Rule2024-30628
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
January 10, 2025
Effective
March 1, 2026
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 final rule, the CFPB implements EGRRCPA section 307 and amends Regulation Z to address how TILA applies to PACE transactions.
Full Text
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<title>Federal Register, Volume 90 Issue 6 (Friday, January 10, 2025)</title>
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[Federal Register Volume 90, Number 6 (Friday, January 10, 2025)]
[Rules and Regulations]
[Pages 2434-2548]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-30628]
[[Page 2433]]
Vol. 90
Friday,
No. 6
January 10, 2025
Part VI
Consumer Financial Protection Bureau
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12 CFR Part 1026
Residential Property Assessed Clean Energy Financing (Regulation Z);
Final Rule
Federal Register / Vol. 90, No. 6 / Friday, January 10, 2025 / Rules
and Regulations
[[Page 2434]]
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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: Final rule.
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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 final rule, the CFPB implements EGRRCPA section
307 and amends Regulation Z to address how TILA applies to PACE
transactions.
DATES: This final rule is effective March 1, 2026.
FOR FURTHER INFORMATION CONTACT: George Karithanom, Regulatory
Implementation and Guidance Program Analyst, Office of Regulations, at
202-435-7700 or <a href="https://reginquiries.consumerfinance.gov/">https://reginquiries.consumerfinance.gov/</a>. If you
require this document in an alternative electronic format, please
contact <a href="/cdn-cgi/l/email-protection#2764617765786644444254544e454e4b4e535e674441574509404851"><span class="__cf_email__" data-cfemail="1754514755485674747264647e757e7b7e636e577471677539707861">[email protected]</span></a>.
SUPPLEMENTARY INFORMATION:
Abbreviations
The following abbreviations are used in this final rule:
<bullet> APOR = Average Prime Offer Rate
<bullet> APR = Annual Percentage Rate
<bullet> Board = Board of Governors of the Federal Reserve System
<bullet> CAEATFA = California Alternative Energy and Advanced
Transportation Financing Authority
<bullet> California DFPI = California Department of Financial
Protection and Innovation
<bullet> CARES Act = Coronavirus Aid, Relief, and Economic Security
Act
<bullet> EGRRCPA = Economic Growth, Regulatory Relief, and Consumer
Protection Act
<bullet> FDIC = Federal Deposit Insurance Corporation
<bullet> FHA = Federal Housing Administration
<bullet> FHFA = Federal Housing Finance Agency
<bullet> FRFA = Final Regulatory Flexibility Analysis
<bullet> FTC = Federal Trade Commission
<bullet> HOEPA = Home Ownership and Equity Protection Act
<bullet> HUD = U.S. Department of Housing and Urban Development
<bullet> IRFA = Initial Regulatory Flexibility Analysis
<bullet> LTV = Loan to Value
<bullet> OCC = Office of the Comptroller of the Currency
<bullet> NCUA = National Credit Union Administration
<bullet> NEPA = National Environmental Policy Act
<bullet> NPRM = Notice of Proposed Rulemaking
<bullet> PACE = Property Assessed Clean Energy
<bullet> PACE Report = Property Assessed Clean Energy (PACE)
Financing and Consumer Financial Outcomes, a CFPB report published
on May 1, 2023
<bullet> RESPA = Real Estate Settlement Procedures Act
<bullet> RFA = Regulatory Flexibility Act
<bullet> TILA = Truth in Lending Act
I. Summary of the Final Rule
Section 307 of the Economic Growth, Regulatory Relief, and Consumer
Protection Act (EGRRCPA) directs the CFPB 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.\1\ In this final rule, the CFPB implements EGRRCPA section
307 and amends Regulation Z to address the application of TILA to
``PACE transactions'' as defined in Sec. 1026.43(b)(15).
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\1\ 15 U.S.C. 1639c(b)(3)(C).
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This final rule:
<bullet> Clarifies an existing exclusion to Regulation Z's
definition of credit that relates to tax liens and tax assessments.
Specifically, the CFPB is clarifying that the commentary's exclusion of
tax liens and tax assessments from being ``credit,'' as defined in
Sec. 1026.2(a)(14), applies only to involuntary tax liens and
involuntary tax assessments.
<bullet> Makes a number of adjustments to the requirements for Loan
Estimates and Closing Disclosures under Sec. Sec. 1026.37 and 1026.38
that will apply when those disclosures are provided for PACE
transactions, including:
[cir] Eliminating certain fields relating to escrow account
information;
[cir] Requiring the disclosure of other fees and amounts not
included in the principal and interest on the projected payments table
in place of disclosure of mortgage insurance premiums;
[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 will 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 will be disclosed for PACE
transactions.
<bullet> Provides 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, as well as Spanish
translations of those model forms under H-28(K) for the Loan Estimate
and H-28(L) for the Closing Disclosure.
<bullet> Exempts PACE transactions from the requirement to
establish escrow accounts for certain higher-priced mortgage loans,
under Sec. 1026.35(b)(2)(i)(E).
<bullet> Exempts PACE transactions from the requirement to provide
periodic statements, under Sec. 1026.41(e)(7).
<bullet> Applies Regulation Z's ability-to-repay requirements in
Sec. 1026.43 to PACE transactions with a number of 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 on their existing mortgage.
<bullet> Provides that a PACE transaction is not a qualified
mortgage as defined in Sec. 1026.43.
<bullet> Extends the ability-to-repay requirements, as well as TILA
section 130, to any ``PACE company,'' as defined in Sec.
1026.43(b)(14), that is substantially involved in making the credit
decision for a PACE transaction.
<bullet> Provides clarification regarding how PACE and non-PACE
mortgage creditors should consider pre-existing PACE transactions when
originating new mortgage loans.
II. Background
A. PACE Financing Market Overview
How does PACE financing work?
PACE financing enables property owners to finance upgrades to real
property through an assessment on their real property.\2\ Eligible
upgrade types
[[Page 2435]]
vary by locality but often include upgrades to promote energy
efficiency or to help prepare for natural disasters. The voluntary
financing agreements 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 alongside the consumer's other property tax payment
obligations. PACE loans are typically collected through the same
process as real property taxes.\4\ Local governments typically fund
PACE loans through bond issuance. PACE assessments are sometimes
collateralized and sold as securitized obligations.
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\2\ Some States authorize PACE financing for residential and
commercial property. In this final rule, 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.
sec. 163.081(1)(e); Fla. Stat. sec. 197.3632(8)(a); Mo. Stat. sec.
67.2815(5).
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PACE loans 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 super-priority 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
loan 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. sec.
163.081(7) (``The recorded agreement must provide constructive
notice that the non-ad valorem 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 States provide for subordinated-lien status for
PACE financing. See, e.g., Minn. Stat. sec. 216C.437(4); Me. Stat.
tit. 35A sec. 10156(3), (4); 24 V.S.A. sec. 3255(b). The CFPB
understands that there has been little to no loan volume in these
programs. See, e.g., Efficiency Maine, FY2024 Annual Report, at 40,
<a href="https://www.efficiencymaine.com/docs/FY2024-Annual-Report.pdf">https://www.efficiencymaine.com/docs/FY2024-Annual-Report.pdf</a>.
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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 financing
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. Often, 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 frequently 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="https://web.archive.org/web/20201030223231/http:/www.energyprograms.org/wp-content/uploads/2017/03/R-PACE-Primer-March-2017.pdf">https://web.archive.org/web/20201030223231/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 on home improvement contractors
to sell PACE loans to consumers and facilitate their origination. Home
improvement contractors frequently market PACE financing directly to
consumers while selling their home improvement services, often door-to-
door. They often serve as the primary point of contact with consumers
during the origination process and collect 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.
Origin and Growth of PACE Programs
In 2008, California passed Assembly Bill no. 811 to enable the
first PACE programs. The CFPB 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\ 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.brickergraydon.com/DevelopOhio/Lucas-County-PACE-program-benefits-homeowners">https://www.brickergraydon.com/DevelopOhio/Lucas-County-PACE-program-benefits-homeowners</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, peaking 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, dropping to an average investment of $769 million per
year during those years.\10\ Overall, as of December 31, 2023, the PACE
financing industry had financed 371,000 home upgrades, totaling over
$9.1 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 2023.
\11\ See id.
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Common Financing Terms
According to data analyzed in a report that the CFPB released
concurrently with its PACE proposal (PACE Report), the term of PACE
loans that were originated between July 2014 and December 2019 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\ For reference, the average
prime offer rate for primary mortgage loans was around 3.5 percent for
most of the period studied in the PACE Report.\14\ Fees vary by PACE
program, but the CFPB has reviewed agreements that include fees for
application, origination, tax administration, lien recordation, title,
escrow, bond counsel, processing, underwriting, and fund disbursement.
The CFPB 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 II.B.
\13\ Id.
\14\ See id. at 13.
