programs. These private companies generally handle the day-to-day
operations, including tasks such as marketing PACE financing to
consumers, training home improvement contractors to sell PACE to
consumers, overseeing originations, performing underwriting, and making
decisions about whether to extend the loan. The PACE companies may also
contract with third-party companies to administer different aspects of
the loans after origination. Typically, PACE companies purchase PACE
bonds that are issued by local governments to fund the programs, which
generate revenue for the PACE companies from interest on consumer
payments. PACE companies are also sometimes involved in securitizing
the bond obligations for sale as asset-backed securities. Additionally,
PACE companies often earn various fees related to the transactions.\6\
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\6\ See, e.g., Energy Programs Consortium, R-PACE, Residential
Property Assessed Clean Energy, A Primer for State and Local Energy
Officials (Mar. 2017), <a href="http://www.energyprograms.org/wp-content/uploads/2017/03/R-PACE-Primer-March-2017.pdf">http://www.energyprograms.org/wp-content/uploads/2017/03/R-PACE-Primer-March-2017.pdf</a>.
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PACE companies often rely heavily upon home improvement contractors
both to sell PACE loans to consumers and to facilitate the origination
of those loans. Home improvement contractors frequently market PACE
financing directly to consumers in the course of selling their home
improvement contracts, often door-to-door. They often serve as the
primary point of contact with consumers during the origination process,
typically collecting any application information that the PACE
companies use to make underwriting and eligibility determinations. The
contractors may also deliver disclosures relating to the PACE
transaction and obtain the consumer's signature on the financing
agreement.
2. Origin and Growth of PACE Programs
In 2008, California passed Assembly Bill no. 811 to enable the
first PACE programs. The Bureau is aware of 19 States plus the District
of Columbia that currently have enabling legislation for residential
PACE financing programs, but only a small number of states have had
active programs, primarily California, Florida, and Missouri.\7\
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\7\ See infra note 329. There has been pilot program activity
for residential PACE financing in some states. See, e.g.,
DevelopOhio, Lucas County PACE program benefits homeowners (Aug. 16,
2019), <a href="https://www.developohio.com/post/detail/lucas-county-pace-program-benefits-homeowners-234705">https://www.developohio.com/post/detail/lucas-county-pace-program-benefits-homeowners-234705</a>. Some States that previously
authorized residential PACE financing programs have amended their
statutes such that PACE financing is no longer authorized for
single-family residential properties. See, e.g., 2021 Wis. Act 175
(codified at Wis. Stat. sec. 66.0627).
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During the early years of PACE financing, lending activity appears
to have been relatively limited, with cumulative obligations of around
$200 million through 2013.\8\ In 2014, PACE financing activity
accelerated, reaching peak production in 2016 with over $1.7 billion in
investment.\9\ This level of activity was maintained in 2017, but it
declined between 2018 and 2021, with an average investment of $769
million per year during those years.\10\ Overall, as of December 31,
2021, the PACE financing industry had financed 323,000 home upgrades,
totaling over $7.7 billion.\11\
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\8\ See PACENation, Market Data, <a href="https://www.pacenation.org/pace-market-data/">https://www.pacenation.org/pace-market-data/</a> (last visited Mar. 30, 2023).
\9\ See id.
\10\ See id. The latest data available on the PACE financing
industry trade association's website is for 2021.
\11\ See id.
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3. Common Financing Terms
According to data analyzed in a report that the Bureau is releasing
concurrently with this proposal (``PACE Report''), the term of PACE
loans that were originated between July 2014 and June 2020 was most
often 20 years, but ranged between five and 30 years.\12\ The Report
also finds that the interest rates for those loans clustered around 7
to 8 percent with annual percentage rates (APRs) averaging
approximately a percentage point higher.\13\ Fees vary by program, but
the CFPB has reviewed agreements that include fees for application,
origination, tax administration, lien recordation, title, escrow, bond
counsel, processing, title, underwriting, and fund disbursement. The
Bureau is not aware of any PACE obligations that are open-end or have a
negative-amortization feature.
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\12\ See CFPB, PACE Financing and Consumer Financial Outcomes at
Table 2 (May 2023), <a href="https://files.consumerfinance.gov/f/documents/cfpb_pace-rulemaking-report_2023-04.pdf">https://files.consumerfinance.gov/f/documents/cfpb_pace-rulemaking-report_2023-04.pdf</a> (PACE Report). The PACE
Report is discussed in more detail in part IV.
\13\ Id.
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4. Consumer Protection Concerns
Consumer advocates have expressed concerns that the PACE market
lacks adequate consumer protections. They have indicated that the
highly secure super-priority lien associated with PACE transactions
creates incentives for PACE companies and home improvement contractors
to originate loans quickly, often on the spot, without regard to
affordability or consumer understanding. They have reported allegations
of deceptive sales tactics, aggressive sales practices, and fraud.
Consumer advocates have criticized other aspects of PACE financing
as well,
[[Page 30390]]
such as the high cost of funding compared to other mortgage debt,
excessive capitalized fees, and inadequate disclosures. They have
argued that these aspects of PACE financing can result in unexpected
and unaffordable tax payment spikes that can lead to delinquency, late
fees, tax defaults, and foreclosure actions.\14\ Some local officials
have echoed many of these concerns in discussions with CFPB staff.
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\14\ See, e.g., Nat'l Consumer Law Ctr., Residential (PACE)
Loans: The Perils of Easy Money for Clean Energy Improvements (Sept.
2017), <a href="https://www.nclc.org/images/pdf/energy_utility_telecom/pace/ib-pace-stories.pdf">https://www.nclc.org/images/pdf/energy_utility_telecom/pace/ib-pace-stories.pdf</a>; see also Off. of the Dist. Att'y, Cnty. of
Riverside, News Release, District Attorneys Announce $4 Million
Consumer Protection Settlement (Aug. 9, 2019), <a href="https://rivcoda.org/community-info/news-media-archives/district-attorneys-announce-4-million-consumer-protection-settlement">https://rivcoda.org/community-info/news-media-archives/district-attorneys-announce-4-million-consumer-protection-settlement</a>; Kirsten Grind, America's
Fastest-Growing Loan Category Has Eerie Echoes of Subprime Crisis,
Wall Street Journal (Jan. 10, 2017), <a href="https://www.wsj.com/articles/americas-fastest-growing-loan-category-has-eerie-echoes-of-subprime-crisis-1484060984">https://www.wsj.com/articles/americas-fastest-growing-loan-category-has-eerie-echoes-of-subprime-crisis-1484060984</a>.
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Additionally, consumer advocates have expressed concern that some
home improvement contractors involved in the origination of PACE
transactions provide consumers with misleading information about
potential energy savings or promote the most expensive energy
improvements, regardless of their actual energy conservation
benefits.\15\ They have noted that such practices could result in
homeowners receiving a smaller reduction in their utility bills than
anticipated, making PACE financing payments more difficult to afford.
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\15\ See Claudia Polsky, Claire Christensen, Kristen Ho, Melanie
Ho & Christina Ismailos, The Darkside of the Sun: How PACE Financing
Has Under-Delivered Green Benefits and Harmed Low Income Homeowners,
Berkeley L., Env't L. Clinic, at 8-13, <a href="https://www.law.berkeley.edu/wp-content/uploads/2021/02/ELC_PACE_DARK_SIDE_RPT_2_2021.pdf">https://www.law.berkeley.edu/wp-content/uploads/2021/02/ELC_PACE_DARK_SIDE_RPT_2_2021.pdf</a>.
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Additionally, consumer advocates have alleged that PACE financing
is disproportionately targeted at older Americans, consumers with
limited English proficiency or lower incomes, and consumers in
predominantly Black or Hispanic neighborhoods. They have also
highlighted that, although a PACE assessment technically remains with
the property at sale, most home buyers are unwilling to take on the
remaining payment obligation for a PACE lien, or their mortgage lender
prohibits them from doing so.\16\ Consumer advocates have reported that
PACE consumers are often unaware of these issues when agreeing to the
financing, which causes an unanticipated financial burden when
consumers are required to pay off the PACE assessment to complete a
home sale.
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\16\ See Freddie Mac, Purchase and ``no cash-out'' refinance
Mortgage requirements (Mar. 31, 2022), <a href="https://guide.freddiemac.com/app/guide/section/4606.4">https://guide.freddiemac.com/app/guide/section/4606.4</a>. As of February 2023, guidelines from both
Fannie Mae and Freddie Mac generally prohibit purchase of mortgages
on properties with outstanding first-lien PACE obligations.
Similarly, the Federal Housing Administration (FHA) updated its
handbook requirements in 2017 to prohibit insurance of mortgage on
properties with outstanding first-lien PACE obligations, see U.S.
Dept. of Hous. & Urban Dev., Property Assessed Clean Energy (PACE)
(Dec. 7, 2017), <a href="https://www.hud.gov/sites/dfiles/OCHCO/documents/17-18ml.pdf">https://www.hud.gov/sites/dfiles/OCHCO/documents/17-18ml.pdf</a>.
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Mortgage industry stakeholders have also asserted that PACE
financing introduces risk to the mortgage market, as PACE liens take
priority over pre-existing mortgage liens.\17\
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\17\ See, e.g., Fed. Hous. Fin. Agency (FHFA), FHFA Statement on
Certain Energy Retrofit Loan Programs (July 6, 2010), <a href="https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Statement-on-Certain-Energy-Retrofit-Loan-Programs.aspx">https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Statement-on-Certain-Energy-Retrofit-Loan-Programs.aspx</a>; FHFA Notice and Request for
Input on PACE Financing, 85 FR 2736 (Jan. 16, 2020); Joint Letter
from Mortgage Trade Assocs. to FHFA Director Mark Calabria (Mar. 16,
2020), <a href="https://www.housingpolicycouncil.org/_files/ugd/d315af_6cb569a5427f4e26ab4ef4d55038b3f6.pdf">https://www.housingpolicycouncil.org/_files/ugd/d315af_6cb569a5427f4e26ab4ef4d55038b3f6.pdf</a>.
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Since 2015, the CFPB has received over 50 complaints related to
PACE financing, primarily from consumers in California and Florida.
Many of the complaints allege fraud, deceptive practices, overly high
costs, or trouble with refinancing the consumer's home. Six of the
complaints involve older Americans, and five of the complaints involve
consumers with limited English proficiency. Consumer advocates have
suggested that consumers may not be aware of their ability to submit
PACE complaints to the CFPB database or may have had difficulty
categorizing them, which may have resulted in a lower number of
complaints reported. Consumers in California are also able to submit
complaints to their State PACE regulator and submitted 385 complaints
between 2019 and 2021.\18\
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\18\ Cal. Dep't of Fin. Prot. & Innovation, Annual Report of
Operation of Finance Lenders, Brokers, and PACE Administrators
Licensed Under the California Financing Law, at 41 (Aug. 2022)
<a href="https://dfpi.ca.gov/wp-content/uploads/sites/337/2022/08/2021-CFL-Aggregated-Annual-Report.pdf">https://dfpi.ca.gov/wp-content/uploads/sites/337/2022/08/2021-CFL-Aggregated-Annual-Report.pdf</a>.
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In August 2019, Renovate America, Inc. (Renovate), a major PACE
company at the time, reached a $4 million settlement with six counties
and one city in California.\19\ The complaint, filed in State court,
alleged that Renovate America misrepresented the PACE program or failed
to make adequate disclosures about key aspects of the program,
including its government affiliation, tax deductibility,
transferability of assessments to subsequent property owners, financing
costs, and Renovate's contractor verification policy.\20\ Subsequently,
in June 2021, the California State PACE regulator moved to revoke
Renovate's Administrator license, required to operate a PACE company in
the State, after finding that one of its solicitors repeatedly
defrauded homeowners in San Diego County.\21\ Renovate ultimately
consented to the revocation.\22\
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\19\ See Riverside Cnty. Dist. Att'y, District Attorneys
Announce $4 Million Consumer Protection Settlement With ``PACE''
Program Administrator Renovate America, Inc. (Aug. 9, 2019), <a href="https://rivcoda.org/community-info/news-media-archives/district-attorneys-announce-4-million-consumer-protection-settlement">https://rivcoda.org/community-info/news-media-archives/district-attorneys-announce-4-million-consumer-protection-settlement</a>; see also State of
California v. Renovate America, Case No. RIC1904068 (Super. Ct.
Riverside Cnty. 2019).
\20\ Id.
\21\ See Cal. Dep't of Fin. Prot. & Innovation, DFPI Moves to
Revoke PACE Administrator's License After Finding Its Solicitor
Defrauded Homeowners (June 4, 2021), <a href="https://dfpi.ca.gov/2021/06/04/dfpi-moves-to-revoke-pace-administrators-license-after-finding-its-solicitor-defrauded-homeowners/">https://dfpi.ca.gov/2021/06/04/dfpi-moves-to-revoke-pace-administrators-license-after-finding-its-solicitor-defrauded-homeowners/</a>.
\22\ Cal. Dep't of Fin. Prot. & Innovation, Settlement Agreement
(Sept. 8, 2021), <a href="https://dfpi.ca.gov/wp-content/uploads/sites/337/2021/09/Admin.-Action-Renovate-America-Inc.-Settlement-Agreement.pdf?emrc=090ca0">https://dfpi.ca.gov/wp-content/uploads/sites/337/2021/09/Admin.-Action-Renovate-America-Inc.-Settlement-Agreement.pdf?emrc=090ca0</a>.
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In October 2022, Ygrene Energy Fund Inc. (Ygrene), a major PACE
company, reached a $22 million settlement with the Federal Trade
Commission (FTC) and the State of California over allegations regarding
its conduct in the PACE marketplace.\23\ In a joint complaint, the FTC
and California alleged that Ygrene deceived consumers about the
potential financial impact of its financing and unfairly recorded liens
on consumers' homes without their consent.\24\ The complaint further
alleged that Ygrene and its contractors falsely told consumers that
PACE financing would not interfere with the sale or refinancing of
their homes and used high-pressure sales tactics and even forgery to
enroll consumers into PACE programs.\25\
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\23\ See Fed. Trade Comm'n, FTC, California Act to Stop Ygrene
Energy Fund from Deceiving Consumers about PACE Financing, Placing
Liens on Homes Without Consumers' Consent (Oct. 28, 2022), <a href="https://www.ftc.gov/news-events/news/press-releases/2022/10/ftc-california-act-stop-ygrene-energy-fund-deceiving-consumers-about-pace-financing-placing-liens">https://www.ftc.gov/news-events/news/press-releases/2022/10/ftc-california-act-stop-ygrene-energy-fund-deceiving-consumers-about-pace-financing-placing-liens</a>; see also Complaint for Permanent
Injunction, Monetary Relief, Civil Penalties, and Other Relief, Fed.
Trade Comm'n et al v. Ygrene Energy Fund Inc., No. 2:22-cv-07864
(C.D. Cal. 2022), <a href="https://www.ftc.gov/system/files/ftc_gov/pdf/Complaint%20-%20Dkt.%201%20-%2022-cv-07864.pdf">https://www.ftc.gov/system/files/ftc_gov/pdf/Complaint%20-%20Dkt.%201%20-%2022-cv-07864.pdf</a>.
\24\ Id.
\25\ Id.
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5. State Laws and Regulations in States With Active PACE Programs
California
California authorized PACE programs in 2008 to finance projects
related to renewable energy and energy efficiency, and later expanded
the scope to include water efficiency, certain disaster hardening, and
electric vehicle charging
[[Page 30391]]
infrastructure measures.\26\ Since 2008, California has passed several
laws to add and adjust consumer protections for PACE programs, with
major additions in a series of amendments that took effect around 2018
(collectively, 2018 California PACE Reforms). Current California law
requires that, before executing a PACE contract, PACE administrators
must make a determination that the consumer has a reasonable ability to
pay the annual payment obligations based on the consumer's income,
assets, and current debt obligations.\27\ Additionally, California law
requires, among other protections, financial disclosures prior to
consummation; \28\ a three-day right to cancel, which is extended to
five days for older adults; \29\ mandatory confirmation-of-terms calls;
\30\ and restrictions on contractor compensation.\31\ California law
also imposes certain financial requirements for consumers to be
eligible for PACE financing, including that consumers must be current
on their property taxes and mortgage and generally not have been party
to a bankruptcy proceeding within the previous four years.\32\ There is
also a maximum permissible loan-to-value ratio for PACE financing under
California law.\33\ California law exempts government agencies from
some of these requirements.\34\
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\26\ See, e.g., Cal. Sts. & Hwys. Code secs. 5898.12, 5899,
5899.3.
\27\ Cal. Fin. Code sec. 22686-87.
\28\ Cal. Sts. & High. Code sec. 5898.17.
\29\ Cal. Sts. & High. Code sec. 5898.16-17.
\30\ Cal. Sts. & High. Code sec. 5913.
\31\ Cal. Sts. & High. Code sec. 5923.
\32\ Cal. Fin. Code sec. 22684(a), (d)-(e).
\33\ Cal. Fin. Code sec. 22684(h).
\34\ Cal. Fin. Code sec. 22018(a) (exempting public agencies
from the definition of ``program administrator'' that is subject to
the ability-to-pay requirements set forth under Cal. Fin. Code sec.
22687).
---------------------------------------------------------------------------
As part of the 2018 California PACE Reforms, California
significantly increased the role of what is now called California's
Department of Financial Protection and Innovation (DFPI).\35\ In 2019,
the DFPI began licensing PACE administrators and subsequently
promulgated rules implementing some of California's statutory PACE
provisions, which became effective in 2021.\36\ DFPI also has certain
examination, investigation, and enforcement authorities over PACE
administrators, solicitors, and solicitor agents.\37\
---------------------------------------------------------------------------
\35\ Cal. AB 1284 (2017-2018), Cal. SB 1087 (2017-2018).
\36\ 10 Cal. Code Regs. sec. 1620.01 et seq. California law uses
the term ``program administrator'' to refer to companies that are
referred to here as PACE companies. See Cal. Fin. Code sec. 22018.
\37\ Cal. Fin. Code sec. 22690. California law uses the term
``PACE solicitor'' and ``PACE solicitor agent'' to refer to persons
authorized by program administrators to solicit property owners to
enter into PACE assessment contracts, often home improvement
contractors. See Cal. Fin. sec. 22017(a)-(b).
---------------------------------------------------------------------------
PACE administrators must be licensed by the DFPI under the
California Financing Law. They must also establish and maintain
processes for the enrollment of PACE solicitors and solicitor agents,
including training and background checks.\38\ PACE administrators are
required to annually share certain operational data with DFPI.\39\ DFPI
compiles the data in annual reports on PACE lending in California,
which provide aggregated information on PACE loans, PACE administrators
and solicitors, and consumer complaints.\40\
---------------------------------------------------------------------------
\38\ Cal. Fin. Code secs. 22680-82.
\39\ Cal. Fin. Code sec. 22692.
\40\ See, e.g., Cal. Dep't of Fin. Prot. & Innovation, Annual
Report of Operation of Finance Lenders, Brokers, and PACE
Administrators Licensed Under the California Financing Law (Aug.