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Consumer Protection Concerns
The structure of PACE transactions carries certain unique risks for
consumers. Primarily, the risks are due to the fact that PACE companies
and secondary-market participants face very low repayment risk,
regardless of whether consumers can repay.\15\ If a
[[Page 2436]]
house with a PACE lien is sold through foreclosure or tax sale, the
sale proceeds are generally assured to cover the outstanding amounts
owed on the PACE transaction because PACE loan amounts are a fraction
of the value of the property, the loans do not accelerate, and the
super-priority lien means that amounts due are paid before other
mortgage debts. Additionally, because PACE loans do not accelerate, the
remaining balance will stay with the property for the next homeowner to
pay under the terms of the original financing agreement.
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\15\ See, e.g., Morningstar, DBRS, Rating U.S. Property Assessed
Clean Energy (PACE) Securitizations, Aug. 2024, at 19, 20, app. A
(``Given the seniority of the amortizing PACE lien and corresponding
low [loan-to-value], in the vast majority of cases, we typically
assume the liquidation proceeds from a foreclosure sale are
sufficient to bring the [residential] PACE Assessment current. Based
on this assumption, a main credit risk to [residential] PACE ABS
transactions is a delay in cash flow receipts related to nonpayment
of the R-PACE Assessments over some period of time. . . . For
[residential] PACE Assessments that go through the foreclosure
process, once the process has concluded and the property sold, the
[residential] PACE Assessment is typically considered reperforming/
performing, and collections resume according to the original
amortization schedule. Furthermore, the new property owner is
subject to subsequent to default. The same process is then applied
to the second and subsequent round of delinquency until the
[residential] PACE Assessments are paid in full.'').
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Consumer groups have stated that PACE companies and home
improvement contractors originate PACE loans quickly, often on the
spot, without regard to affordability or consumer understanding. They
have reported to the CFPB, including in comments to the proposed rule,
deceptive sales tactics, aggressive sales practices, and fraud. A
number of PACE industry stakeholders acknowledged in comments to the
proposal that some consumers experienced mistreatment before many of
the current consumer protection laws and practices were put in place.
Consumer advocates have criticized other aspects of PACE financing
as well, 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 transactions can cause unexpected and
unaffordable tax payment spikes that can lead to delinquency, late
fees, tax defaults, and foreclosure actions.\16\ Some local officials
have echoed some of these concerns in discussions with CFPB staff.
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\16\ See, e.g., Nat'l Consumer L. 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 St. J. (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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The CFPB's PACE Report, discussed under parts II.B and VI.C, bears
out some of these concerns. According to the Report, PACE loans
originated between 2014 and 2019 increased consumers' property tax
bills by about $2,700 per year on average, an average increase of about
88 percent.\17\ The Report also finds that getting a PACE loan
increased mortgage delinquency rates for consumers who had a pre-
existing non-PACE mortgage by 2.5 percentage points over a two-year
period following the PACE origination, which represents an increased
risk of a mortgage delinquency by about 35 percent over two years.\18\
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\17\ See PACE Report at 4.
\18\ See id. at 3.
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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.\19\ 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.
Consumer advocates have also 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.
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\19\ 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 (Feb. 2021), <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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These advocates and mortgage-industry stakeholders have also
highlighted that, although a PACE loan 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.\20\ 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 loan to complete a home
sale.
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\20\ See Freddie Mac, Purchase and ``no cash-out'' refinance
Mortgage requirements (Mar. 31, 2022), <a href="https://guide.freddiemac.com/app/guide/section/4301.4">https://guide.freddiemac.com/app/guide/section/4301.4</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. & Urb. 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 in comments to
the proposal and through other communications that PACE financing
introduces risk to the mortgage market, as PACE liens take priority
over pre-existing mortgage liens.\21\
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\21\ 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/news/statement/fhfa-statement-on-certain-energy-retrofit-loan-programs">https://www.fhfa.gov/news/statement/fhfa-statement-on-certain-energy-retrofit-loan-programs</a>; 85 FR 2736, FHFA Notice and Request for
Input on PACE Financing (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 125 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. Twenty-eight of
the complaints involve older adults, 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 313 such
complaints between 2020 and 2022 alone.\22\
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\22\ 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. 2023)
<a href="https://dfpi.ca.gov/wp-content/uploads/sites/337/2024/01/2022-Annual-Report-CFL-Aggregated.pdf">https://dfpi.ca.gov/wp-content/uploads/sites/337/2024/01/2022-Annual-Report-CFL-Aggregated.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.\23\ The complaint, filed in State court,
alleged that Renovate misrepresented the PACE program or failed to make
adequate disclosures
[[Page 2437]]
about key aspects of the program, including its government affiliation,
tax deductibility, transferability of ethe obligations to subsequent
property owners, financing costs, and Renovate's contractor
verification policy.\24\ Subsequently, in June 2021, the California
State PACE regulator moved to revoke Renovate's Administrator license,
required to administer a PACE program in the State, after finding that
one of its solicitors repeatedly defrauded homeowners in San Diego
County.\25\ Renovate ultimately consented to the revocation.\26\
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\23\ 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).
\24\ Id.
\25\ 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/press_release/dfpi-moves-to-revoke-pace-administrators-license-after-finding-its-solicitor-defrauded-homeowners/">https://dfpi.ca.gov/press_release/dfpi-moves-to-revoke-pace-administrators-license-after-finding-its-solicitor-defrauded-homeowners/</a>.
\26\ 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.\27\ 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.\28\ 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.\29\
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\27\ 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>.
\28\ Id.
\29\ Id.
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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 infrastructure measures.\30\ 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 program 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.\31\ California law also requires, among other protections,
financial disclosures prior to consummation; \32\ a three-day right to
cancel, which is extended to five days for older adults; \33\ mandatory
confirmation-of-terms calls; \34\ and restrictions on contractor
compensation.\35\ Additionally, California law 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.\36\ There is also a maximum permissible
loan-to-value ratio for PACE financing under California law.\37\
California law exempts government agencies from some of these
requirements.\38\
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\30\ See, e.g., Cal. Sts. & Hwys. Code secs. 5898.12, 5899,
5899.3.
\31\ Cal. Fin. Code secs. 22686 & 22687.
\32\ Cal. Sts. & Hwys. Code sec. 5898.17.
\33\ Cal. Sts. & Hwys. Code secs. 5898.16-.17.
\34\ Cal. Sts. & Hwys. Code sec. 5913.
\35\ Cal. Sts. & Hwys. Code sec. 5923.
\36\ Cal. Fin. Code sec. 22684(a), (d)-(e).
\37\ Cal. Fin. Code sec. 22684(h).
\38\ 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).\39\ In 2019,
the DFPI began licensing PACE program administrators and subsequently
promulgated rules implementing some of California's statutory PACE
provisions, which became effective in 2021.\40\ DFPI also has certain
examination, investigation, and enforcement authorities over PACE
program administrators, solicitors, and solicitor agents.\41\
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\39\ Cal. AB 1284 (2017-2018), Cal. SB 1087 (2017-2018).
\40\ 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.
\41\ 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. Code sec. 22017(a)-(b).
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PACE program administrators must be licensed by the DFPI under the
California law. They must also establish and maintain processes for the
enrollment of PACE solicitors and solicitor agents, including training
and background checks.\42\ PACE program administrators are required to
annually share certain operational data with DFPI.\43\ DFPI compiles
the data in annual reports on PACE lending in California, which provide
aggregated information on PACE loans, PACE program administrators and
solicitors, and consumer complaints.\44\
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\42\ Cal. Fin. Code secs. 22680-82.
\43\ Cal. Fin. Code sec. 22692.
\44\ 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>.
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Florida
Florida authorized PACE programs in 2010 to finance projects
related to energy conservation and efficiency improvements, renewable
energy improvements, and wind resistance improvements.\45\ The State
imposed additional consumer protections for PACE transactions, which
took effect July 2024 after the CFPB issued the proposed rule.\46\
Florida law 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 and have not been
subject to bankruptcy proceedings within the preceding five years.\47\
It also includes a maximum loan-to-value ratio,\48\ requires
disclosures about PACE loans and the terms of the PACE transaction,\49\
and requires that the estimated annual payment amount for all PACE
loans on a property does not exceed 10 percent of the property owner's
annual household income.\50\ 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
[[Page 2438]]
together with the maximum principal amount to be financed and the
maximum annual assessment necessary to repay that amount.\51\ Florida
law also provides that a property owner may cancel a PACE transaction
agreement within three business days of consummation without incurring
any financial penalty for doing so \52\ and requires a written
disclosure to prospective purchasers of a property subject to a PACE
transaction.\53\ Additionally, Florida law directs counties and
municipalities to maintain processes regulating home improvement
contractors \54\ and third-party program administrators,\55\ regulates
advertising practices surrounding PACE transactions,\56\ and sets forth
circumstances in which PACE financing agreements may be
unenforceable.\57\
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\45\ See Fla. HB 7179 (2010).
\46\ See Fla. SB 770 (2024), codified at Fla. Stat. sec.
163.081.
\47\ Fla. Stat. sec. 163.081(3)(a).
\48\ Id.
\49\ Fla. Stat. sec. 163.081(4).
\50\ Fla. Stat. sec. 163.081(3)(a)(12).
\51\ Fla. Stat. sec. 163.081(5).
\52\ Fla. Stat. sec. 163.081(6).
\53\ Fla. Stat. sec. 163.081(8).
\54\ Fla. Stat. sec. 163.083.
\55\ Fla. Stat. sec. 163.084.
\56\ Fla. Stat. sec. 163.085.
\57\ Fla. Stat. sec. 163.086.
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Missouri
Missouri authorized PACE programs in 2010 to finance projects
involving energy efficiency improvements and renewable energy
improvements.\58\ 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, 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 obligation.\59\ It also requires verbal confirmation of certain
provisions of the contract, imposes specific financial requirements to
execute a PACE contract, and provides for a three-day right to
cancel.\60\ 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 PACE
contracts.\61\ The new requirements became effective January 1,
2022.\62\
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\58\ Mo. HB 1692 (2010), codified at Mo. Rev. Stat. sec.
67.2800(2)(8) (defining projects eligible for financing).
\59\ Mo. HB 697, codified at Mo. Rev. Stat. sec. 67.2818(4).
\60\ Mo. HB 697, codified at Mo. Rev. Stat. sec. 67.2817(2)
(financial requirements to execute an assessment contract);
67.2817(4) (right to cancel); 67.2818(6) (verbal confirmation).
\61\ Mo. HB 697, codified at Mo. Rev. Stat. secs. 67.2817(2),
67.2818(2)-(3).
\62\ Mo. HB 697, codified at Mo. Rev. Stat. sec. 67.2840.
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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.\63\ 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.\64\ They include provisions
relating to ability-to-pay, financing disclosures, a right to cancel,
and foreclosure-avoidance protections, among others.
---------------------------------------------------------------------------
\63\ 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>.
\64\ Id.
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In comments to the proposal, PACE industry stakeholders enumerated
consumer protections that they said the industry has adopted. These
commenters noted the use of certain disclosures by PACE originators, as
well as other activities intended to enhance consumers' understanding
of PACE transactions, such as confirmation-of-terms calls. PACE
industry commenters also described industry underwriting standards,
including loan-to-value limitations, and mandatory confirmation that
the property owner is not in bankruptcy proceedings or delinquent on
property taxes or mortgage payments. Industry commenters further
described industry efforts to oversee contractors, including efforts to
verify contractors' licensing and insurance status, conduct background
checks for contractors, require contractors to certify compliance with
program policies and marketing standards, provide training to
contractors, monitor contractor performance, terminate contractors who
violate program policies, and withhold funds from the contractor for
the project until the project is certified as complete by the homeowner
and contractor. These commenters stated that industry actors closely
monitor delinquency trends and provide consumers with a right to cancel
and other protections following consummation.
B. Summary of the Rulemaking Process
Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018
The Economic Growth, Regulatory Relief, and Consumer Protection Act
(EGRRCPA) was signed into law on May 24, 2018.\65\ 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.'' It requires the CFPB to 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. It also requires that the regulations
account for the unique nature of PACE financing.\66\ TILA section
129C(a) contains TILA's ability-to-repay provisions for residential
mortgage loans, and TILA section 130 contains civil liability
provisions. Thus, section 307 requires the CFPB to apply TILA's
ability-to-repay provisions to PACE financing, and to apply TILA's
civil liability provisions for violations of those ability-to-repay
provisions, all in a way that accounts for the unique nature of PACE
financing. This final rule discusses the implementation of the ability-
to-repay and civil liability requirements further in the section-by-
section analysis of Sec. 1026.43.
---------------------------------------------------------------------------
\65\ Public Law 115-174, 132 Stat. 1296 (2018).
\66\ 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 CFPB to ``collect such
information and data that the CFPB determines is necessary'' in
prescribing the regulations and requiring the CFPB to ``consult with
State and local governments and bond-issuing authorities.''
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Outreach
To learn about PACE transactions and the industry, the CFPB 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 of external stakeholders, panel appearances by CFPB staff,
and written correspondence.
The CFPB's outreach relating to PACE financing is summarized at a
high level
[[Page 2439]]
below.\67\ The outreach has supplemented information on PACE financing
that the CFPB has gleaned from independent research; the comments
responding to the Advance Notice of Proposed Rulemaking and the
proposed rule, discussed below; the data collection described below in
this in part; and information from publicly available sources such as
news reports, research and analysis, and litigation documents. The CFPB
also consulted with the Board and several other Federal agencies, as
addressed in part VI.A.
---------------------------------------------------------------------------
\67\ The CFPB also engaged in extensive outreach with numerous
stakeholders to design and complete the CFPB data collection on PACE
financing that is discussed below.
---------------------------------------------------------------------------
1. 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 continued the engagement after EGRRCPA section 307 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. 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.
2. Private PACE Industry Stakeholders
Since 2015, the CFPB has engaged on many occasions with various
private PACE industry stakeholders, including private PACE companies, a
national trade association, 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 companies, assessment administrators, and
the national trade association 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 evolved, 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
requirements in particular States. Some of these stakeholders have also
shared their perspectives on EGRRCPA section 307 and this rulemaking.
3. State and Local Governments and Bond-Issuing Authorities
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 financing and this rulemaking, beginning
before EGRRCPA section 307 and accelerating after it took effect given
its mandate for the CFPB to ``consult with State and local governments
and bond-issuing authorities.'' \68\ The CFPB has consulted with
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 has engaged with bond-issuing authorities on a number of
occasions, including discussions over the phone and in person, and
through written correspondence. The CFPB has also conferred on a number
of occasions with membership organizations representing municipalities.
---------------------------------------------------------------------------
\68\ 15 U.S.C. 1639c(b)(3)(C)(iii)(II).
---------------------------------------------------------------------------
In the course of developing the final rule, 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 rulemaking, including, for example,
whether the CFPB should use the same ability-to-repay 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 qualified mortgage
definitions to PACE financing, how to apply TILA's general civil
liability provisions to violations of the ability-to-repay requirements
for PACE financing, and the implications of this rulemaking for PACE
financing bonds. Before the CFPB issued the proposal, it held a series
of calls with several 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. CFPB staff held
additional consultation calls with State and local governments and
bond-issuing authorities after the NPRM's comment period closed, to
solicit additional information and perspectives about this rulemaking
and recent market developments.
During these outreach and consultation efforts, public entities
involved in the operation of PACE financing and third parties operating
on their behalf expressed divergent views on PACE financing. For
example, some individuals from local tax collectors' offices and other
government units 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 shared
consumer protection recommendations and background information about
how the PACE financing industry operates in particular jurisdictions.
Several localities with active PACE financing programs expressed
consumer protection concerns and informed the CFPB that they would
welcome application of TILA's ability-to-repay 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. One stakeholder from a tax collector's office
asserted that, while there are limits to PACE loan amounts relative to
the market value of the home, standards for obtaining a home's market
value are insufficient. This stakeholder asserted that, as a result,
PACE consumers could owe more than the market value of the property.
This stakeholder also asserted that interest rates and APRs for PACE
transactions are relatively high and do not reflect the fact that they
are secure for investors and carry relatively low administrative costs,
given that PACE transactions are repaid through the property tax
system.
Other local governments (and third parties they work with) 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
[[Page 2440]]
originations \69\) 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 creates jobs. Local government representatives in certain
jurisdictions expressed enthusiasm about aspects of PACE financing such
as increased solar panel installations and 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
ability-to-repay 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.
---------------------------------------------------------------------------
\69\ The CFPB understands that a number of government sponsors,
some of which participated in the CFPB'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), <a href="https://www.latimes.com/homeless-housing/story/2020-05-21/la-fi-pace-home-improvement-loans-la-county">https://www.latimes.com/homeless-housing/story/2020-05-21/la-fi-pace-home-improvement-loans-la-county</a>.
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A public PACE provider asserted that PACE is an important public
policy tool that provides financing to retrofit properties that are at
risk of natural disaster, in particular wildfires. This stakeholder
asserted that PACE financing helps homeowners maintain homeowners'
insurance, and that its PACE program does not pose significant consumer
risk. It requested that public PACE providers be exempt from the final
rule.
4. Other Stakeholders
The CFPB's 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, in comments to the proposal and through
other channels, 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 that 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 non-PACE mortgage or apply TILA more
generally to PACE.
Advance Notice of Proposed Rulemaking in 2019
On March 4, 2019, the CFPB issued an Advance Notice of Proposed
Rulemaking to solicit information relating to residential PACE
financing.\70\ The purpose of the Advance Notice of Proposed Rulemaking
was to gather information to better understand the PACE financing
market and other information to inform a proposed rulemaking under
EGRRCPA section 307.
---------------------------------------------------------------------------
\70\ Advance Notice of Proposed Rulemaking on Residential
Property Assessed Clean Energy Financing, 84 FR 8479 (Mar. 8, 2019).