2022), <a href="https://dfpi.ca.gov/wp-content/uploads/sites/337/2022/08/2021-CFL-Aggregated-Annual-Report.pdf">https://dfpi.ca.gov/wp-content/uploads/sites/337/2022/08/2021-CFL-Aggregated-Annual-Report.pdf</a>.
---------------------------------------------------------------------------
Florida
Florida authorized PACE programs in 2010 to finance projects
related to energy conservation and efficiency improvements, renewable
energy improvements, and wind resistance improvements.\41\ The
authorizing legislation imposes certain financial requirements to be
eligible for PACE financing, including that consumers must be current
on their property taxes and all mortgage debts on the property.\42\ It
also includes a maximum loan-to-value ratio and requires a short
general disclosure about PACE assessments.\43\ Additionally, Florida
law requires that the property owner provide holders or servicers of
any existing mortgages secured by the property with notice of their
intent to enter into a PACE financing agreement together with the
maximum principal amount to be financed and the maximum annual
assessment necessary to repay that amount.\44\
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\41\ See Fla. HB 7179 (2010), codified at Fla. Stat. 163.08 et
seq.
\42\ Fla. Stat. sec. 163.08(9).
\43\ Fla. Stat. sec. 163.08(12), (14).
\44\ Fla. Stat. sec. 163.08(13).
---------------------------------------------------------------------------
Missouri
Missouri authorized PACE programs in 2010 to finance projects
involving energy efficiency improvements and renewable energy
improvements.\45\ In 2021, Missouri enacted new legislation imposing
certain consumer protection requirements for PACE transactions. The law
currently requires clean energy development boards (the government
entities offering PACE programs) to provide a disclosure form to
homeowners that shows the financing terms of the assessment contract,
including the total amount funded and borrowed, the fixed rate of
interest charged, the APR, and a statement that, if the property owner
sells or refinances the property, the owner may be required by a
mortgage lender or a purchaser to pay off the assessment.\46\ It also
requires verbal confirmation of certain provisions of the assessment
contract, imposes specific financial requirements to execute an
assessment requirement, and provides for a three-day right to
cancel.\47\ The 2021 legislation also limited the term, amount of
financing, and total indebtedness secured by the property and required
the clean energy development board to review and approve assessment
contracts.\48\ The new requirements became effective January 1,
2022.\49\
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\45\ Mo. HB 1692 (2010), codified at Mo. Rev. Stat. 67.2800(8)
(defining projects eligible for financing).
\46\ Mo. HB 697, codified at Mo. Rev. Stat. 67.2818(4).
\47\ Mo. HB 697, codified at Mo. Rev. Stat. 67.2817(2)
(financial requirements to execute an assessment contract);
67.2817(4) (right to cancel); 67.2817(6) (verbal confirmation).
\48\ Mo. HB 697, codified at Mo. Rev. Stat. 67.2817(2),
67.2818(2)-(3).
\49\ Mo. HB 697, codified at Mo. Rev. Stat. 67.2840.
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6. Self-Regulatory Efforts
In addition to consumer protections mandated by State governments,
in November 2021, the national trade association that advocates for the
PACE financing industry announced voluntary consumer protection policy
principles for PACE programs nationwide.\50\ According to the trade
association, the 22 principles are designed to establish a national
framework for enhanced accountability and transparency within PACE
programs and to offer greater protections for all consumers, as well as
additional protections for low-income homeowners, based on stated
income, and those over the age of 75.\51\ They include provisions
relating to ability-to-pay, financing disclosures, a right to cancel,
and foreclosure-avoidance protections, among others.
---------------------------------------------------------------------------
\50\ See PACENation, PACENation Unveils 22 New Consumer
Protection Policies for Residential PACE Programs Nationwide (Nov.
5, 2021), <a href="https://www.pacenation.org/pacenation-unveils-22-consumer-protection-policies-for-residential-pace-programs-nationwide/">https://www.pacenation.org/pacenation-unveils-22-consumer-protection-policies-for-residential-pace-programs-nationwide/</a>.
\51\ Id.
---------------------------------------------------------------------------
B. EGRRCPA
The Economic Growth, Regulatory Relief, and Consumer Protection Act
of
[[Page 30392]]
2018 (EGRRCPA) was signed into law on May 24, 2018.\52\ EGRRCPA section
307 amended TILA to mandate that the CFPB take regulatory action on
PACE financing, which it defines as ``financing to cover the costs of
home improvements that results in a tax assessment on the real property
of the consumer.'' Specifically, it provides in relevant part that the
CFPB must prescribe regulations that (1) carry out the purposes of TILA
section 129C(a), and (2) apply TILA section 130 with respect to
violations under TILA section 129C(a) with respect to PACE financing,
and requires that the regulations account for the unique nature of PACE
financing.\53\ TILA section 129C(a) contains TILA's ATR provisions for
residential mortgage loans and TILA section 130 contains TILA's civil
liability provisions. Thus, section 307 requires the Bureau to apply
TILA's ATR provisions to PACE financing, and to apply TILA's civil
liability provisions for violations of those ATR provisions, all in a
way that accounts for the unique nature of PACE financing. This
proposal discusses the proposed implementation of the ATR and civil
liability requirements further in the section-by-section analysis of
proposed Sec. 1026.43.
---------------------------------------------------------------------------
\52\ Public Law 115-174, 132 Stat. 1296 (2018).
\53\ EGRRCPA section 307, amending TILA section
129C(b)(3)(C)(ii), 15 U.S.C. 1639c(b)(3)(C)(ii). EGRRCPA section 307
also includes amendments authorizing the Bureau to ``collect such
information and data that the Bureau determines is necessary'' in
prescribing the regulations and requiring the Bureau to ``consult
with State and local governments and bond-issuing authorities.''
---------------------------------------------------------------------------
III. Advance Notice of Proposed Rulemaking
On March 4, 2019, the CFPB issued an Advance Notice of Proposed
Rulemaking (ANPR) to solicit information relating to residential PACE
financing.\54\ The purpose of the ANPR was to gather information to
better understand the PACE financing market and other information to
inform a proposed rulemaking under EGRRCPA section 307.
---------------------------------------------------------------------------
\54\ Advance Notice of Proposed Rulemaking on Residential
Property Assessed Clean Energy Financing, 84 FR 8479 (Mar. 8, 2019).
---------------------------------------------------------------------------
The ANPR sought five categories of information related to PACE
financing: (1) written materials associated with PACE transactions; (2)
descriptions of current standards and practices in the PACE financing
origination process; (3) information relating to civil liability under
TILA for violations of the ATR requirements in connection with PACE
financing, as well as rescission and borrower delinquency and default;
(4) information about what features of PACE financing make it unique
and how the CFPB should address those unique features in this
rulemaking; and (5) views concerning the potential implications of
regulating PACE financing under TILA.
In response to the ANPR, the CFPB received over 115 comments, which
were submitted by a diverse group of entities, including individual
consumers, consumer groups, private PACE industry participants,
mortgage stakeholders, energy and environmental groups, and government
entities, among others. A summary of some of the legal and policy
positions reflected in the ANPR comments is included below, and
additional information from the ANPR comments is referenced throughout
this proposal.
Regarding the need for PACE regulation, consumer groups and
mortgage industry stakeholders generally agreed that PACE transactions
require Federal regulation, advocating for strong ATR rules, in
particular. Some also supported further application of TILA to PACE
financing, including disclosure requirements, rescission rights, loan
originator compensation requirements, and protections for high-cost
PACE transactions. These commenters indicated that PACE financing is
consumer credit, and should be regulated similar to a traditional
mortgage because it is voluntary financing that is secured by the
consumer's home and because delinquency can lead to penalties,
additional interest, and foreclosure. Some argued for more stringent
regulations than currently apply to traditional mortgages due to what
they asserted was the dangerous nature of PACE financing, citing
problematic lending incentives, alleged abuses by home improvement
contractors, and alleged targeting of PACE to vulnerable populations.
On the other hand, PACE industry participants generally opposed the
imposition of additional or stringent regulations. Many argued that
PACE financing is safe for consumers, citing the involvement of State
and local governments, the relatively small size of the debt
obligation, existing State and local requirements, low delinquency
rates, and other features of PACE financing. Some expressed concern
that overly broad rules could infringe on the fundamental taxing
authority of State and local governments, undermine PACE's public
purpose of reducing barriers to green energy financing, decrease access
to private capital, and potentially lead to the termination of PACE
programs. Some were also worried that regulations would erode PACE's
point-of-sale nature, causing consumers and contractors to turn to more
dangerous unsecured credit products and decrease new applications. Many
argued that PACE financing is not consumer credit subject to TILA, and
that the CFPB lacks authority to impose TILA's requirements beyond its
ATR rules.
In regard to application of TILA's ATR requirements to PACE
financing, there were again differing opinions among commenters.
Consumer groups and mortgage industry stakeholders generally agreed
that TILA's existing ATR requirements should be applied, but some
suggested adjusting them to account for factors such as the cadence of
property tax payments, which tend to be due on an annual or semi-annual
basis, and the potential for payment shocks related to PACE financing's
impact on the consumer's existing mortgage escrow account. Some called
for verification of consumers' financial information, and for the ATR
rules to account for pre-existing and simultaneous PACE financing to
prevent loan stacking or loan splitting. In contrast, some PACE
industry participants opposed application of TILA's existing ATR
requirements, stating that it would be unnecessary and too burdensome,
and would lead to decreased consumer participation in PACE programs.
Some also argued that mandatory income verification for all consumers
would interfere with the point-of-sale nature of PACE financing, and
that a modeled income requirement would be sufficient. Some recommended
an emergency exception to any ATR requirement. Still others recommended
that the CFPB structure any ATR rules to avoid conflict with existing
California regulations.
A few commenters provided their opinions on whether certain PACE
transactions should be entitled to a presumption of compliance with the
CFPB's ATR requirements similar to QM status. One PACE company
suggested that a reasonable safe harbor is necessary to ensure that
private capital continues to invest in PACE financing. However, some
consumer groups opposed offering a presumption of compliance, stating
that PACE is structurally unsafe and a source of abuse for some
populations. A mortgage trade association recommended that, if the CFPB
decides to permit such a presumption, subordination of the PACE lien
should be required.
Regarding the application of TILA section 130 to PACE financing,
some consumer groups suggested that PACE companies should be held
liable under TILA section 130 because they are responsible for
operating the PACE
[[Page 30393]]
programs. Some PACE industry participants expressed concern that, if
government entities become subject to civil liability, they might stop
operating PACE programs. Finally, one PACE company recommended capping
civil liability at the amount of the assessment, to prevent TILA's
statutory damages from exceeding the principal amount of the average
PACE transaction.
IV. Data Collection
EGRRCPA section 307 authorizes the CFPB to ``collect such
information and data that the Bureau determines is necessary'' to
support the PACE rulemaking required by the section.\55\ In October
2020, the CFPB requested PACE financing data from all companies
providing PACE financing at that time. The request was voluntary and
was intended to gather information on PACE transaction applications and
originations between July 2014 and June 2020, including basic
underwriting information used for applications, application outcomes,
and loan terms. The CFPB also contracted with one of the three
nationwide consumer reporting agencies to obtain credit record data for
the PACE consumers in the PACE transaction data.
---------------------------------------------------------------------------
\55\ 15 U.S.C. 1639c(b)(3)(C)(iii)(I).
---------------------------------------------------------------------------
In August 2022, the CFPB received from its contractor de-identified
PACE data from the four PACE companies that were active in the PACE
market at the time of submission and matching de-identified credit
record data for the consumers involved in the PACE transactions.\56\
The PACE company data encompassed about 370,000 PACE transaction
applications submitted in California and Florida from 2014 to 2020 and
about 128,000 resulting PACE transaction originations. The CFPB's
contractor was able to provide matching credit data for about 208,000
individual PACE consumers, which included periodic credit snapshots for
each consumer between June 2014 and June 2022. In total, the matched
consumers submitted about 286,000 PACE applications and entered into
approximately 100,000 PACE transactions.\57\
---------------------------------------------------------------------------
\56\ The Bureau received data from FortiFi Financial, Home Run
Financing, Renew Financial, and Ygrene Energy Fund.
\57\ Matched consumers resided in census tracts with smaller
Hispanic populations, higher median income, and lower average
education compared to consumers who were not matched. The PACE
Report verifies that weighting the sample to be more like the full
population of PACE consumers has no meaningful effect on the main
results of the Report. PACE Report, supra note 12, at 11.
---------------------------------------------------------------------------
The CFPB utilized the acquired data to develop a report that
analyzes the impact of PACE transactions on consumer outcomes, with a
particular focus on mortgage delinquency. In addition to other
analyses, the report examines consumers who obtained originated PACE
transactions and compares them to those who applied for PACE
transactions and were approved but did not proceed. The report,
entitled ``PACE Financing and Consumer Financial Outcomes'' (PACE
Report) is being published concurrently with this NPRM.\58\
---------------------------------------------------------------------------
\58\ See PACE Report, supra note 12.
---------------------------------------------------------------------------
Among other findings, the PACE transactions analyzed in the PACE
Report led to an increase in negative credit outcomes, particularly 60-
day mortgage delinquency, with an increase of 2.5 percentage points
over a two-year span following PACE transaction origination.
Additionally, the PACE borrowers discussed in the PACE Report resided
in census tracts with higher percentages of Black and Hispanic
residents than the average for their States.\59\ However, the effect of
PACE transactions on non-PACE mortgage delinquency was statistically
similar for PACE borrowers in majority-white census tracts compared to
those in majority-non-white census tracts.\60\ The PACE Report also
assesses the impact of the 2018 California PACE Reforms, discussed in
part II.A.5. The analysis finds that these laws improved consumer
outcomes while substantially reducing the volume of PACE lending.\61\
---------------------------------------------------------------------------
\59\ Id. at 4.
\60\ Id. at 38-39, Figure 11.
\61\ Id. at 4-5.
---------------------------------------------------------------------------
V. Outreach
To learn about the industry and the unique nature of PACE
financing, the Bureau has engaged with a wide variety of stakeholders
since 2015, including consumer advocates, a range of public and private
participants in the PACE financing industry, mortgage industry
stakeholders, and representatives from energy and environmental groups.
The engagement has included listening sessions, roundtable discussions,
question-and-answer sessions, consultation calls soliciting stakeholder
input, briefings on the ANPR, panel appearances by CFPB staff, and
written correspondence.
The CFPB's outreach relating to PACE financing is summarized at a
high level below.\62\ The outreach has supplemented information on PACE
financing that the CFPB has gleaned from independent research; the
detailed comments responding to the ANPR, discussed in part III; the
data collection described in part IV; and information from publicly
available sources such as news reports, research and analysis, and
litigation documents.
---------------------------------------------------------------------------
\62\ The CFPB also engaged in extensive outreach with numerous
stakeholders to design and complete the Bureau data collection on
PACE financing that is discussed in part IV.
---------------------------------------------------------------------------
A. Consumer Advocates
The CFPB began corresponding with consumer advocates regarding PACE
financing in 2016. These stakeholders have shared their concerns about
consumer risks in the PACE financing market and stories of PACE
financing resulting in financial harm to consumers.
The CFPB has continued the engagement since EGRRCPA section 307 was
passed, meeting on numerous occasions with individual consumer
advocates and consumer advocacy groups to discuss a range of topics
related to PACE financing. For example, these stakeholders have shared
their understanding of how the PACE financing industry functions,
including the structure of the financial obligation, the different
roles of government units and private parties, industry trends, and the
effects of State legislation on PACE financing. Similar to the
perspectives they shared in ANPR comments, discussed in part III, they
have also voiced consumer protection concerns and shared legal and
policy analysis regarding the implementation of EGRRCPA section 307 and
the application of TILA to PACE transactions.
B. Private PACE Industry Stakeholders
Since 2015, the CFPB has engaged on dozens of occasions with
various private PACE industry stakeholders, including private PACE
companies, a national trade organization, private companies that help
administer the assessments (assessment administrators), and at least
one bond counsel. These stakeholders have provided the CFPB a great
deal of information about PACE transactions, industry business
practices, market trends, and the roles of different industry
participants.
Additionally, the PACE financing providers, assessment
administrators, and a national trade organization have shared industry
trends and their views on how the industry has been developing in
different jurisdictions. They have also shared their views on some of
the challenges and progress the industry has experienced as the
programs have developed, including, for example, the causes of
fluctuations in loan volumes, industry efforts to improve the consumer
experience, benefits of PACE financing, and the effects of consumer
protection
[[Page 30394]]
requirements in particular States. Some of these stakeholders have also
shared their perspectives on EGRRCPA section 307 and considerations the
CFPB should bear in mind in this rulemaking.
C. State and Local Governments and Bond-Issuing Authorities
As part of the CFPB's PACE rulemaking, EGRRCPA section 307 requires
that the CFPB ``consult with State and local governments and bond-
issuing authorities.'' \63\ Consistent with this requirement, the CFPB
has conferred on numerous occasions with State and local governments
and bond-issuing authorities involved in PACE financing to gather
information about PACE for the rulemaking. Entities with which the CFPB
has consulted over the years include government sponsors of PACE
financing programs, agencies involved in different aspects of the
programs, local property tax collectors, public PACE financing
providers, and county and city officials. The CFPB engagements with
bond-issuing authorities occurred on a number of occasions, including
discussions over the phone and in-person, and through written
correspondence. The CFPB also conferred on a number of occasions with
membership organizations representing municipalities.
---------------------------------------------------------------------------
\63\ 15 U.S.C. 1639c(b)(3)(C)(iii)(II).
---------------------------------------------------------------------------
In the course of developing the NPRM, CFPB staff also conducted a
series of consultation calls to promote awareness about the CFPB
rulemaking and gather input on topics that the CFPB was considering
addressing in this proposal, including, for example, whether the CFPB
should use the same ATR framework for PACE financing that currently
applies to mortgage credit or a different framework, what changes
should be made to account for the unique nature of PACE financing,
whether to apply any existing QM definitions to PACE financing, how to
apply TILA's general civil liability provisions to violations of the
ATR requirements for PACE financing, and the implications of this
rulemaking for PACE financing bonds. Each call was targeted to specific
stakeholder groups, including: (1) State agencies in the three States
that currently offer PACE, (2) California local government officials,
(3) Missouri local government officials, (4) Florida local government
officials, and (5) State and local officials from states that do not
currently offer PACE. In addition to feedback provided during the
calls, some participants provided input after the calls.
Public entities involved in the operation of PACE financing and
third parties operating on their behalf have expressed divergent views
on PACE financing. For example, some individuals from local tax
collectors' offices and other government units have expressed concern
about the risks or challenges that PACE financing can create for
consumers or local taxing authorities. In part because of these
concerns, some government representatives have shared consumer
protection recommendations and background information about how the
PACE financing industry operates in particular jurisdictions. Several
localities with active PACE financing programs have expressed consumer
protection concerns and informed the CFPB that they would welcome
application of TILA's ATR provisions to PACE, or that they have
implemented certain consumer protection standards themselves. A
nonprofit organization that administered a PACE financing program on
behalf of a local government informed the CFPB that the locality ended
its PACE financing program, largely due to consumer protection
concerns.