---------------------------------------------------------------------------
In response to the Advance Notice of Proposed Rulemaking, the CFPB
received over 115 comments, which were submitted by a variety 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 Advance Notice of Proposed
Rulemaking comments is included in the proposal.\71\
---------------------------------------------------------------------------
\71\ 88 FR 30388, 30392.
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Data Collection and PACE Report
EGRRCPA section 307 authorizes the CFPB to ``collect such
information and data that the CFPB determines is necessary'' to support
the PACE rulemaking required by the section.\72\ 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 1, 2014, and December 31, 2019, 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.
---------------------------------------------------------------------------
\72\ 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.\73\
The PACE company data encompassed about 370,000 PACE transaction
applications submitted in California and Florida from 2014 to 2019 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.\74\
---------------------------------------------------------------------------
\73\ The CFPB received data from FortiFi Financial, Home Run
Financing, Renew Financial, and Ygrene Energy Fund.
\74\ 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 used 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'' was published concurrently with the
NPRM.\75\
---------------------------------------------------------------------------
\75\ 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
[[Page 2441]]
borrowers discussed in the PACE Report resided in census tracts with
higher percentages of Black and Hispanic residents than the average for
their States.\76\ 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 census tracts that
were not majority white.\77\ The PACE Report also assesses the impact
of the 2018 California PACE Reforms, discussed in part II.A. The
analysis finds that these laws improved consumer outcomes while
substantially reducing the volume of PACE lending.\78\
---------------------------------------------------------------------------
\76\ Id. at 4.
\77\ Id. at 38-39, Figure 11.
\78\ Id. at 4-5.
---------------------------------------------------------------------------
The CFPB discusses comments that addressed the PACE Report in part
VI.
Notice of Proposed Rulemaking
The CFPB issued a proposed rule on PACE financing on May 1, 2023,
concurrent with the PACE Report described in this part above. The NPRM
was published in the Federal Register on May 11, 2023,\79\ and the
public comment period closed on July 26, 2023.\80\ The CFPB proposed
the following under Regulation Z:
---------------------------------------------------------------------------
\79\ 88 FR 30388.
\80\ The CFPB received several written requests to extend the
comment period. The CFPB believes that interested parties had
sufficient time to consider the CFPB's proposal and prepare their
responses and did not extend the comment period beyond July 26,
2023. Seventy-six days elapsed between the date the NPRM was
published in the Federal Register and the comment deadline, and ten
additional days elapsed between the CFPB's issuance of the NPRM and
its publication in the Federal Register. Additionally, the CFPB has
received a number of ex parte comments after the close of the
comment period. It has added these comments to the rulemaking docket
and considered them in developing this final rule.
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<bullet> To clarify an existing exclusion to Regulation Z's
definition of credit that relates to tax liens and tax assessments.
Specifically, the CFPB proposed to clarify that the commentary's
exclusion of tax liens and tax assessments from being ``credit,'' as
defined in Sec. 1026.2(a)(14), applies only to involuntary tax liens
and involuntary tax assessments.
<bullet> To 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.
<bullet> To 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> To 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> To exempt PACE transactions from the requirement to
provide periodic statements, under proposed Sec. 1026.41(e)(7).
<bullet> To apply the ability-to-repay 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> To provide that a PACE transaction is not a qualified
mortgage as defined in Sec. 1026.43.
<bullet> To extend the ability-to-repay 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> To provide clarification regarding how PACE and non-PACE
mortgage creditors should consider pre-existing PACE transactions when
originating new mortgage loans.
The CFPB received over 130 comments on the proposal. A variety of
stakeholders submitted comment, including consumers and consumer
groups, PACE companies, a public PACE provider, government sponsors of
PACE programs, local government entities or their membership
organizations, State agencies, a PACE industry trade association, an
assessment administrator, home improvement contractor stakeholders,
bond counsel, credit union stakeholders, mortgage industry
stakeholders, environmental and energy stakeholders, chambers of
commerce, Members of the U.S. Congress, the U.S. Small Business
Administration Office of Advocacy, and State attorneys general. The
CFPB has considered the comments and is adopting the proposal with
certain adjustments as described in the sections below.
III. Legal Authority
The CFPB is finalizing amendments to 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 Act (Dodd-Frank Act),\81\ EGRRCPA section 307, TILA, and the
Real Estate Settlement Procedures Act of 1974 (RESPA).\82\
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\81\ Public Law 111-203,124 Stat. 1376 (2010).
\82\ 12 U.S.C. 2601 et seq.
---------------------------------------------------------------------------
A. Dodd-Frank Act
Section 1022(b)(1) of the CFPA authorizes the CFPB to prescribe
rules ``as may be necessary or appropriate to enable the CFPB to
administer and carry out the purposes and objectives of the Federal
consumer financial laws, and to prevent evasions thereof.'' \83\ Among
other statutes, TILA, RESPA, and the CFPA are Federal consumer
financial laws.\84\ Accordingly, the CFPB is 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.
---------------------------------------------------------------------------
\83\ 12 U.S.C. 5512(b)(1).
\84\ 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).
---------------------------------------------------------------------------
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 CFPB may exempt from or modify disclosure
requirements, in whole or in part, for any class of residential
mortgage loans if the CFPB determines that such exemption or
modification is in the interest of consumers and in the public
interest.\85\ 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.\86\ 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 final rule, the CFPB has considered the purposes of
improving consumer awareness and understanding of transactions
involving residential
[[Page 2442]]
mortgage loans through the use of disclosures and the interests of
consumers and the public. The CFPB is finalizing 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 CFPB
believes the final rule is in the interest of consumers and in the
public interest, consistent with Dodd-Frank Act section 1405(b).
---------------------------------------------------------------------------
\85\ Public Law 111-203, 124 Stat. 1376, 2142 (2010) (codified
at 15 U.S.C. 1601 note).
\86\ Public Law 111-203, 124 Stat. 1376, 2138 (2010) (codified
at 15 U.S.C. 1602(cc)(5)).
---------------------------------------------------------------------------
B. TILA
TILA section 105(a) directs the CFPB 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 CFPB judges
are necessary or proper to effectuate the purposes of TILA, to prevent
circumvention or evasion thereof, or to facilitate compliance
therewith.\87\ 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.\88\ 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.\89\
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\87\ 15 U.S.C. 1604(a).
\88\ 15 U.S.C. 1601(a).
\89\ 15 U.S.C. 1639b(a)(2).
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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.\90\ 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
CFPB provided additional discussion of this integrated disclosure
mandate in the 2013 TILA-RESPA Rule.\91\
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\90\ Public Law 111-203, 124 Stat. 1376, 2108 (2010) (codified
at 15 U.S.C. 1604(b)).
\91\ 78 FR 79730, 79753-54 (Dec. 31, 2013).
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Section 105(f) of TILA, 15 U.S.C. 1604(f), authorizes the CFPB to
exempt from all or part of TILA any class of transactions if the CFPB
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) directs the CFPB to prescribe
regulations to carry out the purposes of the subsection.\92\ In
addition, TILA section 129C(b)(3)(B)(i) authorizes the CFPB to
prescribe regulations that revise, add to, or subtract from the
criteria that define a qualified mortgage 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.\93\
---------------------------------------------------------------------------
\92\ 15 U.S.C. 1639c(b)(3)(A).
\93\ 15 U.S.C. 1639c(b)(3)(B)(i).
---------------------------------------------------------------------------
In section 307 of the EGRRCPA, codified in TILA section
129C(b)(3)(C), Congress directed the CFPB 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.'' \94\
---------------------------------------------------------------------------
\94\ 15 U.S.C. 1639c(b)(3)(C)(ii).
---------------------------------------------------------------------------
C. RESPA
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.\95\
---------------------------------------------------------------------------
\95\ Public Law 111-203, 124 Stat. 1376, 2103 (2010) (codified
at 12 U.S.C. 2603(a)). See discussion of integrated disclosure
above.
---------------------------------------------------------------------------
Section 19(a) of RESPA authorizes the CFPB 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.\96\ 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 home buyers
and sellers of settlement costs.\97\ 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.\98\ In developing rules
under RESPA section 19(a), the CFPB 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.
---------------------------------------------------------------------------
\96\ 12 U.S.C. 2617(a).
\97\ 12 U.S.C. 2601(b).
\98\ 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.
---------------------------------------------------------------------------
IV. Discussion of the Final Rule
A. General Comments on the NPRM
The CFPB received comments addressing several topics other than
those discussed in the section-specific analyses below. These topics
are largely outside the scope of this rulemaking.
Super-Priority Lien Status
Many mortgage industry stakeholders and consumer groups expressed
concerns about the super-priority status held by liens securing PACE
transactions. Several commenters stated that the super-priority status
of PACE liens increases risks for borrowers, mortgage lenders,
communities, and secondary mortgage market participants. A mortgage
industry trade association asserted that PACE transactions violate the
first-lien status of mortgages and create risk for consumers and
communities. One mortgage industry trade association stated that the
super-priority lien status undermines mortgage lenders' underwriting by
increasing the loss severity during foreclosure for the mortgage lender
in a way that was not priced in, limits saleability of mortgages, and
requires mortgage servicers to advance funds to secure the security
interest when consumers go delinquent on property taxes and PACE
obligations. A credit union stated that the super-lien priority
decreases home marketability, and an escrow association stated that
consumers have not understood the priority status of PACE liens.
Some commenters, including a credit union and other mortgage
industry stakeholders, described challenges with identifying the
presence of existing PACE liens. Some commenters, including a community
bankers association, a credit union trade association, and a group of
mortgage industry and consumer group stakeholders, asked the CFPB to
work with State and local governments to find solutions to better
identifying PACE liens or downgrading their priority status.
In contrast to these comments, a PACE company asserted that a PACE
transaction's super-priority lien status
[[Page 2443]]
makes PACE transactions more secure, which allows capital markets to
embrace lower interest rates, with the savings passed on to consumers.
Another PACE company stated that, in California, there is a loss
reserve in place and only two claims have ever been made, showing the
concerns related to whether the lien status would impair the security
of first mortgage loans have not materialized.
Requests for Additional Regulatory Requirements
Several commenters suggested additional regulation of PACE
financing that was not contemplated in the proposed rule. For instance,
a State housing agency association suggested requiring PACE companies
to report PACE transactions to credit bureaus, prohibiting prepayment
penalties on PACE transactions if the first mortgage does not impose
prepayment penalties, regulating the types of fees allowed on PACE
transactions, and imposing conflict-of-interest provisions on PACE
transactions like those found under RESPA. A PACE company recommended
prohibiting payments to home improvement contractors for marketing
services and for work done prior to project completion. This commenter
also suggested the CFPB craft protections against antitrust or
defamation claims for PACE companies, similar to those available to
financial institutions who file Suspicious Activity Reports, so that
they can more effectively share information about problematic home
improvement contractors.
A consumer group suggested the CFPB require independent
verification before PACE-financed work begins (specifically, an energy
audit to verify the need for cost-effective improvements and verifying
the consumer understands related costs and risks) and after work is
completed but before the contractor is paid. Another consumer group
urged the CFPB to prohibit false assertions made on social media
websites.
A consortium of consumer groups stated that the CFPB should
finalize the proposal quickly and should monitor and incorporate
consumer protections into other emerging lending products intended to
be environmentally friendly (i.e., ``green'' lending products, such as
those being implemented under Inflation Reduction Act programs), to
minimize what they characterized as public harm and negative
consequences that resulted from the problematic design and predatory
practices of PACE financing. A few other consumer and environmental
groups echoed the need for collaboration among Federal agencies on
green lending products to share lessons learned from PACE financing and
to ensure these products are fair, safe, affordable, and sustainable
for consumers.
National Environmental Policy Act
Two PACE companies and a PACE industry trade association stated
that the National Environmental Policy Act (NEPA) applies to the CFPB's
PACE financing rulemaking. These commenters asserted that the CFPB
should complete an environmental impact statement under NEPA.
Specifically, commenters expressed concerns that the proposed rule
would have a significant adverse impact on the quality of the human
environment by causing fewer PACE loans to be originated, thereby
reducing the environmental benefits associated with PACE financing,
including benefits related to the reduction of water and energy
consumption.
The CFPB has prepared an environmental assessment and finding of no
significant impact regarding the proposed rule, to be published in the
Federal Register concurrently with this final rule. The environmental
assessment provides the basis for the conclusion that the proposed
rule, which the CFPB is adopting in this final rule with small changes
described below, will not have a significant effect on the human
environment.\99\ In developing the environmental assessment, the CFPB
considered commenters' estimates of the environmental benefits
associated with PACE financing. As discussed in the environmental
assessment, the CFPB found that those estimates likely overstate the
impacts on energy and water consumption that PACE loans provide. It
also found, however, that even assuming that the proposal would
entirely eliminate PACE financing (an outcome the CFPB does not expect
to occur), the proposed rule would not result in significant effects on
the human environment. Based on the finding of no significant impact,
the CFPB determined that an environmental impact statement need not be
prepared as some commenters suggested.
---------------------------------------------------------------------------
\99\ CFPB, Environmental Assessment and Finding of No
Significant Impact (Dec. 17, 2024).
---------------------------------------------------------------------------
B. 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.'' The
CFPB proposed to clarify that comment 2(a)(14)-1.ii's exclusion of tax
liens and tax assessments from the definition of credit applies only to
involuntary tax liens and involuntary tax assessments, and not to
voluntary ones, such as PACE transactions. The CFPB proposed to change
the comment by adding the word ``involuntary'' to clarify which tax
liens and tax assessments are not considered credit. Without an
exclusion for voluntary tax liens and voluntary tax assessments, the
proposal separately recognized that PACE transactions would meet TILA's
definition of ``credit.'' For the reasons discussed below, the CFPB is
finalizing comment 2(a)(14)-1.ii as proposed, to clarify 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.\100\
---------------------------------------------------------------------------
\100\ The CFPB is also finalizing 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.
---------------------------------------------------------------------------
Many commenters addressed this part of the proposal. Consumer
groups, mortgage industry stakeholders, and a State agency were
generally supportive of amending the comment, as well as recognizing
PACE transactions as credit. Some of these commenters asserted that
PACE transactions meet the definition of consumer credit under TILA and
Regulation Z and should be treated as such. Several consumer groups
stated that Congress's directive to prescribe rules for PACE financing
under TILA assumes that PACE transactions will be treated as credit
because the CFPB would otherwise have no authority to issue regulations
under TILA, as TILA governs consumer credit. A State agency stated that
PACE transactions are clearly a form of consumer credit, and that the
proposed amendment appears to be the simplest and most efficient means
of allowing PACE transactions to be subject to the requirements of TILA
and Regulation Z. Some mortgage industry stakeholders and consumer
groups stated that, as voluntary home-secured financing, PACE
transactions are mortgages or their functional
[[Page 2444]]
equivalents and should be treated the same under TILA.
A number of consumer groups and mortgage industry stakeholders
stated that applying TILA's mortgage requirements to PACE transactions
would curb abuses and help ensure consumers qualify and understand
repayment obligations. Two consumer groups expressed support for
applying the mortgage requirements under TILA and Regulation Z to PACE
transactions and suggested a number of adjustments to enhance consumer
protections. One credit union trade association stated that it was
critical that consumers with PACE transactions have the same rights and
protections as with other home-secured lending, particularly because
foreclosure related to unpaid municipal levies may involve a faster
process than a civil mortgage foreclosure.
A number of commenters suggested covering PACE transactions as TILA
credit would be important because the structure of PACE transactions
creates risk for consumers or other stakeholders. Some consumer groups
and mortgage industry stakeholders asserted that the role of private
contractors in PACE transactions has spurred predatory practices. A few
commenters indicated that alternatives to PACE financing, such as solar
funds, home equity lines of credit, or second mortgages may be safer
for consumers or carry lower fees or interest rates. One credit union
league asserted various concerns about PACE financing, such as high
interest rates, exploitation and targeting of vulnerable consumers,
risks of losing homes, deceptive marketing practices, and a lack of
disclosures. A few commenters made assertions about possible negative
impacts of PACE financing on certain groups of consumers, including
older Americans, lower-income consumers, consumers with limited English
proficiency, and majority Black or Hispanic communities.
Several commenters, including consumer groups, mortgage industry
stakeholders, and environmental groups, asserted that treating PACE
transactions like mortgages would ensure a level playing field for
market participants. Some mortgage industry and consumer group
stakeholders stated that the proposal would ensure that PACE
transactions receive the same level of scrutiny and safeguards as non-
PACE mortgage products. One consumer group and one title insurance
trade association stated that PACE transactions tend to come with
higher costs, fees, and interest rates than non-PACE mortgage products,
warranting scrutiny for the market. One environmental group commented
that PACE companies effectively act like mortgage bankers without
having to comply with banking or lending regulations.
Many PACE industry stakeholders objected to treating PACE
transactions as credit under TILA. Some commenters stated that PACE
transactions are legally distinguishable from consumer credit. Several
commenters, including PACE companies and a government sponsor, referred
to State law or case law to assert that PACE transactions are not
consumer credit or are property tax assessments. A PACE company stated
that there is no legal difference between voluntary and involuntary tax
assessments, and that voluntariness does not render a tax assessment
consumer credit. This commenter also asserted that the proposal did not
distinguish between voluntary and involuntary court judgments, which,
like tax assessments and tax liens, were excluded from ``credit'' under
existing comment 2(a)(14)-1.ii.
PACE companies, trade associations, and a government sponsor of
PACE programs asserted that covering PACE transactions as consumer
credit under TILA would not be supported by EGRRCPA section 307 or
other TILA provisions. Several commenters stated that treating PACE
transactions as credit would be overreach because, they asserted, it
would exceed Congress's narrow directive in EGRRCPA section 307 by
applying TILA to all voluntary tax assessments and tax liens.