Other local governments (and third parties they work with) have
shared views that reflect more positive assessments of the industry.
For example, representatives from one government sponsor of PACE
financing (that later ceased sponsoring new PACE financing originations
\64\) told the CFPB that the program carries important consumer
benefits, including that it provides a financing option for home
improvement projects that have energy and environmental benefits, and
creating jobs. Local government representatives in certain
jurisdictions have expressed enthusiasm about aspects of PACE financing
such as increased solar panel installations, and have indicated that
they think PACE financing programs generally function well. Some
government sponsors indicated that their PACE financing programs had
instituted a number of practices that were consumer-protective, such as
repayment analysis, low fees, contractor screening, or monitoring and
oversight of private entities involved in the originations. Some
government sponsors expressed concern that Federal regulation could
negatively impact PACE programs, and that the CFPB should not apply
TILA's ATR provisions or other consumer protections to PACE financing.
Several State and local entities also informed the CFPB that consumer
complaints had declined significantly in recent years.
---------------------------------------------------------------------------
\64\ The Bureau understands that a number of government
sponsors, some of which participated in the Bureau's outreach, have
stopped participating in new originations. See, e.g., Jeff Horseman,
Riverside-based agency to end controversial PACE loans for energy
improvements, The Press-Enterprise (Dec. 12, 2022); Andrew Khouri,
L.A. County ends controversial PACE home improvement loan program,
L.A. Times (May 21, 2020), https://www.latimes.com/homeless-housing/
story/2020-05-21/la-fi-pace-home-improvement-loans-la-
county#:~:text=Los%20Angeles%20County%20has%20ended,risk%20of%20losin
g%20their%20homes.
---------------------------------------------------------------------------
D. Other Stakeholders
The CFPB outreach has also included other stakeholders with an
interest in PACE financing. For example, several times since 2016, the
CFPB has discussed PACE financing with national and State-level
mortgage industry trade organizations. These stakeholders have provided
updates on, for example, State-level developments in the PACE financing
industry and analysis of Federal policy involving PACE financing. Some
have also shared concerns about the potential impact of PACE financing
on mortgage industry participants, noting, for example, the priority
position of liens securing PACE transactions relative to non-PACE
mortgage liens, the challenges non-PACE mortgage industry stakeholders
have in obtaining information about PACE transactions and attendant
risks, and that non-PACE mortgage servicers may need to collect PACE
transactions through an escrow account, which may include advancing
their own funds if the consumer is unable to afford the PACE financing
payment. Some mortgage industry stakeholders have also raised consumer
protection concerns, sharing anecdotal reports of consumer harm and
asserting that, in practice, consumers have often had to repay the full
PACE financing balance before they have been able to sell properties
encumbered with a PACE financing lien. Some suggested that the CFPB
should treat PACE like a standard mortgage or apply TILA more generally
to PACE.
The CFPB has also met with representatives from environmental and
energy groups. These representatives shared general views on, for
example, the role of PACE financing in the marketplace, industry
trends, and potential risks to consumers.
As discussed in part IX, the CFPB has also consulted with Federal
government entities.
VI. Legal Authority
The Bureau is proposing to amend Regulation Z pursuant to its
authority under the Consumer Financial Protection Act of 2010 (CFPA)
and other provisions of the Dodd-Frank Wall Street Reform and Consumer
Protection
[[Page 30395]]
Act (Dodd-Frank Act),\65\ EGRRCPA section 307, TILA, and Real Estate
Settlement Procedures Act of 1974 (RESPA).\66\
---------------------------------------------------------------------------
\65\ Public Law 111-203, 124 Stat. 1376 (2010).
\66\ 12 U.S.C. 2601 et seq.
---------------------------------------------------------------------------
A. Dodd-Frank Act
CFPA section 1022(b)(1). Section 1022(b)(1) of the CFPA authorizes
the Bureau to prescribe rules ``as may be necessary or appropriate to
enable the Bureau to administer and carry out the purposes and
objectives of the Federal consumer financial laws, and to prevent
evasions thereof.'' \67\ Among other statutes, TILA, RESPA, and the
CFPA are Federal consumer financial laws.\68\ Accordingly, the Bureau
proposes exercising its authority under CFPA section 1022(b) to
prescribe rules that carry out the purposes and objectives of TILA,
RESPA, and the CFPA and prevent evasion of those laws.
---------------------------------------------------------------------------
\67\ 12 U.S.C. 5512(b)(1).
\68\ CFPA section 1002(14), 12 U.S.C. 5481(14) (defining
``Federal consumer financial law'' to include the ``enumerated
consumer laws'' and the provisions of CFPA); CFPA section 1002(12),
12 U.S.C. 5481(12) (defining ``enumerated consumer laws'' to include
TILA and RESPA).
---------------------------------------------------------------------------
Dodd-Frank Act section 1405(b). Section 1405(b) of the Dodd-Frank
Act provides that, notwithstanding any other provision of title XIV of
the Dodd-Frank Act, in order to improve consumer awareness and
understanding of transactions involving residential mortgage loans
through the use of disclosures, the Bureau may exempt from or modify
disclosure requirements, in whole or in part, for any class of
residential mortgage loans if the Bureau determines that such exemption
or modification is in the interest of consumers and in the public
interest.\69\ Section 1401 of the Dodd-Frank Act, which amends TILA
section 103(cc)(5), generally defines a residential mortgage loan as
any consumer credit transaction that is secured by a mortgage on a
dwelling or on residential real property that includes a dwelling,
other than an open-end credit plan or an extension of credit secured by
a consumer's interest in a timeshare plan.\70\ Notably, the authority
granted by section 1405(b) applies to disclosure requirements generally
and is not limited to a specific statute or statutes. Accordingly,
Dodd-Frank Act section 1405(b) is a broad source of authority to exempt
from or modify the disclosure requirements of TILA and RESPA. In
developing this proposed rule, the Bureau has considered the purposes
of improving consumer awareness and understanding of transactions
involving residential mortgage loans through the use of disclosures and
the interests of consumers and the public. The Bureau proposes these
amendments pursuant to its authority under Dodd-Frank Act section
1405(b). For the reasons discussed below and in the 2013 TILA-RESPA
Rule, the Bureau believes the proposal is in the interest of consumers
and in the public interest, consistent with Dodd-Frank Act section
1405(b).
---------------------------------------------------------------------------
\69\ Public Law 111-203, 124 Stat. 1376, 2142 (2010) (codified
at 15 U.S.C. 1601 note).
\70\ Public Law 111-203, 124 Stat. 1376, 2138 (2010) (codified
at 15 U.S.C. 1602(cc)(5)).
---------------------------------------------------------------------------
B. TILA
TILA section 105(a). TILA section 105(a) directs the Bureau to
prescribe regulations to carry out the purposes of TILA and provides
that such regulations may contain additional requirements,
classifications, differentiations, or other provisions and may further
provide for such adjustments and exceptions for all or any class of
transactions that the Bureau judges are necessary or proper to
effectuate the purposes of TILA, to prevent circumvention or evasion
thereof, or to facilitate compliance therewith.\71\ A purpose of TILA
is to assure a meaningful disclosure of credit terms so that the
consumer will be able to compare more readily the various available
credit terms and avoid the uninformed use of credit.\72\ Additionally,
a purpose of TILA sections 129B and 129C is to assure that consumers
are offered and receive residential mortgage loans on terms that
reasonably reflect their ability to repay the loans and that are
understandable and not unfair, deceptive, or abusive.\73\
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\71\ 15 U.S.C. 1604(a).
\72\ 15 U.S.C. 1601(a).
\73\ 15 U.S.C. 1639b(a)(2).
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TILA section 105(b). TILA section 105(b), amended by the CFPA,
requires publication of an integrated disclosure for mortgage loan
transactions covering the disclosures required by TILA and the
disclosures required by sections 4 and 5 of RESPA.\74\ The purpose of
the integrated disclosure is to facilitate compliance with the
disclosure requirements of TILA and RESPA and to improve borrower
understanding of the transaction. The Bureau provided additional
discussion of this integrated disclosure mandate in the 2013 TILA-RESPA
Rule.\75\
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\74\ Public Law 111-203, 124 Stat. 1376, 2108 (2010) (codified
at 15 U.S.C. 1604(b)).
\75\ 78 FR 79730, 79753-54 (Dec. 31, 2013).
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TILA section 105(f). Section 105(f) of TILA, 15 U.S.C. 1604(f),
authorizes the Bureau to exempt from all or part of TILA any class of
transactions if the Bureau determines after the consideration of
certain factors that TILA coverage does not provide a meaningful
benefit to consumers in the form of useful information or protection.
TILA section 129C(b)(3)(A), (B)(i). TILA section 129C(b)(3)(A)
directs the Bureau to prescribe regulations to carry out the purposes
of the subsection.\76\ In addition, TILA section 129C(b)(3)(B)(i)
authorizes the Bureau to prescribe regulations that revise, add to, or
subtract from the criteria that define a QM upon a finding that such
regulations are necessary or proper to ensure that responsible,
affordable mortgage credit remains available to consumers in a manner
consistent with the purposes of TILA section 129C; or are necessary and
appropriate to effectuate the purposes of TILA sections 129B and 129C,
to prevent circumvention or evasion thereof, or to facilitate
compliance with such sections.\77\
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\76\ 15 U.S.C. 1639c(b)(3)(A).
\77\ 15 U.S.C. 1639c(b)(3)(B)(i).
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TILA section 129C(b)(3)(C)(ii). In section 307 of the EGRRCPA,
codified in TILA section 129C(b)(3)(C), Congress directed the Bureau to
conduct a rulemaking to ``prescribe regulations that carry out the
purposes of [TILA's ATR requirements] and apply section 130 [of TILA]
with respect to violations [of the ATR requirements] with respect to
[PACE] financing, which shall account for the unique nature of [PACE]
financing.'' \78\
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\78\ 15 U.S.C. 1639c(b)(3)(C)(ii).
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C. RESPA
RESPA section 4(a). RESPA section 4(a), amended by the CFPA,
requires publication of an integrated disclosure for mortgage loan
transactions covering the disclosures required by TILA and the
disclosures required by sections 4 and 5 of RESPA.\79\ The purpose of
the integrated disclosure is to facilitate compliance with the
disclosure requirements of TILA and RESPA and to improve borrower
understanding of the transaction. The Bureau provided additional
discussion of this integrated disclosure mandate in the 2013 TILA-RESPA
Rule.\80\
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\79\ Public Law 111-203, 124 Stat. 1376, 2103 (2010) (codified
at 12 U.S.C. 2603(a)).
\80\ 78 FR 79730, 79753-54 (Dec. 31, 2013).
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RESPA section 19(a). Section 19(a) of RESPA authorizes the Bureau
to prescribe such rules and regulations and to make such
interpretations and grant such reasonable exemptions for classes of
transactions as may be necessary to achieve the purposes of RESPA.\81\
One purpose of RESPA is to effect certain changes in the settlement
process for residential real estate that will result in more effective
advance disclosure to
[[Page 30396]]
home buyers and sellers of settlement costs.\82\ In addition, in
enacting RESPA, Congress found that consumers are entitled to greater
and more timely information on the nature and costs of the settlement
process and to be protected from unnecessarily high settlement charges
caused by certain abusive practices in some areas of the country.\83\
In developing proposed rules under RESPA section 19(a), the Bureau has
considered the purposes of RESPA, including to effect certain changes
in the settlement process that will result in more effective advance
disclosure of settlement costs.
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\81\ 12 U.S.C. 2617(a).
\82\ 12 U.S.C. 2601(b).
\83\ 12 U.S.C. 2601(a). In the past, RESPA section 19(a) has
served as a broad source of authority to prescribe disclosures and
substantive requirements to carry out the purposes of RESPA.
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VII. Section-by-Section Analysis
1026.2 Definitions and Rules of Construction.
1026.2(a) Definitions
1026.2(a)(14) Credit
Section 1026.2(a)(14) defines ``credit'' to mean ``the right to
defer payment of debt or to incur debt and defer its payment.''
Currently, comment 2(a)(14)-1.ii states, in part, that ``tax liens''
and ``tax assessments'' are not considered credit for purposes of the
regulation. The Bureau proposes to amend comment 2(a)(14)-1.ii to add
the word ``involuntary'' to clarify which tax liens and tax assessments
are not considered credit. Amended as proposed, comment 2(a)(14)-1.ii
would provide that ``involuntary tax liens, involuntary tax
assessments, court judgments, and court approvals of reaffirmation of
debts in bankruptcy'' are not considered credit for purposes of the
regulation.\84\ The proposed amendment would resolve ambiguity in the
existing comment and bring the exclusion in line with the definition of
credit in TILA and congressional intent with respect to TILA coverage.
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\84\ The proposed rule would also make a conforming change later
in the comment, inserting the word ``involuntary'' before ``tax
lien'' in an illustrative example of third-party financing that is
credit for purposes of the regulation notwithstanding the exclusion.
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For a number of years, stakeholders have expressed disagreement in
litigation, ANPR comments, and other communications about whether
comment 2(a)(14)-1.ii excludes PACE transactions from TILA coverage.
The ambiguity derives largely from the text of the comment in light of
the structure of PACE transactions. The comment excludes tax
assessments and tax liens, and PACE transactions have attributes of
both involuntary special property tax assessments that are not subject
to TILA and voluntary mortgage transactions that are. As described in
part II.A, PACE transactions have been treated as assessments under
State law, are collected through local property tax systems, and are
secured by liens treated similarly to property tax liens; but PACE
transactions arise through voluntary contractual agreement, similar to
other credit transactions that are subject to TILA.
In general, PACE industry stakeholders have argued that PACE
transactions are not TILA credit, in part because the text of the
comment states that tax liens and tax assessments are not credit
without explicitly distinguishing between voluntary and involuntary
obligations; and consumer advocates and mortgage industry stakeholders
have argued that PACE transactions are TILA credit because, unlike
other tax liens and assessments, PACE transactions are voluntary for
consumers. One Federal district court has directly addressed the
question, ruling that PACE financing is not credit for purposes of TILA
in part due to the text of comment 2(a)(14)-1.ii.\85\
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\85\ See In re HERO Loan Litig., 017 WL 3038250 (C.D. Cal.
2017); see also Burke v. Renew Fin. Grp., Inc., 2021 WL 5177776
(C.D. Cal. 2021) (ruling that PACE transactions are not consumer
credit under TILA). The In re HERO and Burke courts suggested that
PACE assessments are not ``consumer credit transactions'' for
purposes of TILA. 2017 WL 3038250, at *2-*3; 2021 WL 5177776, at *3.
TILA defines ``consumer credit transactions'' to mean that a credit
transaction is ``one in which the party to whom credit is offered or
extended is a natural person, and the money, property, or services
which are the subject of the transaction are primarily for personal,
family, or household purposes.'' 15 U.S.C. 1602(i). Consistent with
this, Regulation Z defines ``consumer credit'' to mean ``credit
offered or extended to a consumer primarily for personal, family, or
household purposes.'' 12 CFR 1026.2(a)(12). Residential PACE
transactions satisfy these definitions. Notwithstanding the rulings
in Burke and In re HERO, such Residential PACE transactions satisfy
these definitions. Notwithstanding the rulings in Burke and In re
HERO, such transactions are ``offered or extended'' to consumers,
who as natural persons are the targets of marketing and sales
efforts, are offered the loans and decide whether to sign up, and
are signatories to the financing agreements, which are for money to
fund home improvement services that are primarily for personal,
family, or household purposes.
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The Bureau proposes to amend the commentary to clarify that PACE
transactions are credit under TILA and Regulation Z. Amended as
proposed, comment 2(a)(14)-1.ii would state that ``involuntary tax
liens, involuntary tax assessments, court judgments, and court
approvals of reaffirmation of debts in bankruptcy'' are not considered
credit for purposes of the regulation. By adding the word
``involuntary'' to comment 2(a)(14)-1.ii, the Bureau would clarify that
the comment does not exclude tax liens and tax assessments that arise
from voluntary contractual agreements, such as PACE transactions. Thus,
under the proposed amendments, tax liens and tax assessments that are
voluntary would be credit if they meet the definition of credit under
TILA and Regulation Z and are not otherwise excluded.\86\
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\86\ Under the proposed amendments, tax liens and tax
assessments that are not voluntary for the consumer would continue
to be excluded.
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The proposed amendment would bring the exclusion in comment
2(a)(14)-1.ii in line with the definition of credit in TILA and
Regulation Z. TILA defines ``credit'' to mean the ``right granted by
creditor to a debtor to defer payment of debt or to incur debt and
defer its payment,'' and Regulation Z defines ``credit'' as ``the right
to defer payment of debt or to incur debt and defer its payment.'' \87\
In general, PACE transactions appear to easily fit these definitions--
the agreements provide for consumers to receive funding for home
improvement projects and repay those funds over time in
installments.\88\
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\87\ 15 U.S.C. 1602(f); 12 CFR 1026.2(a)(14). Regulation Z
further defines creditor generally as ``a person who regularly
extends consumer credit that is subject to a finance charge or is
payable by written agreement in more than four installments (not
including a down payment), and to whom the obligation is initially
payable, either on the face of the note or contract, or by agreement
when there is no note or contract.'' 12 CFR 1026.2(a)(17).
\88\ Treating PACE transactions as TILA credit is consistent
with the FTC's assertion of claims against a PACE company under the
Bureau's Regulation N, 12 CFR part 1014, which the parties settled
pursuant to a proposed court order. See Stipulation as to Entry of
Order for Permanent Injunction, Monetary Judgement, and Other Relief
(Oct. 28, 2022), <a href="https://www.ftc.gov/system/files/ftc_gov/pdf/Stipulation%20-%20Dkt.%202%20-%2022-cv-07864.pdf">https://www.ftc.gov/system/files/ftc_gov/pdf/Stipulation%20-%20Dkt.%202%20-%2022-cv-07864.pdf</a>; see also part
II.A.4 (describing the settlement). Regulation N, also known as the
Mortgage Acts and Practices--Advertising Rule, implements section
626 of the Omnibus Appropriations Act, 2009, as amended. 12 U.S.C.
5538. Regulation N applies to the advertising, marketing, and sale
of a ``mortgage credit product,'' defined as ``any form of credit
that is secured by real property or a dwelling and that is offered
or extended to a consumer primarily for personal, family, or
household purposes.'' 12 CFR 1014.2. Regulation N defines ``credit''
identically to Regulation Z but does not include any commentary
analogous to comment 2(a)(14)-1.ii to Regulation Z.
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The proposed amendments to comment 2(a)(14)-1.ii would also be in
line with congressional intent. Congress enacted TILA in part to enable
consumers ``to compare more readily the various credit terms
available'' to them, and to ``avoid the uninformed use of credit.''
\89\ To that end, relevant legislative history indicates that TILA was
intended to require ``all creditors to disclose credit information in a
uniform manner'' so that ``the American
[[Page 30397]]
consumer will be given the information he needs to compare the cost of
credit and to make the best informed decision on the use of credit.''
\90\ Clarifying that voluntary tax liens and tax assessments can be
credit, such that PACE transactions are subject to TILA's uniform
disclosure requirements, would squarely align with these goals.
Consumers have a number of financing options for home improvement
projects, such as home equity lines of credit, personal loans, and
credit cards. Just like these other financing options, PACE
transactions carry certain costs, terms, and conditions that consumers
must be aware of in order to make informed credit decisions. Requiring
TILA disclosures for PACE transactions allows consumers to shop among
different options and across creditors.
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\89\ TILA section 102(a), 15 U.S.C. 1601(a).
\90\ H.R. Rep. No. 1040, 90th Cong. (1967).
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Notably, it appears that the current text of comment 2(a)(14)-1.ii
was not intended to exclude voluntary transactions such as PACE. The
Board of Governors of the Federal Reserve System (Board) first issued
the comment in 1981 as part of a broader rulemaking issuing commentary
to Regulation Z.\91\ In preamble preceding that issuance and in several
public information letters that were forerunners to the 1981 rule, it
is clear that the Board was addressing whether certain types of
involuntary tax and assessment obligations were credit under TILA and
Regulation Z. In one letter, the Board stated that the definition of
``credit'' ``necessarily assumes the right to avoid incurring debt.
That is, the debt must arise from a contractual relationship,
voluntarily entered into, between the debtor and creditor.'' \92\
Because ``such a relationship [did] not exist in the delinquent tax
arrangement case,'' the Board found that TILA and Regulation Z ``would
not govern the transaction.'' \93\ Other letters contained similar
analysis,\94\ and the Board reiterated this reasoning in preamble
predating the commentary in which it explained its rationale for the
comment, again focusing on the involuntary nature of the obligations as
the reason they were not credit.\95\ The Board explained:
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\91\ See 46 FR 50288, 50292 (Oct. 9, 1981).
\92\ Fed. Rsrv. Bd., Public Information Letter No. 166 (1969).
\93\ Id.
\94\ See Fed. Rsrv. Bd., Public Information Letter No. 153
(1969) (similar with regard to sewer assessment installment
payments); Fed. Rsrv. Bd., Public Information Letter No. 40 (1969)
(``[T]he term `credit', for the purposes of Truth-in-Lending,
assumes a contractual relationship, voluntarily entered, between
creditor and debtor. Since such a relationship [did] not exist in
the case of tax assessments by the Sewer District (and, similarly in
the case of ad valorem taxes imposed by a city), . . . such
assessments (and city taxes) would not fall within the coverage of
[TILA] or Regulation Z.'').
\95\ 46 FR 20848, 20851 (Apr. 7, 1981).
Certain transactions do not involve the voluntary incurring of
debt; others do not involve the right to defer a debt. Tax liens,
tax assessments and court judgments (including reaffirmations of a
debt discharged in bankruptcy, if approved by a court) fall into
this category and are therefore not covered by the regulation.\96\
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\96\ Id.
Moreover, in this preamble and in the commentary to Regulation Z
that it adopted later that year, the Board specifically juxtaposed the
excluded obligations with voluntary ones, stating that, while the
obligations it was excluding are not credit, ``third-party financing of
such obligations (for example, obtaining a bank loan to pay off a tax
lien) would constitute credit for Truth in Lending purposes.'' \97\
There is no indication that, in issuing the comment excluding tax liens
and tax assessments, the Board had considered any tax lien or tax
assessment that had originally arisen from a voluntary contractual
agreement.
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\97\ Id.; see also 46 FR 50288, 50292 (Oct. 9, 1981) (adopting
the relevant comment with the same language). In 2011, the authority
to interpret TILA and implement Regulation Z transferred to the
Bureau, which republished the 1981 Board interpretation as an
official Bureau interpretation in comment 2(a)(14)-1.ii with no
substantive changes.
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PACE industry stakeholders have asserted a number of additional
reasons PACE transactions should not be treated as TILA credit,
including that PACE financing serves important public policy purposes
as mandated by State law, and that PACE transactions are special
assessments that are repaid through the property tax system and are
secured by liens enforced similar to property tax liens under State
law. The Bureau is not aware of any indication that Congress intended
for TILA to exclude voluntary transactions like PACE financing on
account of their being processed through property tax systems or
because they are intended to further certain public policy purposes.
The Bureau recognizes that clarifying the exclusion in comment
2(a)(14)-1.ii as limited to involuntary tax assessments and involuntary
tax liens would ensure that TILA applies generally to PACE
transactions. As a result, it would ensure that certain participants in
PACE transactions would be subject to TILA requirements. For example,
various disclosure and other requirements would apply to the entity
that is the ``creditor'' as defined in Sec. 1026.2(a)(17), which the
Bureau understands is typically the government sponsor in a PACE
transaction.\98\ Other requirements would apply to any entity that
operates as a ``loan originator'' for a PACE transaction, which could
include a PACE company or home improvement contractor depending on the
roles those entities play in a particular transaction.\99\ In the
Bureau's view, PACE transactions share relevant characteristics with
other credit transactions, as described above. If they were not subject
to TILA and Regulation Z, consumers would be at risk, and it would run
counter to the purposes for enacting TILA expressed by Congress. The
Bureau understands, however, that certain existing requirements in
Regulation Z might warrant adjustment to better accommodate the unique
structure of PACE transactions. The Bureau is proposing amendments to
that end, as described in the relevant section-by-section analyses in
this proposal.
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\98\ Implementing TILA section 103(g), Sec. 1026.2(a)(17)
defines ``creditor'' generally as a person who regularly extends
consumer credit that is subject to a finance charge or is payable by
written agreement in more than four installments, and to whom the
obligation is initially payable. The Bureau's understanding,
consistent with ANPR comments and other research, is that these
characteristics apply to government sponsors of PACE transactions in
the PACE programs that have been active.
\99\ Section 1026.36(a)(1) generally defines a ``loan
originator'' as a person who, in expectation of direct or indirect
compensation or other monetary gain or for direct or indirect
compensation or other monetary gain, performs any of the following
activities: takes an application, offers, arranges, assists a
consumer in obtaining or applying to obtain, negotiates, or
otherwise obtains or makes an extension of consumer credit for
another person; or through advertising or other means of
communication represents to the public that such person can or will
perform any of these activities. See the section-by-section analysis
of proposed Sec. 1026.41 for discussion of servicing provisions in
Regulation Z.
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The Bureau seeks comment on the proposed amendments to comment
2(a)(14)-1.ii. The Bureau also seeks comment on whether any TILA
provisions not addressed in this proposal warrant amendment for PACE
transactions.
1026.32 Requirements for High-Cost Mortgages and 1026.34 Prohibited
Acts or Practices in Connection With High-Cost Mortgages
The Home Ownership and Equity Protection Act (HOEPA) was enacted in
1994 as an amendment to TILA to address abusive practices in
refinancing and home-equity mortgage loans with high interest rates or
high fees.\100\ Loans that meet HOEPA's high-cost coverage tests are
subject to special disclosure requirements and restrictions on loan
terms, and borrowers in high-cost
[[Page 30398]]
mortgages have enhanced remedies for violations of the law.\101\ The
provisions of HOEPA are implemented in Regulation Z in Sec. Sec.
1026.32 and 1026.34.\102\
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\100\ Public Law 103-325, 108 Stat. 2160.
\101\ See 15 U.S.C. 1602(bb), 1639.
\102\ 12 CFR part 1026.
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The Bureau is not proposing any changes to Sec. 1026.32 or Sec.
1026.34 in this proposed rule. Thus, if the proposed rule is finalized
as proposed, the high-cost loan requirements implemented in Sec. Sec.
1026.32 and 1026.34 would apply to PACE transactions that meet the
definition of high-cost mortgage in Sec. 1026.32(a)(1) in the same way
that they apply to other high-cost mortgages.\103\ The Bureau requests
comment on whether any clarification is required through rulemaking or
otherwise with respect to how HOEPA's provisions as implemented in
Regulation Z apply to PACE transactions that may qualify as high-cost
mortgages. In particular, the Bureau requests comment on the interest
rates and late fees that consumers may have to pay in connection with
their PACE transactions both before and after default, and whether, for
example, late fees that apply to all property taxes should be treated
differently from contractually-imposed late fees for purposes of
HOEPA's limitations on late fees \104\ as implemented in Sec.
1026.34(a)(8).
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\103\ A mortgage is generally a high-cost mortgage if (1) the
spread between the APR and the average prime offer rate (APOR) is
greater than 6.5 percentage points for a first-lien transaction or
8.5 percentage points for a subordinate-lien transaction, (2) points
and fees exceed 5 percent of the total loan amount (for loans under
$20,000) or the lesser of 8 percent or $1,000 (for loans over
$20,000), or (3) the creditor can charge prepayment penalties more
than 36 months after consummation or in an amount exceeding 2
percent of the amount prepaid. 12 CFR 1026.32(a)(1). As discussed in
the PACE Report, the Bureau estimates that a small percentage of
PACE transactions would exceed the APR-APOR spread trigger, while
over one-third of existing PACE transactions have points and fees
that would exceed the HOEPA points and fees coverage trigger. PACE
Report, supra note 12, at 15.
\104\ 15 U.S.C. 1639(k).
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1026.35 Requirements for Higher-Priced Mortgage Loans
35(b) Escrow Accounts
35(b)(2) Exemptions
35(b)(2)(i)
35(b)(2)(i)(E)
TILA section 129D generally requires creditors to establish escrow
accounts for certain higher-priced mortgage loans (HPMLs).\105\
Regulation Z implements this requirement in Sec. 1026.35(a) and (b),
defining an HPML as a closed-end consumer credit transaction secured by
the consumer's principal dwelling with an APR exceeding the average
prime offer rate (APOR) \106\ for a comparable transaction by a certain
number of percentage points.\107\ With certain exemptions, Regulation Z
Sec. 1026.35(b) prohibits creditors from extending HPMLs secured by
first liens on consumers' principal dwellings unless an escrow account
is established before consummation for payment of property taxes, among
other charges (HPML escrow requirement). The Bureau is unaware of any
PACE transactions that require consumers to escrow property tax
payments or other charges, whether or not the PACE transaction could be
characterized as an HPML. The Bureau believes that requiring escrow
accounts for PACE transactions that would be subject to the HPML escrow
requirement would provide little or no benefit to consumers while
imposing substantial burden on industry. The Bureau proposes to add
Sec. 1026.35(b)(2)(i)(E) to exempt PACE transactions from the HPML
escrow requirement.
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\105\ 15 U.S.C. 1639d.
\106\ Section 1026.35(a)(2) defines APOR as an APR that is
derived from average interest rates, points, and other loan pricing
terms currently offered to consumers by a representative sample of
creditors for mortgage transactions that have low-risk pricing
characteristics. The Bureau publishes APORs for a broad range of
types of transactions in a table updated at least weekly as well as
the methodology the Bureau uses to derive these rates.
\107\ Section 1026.35(a)(1) defines HPML to mean ``a closed-end
consumer credit transaction secured by the consumer's principal
dwelling with an APR that exceeds the APOR for a comparable
transaction as of the date the interest rate is set'' by at least
1.5, 2.5, or 3.5 percentage points depending on the lien priority
and the size of the loan relative to the maximum principal
obligation eligible for purchase by Freddie Mac.
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The Bureau believes that a mandatory escrow requirement would
provide little or no benefit to PACE borrowers. According to the
Bureau's PACE data, nearly three-fourths of PACE borrowers had a
mortgage at the time their PACE transactions were funded.\108\ As a
result, a large proportion of PACE borrowers already may have escrow
accounts through their pre-existing mortgage loan.\109\ For PACE
borrowers for whom this is true, PACE payments are already incorporated
into the mortgage escrow accounts as part of the property tax payment.
Those borrowers who do not have a pre-existing escrow account are
already paying their property taxes and any other traditionally
escrowed charges on their own and likely do not need or perhaps even
want an escrow account. Because the PACE charges are billed with the
property taxes, the Bureau believes that it is unlikely that such
borrowers will mistakenly neglect to pay them.
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\108\ See PACE Report, supra note 12, at 12.
\109\ See Adam H. Langley, Lincoln Inst. Of Land Pol'y,
Improving the Property Tax by Expanding Options for Monthly
Payments, at 2 (Jan. 2018), <a href="https://www.lincolninst.edu/sites/default/files/pubfiles/langley-wp18al1_0.pdf">https://www.lincolninst.edu/sites/default/files/pubfiles/langley-wp18al1_0.pdf</a> (stating that, in 2015,
44 percent of U.S. homeowners paid their property taxes as a part of
their monthly mortgage payment).
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Additionally, escrow accounts for PACE transactions would be
governed by rules in Regulation X.\110\ The rules include a variety of
detailed requirements governing, for example, escrow account analyses,
escrow account statements, and the treatment of surpluses, shortages,
and deficiencies in escrow accounts.\111\ The Bureau believes the
additional cost and burden to comply with these requirements in this
context would not be warranted given the lack of consumer benefit.\112\
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\110\ See generally Regulation X, 12 CFR 1024.17.
\111\ Id.
\112\ Commenters to the 2008 HPML escrow rule estimated that the
cost could range between one million and $16 million for a large
creditor. See 73 FR 44521, 44558 (July 30, 2008).
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Further, Federal law requires certain escrow account disclosures,
including escrow account statements required under Regulation X \113\
and escrow-related elements of the TILA-RESPA integrated disclosure
forms required under Regulation Z,\114\ that could be confusing in the
context of PACE transactions. A defining feature of PACE is that the
loans are paid back through the property tax system. The escrow account
disclosures were developed to address more traditional escrow accounts;
they would not effectively communicate that an escrow account for a
PACE transaction would collect the principal and interest payments as
part of the property tax payment. These disclosures would not be
required if the Bureau finalizes this proposal--Regulation X does not
require escrow account statements if there will be no escrow
account,\115\ and the TILA-RESPA integrated disclosure forms would not
be required to disclose escrow-related information for PACE
transactions.\116\ Additionally, the escrow account disclosures may
create uncertainty about whether the PACE transaction affects the
consumer's pre-existing mortgage escrow account when applicable.
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\113\ See 12 CFR 1024.17(g)-(j).
\114\ See 12 CFR 1026.37, .38.
\115\ See generally 12 CFR 1024.17.
\116\ As discussed in the section-by-section analyses of
Sec. Sec. 1026.37(p) and 1026.38(u) below, the Bureau is proposing
to eliminate certain escrow-related fields from the TILA-RESPA
integrated disclosure forms, and the remaining escrow-related fields
can generally be left blank on the TILA-RESPA integrated disclosure
forms if there is no escrow account associated with the transaction.
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The Bureau notes that some of the consumer protection concerns that
[[Page 30399]]
prompted the Board to adopt the initial HPML escrows rule do not apply
in the same way to the PACE market. The Board first implemented the
HPML escrow requirement in Regulation Z in 2008, before the requirement
was codified in TILA, relying on its authority to prohibit deceptive or
unfair acts or practices.\117\ The Board's HPML rule was originally
intended to protect consumers who receive relatively high interest
rates. The Board was concerned that market pressures discouraged
creditors from offering escrow accounts to borrowers getting subprime
loans, increasing the risk that these consumers would base borrowing
decisions on an unrealistically low assessment of their mortgage-
related obligations. In contrast, PACE borrowers for whom the HPML
escrow requirement would apply will already be paying property taxes as
a function of homeownership, and the Bureau understands that PACE
transactions do not generally require any mortgage-related insurance.
To the extent consumers do lack information about their overall payment
obligations, and to the extent this could lead to them receiving
unaffordable PACE loans, the Bureau believes such concerns are better
addressed through other TILA provisions, including the TILA-RESPA
integrated disclosures and ATR requirements that are tailored to PACE
as discussed in the section-by-section analyses below.\118\
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\117\ 73 FR 44521 (July 30, 2008). The requirement was later
codified in TILA section 129D, 15 U.S.C. 1639d.
\118\ See section-by-section analyses of proposed Sec. Sec.
1026.37, 1026.38, 1026.43, infra.
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One ANPR comment letter from consumer groups advocated for applying
the HPML escrow requirement for PACE consumers without an existing
mortgage escrow, to help spread out payments. The Bureau recognizes
that having the option to break up property tax payments into smaller
amounts could be helpful to taxpayers generally and particularly to
taxpayers with PACE accounts who do not already have a pre-existing
mortgage with an escrow account.\119\ The Bureau believes it would be
beneficial if local taxing authorities facilitated the spreading-out of
payments for PACE borrowers \120\ but does not believe that requiring
an escrow account for PACE HPMLs would be the best way to accomplish
this.
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\119\ Langley, Improving the Property Tax by Expanding Options
for Monthly Payments, supra note 109, at 7.
\120\ See generally id. (encouraging local governments to expand
options for consumers to pay property taxes on a monthly basis).
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The Bureau is proposing this exemption pursuant to TILA sections
105(a) and 105(f). For the reasons discussed in this section-by-section
analysis, the Bureau believes that exempting PACE transactions from the
requirements of TILA section 125D is proper to carry out the purposes
of TILA. As described above, the Bureau believes that the requirements
of TILA section 125D would significantly complicate, hinder, and make
more expensive the credit process for PACE transactions. The Bureau
thus has preliminarily determined that the goal of consumer protection
would not be undermined by this exemption.
TILA-RESPA Integrated Disclosure Requirements Implemented Under
Sections 1026.37 and 1026.38
The CFPA directed the Bureau to integrate the mortgage loan
disclosures required under TILA and RESPA sections 4 and 5, and to
publish model disclosure forms to facilitate compliance.\121\ The
Bureau issued regulatory requirements and model forms to satisfy these
statutory obligations in 2013 (2013 TILA-RESPA Rule).\122\ The
requirements and forms generally apply to closed-end consumer credit
transactions secured by real property or a cooperative unit, other than
a reverse mortgage subject to Sec. 1026.33.\123\
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\121\ CFPA sections 1098 & 1100A, codified at 12 U.S.C. 2603(a)
& 15 U.S.C. 1604(b), respectively.
\122\ See 78 FR 80225 (Dec. 31, 2013); 80 FR 43911 (July 24,
2015). The TILA-RESPA integrated disclosure requirements have been
amended several times. See <a href="https://www.consumerfinance.gov/rules-policy/final-rules/2013-integrated-mortgage-disclosure-rule-under-real-estate-settlement-procedures-act-regulation-x-and-truth-lending-act-regulation-z/">https://www.consumerfinance.gov/rules-policy/final-rules/2013-integrated-mortgage-disclosure-rule-under-real-estate-settlement-procedures-act-regulation-x-and-truth-lending-act-regulation-z/</a>.
\123\ See Sec. 1026.19(e)(1) and (f)(1).
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The integrated disclosures consist of two forms: a Loan Estimate
and a Closing Disclosure. The Loan Estimate provides the consumer with
good faith estimates of credit costs and transaction terms. It is
designed to provide disclosures that are helpful to consumers in
understanding the key features, costs, and risks of the mortgage for
which they are applying.\124\ In general, the Loan Estimate must be
provided to consumers within three business days after they submit a
loan application \125\ and not later than the seventh business day
before consummation.\126\ The Closing Disclosure is a final disclosure
reflecting the actual terms of the transaction. In general, the Closing
Disclosure must be provided to the consumer three business days before
consummation of the transaction.\127\
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\124\ See 78 FR 79730, 80225 (Dec. 31, 2013).