Some commenters stated that the CFPB lacks statutory authority to
regulate PACE transactions as proposed because they are tax assessments
subject to State law and are not credit under TILA. A few commenters
stated that EGRRCPA section 307's mandate was narrow, and that the term
``consumer credit'' cannot be reasonably interpreted to include PACE
transactions. A few commenters asserted that, if Congress had intended
to make definitional changes and subject PACE transactions to further
regulation beyond ability to repay and civil liability, it would have
said so explicitly. A PACE company stated that EGRRCPA section 307
would be superfluous if PACE transactions were TILA credit because they
would already be covered. A few commenters asserted that TILA's
preservation of governmental immunity from certain remedies is evidence
that Congress did not intend TILA to apply generally to PACE
transactions, since TILA liability generally attaches to creditors, and
local governments would be creditors in PACE transactions.
Several commenters took issue with the coverage of government
sponsors of PACE programs. Eight Members of the U.S. Congress stated
that local governments that levy PACE financing as property tax
assessments are not ``creditors.'' Two membership organizations for
local governments asserted that, since PACE government sponsors are
plausibly the ``creditors'' in PACE transactions but are protected from
civil and criminal penalties under TILA, the text of TILA itself
forbids including PACE financing in the definition of credit. Another
government association asserted that, while the public agency is the
entity entering into the financing agreements, issuing bonds secured by
the obligations, and bearing ultimate responsibility for their
administration and enforcement, the public agency should not be treated
as a creditor. One government sponsor asserted that the rule would have
a disproportionate effect on its State and would significantly reduce
PACE originations.
Many local governments and a public PACE provider requested an
exclusion for government-operated PACE programs. One public PACE
provider stated, among other things, that such programs are designed to
achieve public policy objectives, are subject to rigorous underwriting
standards and other robust consumer protections, are not driven by a
profit motive, and have not resulted in claims of abuse or negative
outcomes. One nonprofit commenter asserted that the likelihood of
fraud, deception, and abuse is virtually nil where a government entity
alone administers a PACE program.
Several commenters took issue with TILA coverage on the ground that
PACE transactions run with the underlying property and are not personal
liabilities. One PACE company asserted that, while TILA defines
``credit'' to mean, in part, a ``right granted by a creditor to a
debtor . . . , '' there are no ``debtors'' in PACE transactions--that
``debtors'' are natural persons to whom the credit is extended, whereas
PACE transactions are attached to the property and are not personal
liabilities. Eight Members of the U.S. Congress, several PACE
companies, trade associations, and a local government organization
asserted that PACE transactions are not personal debts but rather tax
assessments that are levied against and run with the land. One PACE
company asserted that PACE transactions are not consumer credit because
their primary purpose is to advance State environmental and economic
policies, whereas TILA and Regulation Z define ``consumer credit'' in
part to mean credit that is primarily
[[Page 2445]]
for personal, family, or household purposes. This commenter also stated
that PACE transactions are attached to the property and are not
personal debts.
PACE companies, government sponsors, local government trade groups,
a PACE industry trade association, an energy industry stakeholder, and
eight Members of U.S. Congress opposed treating PACE transactions as
mortgages under TILA. A PACE company stated that PACE does not meet
TILA's definition of residential mortgage loan, in part because the
lien will arise as a matter of State law pursuant to governments' power
of taxation. A different PACE company stated that PACE transactions are
not residential mortgage loans as defined in TILA. Several commenters,
including PACE companies and a government sponsor, asserted that
EGRRCPA section 307's directive to ``account for the unique nature'' of
PACE transactions in prescribing regulations indicates that Congress
did not intend to treat them as mortgage loans. One PACE company stated
that the distinctions between principal and interest payments and
property tax payments under TILA point to PACE transactions being
distinct from mortgage loans. A PACE industry trade association and a
PACE company, among others, asserted several differences between PACE
transactions and mortgages, including that PACE transactions do not
accelerate, are nonrecourse, and have longer foreclosure timelines. One
PACE company stated that TILA's requirements are designed for higher
dollar amount mortgages. The PACE company stated that PACE transactions
are functionally and practically distinguishable from mortgages, and
that they are significantly smaller than mortgages and therefore less
risky for consumers. An environmental group and a PACE industry trade
association stated that PACE assessments have structural protections
that mortgages do not, including that consumers have years (versus
months) for consumers to come current on their property taxes before
local governments can initiate a foreclosure or tax sale.
Numerous commenters, including eight Members of the U.S. Congress,
home improvement contractors, and an environmental group, stated that
treating PACE financing like a mortgage loan would disregard the unique
nature of PACE transactions. The eight Members of the U.S. Congress
characterized PACE transactions as land-secured municipal finance, and
other commenters, including a PACE company, a government sponsor, and
another industry stakeholder, characterized them as property tax
assessments imposed by government entities to advance important public
policy purposes as mandated by State law. Some commenters stated that
State and local governments have authorized similar transactions for
some time, and that such transactions have only been authorized for
projects that advance public purposes dictated by State and local
governments.
Numerous commenters, including PACE companies, government sponsors,
membership organizations for local governments, home improvement
contractors, energy stakeholders, and others, expressed a wide variety
of concerns about PACE transactions being subject broadly to TILA. They
stated, for example, that broad TILA coverage would (1) exceed the
mandate in EGRRCPA section 307, which required only ability-to-repay
and civil liability regulations; (2) introduce substantial burden that
would be unwarranted given the industry's progress on consumer
protections in recent years; (3) deter industry actors from
participating and render the programs nonviable or reduce PACE
originations, which they stated would reduce access to credit, push
consumers into more expensive forms of financing, or limit revenue
options for State and local governments.
Some commenters asserted that broad TILA coverage would be
unwarranted. Some stated, for example, that the CFPB lacked
sufficiently reliable, recent data or anecdotes to justify broad
application of TILA to PACE transactions. Several commenters stated
that data sources, including the data discussed in the PACE Report,
reports issued by the California Department of Financial Protection and
Innovation (California DFPI), and analysis from private bond rating
agencies, for example, do not support the conclusion that PACE
transactions are particularly harmful. Some commenters asserted that
available data in fact demonstrates, for example, that PACE financing
correlates with a negligible impact on credit outcomes; that PACE
financing has relatively low delinquency rates, sometimes lower than
general aggregate property taxes and mortgages; or that foreclosure
rates for homes with a PACE lien are quite low. A PACE company asserted
that only two claims have been made on the California Alternative
Energy and Advanced Transportation Financing Authority (CAEATFA) loan
loss reserve, which the commenter interpreted to mean that mortgage
industry concerns relating to the priority status of PACE liens are
overblown.
Some commenters, including PACE companies and home improvement
contractors, pointed to specific TILA requirements that they asserted
would pose particular challenges if applied to PACE transactions. For
example, a PACE company and a home improvement contractor stated that
TILA's disclosure and appraisal requirements do not make sense or are
overly costly for PACE transactions compared to other mortgages, in
part because the time to close on a non-PACE mortgage is longer and the
transaction is for a much larger dollar amount. PACE companies and home
improvement contractors asserted that loan originator requirements
would impose undue costs and could cause home improvement contractors
to stop offering PACE financing to consumers, either by choice or
because they could not satisfy applicable requirements under State law.
A PACE company also stated that Regulation Z requirements as to the
treatment of credit balances would inhibit prepayment of property
taxes.
Numerous commenters opposed PACE transactions being subject to the
higher-priced mortgage loan appraisal requirement, including public and
private industry stakeholders, home improvement contractors, and energy
groups. A PACE company, an energy industry stakeholder, and home
improvement contractor firms asserted that the higher-priced mortgage
loan appraisal requirement would increase cost or delay and deter home
improvement contractor participation in PACE programs. The PACE company
stated that the higher-priced mortgage loan appraisal requirement and
TILA's high-cost mortgage protections \101\ would effectively cap the
rates and fees for PACE transactions, which could make PACE financing
economically nonviable. One home improvement contractor firm stated
that the cost of an appraisal, estimated to be $300-$500, is
unnecessary because the current valuation process used by industry
stakeholders is more conservative than receiving an appraisal. Two PACE
companies and an industry trade association recommended permitting the
use of automated valuation models (AVMs) instead of appraisals--they
asserted that AVMs are effective and more efficient than appraisals and
already permitted under California law.
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\101\ See the discussion of Sec. Sec. 1026.32 and 1026.34 for a
full discussion of comments pertaining to the application of TILA's
high-cost mortgage protections.
---------------------------------------------------------------------------
Some commenters stated that applying TILA to PACE transactions
[[Page 2446]]
would delay PACE originations. Comments about delay in the context of
specific TILA requirements, such as the TILA-RESPA integrated
disclosure requirements for which there is a mandatory waiting period
between disclosure and consummation, are discussed below. One home
improvement contractor asserted that a delay would result in financial
hardship for contractors who do not get paid until the consumer signs
off on the project. Another commenter stated that this delay threatens
the point-of-sale nature of PACE transactions, which would be
detrimental because PACE transactions allow for emergency repairs and
upgrades to help consumers obtain homeowners insurance.