\125\ See Sec. 1026.2(a)(3)(ii) (defining ``application'' for
these purposes as one that ``consists of the submission of the
consumer's name, the consumer's income, the consumer's social
security number to obtain a credit report, the property address, an
estimate of the value of the property, and the mortgage loan amount
sought'').
\126\ Section 1026.19(e)(1)(iii)(A)-(B).
\127\ Section 1026.19(f)(1)(ii)(A).
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As the Bureau explained in the 2013 TILA-RESPA Rule, the TILA-RESPA
integrated disclosure forms use clear language and design to make it
easier for consumers to locate key information, such as interest rate,
periodic payments, and loan costs.\128\ The forms also provide
information to help consumers decide whether they can afford the loan
and to compare the cost of different loan offers, including the cost of
the loans over time.\129\ These benefits are important for PACE
borrowers just as they are for other mortgage borrowers.
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\128\ 78 FR 79730, 80225 (Dec. 31, 2013).
\129\ Id.
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The Bureau believes that certain elements of the current TILA-RESPA
integrated disclosures may benefit from adaptation so that the forms
more effectively disclose information about PACE transactions in view
of their unique nature. The Bureau proposes the modifications to the
Loan Estimate and Closing Disclosure described below. Where this
proposal would not provide a PACE-specific version of a particular
provision, the existing requirements in Sec. Sec. 1026.37 and 1026.38
would apply. As with other mortgage transactions, elements of the forms
that are not applicable for PACE transactions may generally be left
blank.\130\ The Bureau requests comment on the proposed amendments and
on any further amendments that may improve consumer understanding for
PACE transactions. The Bureau is proposing model forms in appendix H-
24(H) (Loan Estimate) and appendix H-25(K) (Closing Disclosure)
reflecting the proposed PACE-specific implementation of the TILA-RESPA
integrated disclosure requirements.
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\130\ See comments 37-1 and 38-1.
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The Bureau is not proposing amendments to the timing requirements
for the Loan Estimate and Closing Disclosure for PACE transactions. The
Bureau explained in the 2013 TILA-RESPA Rule that the seven-business-
day waiting period between provision of the Loan Estimate and
consummation is intended to effectuate the purposes of both TILA and
RESPA by enabling the informed use of credit and ensuring effective
advance disclosure of settlement charges.\131\ The Bureau
[[Page 30400]]
explained that the three-business-day-period following provision of the
Closing Disclosure greatly enhances consumer awareness and
understanding of the costs associated with the mortgage
transaction.\132\ As with the substantive disclosures, the timing
requirements are important to PACE borrowers, particularly given
concerns that the origination process for some PACE borrowers may not
provide enough time to understand the obligation and shop for other
financing options.\133\
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\131\ 78 FR 79730, 79802-03 (Dec. 31, 2013); see also id. at
79806-07 (reasoning in context of considering amendments to bona
fide personal financial emergencies that, at least with respect to
relatively large mortgage loans, the seven-business-day-waiting-
period would provide consumers a meaningful opportunity to shop for
a loan, compare available financing options, and negotiate favorable
terms, and that the seven-business-day-waiting period ``is the
minimum amount of time'' in which consumers could meaningfully do
so).
\132\ 78 FR 79730, 79847 (Dec. 31, 2013).
\133\ See part II.A.4, supra.
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The Bureau is proposing the implementation of the disclosure
requirements described in the section-by-section analyses of proposed
Sec. Sec. 1026.37(p) and 1026.38(u) pursuant to its authority under
TILA section 105(a) and 105(f), and RESPA section 19(a). For the
reasons discussed in the respective section-by-section analyses, the
Bureau believes, in its initial analysis, that the proposed
implementation would be necessary and proper to carry out the purposes
of TILA and RESPA. The proposed provisions that would implement the
disclosure requirements under TILA section 105(a), including
adjustments or exceptions discussed in the applicable section-by-
section analyses, are intended to assure a meaningful disclosure of
credit terms, avoid the uninformed use of credit, or facilitate
compliance with TILA. In general, the proposed changes are intended to
make the Loan Estimate and Closing Disclosure more effective and
understandable for PACE borrowers, and to facilitate compliance given
the unique nature of PACE transactions. The Bureau believes that the
proposed provisions that would implement the disclosure requirements
under RESPA section 19(a), including interpretations discussed in the
applicable section-by-section analysis, would further the purposes of
RESPA and be consistent with the Bureau's authority under RESPA section
19(a).
For the reasons discussed in the respective section-by-section
analyses, the Bureau is proposing various exemptions in Sec. Sec.
1026.37(p) and 1026.38(u) pursuant to its authority under TILA section
105(a) and 105(f). With respect to TILA section 105(a), the Bureau
believes, in its initial analysis, that the proposed exemptions would
be necessary and proper to carry out TILA's purposes, including by
assuring the meaningful disclosure of credit terms and avoiding the
uninformed use of credit. Additionally, with respect to TILA section
105(f), the Bureau's preliminary determination, after considering the
factors in TILA section 105(f)(2), is that the disclosures proposed to
be exempted would not provide meaningful benefit to consumers in the
form of useful information or protection. In the Bureau's preliminary
analysis, the exempted disclosure requirements would significantly
complicate, hinder, or make more expensive credit for PACE
transactions, and the exemptions would not undermine the goal of
consumer protection. Where the Bureau believes that doing so would help
assure the meaningful disclosure of credit terms and avoid the
uninformed use of credit, the proposal would replace the exempted
disclosures with disclosures that serve similar purposes to the
existing disclosures, but that would better fit the context of PACE
transactions.
Section 1026.37 Content of Disclosures for Certain Mortgage
Transactions (Loan Estimate)
37(p) PACE Transactions
Section 1026.37 implements the TILA-RESPA integrated disclosure
requirements by setting forth the requirements for the Loan Estimate.
Proposed Sec. 1026.37(p)(1)-(7) would set forth modifications to the
Loan Estimate requirements for ``PACE transactions,'' as defined under
proposed Sec. 1026.43(b)(15), to account for the unique nature of
PACE.
37(p)(1) Itemization
TILA section 128(a)(6), (a)(16), (b)(2)(C), and (b)(4) are
currently implemented in part by Sec. 1026.37(c)(1) through (5), which
generally requires creditors to disclose a table itemizing each
separate periodic payment or range of payments, among other
information, under the heading ``Projected Payments.'' As part of the
projected payments table, the creditor is required to state the total
periodic payment under Sec. 1026.37(c)(2)(iv), as well as the
constituent parts of the total periodic payment under Sec.
1026.37(c)(2)(i) through (iii). Relevant here, Sec. 1026.37(c)(2)(iii)
generally requires a field for the disclosure of the amount payable
into an escrow account to pay for some or all mortgage-related
obligations, as applicable, labeled ``Escrow,'' together with a
statement that the amount disclosed can increase over time. Proposed
Sec. 1026.37(p)(1) would exempt PACE transactions from the escrow
account payment disclosure requirements implemented under Sec.
1026.37(c)(2)(iii).
As discussed in the section-by-section analysis of proposed Sec.
1026.35(b)(2)(i)(E), the Bureau is unaware of any PACE transactions
that carry their own escrow accounts. Thus, the escrow account payment
field under Sec. 1026.37(c)(2)(iii) would generally be left blank if
it were included on the Loan Estimate associated with any PACE
transaction.\134\ This blank entry could cause confusion for PACE
borrowers who pay their property taxes into pre-existing escrow
accounts associated with non-PACE mortgage loans, since PACE
transactions are typically part of the property tax payment. It also
could create doubt for the consumer about whether the PACE transaction
will be repaid through the existing escrow account. The Bureau believes
the proposed exemption would mitigate this risk.
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\134\ See existing comment 37-1, which provides that a portion
of the Loan Estimate that is inapplicable may generally be left
blank. (Existing comment 38-1 provides similarly for the Closing
Disclosure.)
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37(p)(2) Taxes, Insurance, and Assessments
TILA sections 128(a)(16) and 128(b)(4)(A) are currently implemented
in part by Sec. 1026.37(c)(4)(ii). Section 1026.37(c)(4) requires
creditors to include in the projected payments table \135\ information
about taxes, insurance, and assessments, with the label ``Taxes,
Insurance & Assessments.'' Section 1026.37(c)(4)(ii) generally requires
disclosure of the sum of mortgage-related obligations, including
property taxes, insurance premiums, and other charges.\136\ Section
1026.37(c)(4)(iii) through (vi) requires various statements about this
disclosure. Under proposed Sec. 1026.37(p)(2)(i) and
[[Page 30401]]
(ii), the Bureau would retain most of these requirements for PACE
transactions, with changes to the disclosures currently required under
Sec. 1026.37(c)(4)(iv), (v), and (vi) for PACE transactions.
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\135\ As noted in the section-by-section analysis of proposed
Sec. 1026.37(p)(1), Sec. 1026.37(c) generally requires creditors
to disclose a table itemizing each separate periodic payment or
range of payments, among other information, under the heading
``Projected Payments.''
\136\ Section 1026.37(c)(4)(ii) requires disclosure of ``[t]he
sum of the charges identified in Sec. 1026.43(b)(8), other than
amounts identified in Sec. 1026.4(b)(5), expressed as a monthly
amount, even if no escrow account for the payment of some or any of
such charges will be established.'' Section 1026.43(b)(8) defines
mortgage-related obligations as ``property taxes; premiums and
similar charges identified in Sec. 1026.4(b)(5), (7), (8), and (10)
that are required by the creditor; fees and special assessments
imposed by a condominium, cooperative, or homeowners association;
ground rent; and leasehold payments.'' See also the section-by-
section analysis of proposed Sec. 1026.37(p)(8)(i) for discussion
of the applicable unit-period for PACE transactions.
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Currently, Sec. 1026.37(c)(4)(iv) requires a statement of whether
the sum of mortgage-related obligations disclosed pursuant to Sec.
1026.37(c)(4)(ii) includes payments for property taxes, certain
insurance premiums, or other charges.\137\ Section 1026.37(c)(4)(iv)
currently does not require a more specific statement regarding the PACE
payment, separate from other property tax obligations. The Bureau is
proposing Sec. 1026.37(p)(2)(i) to provide such specificity. Proposed
Sec. 1026.37(p)(2)(i) would require a statement of whether the amount
disclosed pursuant to Sec. 1026.37(c)(4)(ii) includes payments for the
PACE transaction and, separately, whether it includes payments for the
non-PACE portions of the property tax payment. The statement about the
PACE loan payment would be labeled ``PACE Payment,'' and the statement
about the other property taxes would be labeled ``Property Taxes (not
including PACE loan).'' Besides having a more specific statement
regarding the PACE payment separate from the other property taxes, the
other components regarding certain insurance premiums or other charges
would continue to be disclosed under proposed Sec. 1026.37(p)(2)(i)
similar to how they are disclosed under current Sec.
1026.37(c)(4)(iv). The Bureau believes these proposed changes would
help consumers understand the unique nature of PACE and reinforce that
the PACE transaction will increase the consumer's property tax payment.
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\137\ Section 1026.37(c)(4)(iv) refers to ``payments for
property taxes, amounts identified in Sec. 1026.4(b)(8), and other
amounts described in'' Sec. 1026.37(c)(4)(ii). Section
1026.4(b)(8), in turn, refers to ``[p]remiums or other charges for
insurance against loss of or damage to property, or against
liability arising out of ownership or use of property, written in
connection with a credit transaction.'' Additionally, the Bureau
notes that a creditor issuing a simultaneous loan that is a PACE
transaction would generally be required to include the simultaneous
PACE loan in calculating the sum of taxes, assessments, and
insurance described in Sec. 1026.37(c)(4)(ii), since the
simultaneous PACE loan would increase the consumer's property tax
payment. This is consistent with existing comment 19(e)(1)(i)-1,
which cross-references existing Sec. 1026.17(c)(2)(i) and generally
provides that creditors must make TILA-RESPA integrated disclosures
based on the best information reasonably available to the creditor
at the time the disclosure is provided to the consumer. As discussed
in the section-by-section analysis of Sec. 1026.43(c)(2)(iv), the
Bureau is also proposing to clarify that a creditor originating a
PACE transaction knows or has reason to know of simultaneous loans
that are PACE transactions if the transactions are included in any
existing database or registry of PACE transactions that includes the
geographic area in which the property is located and to which the
creditor has access.
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Section 1026.37(c)(4)(iv) also currently requires creditors to
state whether the constituent parts of the taxes, insurance, or
assessments will be paid by the creditor using escrow account funds.
Proposed Sec. 1026.37(p)(2)(i) would eliminate this requirement for
PACE transactions. Omitting this information would avoid potential
consumer confusion for similar reasons as explained in the section-by-
section analysis of proposed Sec. 1026.37(p)(1).
The Bureau is also proposing amendments to the requirements in
Sec. 1026.37(c)(4)(v) and (vi). Currently, Sec. 1026.37(c)(4)(v)
requires a statement that the consumer must pay separately any amounts
described in Sec. 1026.37(c)(4)(ii) that are not paid by the creditor
using escrow account funds; and Sec. 1026.37(c)(4)(vi) requires a
reference to escrow account information, required under Sec.
1026.37(g)(3), located elsewhere on the Loan Estimate. Proposed Sec.
1026.37(p)(2)(ii) would replace these disclosures with the following
for PACE transactions: (1) a statement that the PACE transaction,
described in plain language as a ``PACE loan,'' will be part of the
property tax payment; and (2) a statement directing the consumer, if
the consumer has a pre-existing mortgage with an escrow account, to
contact the consumer's mortgage servicer for what the consumer will owe
and when. The Bureau believes the proposed disclosures would promote
consumer understanding of PACE transactions and their effect on any
pre-existing mortgage loans, and that omitting the two existing
disclosures would not impair consumer understanding of the transaction.
37(p)(3) Contact Information
TILA section 128(a)(1) is currently implemented in part by Sec.
1026.37(k), which requires disclosure of certain contact information,
under the heading ``Additional Information About this Loan.'' \138\ In
general, a creditor must disclose: (1) the name and NMLSR ID,\139\
license number, or other unique identifier issued by the applicable
jurisdiction or regulating body for the creditor, labeled ``Lender,''
and mortgage broker, labeled ``Mortgage Broker,'' if any; (2) similar
information for the individual loan officer, labeled ``Loan Officer,''
of the creditor and the mortgage broker, if any, who is the primary
contact for the consumer; and (3) the email address and telephone
number of the loan officer. Section 1026.37(k)(1) through (3) further
provides that, in the event the creditor, mortgage broker, or loan
officer has not been assigned an NMLSR ID, the license number or other
unique identifier issued by the applicable jurisdiction or regulating
body with which the creditor or mortgage broker is licensed and/or
registered shall be disclosed, with the abbreviation for the State of
the applicable jurisdiction or regulating body.
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\138\ Section 1026.37(k) also integrates the disclosure of
certain information required under appendix C to Regulation X.
\139\ Under Sec. 1026.37(k)(1), the NMLS ID refers to the
Nationwide Mortgage Licensing System and Registry identification
number.
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Proposed Sec. 1026.37(p)(3) would additionally require similar
disclosures for PACE companies if such information is not disclosed
under the requirements described above. Specifically, proposed Sec.
1026.37(p)(3) would require disclosure of the PACE company's name,
NMLSR ID (labeled ``NMLS ID/License ID''), email address, and telephone
number of the PACE company (labeled ``PACE Company''). Similar to Sec.
1026.37(k)(1) through (3)'s existing requirements with respect to
creditors, mortgage brokers, and loan officers, proposed Sec.
1026.37(p)(3) would provide that, in the event that the PACE company
has not been assigned an NMLSR ID, the creditor must disclose on the
Loan Estimate the license number or other unique identifier issued by
the applicable jurisdiction or regulating body with which the PACE
company is licensed and/or registered, along with the abbreviation for
the State of the applicable jurisdiction or regulatory body stated
before the word ``License'' in the label, if any. These disclosures
would not be required if the PACE company's contact information is
otherwise disclosed pursuant to Sec. 1026.37(k)(1) through (3).
Proposed comment 37(p)(3)-1 would clarify that, for example, if the
PACE company is a mortgage broker as defined in Sec. 1026.36(a)(2),
then the PACE company is disclosed as a mortgage broker and the field
for PACE company may be left blank.
As explained in the 2013 TILA-RESPA Rule, disclosing the name and
NMLSR ID number, if any, for the creditor, mortgage broker, and loan
officers employed by such entities provides consumers with the
information they need to conduct the due diligence necessary to ensure
that these parties are appropriately licensed.\140\ Having this
information may also help consumers assess the risks associated with
services and service providers associated with the
[[Page 30402]]
transaction, which in turn serves the purposes of TILA, RESPA, and the
CFPA and Dodd-Frank Act.\141\ The Bureau believes that similar
considerations apply to the disclosure of the PACE company.
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\140\ 78 FR 79730, 79975-76 (Dec. 31, 2013).
\141\ See id.
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Proposed Sec. 1026.37(p)(3) would reference proposed Sec.
1026.43(b)(14) for the definition of ``PACE company.'' As explained in
the section-by-section analysis of proposed Sec. 1026.43(b)(14),
``PACE company'' means a person, other than a natural person or a
government unit, that administers the program through which a consumer
applies for or obtains PACE financing.
The Bureau seeks comment on proposed Sec. 1026.37(p)(3) generally,
and on whether to require the contact information for the PACE company
under the ``PACE Company'' heading in all cases, instead of under the
``Mortgage Broker'' heading when applicable.
37(p)(4) Assumption
TILA section 128(a)(13) is currently implemented in part by Sec.
1026.37(m)(2), which requires the creditor to disclose a statement of
whether a subsequent purchaser of the property may be permitted to
assume the remaining loan obligation on its original terms, labeled
``Assumption.'' This existing disclosure requirement could be
misleading for PACE transactions. In general, PACE payment obligations
can transfer with the sale of the property, such that the subsequent
property owner would be required to pay the remaining obligation as a
function of property ownership. However, the new homeowners generally
do not technically assume the loans.
Proposed Sec. 1026.37(p)(4) would instead require a statement
reflecting a PACE-specific risk that stakeholders have indicated
sometimes occurs when consumers try to transfer the PACE obligation by
selling the property. The proposed statement would state that, if the
consumer sells the property, the buyer or the buyer's mortgage lender
may require the consumer to pay off the PACE transaction as a condition
of the sale. For clarity, proposed Sec. 1026.37(p)(4) requires the
creditor to label this disclosure ``Selling the Property'' and use of
the term ``PACE loan'' in the disclosure. The Bureau believes the
proposed disclosure would further the purposes of TILA by providing
useful information about key risks of PACE loans, thus avoiding the
uninformed use of credit.
37(p)(5) Late Payment
TILA section 128(a)(10) is currently implemented in part by Sec.
1026.37(m)(4), which requires the creditor to disclose a statement
detailing any charge that may be imposed for a late payment, stated as
a dollar amount or percentage charge of the late payment amount, and
the number of days that a payment must be late to trigger the late
payment fee, labeled ``Late Payment.'' Unlike non-PACE mortgage loans,
however, late payment charges for PACE transactions are typically
determined by taxing authorities as part of the overall property tax
payment. It may be challenging to disclose all late charges that may be
associated with a property tax delinquency succinctly and effectively
on the Loan Estimate, either under existing Sec. 1026.37(m)(4) or
otherwise. The Bureau understands that some States impose several types
of late charges, some of which can change as the delinquency persists
or depend on factors that are unknown at the time of the disclosure.
To avoid potential confusion for consumers and ensure the Loan
Estimate includes useful information about the charges a PACE borrower
might accrue in delinquency, the Bureau proposes to implement TILA
section 128(a)(10) for PACE transactions by requiring the disclosure in
proposed Sec. 1026.37(p)(5) rather than the existing disclosure in
Sec. 1026.37(m)(4). Proposed Sec. 1026.37(p)(5) would require
creditors, to include one or more statements relating to late charges,
as applicable. First, proposed Sec. 1026.37(p)(5)(i) would require a
statement detailing any charge specific to the PACE transaction that
may be imposed for a late payment, stated as a dollar amount or
percentage charge of the late payment amount, and the number of days
that a payment must be late to trigger the late payment fee, labeled
``Late Payment.'' Proposed comment 37(p)(5)-1 would clarify that a
charge is specific to the PACE transaction if the property tax
collector does not impose the same charges for general property tax
delinquencies. Although the Bureau is not aware of PACE transactions
that impose such PACE-specific late charges, if any PACE transactions
do provide for it, disclosure of late payment information would be
incomplete without it. If a PACE transaction does not provide for it,
the disclosure would not be required.
Second, proposed Sec. 1026.37(p)(5)(ii) would require, for any
charge that is not specific to the transaction, either (1) a statement
notifying the consumer that, if the consumer's property tax payment is
late, they may be subject to penalties and late fees established by
their property tax collector, as well as a statement directing the
consumer to contact the tax collector for more information; or (2) a
statement describing any charges that may result from property tax
delinquency that are not specific to the PACE transaction, which may
include dollar amounts or percentage charges and the number of days a
payment must be late to trigger the fee. Proposed Sec.
1026.37(p)(5)(ii) would provide flexibility for the creditor while
ensuring that the Loan Estimate contains useful information about
charges that may result from a property tax delinquency.
The Bureau solicits comment on whether it should require creditors
to disclose specific late-payment information and, if so, what
information to require.
37(p)(6) Servicing
RESPA section 6(a) is currently implemented by Sec. 1026.37(m)(6),
which requires the creditor to disclose a statement of whether the
creditor intends to service the loan or transfer the loan to another
servicer, using the label ``Servicing.'' PACE transactions are not
subject to transfer of servicing rights as far as the Bureau is aware.
Thus, the Bureau is proposing to implement RESPA section 6(a) for PACE
transactions by requiring a servicing-related disclosure that would be
more valuable for PACE borrowers.
Proposed Sec. 1026.37(p)(6) would require the PACE creditor to
provide a statement that the consumer will pay the PACE transaction,
using the term ``PACE loan,'' as part of the consumer's property tax
payment. Proposed Sec. 1026.37(p)(6) would also require a statement
directing the consumer, if the consumer has a mortgage escrow account
that includes the consumer's property tax payment, to contact the
consumer's mortgage servicer for what the consumer will owe and when.
Proposed Sec. 1026.37(p)(6) would preserve the label ``Servicing'' for
the disclosure. The Bureau believes that proposed Sec. 1026.37(p)(6)
would promote the informed use of credit.
37(p)(7) Exceptions
37(p)(7)(i) Unit-Period
Because PACE transaction payments are repaid with the property
taxes once or twice a year, the applicable unit-period would typically
be annual or semi-annual. The proposed model form for PACE under
proposed appendix H-24(H) would use ``annual'' in the tables disclosing
loan terms and projected payments. Proposed Sec. 1026.37(p)(7)(i)
[[Page 30403]]
would provide that, wherever the proposed form uses ``annual'' to
describe the frequency of any payments or the applicable unit-period,
the creditor shall use the appropriate term to reflect the
transaction's terms, such as semi-annual payments. Proposed Sec.
1026.37(p)(7)(i) would be similar to existing Sec. 1026.37(o)(5),
which permits unit-period changes wherever the Loan Estimate or Sec.
1026.37 uses ``monthly'' to describe the frequency of any payments or
uses ``month'' to describe the applicable unit-period.\142\
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\142\ Comment 37(o)(5)-4 explains that, for purposes of Sec.
1026.37, the term ``unit-period'' has the same meaning as in
appendix J to Regulation Z.
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37(p)(7)(ii) PACE Nomenclature
The Bureau understands that PACE companies may market PACE loans to
consumers using brand names that do not include the term ``Property
Assessed Clean Energy'' or the acronym ``PACE.'' To improve the Loan
Estimate's utility and understandability, proposed Sec.
1026.37(p)(7)(ii) would clarify that, wherever Sec. 1026.37 requires
disclosure of the term ``PACE'' or the proposed model form in appendix
H-24(H) uses the term ``PACE,'' the creditor may substitute the name of
a specific PACE financing program that will be recognizable to the
consumer. Proposed comment 37(p)(7)(ii)-1 would provide an example of
how a creditor may substitute the name of a specific PACE financing
program that is recognizable to the consumer as PACE on the form.
Section 1026.38 Content of Disclosures for Certain Mortgage
Transactions (Closing Disclosure)
38(u) PACE Transactions
Section 1026.38 implements the TILA-RESPA integrated disclosure
requirements by setting forth the requirements for the Closing
Disclosure. Proposed Sec. 1026.38(u)(1)-(9) would set forth
modifications to the Closing Disclosure requirements under Sec.
1026.38 for ``PACE transactions,'' as defined under proposed Sec.
1026.43(b)(15), to account for the unique nature of PACE.
38(u)(1) Transaction Information
TILA section 128(a)(1) is currently implemented in part by Sec.
1026.38(a)(4), which requires disclosure of identifying information for
the borrower, the seller, where applicable, and the lender,\143\ under
the heading ``Transaction Information.'' \144\ Proposed Sec.
1026.38(u)(1) would additionally require the Closing Disclosure for a
PACE transaction to include the name of any PACE company involved in
the transaction, labeled ``PACE Company.'' It would refer to proposed
Sec. 1026.43(b)(14) for the definition of ``PACE company'' for these
purposes: a person, other than a natural person or a government unit,
that administers the program through which a consumer applies for or
obtains PACE financing.
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\143\ For purposes of Sec. 1026.38(a)(4)(iii), the lender is
defined as ``the name of the creditor making the disclosure.'' In
relevant part, the ``creditor'' is a ``person who regularly extends
consumer credit that is subject to a finance charge or is payable by
written agreement in more than four installments (not including a
down payment), and to whom the obligation is initially payable.''
See Sec. 1026.2(a)(17). As noted in the section-by-section analysis
of proposed Sec. 1026.2(a)(14), government sponsors are typically
the creditors for PACE transactions.
\144\ Section 1026.38(a)(4) also integrates the disclosure of
certain information required under appendix A to Regulation X.
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As the Bureau explained in the 2013 TILA-RESPA Rule, disclosing the
identifying information for the borrower, seller, and lender is
intended to effectuate statutory purposes by promoting the informed use
of credit.\145\ The Bureau believes disclosing the PACE company's
identifying information would do the same.\146\
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\145\ 78 FR 79730, 80002-03 (Dec. 31, 2013).
\146\ See part II.A.1 for discussion of the central role PACE
companies often play in PACE transactions.
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38(u)(2) Projected Payments
TILA section 128(a)(6), (a)(16), (b)(2)(C), and (b)(4) is currently
implemented in part by Sec. 1026.38(c). Under Sec. 1026.38(c)(1), the
Closing Disclosure must disclose the information in the projected
payments table required on the Loan Estimate under Sec. 1026.37(c)(1)-
(4),\147\ with certain exceptions. These disclosures generally include
the total periodic payment, as well as an itemization of the periodic
payment's constituent parts. Additionally, Sec. 1026.38(c)(2) requires
the projected payments table on the Closing Disclosure to include a
statement referring the consumer to a detailed disclosure of escrow
account information located elsewhere on the form.
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\147\ Section 1026.37(c)(1)-(3) requires information about the
initial periodic payment or range of payments; and Sec.
1026.37(c)(4) requires information about estimated taxes, insurance,
and assessments. The Bureau is proposing changes to these disclosure
requirements for PACE transactions as described in the section-by-
section analysis of proposed Sec. 1026.37(p)(1) and (2).
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Proposed Sec. 1026.38(u)(2) would retain the existing structure of
the projected payments table but would (1) eliminate the field for
escrow account information that is part of the periodic payment
disclosure currently required under Sec. 1026.37(c)(2)(iii); (2)
require the creditor to disclose whether the amount disclosed for
estimated taxes, insurance, and assessments includes payments for the
PACE transaction and, separately, whether it includes the non-PACE
portions of the property tax payment, with corresponding labels for
both; and (3) require a statement that the PACE transaction will be
part of the property tax payment and a statement directing the
consumer, if they have a mortgage with an escrow account, to contact
their mortgage servicer for what they will owe and when. Additionally,
proposed Sec. 1026.38(u)(2) would require the creditor to omit the
existing reference to detailed escrow account information located
elsewhere on the form. With these proposed amendments, the projected
payments table for the Closing Disclosure in a PACE transaction would
mirror that on the Loan Estimate as amended under proposed Sec.
1026.37(p)(1) and (2). The Bureau is proposing these changes for the
same reasons as set forth in the section-by-section analyses of
proposed Sec. 1026.37(p)(1) and (2) above.
38(u)(3) Assumption
TILA section 128(a)(13) is currently implemented in part by Sec.
1026.38(l)(1), which requires the information described in Sec.
1026.37(m)(2) to be provided on the Closing Disclosure under the
subheading ``Assumption.'' Section 1026.37(m)(2) requires the creditor
to disclose a statement of whether a subsequent purchaser of the
property may be permitted to assume the remaining loan obligation on
its original terms. As discussed in the section-by-section analysis of
proposed Sec. 1026.37(p)(4), the Bureau understands that this
disclosure would not be as relevant for PACE transactions, since
subsequent property owners typically would not assume PACE obligations.
For the reasons discussed in the section-by-section analysis of
proposed Sec. 1026.37(p)(4), proposed Sec. 1026.38(u)(3) would thus
implement TILA section 128(a)(13) for PACE transactions by requiring
the creditor to use the subheading ``Selling the Property'' and to
disclose the information required by Sec. 1026.37(p)(4) in place of
the information required under Sec. 1026.38(l)(1).
38(u)(4) Late Payment
TILA section 128(a)(10) is currently implemented in part by Sec.
1026.38(l)(3), which requires the creditor to disclose on the Closing
Disclosure the information described in Sec. 1026.37(m)(4) under the
subheading ``Late Payment.'' It requires a statement detailing any
charge that may be
[[Page 30404]]
imposed for a late payment, stated as a dollar amount or percentage
charge of the late payment amount, and the number of days that a
payment must be late to trigger the late payment fee, labeled ``Late
Payment.'' Proposed Sec. 1026.38(u)(4) would make changes relating to
the disclosure of late payment charges on the Closing Disclosure for
PACE transactions to parallel the changes that would be made in
proposed Sec. 1026.37(p)(5) with respect to the Loan Estimate. The
Bureau proposes these changes for the same reasons discussed in the
section-by-section analysis of proposed Sec. 1026.37(p)(5).
38(u)(5) Partial Payment Policy
TILA section 129C(h) is currently implemented by Sec.
1026.38(l)(5), which requires certain disclosures regarding the
lender's acceptance of partial payments under the subheading ``Partial
Payments.'' Section 1026.38(l)(5)(i) through (iii) generally requires
disclosure of whether the creditor accepts partial payments and, if so,
whether the creditor may apply the partial payments or hold them in a
separate account. Section 1026.38(l)(5)(iv) requires a statement that,
if the loan is sold, the new lender may have a different policy.
For PACE transactions, however, the current partial-payment
disclosure may not accurately and effectively reflect partial-payment
options for PACE transactions. In general, partial payment policies for
PACE transactions are typically set by the taxing authority and not by
the creditor. The tax collector may offer payment options not described
accurately in the disclosure required under Sec. 1026.38(l)(5), and
any payment options would likely apply to the full property tax
payment, not only to the PACE payment specifically. Further, if a PACE
borrower pays their property taxes into an escrow account on a pre-
existing mortgage loan, their PACE loans may be subject to a partial
payment policy associated with the pre-existing mortgage loan, which
the disclosure of partial-payment policies associated with the creditor
for the PACE transaction would not necessarily reflect.
Proposed Sec. 1026.38(u)(5) would avoid potential inaccuracies
that might arise under existing requirements and is intended to provide
the consumer with useful information as it relates to a PACE
transaction. It would require that, in lieu of the information required
by Sec. 1026.38(l)(5), the creditor shall disclose a statement
directing the consumer to contact the mortgage servicer about the
partial payment policy for the account if the consumer has a mortgage
escrow account for property taxes, and to contact the tax collector
about the tax collector's partial payment policy if the consumer pays
property taxes directly to the tax authority.
38(u)(6) Escrow Account
TILA section 129D(h) and 129D(j) is currently implemented in part
by Sec. 1026.38(l)(7), which requires a statement of whether an escrow
account will be established for the transaction, as well as detailed
information about the effects of having or not having an escrow
account, under the subheading ``Escrow Account.'' For similar reasons
as discussed in the section-by-section analysis for proposed Sec.
1026.37(p)(1) with respect to exempting escrow-related information from
the projected payments table on the Loan Estimate for PACE
transactions, and because certain elements of the disclosure under
Sec. 1026.38(l)(7) could be inaccurate for some PACE borrowers,
proposed Sec. 1026.38(u)(6) would exempt creditors in PACE
transactions from the requirement to disclose on the Closing Disclosure
the information otherwise required under Sec. 1026.38(l)(7).
38(u)(7) Liability After Foreclosure
TILA section 129C(g)(2) and 129C(g)(3) is currently implemented in
part by Sec. 1026.38(p)(3), which requires the creditor to disclose
certain information about the consumer's potential liability after
foreclosure. It requires, under the subheading ``Liability after
Foreclosure,'' a brief statement of whether, and the conditions under
which, the consumer may remain responsible for any deficiency after
foreclosure under applicable State law, a brief statement that certain
protections may be lost if the consumer refinances or incurs additional
debt on the property, and a statement that the consumer should consult
an attorney for additional information.
In general, this disclosure provides useful information for
consumers who may have State-law protections against deficiency.
However, it may not be applicable in the same way, or at all, with
respect to PACE transactions due to their unique nature. Thus, proposed
Sec. 1026.38(u)(7) would provide that the creditor shall not disclose
the liability-after-foreclosure disclosure described in Sec.
1026.38(p)(3).\148\ It would provide that, if the consumer may be
responsible for any deficiency after foreclosure or tax sale under
applicable State law, the creditor shall instead disclose a brief
statement that the consumer may have such responsibility, a description
of any applicable protections provided under State anti-deficiency
laws, and a statement that the consumer should consult an attorney for
additional information. This information would be under the subheading
``Liability after Foreclosure or Tax Sale.'' The Bureau believes this
information would be more useful for PACE borrowers than the existing
disclosure required under Sec. 1026.38(p)(3), thus helping to avoid
the uninformed use of credit.
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\148\ As described in Sec. 1026.37(m)(7), if the purpose of the
credit transaction is to refinance an extension of credit as
described in Sec. 1026.37(a)(9)(ii), the Loan Estimate would be
required to disclose information about the consumer's liability
after foreclosure. The Bureau believes that this disclosure is
unlikely to be required on a Loan Estimate for a PACE loan.
Therefore the proposal does not currently address such language on
the Loan Estimate.
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38(u)(8) Contact Information
TILA section 128(a)(1) is currently implemented in part by Sec.
1026.38(r), which generally requires certain information disclosed in a
separate table, under the heading ``Contact Information.'' \149\ For
transactions without a seller, Sec. 1026.38(r) requires specified
contact and licensing information for each creditor, mortgage broker,
and settlement agent participating in the transaction. Proposed Sec.
1026.38(u)(8) would require the same contact and licensing information
for the PACE company if not otherwise disclosed pursuant to Sec.
1026.38(r). As discussed in the section-by-section analysis of proposed
Sec. 1026.37(p)(3) and proposed comment 37(p)(3)-1,\150\ the PACE
company may be a mortgage broker, in which case its information would
be required under the existing requirements in Sec. 1026.38(r);
proposed Sec. 1026.38(u)(8) would not require the disclosure of the
PACE company a second time. As explained in the section-by-section
analysis of proposed Sec. 1026.43(b)(14), given the important role
that PACE companies play in PACE transactions, the Bureau believes that
disclosing their contact information could be useful to consumers and
would facilitate the informed use of credit.
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\149\ Section 1026.38(r) also integrates the disclosure of
certain information required under appendix A and appendix C to
Regulation X.
\150\ Proposed comment 37(p)(3)-1 explains that a PACE company
may be a mortgage broker as defined in Sec. 1026.36(a)(2).
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38(u)(9) Exceptions
38(u)(9)(i) Unit-Period
To permit creditors the flexibility to disclose the correct unit-
period for each PACE transaction, proposed
[[Page 30405]]
Sec. 1026.38(u)(9)(i) would provide that, wherever proposed form H-
25(K) of appendix H uses ``annual'' to describe the frequency of any
payments or the applicable unit-period, the creditor shall use the
appropriate term to reflect the transaction's terms, such semi-annual
payments. The Closing Disclosure changes in proposed Sec.
1026.38(u)(9)(i) parallel the Loan Estimate changes in proposed Sec.
1026.37(p)(7)(i), and the Bureau is proposing proposed Sec.
1026.38(u)(9)(i) for the same reasons stated in the section-by-section
analysis of proposed Sec. 1026.37(p)(7)(i). Proposed Sec.
1026.38(u)(9)(i) is also similar to existing Sec. 1026.38(t)(5)(i),
which permits changes wherever the Closing Disclosure or Sec. 1026.38
uses ``monthly'' to describe the frequency of any payments or uses
``month'' to describe the applicable unit-period.'' \151\
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\151\ Comment 38(t)(5)-3 explains that, for purposes of Sec.
1026.38, the term ``unit-period'' has the same meaning as in
appendix J to Regulation Z.
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38(u)(9)(ii) PACE Nomenclature
The Bureau understands that PACE companies may market to consumers
using brand names that do not include the term ``Property Assessed
Clean Energy'' or the acronym ``PACE.'' To ensure that consumers
understand Closing Disclosures provided for PACE transactions, proposed
Sec. 1026.38(u)(9)(ii) would clarify that, wherever Sec. 1026.38
requires disclosure of the term ``PACE'' or the proposed model form in
appendix H-25(K) uses the term ``PACE,'' the creditor may substitute
the name of a specific PACE financing program that will be recognizable
to the consumer. Proposed comment 38(u)(9)(ii)-1 would provide an
example of how a creditor may substitute the name of a specific PACE
financing program that is recognizable to the consumer as PACE on the
form.