One PACE company asserted that TILA's right of rescission would not
benefit consumers and would be confusing for consumers and burdensome
for States. The commenter stated that PACE transactions are already
subject to a right to cancel under State law and industry practice,
including a five-day right for senior citizens under California law.
A number of commenters, including an assessment administrator, PACE
companies, government sponsors, bond counsel, a trade association for
special districts, and a public PACE provider stated that the proposal
would extend TILA coverage to many assessment financing transactions
that are not commonly known as PACE. These commenters stated that this
coverage would create concern and uncertainty for non-PACE financing.
Some of these commenters asserted that coverage of non-PACE
transactions would exceed the congressional mandate provided in EGRRCPA
section 307 and impede State and local governments' ability to use
their taxing and bonding authorities as they see fit. A public PACE
provider recommended covering voluntary contractual assessments,
instead of simply voluntary assessments, to avoid covering obligations
arising from what the commenter referred to as traditional voluntary
assessment districts.
Many commenters, including PACE companies, a public PACE provider,
home improvement contractors, eight Members of the U.S. Congress, an
assessment administrator, an industry trade association, bond counsel,
and a group of State attorneys general, stated that PACE transactions
already have sufficient consumer protections in place. Some of these
commenters stated that PACE transactions are already sufficiently
regulated at the State and local levels. One trade association
representing special districts stated that State and local regulations
strike an effective balance of consumer protection and enabling PACE
financing to achieve its objectives. Many commenters stated that PACE
companies have instituted a series of additional consumer protections
as well, including verifying project completion before payment, various
consumer communications, and oversight of home improvement contractors.
One environmental group stated that PACE programs are accountable to
local government oversight.
PACE industry stakeholders also stated that the rate of consumer
complaints involving PACE transactions has been low. A PACE company and
an industry trade association asserted that approximately one in 1,000
PACE loans have prompted consumer complaints across several years. A
different trade association stated that a California DFPI report on
PACE showed only 69 complaints, and that all but two were resolved. Two
PACE companies stated that the number of complaints has been trending
down, suggesting that industry reforms have been effective at
addressing the consumer protection issues from prior years.
Many commenters stated that the proposal was premised on outdated
concerns, and that the CFPB should have relied more heavily on more
recent trends and information. Some commenters, including PACE
companies, a State agency, and a government sponsor, stated that
evidence, including evidence from the PACE Report and California DFPI
reports, for example, demonstrates that consumer outcomes improved
after California's and Missouri's consumer-protection legislation took
effect. Citing to data from CAEATFA and the Institutional Investor
Journal of Structured Finance, one PACE company asserted that PACE
financing does not prevent subsequent home sales. This commenter also
stated that PACE delinquency rates are improving, and that PACE
customers are usually able to catch up on delinquent tax payments,
noting that 461 PACE delinquencies were reflected in a 2021 annual
report, down from 889 delinquencies in the previous year's report.
Eight Members of the U.S. Congress stated that the delinquency rate in
Florida is lower than in California after its 2018 California PACE
Reforms.
A number of these commenters acknowledged that, before States and
private industry stakeholders instituted consumer protection measures,
there were concerns associated with PACE financing. Several commenters
acknowledged that malfeasance by some home improvement contractors
created risk and harm for consumers. One PACE company and a government
sponsor stated that home improvement contractor malfeasance included,
for example, misrepresentation, forging signatures on the loan
contracts or completion certificates, creating false business records
or contact information, and simply disappearing after the proceeds were
disbursed. One State regulator stated that around 45 percent of
claimants under a State-established financial restitution program for
consumer fraud in residential solar purchases from licensed contractors
were PACE customers, and that most of the relevant contracts were
executed before the 2018 California PACE Reforms took effect.
Several consumers who reported receiving a PACE transaction
described various protections and benefits that they received
associated with the loan. They asserted, for example, that the PACE
transactions provided financing for home improvements on a short
timeline and lowered their homeowner's insurance premiums. One home
improvement contractor estimated that 90 percent of homeowners that the
company has helped secure a PACE loan have benefited from the program.
Several commenters asserted positive impacts and benefits of PACE
transactions, which they asserted the proposed rule would diminish.
Examples included (1) increased home values, (2) increased access to
homeowner's insurance, (3) better access to credit for some consumers,
(4) job creation, (5) environmental benefits, (6) lower utility bills,
and (7) positive impacts for small businesses. One environmental group
commented that PACE transactions are unique because they provide
affordable, equitable, fixed-rate financing for homeowners to achieve
public policy goals.
Some commenters stated that PACE programs are uniquely designed to
help the environment and communities by facilitating green and
disaster-resilient homes. One public PACE provider, in discussing a
recent history of natural disasters, characterized PACE financing as a
critical public policy and public safety tool. One PACE company stated
that local governments can tailor their PACE programs to serve the
individual community needs.
Several commenters also stated that PACE transactions represent a
better alternative to other financing options. An individual commenter
stated that PACE financing provides low-cost private capital funding to
consumers, and that given current high interest rates on credit cards,
a reduction in the availability of PACE financing would be
[[Page 2447]]
troubling for their State. An environmental group stated that the
proposal would reduce PACE funding access, which would push homeowners
into more expensive, less equitable financing options that do not vet
or monitor contractors or contain anti-consumer clauses like variable
rates or prepayment penalties.
PACE industry stakeholders also identified certain elements of the
transactions that the commenters asserted make PACE transactions more
affordable, understandable, or secure. These included assertions that
PACE transactions are nonrecourse and do not accelerate upon default,
and that the total loan amount correlates to the property value and a
loan term that cannot exceed the useful life of the home improvement
that is financed with the PACE loan. Commenters asserted that PACE
transactions carry a relatively low fixed interest rate, require no
downpayment, have no prepayment penalty, and fully amortize. Commenters
noted that home improvement contractors typically receive no payment
until the project is complete, and that PACE transactions can help
lower insurance premiums for homes that have been improved with a
completed PACE financed project. An industry trade association for the
PACE industry asserted that PACE financing is less risky than home
equity lines of credit or a second mortgage, which the commenter said
can strip equity without a corresponding home improvement project that
would increase property value.
At least three commenters expressed concern that the proposed rule,
if finalized, would interfere with State consumer protection laws that
apply to PACE transactions. A PACE company, a government sponsor, and a
trade association asserted that the proposed rule would complicate or
conflict with existing State laws, or interfere with States' ability to
adjust their laws to address concerns over time. One commenter
suggested this could possibly result in preemption of State laws.
A number of commenters, including State attorneys general, PACE
companies, and bond counsel, stated that regulating PACE transactions
in this rulemaking would be unconstitutional under principles of
federalism, sovereign immunity, and commandeering. Several commenters
asserted that the CFPB's proposal would encroach on States' rights to
use local taxing and bonding authorities as they see fit.
Numerous commenters asserted that the proposal could have an impact
on access to credit for home improvements to improve energy efficiency
of homes or to strengthen homes' resilience to withstand natural
disasters. A bank that provides PACE funding stated that PACE financing
provides access to capital to many borrowers who would otherwise be
unable to pay for energy efficiency, renewable energy, or resilience
home improvements. Members of the U.S. Congress stated that PACE
transactions provide low-to-moderate income families with access to
affordable financing for retrofits and energy efficient home
improvements.
Numerous commenters, including but not limited to eight Members of
the U.S. Congress, PACE companies, and a government association, stated
that PACE financing helps consumers obtain, maintain, or reduce the
cost of homeowner's insurance. A home improvement contractor asserted
that the homeowners that use PACE financing are the most vulnerable to
high energy bills and/or catastrophic damage to their homes during a
strong storm or hurricane. One environmental group asserted that
California protections caused reduced PACE originations at a time when
there are not enough financing opportunities to meet what they cast as
overwhelming needs.
For the reasons set forth herein, the CFPB is finalizing its
proposed amendment to comment 2(a)(14)-1.ii. As finalized, amended
comment 2(a)(14)-1.ii states 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'' in several places to
modify the tax assessments and tax liens excluded under comment
2(a)(14)-1.ii, the CFPB clarifies that the comment does not exclude tax
liens and tax assessments that arise from voluntary contractual
agreements, such as PACE transactions. Thus, tax liens and tax
assessments that are voluntary will be credit subject generally to TILA
if they meet the definition of credit under TILA and Regulation Z and
are not otherwise excluded.\102\
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\102\ Under the finalized amendment, tax liens and tax
assessments that are not voluntary for the consumer would continue
to be excluded.
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The amendment brings the exclusion in comment 2(a)(14)-1.ii in line
with the plain text definition of credit in TILA. TILA defines
``credit'' to mean the ``right granted by a 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.'' \103\
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\103\ 15 U.S.C. 1602(f); 12 CFR 1026.2(a)(14).