1026.41 Periodic Statement
41(e) Exemptions
41(e)(7) PACE Transactions
TILA section 128(f) generally requires periodic statements for
residential mortgage loans.\152\ Section 1026.41 implements this
requirement by requiring creditors, servicers, or assignees, as
applicable, to provide a statement for each billing cycle that contains
information such as the amount due, payment breakdown, transaction
activity, contact information, and delinquency information.\153\
Proposed Sec. 1026.41(e)(7) would exempt PACE transactions, as defined
in proposed Sec. 1026.43(b)(15), from the periodic statement
requirement to reduce consumer confusion while avoiding undue burden
for PACE creditors.
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\152\ 15 U.S.C. 1638(f).
\153\ For purposes of Sec. 1026.41, the term ``servicer''
includes the creditor, assignee, or servicer of the loan, as
applicable. Sec. 1026.41(a)(2).
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Several unique characteristics of PACE financing support this
proposed exemption. First, PACE payments and delinquency charges are
typically integrated with broader property tax payments and delinquency
charges. Consumers may be confused about whether fields in the periodic
statement include details of the PACE financing, property taxes, or
both, or why the figures do not align with those in their property tax
statements. Second, the annual or semi-annual payment schedule for PACE
financing means that information on the periodic statement about the
next expected payment would come many months before the payment was
due, given timing requirements for periodic statements under Regulation
Z, which may limit its utility for consumers.\154\ Finally, requiring a
periodic statement could impose a significant burden on the party
providing the statement given that local taxing authorities would hold
needed information such as whether and when payments were made or
delinquency charges applied.
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\154\ See 12 CFR 1026.41(b).
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Even with the proposed exemption, consumers would still receive
information regarding payments and delinquency from their property tax
collector and, if they have a mortgage with an escrow, from their
mortgage servicer. Consumers could also obtain information about the
PACE loan by requesting a payoff statement pursuant to Sec.
1026.36(c)(3).
The Bureau seeks comment on proposed Sec. 1026.41(e)(7) and
whether a periodic statement requirement would benefit PACE consumers.
Specifically, the Bureau seeks comment on the types of disclosures
related to PACE financing that consumers currently receive from PACE
creditors, property tax collectors, and others. The Bureau also seeks
comment on whether an annual or semi-annual disclosure like the
periodic statement would be useful for PACE consumers and, if so, what
information it should contain.
The Bureau also requests comment on whether there are any other
mortgage servicing requirements in Regulation Z or X beyond the
periodic statement requirement that the Bureau should address in the
final rule. Some servicing requirements, such as the requirements to
provide periodic statements and to provide payoff statements, apply not
just to servicers but also to creditors and assignees.\155\ Both
Regulation Z and Regulation X also impose certain servicing
requirements that apply only to ``servicers'' as defined in Regulation
X, 12 CFR 1024.2(b).\156\ Regulation X generally defines servicer as
``a person responsible for the servicing of a federally related
mortgage loan'' and servicing as receiving any scheduled periodic
payments from a borrower pursuant to the loan's terms and making
certain payments to the loan's owner or other third parties.\157\ The
definition of ``person'' in RESPA \158\ has been interpreted not to
apply to government entities.\159\ This proposed rule does not address
any servicing requirements that apply only to ``servicers'' as defined
in Regulation X because there does not appear to be a ``servicer'' in
typical PACE transactions. Pursuant to the terms of PACE transactions
that the Bureau has reviewed, the consumer's local government taxing
authority typically receives the borrower's regular PACE payments as
part of the consumer's larger property tax payment.
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\155\ See Sec. Sec. 1026.41(a)(2); 1026.36(c)(3).
\156\ See, e.g., 12 CFR 1024.41 (loss mitigation); 1026.36(c)(1)
and (2) (payment processing and pyramiding of late fees).
\157\ 12 CFR 1024.2(b) (emphasis added); see also 12 U.S.C.
2605(i)(2).
\158\ See 12 U.S.C. 2602(5).
\159\ See, e.g., New Jersey Title Ins. Co. v. Cecere, 2020 WL
7137873, at *10 (D.N.J. 2020); United States v. Davis, 2018 WL
6694826, at *4 (C.D. Ill. 2018); Rodriguez v. Bank of Am., 2017 WL
3086369, at *5 (D.N.J. 2017). Other entities involved in PACE
transactions, such as the PACE company and home improvement
contractor, would fall within RESPA's definition of ``person'' but
do not appear to meet the Regulation X definition of ``servicer'' in
typical PACE transactions. For federally related mortgage loans,
defined in RESPA section 3(1), 12 U.S.C. 2602(1), and Regulation X
Sec. 1024.2(b), RESPA covered persons are generally subject to
RESPA's provisions including the anti-kickback provisions in 12
U.S.C. 2607.
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The Bureau proposes to use its authority under TILA sections 105(a)
and (f) and Dodd-Frank Act section 1405(b) to exempt PACE financing
from the periodic statement requirement. The Bureau preliminarily
concludes that this exemption is necessary and proper under TILA
section 105(a). Furthermore, the Bureau preliminarily concludes, for
the reasons stated above, that disclosure of the information specified
in TILA section 128(f)(1) would not provide a meaningful benefit to
PACE consumers, considering the factors in TILA section 105(f). The
Bureau preliminarily believes that this conclusion would be true
regardless of the loan amount, borrower status (including related
[[Page 30406]]
financial arrangements, financial sophistication, and the importance to
the borrower of the loan), or whether the loan is secured by the
consumer's principal residence. Consequently, the proposed exemption
appears to further the consumer protection objectives of the statute,
and helps to avoid complicating, hindering, or making more expensive
the credit process. The Bureau also believes that the proposed
modification of the requirements in TILA section 128(f) to exempt PACE
financing would improve consumer awareness and understanding and is in
the interest of consumers and in the public interest, consistent with
Dodd-Frank Act section 1405(b).
1026.43 Minimum Standards for Transactions Secured by a Dwelling
Section 1026.43 implements the requirement in TILA section 129C(a)
that creditors must make a reasonable, good faith determination of a
consumer's ability to repay a residential mortgage loan and defines the
loans eligible to be ``qualified mortgages,'' which obtain certain
presumptions of compliance pursuant to TILA section 129C(b). The Bureau
is proposing a number of amendments to Sec. 1026.43 and its commentary
to account for the unique nature of PACE. Specifically, this proposal
would (1) define ``PACE company'' and ``PACE transaction'' for purposes
of Sec. 1026.43; (2) provide an additional factor a creditor must
consider when making a repayment ability determination for PACE
transactions extended to consumers who pay their property taxes through
an escrow account; (3) provide that a PACE transaction is not a QM as
defined in Sec. 1026.43; and (4) extend the requirements of Sec.
1026.43 and the liability provisions of section 130 of TILA \160\ to
any PACE company that is substantially involved in making the credit
decision. This proposal would also amend the commentary to this section
to explain that a creditor originating a PACE transaction knows or has
reason to know of any simultaneous loans that are PACE transactions if
the transactions are included in a relevant database or registry of
PACE transactions. The Bureau further proposes to amend the commentary
to make clear that pre-existing PACE transactions are considered a
property tax for purposes of considering mortgage-related obligations
under Sec. 1026.43(b)(8) and to clarify the verification requirements
for existing PACE transactions. The CFPB seeks comment on these
proposed amendments.
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\160\ 15 U.S.C. 1640.
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Background on the Existing Ability-to-Repay Requirements for Mortgages
The Dodd-Frank Act amended TILA to establish, among other things,
ATR requirements in connection with the origination of most residential
mortgage loans.\161\ As amended, TILA prohibits a creditor from making
a residential mortgage loan unless the creditor makes a reasonable and
good faith determination based on verified and documented information
that, at the time the loan is consummated, the consumer has a
reasonable ability to repay the loan according to its terms, and all
applicable taxes, insurance (including mortgage guarantee insurance),
and assessments.\162\
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\161\ Dodd-Frank Act sections 1411-12, 1414, 124 Stat. 2142-48,
2149; 15 U.S.C. 1639c.
\162\ 15 U.S.C. 1639c(a)(1). TILA section 103 defines
``residential mortgage loan'' to mean, with some exceptions
including open-end credit plans, ``any consumer credit transaction
that is secured by a mortgage, deed of trust, or other equivalent
consensual security interest on a dwelling or on residential real
property that includes a dwelling.'' 15 U.S.C. 1602(dd)(5). TILA
section 129C also exempts certain residential mortgage loans from
the ATR requirements. See, e.g., 15 U.S.C. 1639c(a)(8) (exempting
reverse mortgages and temporary or bridge loans with a term of 12
months or less).
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TILA identifies the factors a creditor must consider in making a
reasonable and good faith assessment of a consumer's ability to repay.
These factors are the consumer's credit history, current and expected
income, current obligations, debt-to-income (DTI) ratio or residual
income after paying non-mortgage debt and mortgage-related obligations,
employment status, and other financial resources other than equity in
the dwelling or real property that secures repayment of the loan.\163\
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\163\ 15 U.S.C. 1639c(a)(3).
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In January 2013, the Bureau issued a final rule amending Regulation
Z to implement TILA's ATR requirements (January 2013 Final Rule).\164\
This proposal refers to the January 2013 Final Rule and later
amendments to it collectively as the ATR/QM Rule. The ATR/QM Rule
implements the statutory criteria listed above in the eight
underwriting factors a creditor must consider in making a repayment
ability determination set out in Sec. 1026.43(c)(2).\165\ These
factors are (1) the consumer's current or reasonably expected income or
assets (other than the value of the dwelling and attached real property
that secures the loan) that the consumer will rely on to repay the
loan; (2) the consumer's current employment status (if a creditor
relies on employment income when assessing the consumer's ability to
repay); (3) the monthly mortgage payment for the loan that the creditor
is underwriting; (4) the monthly payment on any simultaneous loans
secured by the same dwelling; (5) monthly mortgage-related obligations;
(6) the consumer's current debts, alimony, and child-support
obligations; (7) the consumer's monthly DTI ratio or residual income;
and (8) the consumer's credit history.\166\
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\164\ 78 FR 6408 (Jan. 30, 2013).
\165\ See id. at 6463.
\166\ 12 CFR 1026.43(c)(2).
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The ATR/QM Rule generally requires a creditor to verify the
information it relies on when determining a consumer's repayment
ability using reasonably reliable third-party records.\167\ For
example, to verify the consumer's income and assets, a creditor may use
a tax-return transcript issued by the Internal Revenue Service or a
variety of other records, such as filed tax returns, IRS Form W-2s,
payroll statements, financial institution records, or other third-party
documents.\168\
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\167\ 12 CFR 1026.43(c)(3)-(4).
\168\ 12 CFR 1026.43(c)(4). TILA section 129C(a)(4) provides
that, in order to safeguard against fraudulent reporting, any
consideration of a consumer's income history must include the
verification of income using either (1) IRS transcripts of tax
returns; or (2) an alternative method that quickly and effectively
verifies income documentation by a third-party, subject to rules
prescribed by the Bureau. In the January 2013 Final Rule, the Bureau
implemented TILA section 129C(a)(4)(B) by adjusting the requirement
to (1) require the creditor to use reasonably reliable third-party
records, consistent with TILA section 129C(a)(4), rather than the
``quickly and effectively'' standard of TILA section 129C(a)(4)(B);
and (2) provide examples of reasonably reliable records that a
creditor can use to efficiently verify income, as well as assets.
See 78 FR 6408, 6474 (Jan. 30, 2013).
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The ATR/QM Rule also defines categories of loans, called QMs, that
are presumed to comply with the ATR requirement.\169\ Under the ATR/QM
Rule, a creditor that makes a QM loan is deemed to have complied with
ATR requirements presumptively or conclusively, which generally depends
on whether the loan is ``higher priced.'' \170\ The ATR/QM Rule defines
several categories of QM loans. As
[[Page 30407]]
relevant here, those categories include General QM, Small Creditor QM,
Seasoned QM, and Balloon-Payment QM loans.\171\
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\169\ 15 U.S.C. 1639c(b)(1).
\170\ The ATR/QM Rule generally defines a ``higher-priced'' loan
to mean a first-lien mortgage with an APR that exceeded APOR for a
comparable transaction as of the date the interest rate was set by
1.5 or more percentage points; or a subordinate-lien mortgage with
an APR that exceeded APOR for a comparable transaction as of the
date the interest rate was set by 3.5 or more percentage points. 12
CFR 1026.43(b)(4). A creditor that makes a QM loan that is not
``higher priced'' is entitled to a conclusive presumption that it
has complied with the ATR/QM Rule--i.e., the creditor receives a
safe harbor from liability. 12 CFR 1026.43(e)(1)(i). A creditor that
makes a loan that meets the standards for a QM loan but is ``higher
priced'' is entitled to a rebuttable presumption that it has
complied with the ATR/QM Rule. 12 CFR 1026.43(e)(1)(ii).
\171\ 12 CFR 1026.43(c), (e), (f). TILA section
129C(b)(3)(B)(ii) directs HUD, the Department of Veterans Affairs
(VA), the Department of Agriculture (USDA), and the Rural Housing
Service (RHS) to prescribe rules defining the types of loans they
insure, guarantee, or administer, as the case may be, that are QMs.
Section 1026.43(e)(4) provides that, notwithstanding paragraph Sec.
1026.43.43(e)(2), a QM is a covered transaction that is defined as a
QM by HUD under 24 CFR 201.7 and 24 CFR 203.19, VA under 38 CFR
36.4300 and 38 CFR 36.4500, or USDA under 7 CFR 3555.109. In
addition, section 101 of the EGRRCPA amended TILA to provide
protection from liability for insured depository institutions and
insured credit unions with assets below $10 billion with respect to
certain ATR requirements regarding residential mortgage loans. The
Bureau is not aware of any PACE creditors that would qualify for
protection under these provisions, and these provisions are not
addressed in this proposed rule.
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QM Definitions
One category of QM loans defined by the ATR/QM Rule consists of
``General QM loans.'' \172\ The January 2013 Final Rule provided that a
loan was a General QM loan if:
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\172\ Another temporary category of QMs defined by the ATR/QM
Rule, Temporary GSE QMs, expired on October 1, 2022.
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<bullet> The loan did not have negative-amortization, interest-
only, or balloon-payment features, a term that exceeds 30 years, or
points and fees that exceed specified limits; \173\
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\173\ 12 CFR 1026.43(e)(2)(i)-(iii).
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<bullet> The creditor underwrote the loan based on a fully
amortizing schedule using the maximum rate permitted during the first
five years; \174\
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\174\ 12 CFR 1026.43(e)(2)(iv).
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<bullet> The creditor considered and verified the consumer's income
and debt obligations in accordance with appendix Q; \175\ and
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\175\ 12 CFR 1026.43(e)(2)(v).
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<bullet> The consumer's DTI ratio was no more than 43 percent,
determined in accordance with appendix Q.\176\
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\176\ 12 CFR 1026.43(e)(2)(vi). Appendix Q contained standards
for calculating and verifying debt and income for purposes of
determining whether a mortgage satisfied the 43 percent DTI limit
for General QM loans. The standards in appendix Q were adapted from
guidelines maintained by the Federal Housing Administration (FHA) of
HUD when the January 2013 Final Rule was issued. 78 FR 6408, 6527-28
(Jan. 30, 2013) (noting that appendix Q incorporates, with certain
modifications, the definitions and standards in HUD Handbook 4155.1,
Mortgage Credit Analysis for Mortgage Insurance on One-to-Four-Unit
Mortgage Loans).
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The Bureau amended the General QM definition on December 10, 2020
(General QM Final Rule).\177\ The General QM Final Rule amended
Regulation Z to remove the General QM loan definition's DTI limit (and
appendix Q) and replace it with limits based on the loan's pricing. For
non-PACE mortgages, loan pricing in general is strongly correlated with
early delinquency rates, which the General QM Final Rule used as a
proxy for repayment ability.\178\ The Bureau concluded that a
comparison of a loan's APR to the APOR for a comparable transaction is
a more holistic and flexible indicator of a consumer's ability to repay
than DTI alone.\179\ The Bureau further concluded that the bright-line
pricing thresholds established in the General QM Final Rule strike an
appropriate balance between ensuring consumers' ability to repay and
ensuring access to responsible, affordable mortgage credit.\180\ Under
the amended rule, a loan meets the General QM loan definition only if
the APR exceeds the APOR for a comparable transaction by less than 2.25
percentage points, with higher thresholds for loans with smaller loan
amounts, for certain manufactured housing loans, and for subordinate-
lien transactions.\181\
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\177\ 85 FR 86308 (Dec. 29, 2020).
\178\ See part IX.A for a discussion of why these dynamics
differ for PACE transactions.
\179\ 85 FR 86308, 86317 (Dec. 29, 2020).
\180\ Id.
\181\ Id. at 86367.
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In May 2013, the Bureau amended the ATR/QM Rule to add, among other
things, a new QM category for covered transactions that are originated
by creditors that meet certain size criteria and that satisfy certain
other requirements (the Small Creditor QM).\182\ Those requirements
include many that apply to General QMs, with some exceptions.
Specifically, Small Creditor QMs are not subject to the pricing
threshold for QM status, and the threshold for determining whether
Small Creditor QMs are higher-priced covered transactions, and thus
qualify for the QM safe harbor or rebuttable presumption, is higher
than the threshold for General QMs.\183\ In addition, Small Creditor
QMs must be held in portfolio for three years (a requirement that does
not apply to General QMs).\184\
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\182\ 78 FR 35430 (June 12, 2013). The Bureau made several
amendments to the Small Creditor QM provisions in 2015. 80 FR 59944
(Oct. 2, 2015).
\183\ QMs are generally considered to be higher priced if they
have an APR that exceeds the applicable APOR by at least 1.5
percentage points for first-lien loans and at least 3.5 percentage
points for subordinate-lien loans. In contrast, Small Creditor QMs
are only considered higher priced if the APR exceeds APOR by at
least 3.5 percentage points for either a first- or subordinate-lien
loan. 12 CFR 1026.43(b)(4). The same is true for another QM
definition that permits certain creditors operating in rural or
underserved areas to originate QMs with a balloon payment provided
that the loans meet certain other criteria (Balloon Payment QM
loans). QMs that are higher priced enjoy only a rebuttable
presumption of compliance with the ATR requirements, whereas QMs
that are not higher priced enjoy a safe harbor.
\184\ 12 CFR 1026.43(e)(5)(ii).
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In December 2020, the Bureau created a new category of QMs
(Seasoned QMs) for first-lien, fixed-rate covered transactions that
have met certain performance requirements, are held in portfolio by the
originating creditor or first purchaser for a 36-month period, comply
with general restrictions on product features and points and fees, and
meet certain underwriting requirements.\185\ To qualify, a transaction
generally must have no more than two delinquencies of 30 or more days
and no delinquencies of 60 or more days at the end of the seasoning
period of 36 months beginning on the date on which the first periodic
payment is due.\186\ The Bureau found that if combined with certain
other factors, successful loan performance over a number of years
indicates sufficient certainty to presume that loans were originated in
compliance with the ATR/QM Rule.\187\
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\185\ 85 FR 86402 (Dec. 29, 2020).
\186\ 12 CFR 1026.43(e)(7)(ii).
\187\ 85 FR 86402, 86415 (Dec. 29, 2020).
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TILA section 129C(b)(2)(E)(iv)(I) granted the Bureau the discretion
to create a special provision allowing origination of balloon-payment
QMs, which it implemented in the January 2013 Final Rule.\188\ As
directed by Congress, the Bureau considered the issues facing small
creditors in rural and underserved areas and determined that it was
appropriate to exercise its discretion under TILA to reduce burdens on
certain small creditors that operate predominantly in rural or
underserved areas. Accordingly, the Bureau established a special
provision allowing these creditors to originate balloon-payment QMs,
even though balloon-payment mortgages are otherwise precluded from
being considered QMs.\189\
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\188\ 78 FR 6408, 6538 (Jan. 30, 2013).
\189\ Id. The Bureau further amended the Regulation Z
requirements for balloon-payment QMs in response to the HELP Rural
Communities Act in October 2015. 81 FR 16074 (Mar. 25, 2016); see
Public Law 114-94, 129 Stat. 1312 (2015).
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43(b) Definitions
Section 1026.43(b) sets forth certain definitions for purposes
Sec. 1026.43. The Bureau is proposing to amend the commentary to Sec.
1026.43(b)(8), regarding the existing definition of mortgage-related
obligations, to clarify the treatment of payments for pre-existing PACE
transactions. The Bureau is also proposing two new definitions in Sec.
1026.43(b)(14) and (b)(15). Under the proposal, Sec. 1026.43(b)(14)
would define
[[Page 30408]]
PACE company, and Sec. 1026.43(b)(15) would define PACE
transaction.\190\
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\190\ If the Bureau finalizes the new definitions in proposed
Sec. 1026.43(b)(14) and (b)(15), the final rule would add the new
definitions into Sec. 1026.43(b) where they belong alphabetically
in that paragraph and would renumber existing definitions as needed
and make conforming technical adjustments to cross-references to
those definitions to reflect the renumbering changes.
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43(b)(8) Mortgage-Related Obligations
Section 1026.43(b)(8) defines ``mortgage-related obligations'' to
include property taxes, among other things. In turn, Sec.
1026.43(c)(2)(v) requires a creditor to consider the consumer's monthly
payment for mortgage-related obligations in making the repayment
ability determination required under Sec. 1026.43(c)(1). The Bureau
proposes to amend comment 43(b)(8)-2 to explicitly state that payments
for pre-existing PACE transactions are considered property taxes for
purposes of Sec. 1026.43(b)(8). The intent of this proposed amendment
is to ensure that it is clear that a creditor must consider payments
for pre-existing PACE transactions as mortgage-related obligations.
The proposed amendment to comment 43(b)(8)-2 is consistent with the
existing rule but adds an explicit reference to PACE transactions for
clarity. Comment 43(b)(8)-2 already provides that all obligations that
are related to the ownership or use of real property and paid to a
taxing authority, whether on a monthly, quarterly, annual, or other
basis, are property taxes for purposes of Sec. 1026.43(b)(8). PACE
transactions are related to the ownership or use of real property and
are paid to a taxing authority. In addition, the existing comment
provides as an example that taxes, assessments, and surcharges imposed
by independent districts established or allowed by the government with
the authority to impose levies on properties within the district to
fund a special purpose qualify as property taxes for purposes of Sec.
1026.43(b)(8). The Bureau seeks comment on this proposed amendment.
43(b)(14) PACE Company
To provide clarity and for ease of reference, the Bureau proposes
to add a definition of ``PACE company'' in Sec. 1026.43(b)(14).
As discussed in part II.A above, most local governments that engage
in PACE financing rely on private companies to administer PACE
programs. PACE companies are generally responsible for operating the
applicable programs, including marketing PACE financing to consumers,
administering originations, making decisions about whether to extend
the loan, and enlisting home improvement contractors that will
implement the projects to facilitate the originations. PACE companies
thus play an extensive role in PACE transactions, and as discussed in
the section-by-section analysis of Sec. 1026.43(i) below, the Bureau
proposes to apply the requirements of Sec. 1026.43 to any PACE company
that is substantially involved in making the credit decision.\191\
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\191\ The Bureau also proposes to apply section 130 of TILA, 15
U.S.C. 1640, to covered PACE companies that fail to comply with
Sec. 1026.43. See section-by-section analysis of proposed Sec.
1026.43(i)(3).
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Proposed Sec. 1026.43(b)(14) would provide that PACE company means
a person, other than a natural person or a government unit, that
administers the program through which a consumer applies for or obtains
a PACE transaction. Proposed comment 43(b)(14)-1 would provide indicia
of whether a person is administering a PACE financing program. The
Bureau intends this proposed provision and associated commentary to
target the private companies involved in running the PACE programs as
described above--the Bureau understands that it would not apply to home
improvement contractors, who may be natural persons and who generally
do not administer the PACE program. The CFPB seeks comment on this
proposed definition and, in particular, on whether it accurately
identifies the intended entities and whether the use of this term
accounts for the unique nature of PACE financing.
43(b)(15) PACE Transaction
Section 307 of the EGRRCPA amended TILA to define the term
``Property Assessed Clean Energy financing'' for purposes of TILA
section 129C(b)(3)(C) as financing to cover the costs of home
improvements that results in a tax assessment on the real property of
the consumer.\192\ The Bureau proposes to add a definition for the term
``PACE transaction'' to Regulation Z that is based on the EGRRCPA
section 307 definition. Specifically, proposed Sec. 1026.43(b)(15)
would provide that a PACE transaction means financing to cover the
costs of home improvements that results in a tax assessment on the real
property of the consumer. The Bureau seeks comment on this proposed
definition.
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\192\ See 15 U.S.C. 1639C(b)(3)(C)(i).
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43(c) Repayment Ability
Section 307 of the EGRRCPA directed the Bureau to prescribe
regulations that carry out the purposes of TILA's ATR provisions for
residential mortgage loans with respect to PACE transactions. The
Bureau has preliminarily concluded that the existing ATR framework set
out in Sec. 1026.43(c) effectively carries out the purposes of TILA's
ATR provisions and is generally appropriate for PACE transactions, with
adjustments to the commentary to Sec. 1026.43(c) and the addition of
the provisions set out in Sec. 1026.43(i) described below.
As described above, the existing ATR requirement in Sec.
1026.43(c)(1) requires a creditor to make a reasonable and good faith
determination of a consumer's ability to repay at or before
consummation of a covered mortgage loan. Section 1026.43(c)(2) provides
eight factors that a creditor must consider in making the repayment
ability determination, while Sec. 1026.43(c)(3) and (c)(4) generally
requires a creditor to verify the information that the creditor relies
on in determining a consumer's repayment ability using reasonably
reliable third-party records. These verification requirements are
important to carrying out the purpose of TILA's ATR provisions.\193\
TILA section 129C(a)(4) is intended to safeguard against fraudulent
reporting and inaccurate underwriting, as the statute specifically
notes that a creditor must verify a consumer's income history ``[i]n
order to safeguard against fraudulent reporting.'' These concerns
appear to be heightened in the PACE market given the consumer
protection issues observed by advocates and others, such that weakening
the verification requirement in this context would be inappropriate.
The Bureau believes the current ATR provisions, which provide minimum
requirements for creditors making ability-to-repay determinations but
do not dictate particular underwriting models, are similarly
appropriate for PACE transactions, subject to certain proposed
adjustments specific to PACE transactions discussed below.
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\193\ See 78 FR 6408, 6475 (Jan 30. 2013) (``One of the purposes
of TILA section 129C is to assure that consumers are offered and
receive covered transactions on terms that reasonably reflect their
ability to repay the loan. See TILA section 129B(a)(2). The Bureau
believes that a creditor consulting reasonably reliable records is
an effective means of verifying a consumer's income and helps ensure
that consumers are offered and receive loans on terms that
reasonably reflect their repayment ability.'').
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Applying existing Sec. 1026.43(c) to PACE transactions will allow
PACE creditors to account for the particular features of the PACE
transactions that they originate when assessing a consumer's ability to
repay. The Bureau's ATR framework is designed to be flexible, to allow
creditors to develop
[[Page 30409]]
and apply their own underwriting standards, and to permit creditors to
consider the facts and circumstances of each individual extension of
credit. The ATR provisions of Regulation Z also do not provide
comprehensive underwriting standards to which creditors must
adhere.\194\ For example, the rule and commentary do not specify how
much income is needed to support a particular level of debt or how
credit history should be weighed against other factors. So long as
creditors consider the factors set forth in Sec. 1026.43(c)(2)
according to the requirements of Sec. 1026.43(c), creditors are
permitted to develop their own underwriting standards and make changes
to those standards over time in response to empirical information and
changing economic and other conditions.\195\ As such, the Bureau
preliminarily believes that the existing ATR framework provides PACE
creditors sufficient operational flexibility while still requiring
compliance with the general requirement to make a reasonable and good
faith determination at or before consummation that the consumer will
have a reasonable ability to repay the loan according to its terms.
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\194\ See comment 43(c)(1)-1.
\195\ See id.; see also comment 43(c)(2)-1.
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For these reasons, the Bureau proposes to apply existing Sec.
1026.43(c) to PACE transactions, with adjustments to the commentary to
Sec. 1026.43(c) and the addition of the provisions set out in Sec.
1026.43(i) described below. The Bureau seeks comment on these proposed
changes. In particular, the Bureau seeks comment on whether Sec.
1026.43(c) should be amended to permit or require a creditor to
consider the effect of potential savings resulting from the home
improvement project financed in the PACE transaction (such as lowered
utility payments).
43(c)(2) Basis for Determination
43(c)(2)(iv)
Section 1026.43(c)(2) sets forth factors creditors must consider
when making the ATR determination required under Sec. 1026.43(c)(1),
and the accompanying commentary provides guidance regarding these
factors. Section 1026.43(c)(2)(iv) provides that one factor a creditor
must consider is the consumer's payment obligation on any simultaneous
loan that the creditor knows or has reason to know will be made at or
before consummation of the covered transaction. The Bureau proposes to
add new comment 43(c)(2)(iv)-4 to provide additional guidance to
creditors originating PACE transactions. Proposed comment 43(c)(2)(iv)-
4 would provide that a creditor originating a PACE transaction knows or
has reason to know of any simultaneous loans that are PACE transactions
if the transactions are included in any existing database or registry
of PACE transactions that includes the geographic area in which the
property is located and to which the creditor has access.
Proposed comment 43(c)(2)(iv)-4 is intended to help address
concerns about the prevalence of ``loan splitting'' and ``loan
stacking'' in the PACE industry that were raised in ANPR comments from
consumer groups and other stakeholders. As described in the comments,
loan splitting refers to the practice of a contractor dividing a loan
for one consumer into more than one transaction to make each
transaction appear more affordable, while loan stacking refers to
contractors returning to a PACE borrower to offer additional PACE
financing (often through different creditors). The Bureau's statistical
analysis indicates that a little more than 13 percent of PACE borrowers
between 2014 and 2020 received multiple PACE transactions, with many of
these transactions originated simultaneously or within a few months of
each other, which could be indicative of loan splitting or
stacking.\196\ About one-fourth of PACE borrowers with multiple PACE
transactions consummated multiple transactions in the same month, and
about three-quarters of PACE borrowers with multiple PACE loans
consummated more than one transaction within the same 6-month
period.\197\ In some cases, the creditor originating the second or
successive PACE transaction might not be aware of previous
transactions, due to delays in recording.
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\196\ See PACE Report, supra note 12, at 12, 24.
\197\ See id. at 24.
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Given these concerns and the increased possibility of a PACE
borrower having previously entered a PACE transaction, the Bureau
preliminarily concludes that it is practical and appropriate for a PACE
creditor to search any existing database or registry of PACE
transactions that includes the geographic area in which the property is
located and to which the creditor has access. A PACE industry
association has recommended that market participants create a PACE-
related lien registry for PACE companies to review when underwriting
consumers for PACE transactions.\198\ In addition, the Bureau
understands that at least one active PACE State has contemplated
establishing a real-time registry or database system for tracking PACE
assessments.\199\ The Bureau believes that if a database of PACE
transactions that covers the geographic area in which the property is
located exists, proposed comment 43(c)(2)(iv)-4 would lead PACE
creditors to discover more simultaneous loans, which could reduce the
extent of loan splitting and loan stacking. The Bureau is not proposing
to apply this provision to creditors originating non-PACE mortgages,
because the origination of a PACE loan and a non-PACE mortgage in short
succession does not appear to raise the same concerns regarding loan
splitting or loan stacking. Additionally, it is relatively rare for a
new mortgage borrower to have a pre-existing PACE transaction on the
same property, since PACE transactions are less common than non-PACE
mortgages and a property sale is unlikely to be completed unless any
existing PACE loan has already been paid off. The Bureau seeks comment
on this proposal.
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\198\ PACENation, Residential Property Assessed Clean Energy (R-
PACE) State and Local Consumer Protection Policy Principles, at 3
(Oct. 21, 2021), <a href="https://www.pacenation.org/wp-content/uploads/2021/11/PACENation-R-PACE-Consumer-Protection-Policy-Principles-ADOPTED-October-21.2021.pdf">https://www.pacenation.org/wp-content/uploads/2021/11/PACENation-R-PACE-Consumer-Protection-Policy-Principles-ADOPTED-October-21.2021.pdf</a>.
\199\ See Cal. Fin. Code sec. 22693.
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43(c)(3) Verification Using Third-Party Records
In general, a creditor must verify the information that the
creditor relies on in determining a consumer's repayment ability under
Sec. 1026.43(c)(2) using reasonably reliable third-party records. The
Bureau proposes to amend comment 43(c)(3)-5 to clarify how this
requirement applies to consumers with existing PACE transactions.\200\
Current comment 43(c)(3)-5 provides that, ``[w]ith respect to the
verification of mortgage-related obligations that are property taxes
required to be considered under Sec. 1026.43(c)(2)(v), a record is
reasonably reliable if the information in the record was provided by a
governmental organization, such as a taxing authority or local
government.'' Additionally, the comment provides that the creditor
complies with Sec. 1026.43(c)(2)(v) by relying on property taxes
referenced in the title report if the source of the property tax
information was a local taxing authority.
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\200\ As discussed above, the Bureau is proposing to clarify
that payments for pre-existing PACE transactions are considered a
property tax and therefore mortgage-related obligations under Sec.
1026.43(b)(8). See discussion of comment 43(b)(8)-2 in section-by-
section analysis of proposed Sec. 1026.43(b)(8) supra.
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The Bureau proposes to amend comment 43(c)(3)-5 to clarify that a
[[Page 30410]]
creditor that knows or has reason to know that a consumer has an
existing PACE transaction does not comply with Sec. 1026.43(c)(2)(v)
by relying on information provided by a governmental organization,
either directly or indirectly, if the information provided does not
reflect the PACE transaction. A PACE creditor might know or have reason
to know of a PACE transaction that is about to be originated and that,
therefore, will not appear in property tax records or property tax
information in a title report. For example, a PACE creditor might learn
of the existing PACE transaction by searching a relevant database of
PACE transactions, or a consumer might inform the creditor of the PACE
transaction in application materials. In those circumstances, the
proposed amendment provides that a creditor would not comply with the
requirement to verify mortgage-related obligations using reasonably
reliable third-party records by verifying the consumer's property taxes
solely using property tax records or property tax information in a
title report that do not include the existing PACE transaction. The
CFPB seeks comment on this proposed amendment.
43(i) PACE Transactions
43(i)(1)
Many consumers who obtain PACE transactions have pre-existing
mortgages that require the payment of property taxes through an escrow
account. Consumers with such pre-existing mortgages will typically also
make their PACE transaction payments through their existing escrow
account. Under certain circumstances, the addition of payments for a
PACE transaction can result in a sharp increase in the consumer's
escrow payments. This increase is relevant to the consumer's ability to
repay the PACE transaction. The CFPB preliminarily concludes that, for
consumers who pay their property taxes through an escrow account, a
creditor's reasonable and good faith determination of a consumer's
ability to repay a PACE transaction according to its terms must include
the creditor's consideration of the effect of incorporating a PACE
transaction into a consumer's escrow payments. For the reasons
discussed below, the Bureau proposes to add new Sec. 1026.43(i)(1) to
require that a creditor making the repayment ability determination
under Sec. 1026.43(c)(1) and (2) also consider any monthly payments
the consumer will have to pay into the consumer's escrow account as a
result of the PACE transaction that are in excess of the monthly
payment amount considered under Sec. 1026.43(c)(2)(iii).
One unique aspect of PACE transactions is that, unlike traditional
mortgages, consumers may pay them through an escrow account on another
mortgage loan. PACE transactions are also distinct from non-PACE
mortgage loans in several other respects, including with regard to the
timing of when the first PACE payment is due and their annual or semi-
annual repayment schedule. These distinct features of PACE transactions
can result in significant payment spikes for consumers. Consumers who
are required to make their PACE payments through their existing escrow
account have faced particularly long delays before payments have come
due on their PACE transaction.\201\ These consumers only begin repaying
their PACE transaction once their mortgage servicer conducts an escrow
account analysis and adjusts their monthly payment to reflect the
addition of the PACE transaction to their property tax bill. A servicer
must conduct an escrow account analysis every 12 months but may, and in
some cases must, do so more frequently. The Bureau understands that the
timing of this analysis--and whether the servicer knows of the PACE
transaction at the time of the first analysis following consummation--
can have a significant impact on the amount of the consumer's initial
escrow payments once adjusted to incorporate the PACE transaction.\202\
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\201\ Regulation X provides that an escrow account is any
account established or controlled by a servicer on behalf of a
borrower to pay taxes, insurance premiums, or other charges with
respect to a federally related mortgage loan, including those
charges that the servicer and borrower agreed to have the servicer
collect and pay. 12 CFR 1024.17(b).
\202\ See generally 12 CFR 1024.17(c)(3) (discussing annual
escrow account analyses).
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For example, assume a PACE transaction was consummated in June
2021, and the first PACE payment was due November 1, 2021. If the
servicer had not learned of the PACE transaction before receiving a tax
bill for the November 1, 2021 payment, the PACE transaction would not
have been promptly incorporated into the consumer's escrow account.
Assuming no funds were set aside to pre-pay the consumer's escrow
account, in this example the servicer's next escrow account analysis
might newly account for (1) the initial payment due November 1, 2021
for which no escrow funds were previously collected, (2) the upcoming
PACE payment that would be due November 1, 2022, and (3) any potential
adjustments to the escrow account cushion attributable to the PACE
transaction.\203\ In this example, a consumer could experience a sharp
and unexpected increase in their initial escrow payments beyond the
amount that would have been owed had the PACE transaction been
incorporated into escrow promptly. This payment spike would undercut a
central benefit of escrow accounts to consumers in spreading out large
obligations into more manageable, regular payments.
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[…truncated; see source link]Indexed from Federal Register on May 11, 2023.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.