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PACE transactions easily fit these definitions--the agreements
provide for consumers to receive funding for home improvement projects
and repay those funds over time in installments.\104\ Consumers
voluntarily incur these financial obligations and are signatories to
the financing agreements. In brief, consumers choose to take out the
PACE debt obligation and must repay it over time.\105\
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\104\ Treating PACE transactions as TILA credit is consistent
with the FTC's assertion of claims against a PACE company under the
CFPB'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
(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.
\105\ See also, 89 FR 68086, 68087 (Aug. 23, 2024); 89 FR 61358,
61360 (July 31, 2024).
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That PACE transactions are repaid alongside property tax payments,
do not accelerate, are nonrecourse, or can remain with the property
after the consumer sells the home does not change the fundamental
nature of the transaction. Nor do other reasons commenters asserted for
why PACE transactions should not be treated as TILA credit--including
that PACE financing is authorized for important public policy purposes
under State law, may have characteristics that differ from other types
of mortgage obligations, or has produced benefits for industry
participants and communities. That States may also have laws in place
for PACE financing is similarly immaterial.\106\
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\106\ States have rules in place governing transactions that may
also be subject to TILA, including, for example, door-to-door sales
(see, e.g., Idaho Admin. Code r. 04.02.01.160; Ohio Admin. Code
109:4-3-11; Utah Admin. Code r. R152-11-9; Wis. Admin. Code ATCP
Sec. 127.62) and home improvement contractor work (see, e.g., Haw.
Rev. Stat. secs. 444-1 to 444-36; Haw. Code R. secs. 16-77-1 to 16-
77-117; La. Stat. secs. 37:2150 to 37:2764; N.J. Stat. secs. 17:16C-
62 to 17:16C-94; N.J. Stat. secs. 17:16C-95 to 17:16C-103; N.J.
Stat. sec. 56:8-151; Wash. Rev. Code secs. 19.186.005 to
19.186.060). In response to commenters' concerns that the proposed
rule, if finalized, would interfere with State consumer-protection
laws that apply to PACE transactions, the CFPB notes that TILA
preempts State disclosure laws only if they are ``inconsistent''
with it. TILA section 11(a), 15 U.S.C. 1610(a); 12 CFR
1026.28(a)(1). Additionally, any State may apply to the CFPB to
exempt a class of transactions within the State from certain TILA
and Regulation Z provisions if the State's law is substantially
similar to the Federal law (or, for credit billing provisions,
affords the consumer greater protection than the Federal law) and
there is adequate provision for enforcement. 15 U.S.C. 1633; 12 CFR
1026.29(a).
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[[Page 2448]]
Covering PACE transactions as credit under TILA notwithstanding
these characteristics is consistent with the treatment of other covered
credit transactions. For example, TILA explicitly treats other
nonrecourse obligations as consumer credit,\107\ and many mortgages are
effectively nonrecourse under State anti-deficiency statutes.\108\
Other forms of TILA-covered financing may also advance important public
policy purposes under State law. To the extent there are unique aspects
of PACE transactions that warrant adjustments, as mandated by EGRRCPA,
the CFPB is codifying amendments or exemptions to that end, as
described below.\109\ The amendment to comment 2(a)(14)-1.ii does not
specifically address the coverage or characteristics of PACE
transactions; it merely removes ambiguity that the existing regulatory
comment may have created, and that is not reflected in the statute's
definition of ``credit.'' Indeed, the original text of comment
2(a)(14)-1.ii was not intended to impinge on the statutory coverage of
voluntary transactions, such as PACE. The Board of Governors of the
Federal Reserve System (Board) issued the comment in 1981 when it
officially ``adopted, in substance'' existing staff opinion letters
regarding Regulation Z.\110\ In preamble and in several such letters
preceding issuance of the 1981 official staff interpretation, the Board
was clear that in addressing only whether certain 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.'' \111\ 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.'' \112\
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\107\ See e.g., 12 CFR 1026.33 (requirements applicable to
nonrecourse reverse mortgages).
\108\ See generally Alaska Stat. sec. 34.20.090; Ariz. Rev.
Stat. secs. 33-814(G), 33-729(A); Cal. Civ. Proc. Code secs. 580a-
580d; Haw. Rev. Stat. sec. 667-38; Minn. Stat. sec. 582.30; Mont.
Code secs. 71-1-232, 71-1-317; Nev. Rev. Stat. secs. 40.455, 40.458,
40.459; N.C. Gen. Stat. secs. 45-21.36, 45-21.38, 45-21.38A; N.D.
Cent. Code sec. 32-19-03; Okla. Stat. tit. 12, secs. 686, 765, 773;
Okla. Stat. tit. 46, sec. 43; Or. Rev. Stat. sec. 86.797(2); Wash.
Rev. Code secs. 61.24.100.
\109\ The considerations discussed in this section as to why
PACE transactions should not be subject to TILA also generally apply
with respect to other voluntary transactions that involve an
assessment on the property and are repaid through the property tax
system, even when they are not commonly known as PACE transactions.
\110\ See 46 FR 50288, 50288, 50292 (Oct. 9, 1981).
\111\ Fed. Rsrv. Bd., Public Information Letter No. 166 (1969).
\112\ Id.
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Other staff opinion letters contained similar analyses,\113\ and
the Board reiterated this reasoning in final rule preamble shortly
before issuing the 1981 official staff interpretation, again focusing
on the involuntary nature of the obligations as the reason they were
not credit.\114\ The Board explained:
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\113\ See Fed. Rsrv. Bd., Public Information Letter No. 153
(1969) (finding that sewer assessment installment payments did not
arise ``from a contractual relationship voluntarily entered into,
between debtor and creditor'' and thus, that TILA and Regulation Z
would not apply); 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.'').
\114\ 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.\115\
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\115\ Id.
Moreover, in this preamble and in the 1981 official staff
interpretation, 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.'' \116\ 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.\117\
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\116\ 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
CFPB, which republished the 1981 Board interpretation as an official
CFPB interpretation in comment 2(a)(14)-1.ii with no substantive
changes.
\117\ With regard to the comment noting that the proposal did
not distinguish between voluntary and involuntary court judgments,
which are also discussed in comment 2(a)(14)-1.ii, those
transactions are distinct from PACE transactions and are outside the
scope of this rulemaking.
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Recognizing PACE financing as TILA credit is consistent not only
with TILA's definition of ``credit,'' but with the goals of EGRRCPA
section 307. By directing the CFPB to prescribe certain regulations for
PACE financing under TILA, in EGRRCPA section 307, Congress evinced its
intent for PACE transactions to be covered as TILA credit, in line with
the text of the statute. To the extent there has been uncertainty as to
whether PACE financing is credit under TILA, EGRRCPA section 307's
explicit choice to address PACE financing using TILA resolves the
question.
More generally, 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.'' \118\ Many commenters
noted that PACE financing can be used in place of other forms of
consumer credit (including home equity lines of credit, personal loans,
credit cards, and mortgage loans) but there was no consensus on which
product was best for the consumer. Ensuring that consumers can compare
these alternatives promotes competition and falls squarely within the
congressional intent and purpose of TILA. Commenters concerned about
coverage of PACE transactions under TILA provided no compelling reason
why consumers should not receive the same disclosures and protections
when entering into a PACE transaction as when entering into any other
financing transaction that could result in the loss of their home.
Additionally, clarifying that voluntary tax liens and tax assessments
may still qualify as TILA credit is necessary to prevent circumvention
or evasion of TILA's purposes, including as to PACE transactions.
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\118\ TILA section 102(a), 15 U.S.C. 1601(a).
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Regarding comments opposing TILA coverage because PACE transactions
attach to the property, the CFPB notes that PACE transactions are
offered or extended to consumers. Unlike involuntary tax assessments
and liens,\119\ which are imposed upon real property as a function of
ownership and without the owner's specific consent, PACE transactions
cannot be completed without a natural person (the homeowner) signing a
voluntary
[[Page 2449]]
financing agreement secured by their home; these transactions, like
other mortgage transactions, are always offered or extended to
consumers and are secured by residential real property that they
personally own.\120\
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\119\ In response to the suggestion to carve out voluntary
contractual assessments from the credit exclusion, the CFPB
concludes that adding the word ``involuntary'' into comment
2(a)(14)-1.ii appropriately distinguishes between transactions that
the consumer chooses to enter into and transactions that are not
voluntary for the consumer.
\120\ See 12 CFR 1026.1(c)(1)(i) (stating one of the four
conditions of Regulation Z coverage is when ``[t]he credit is
offered or extended to consumer''); see also 12 CFR 1026.2(a)(12)
(defining ``consumer credit'' as that which is ``offered or extended
to a consumer primarily for personal, family, or household
purposes''); see also Fla. Stat. sec. 163.081(2) (``The owner of
record of the residential property within the jurisdiction of an
authorized program may apply to the authorized program administrator
to finance a qualifying improvement. The program administrator may
only enter into a financing agreement with the property owner.'');
Cal. Sts. & Hwys. Code sec. 5898.20 (authorizing the creation of
PACE programs whereby ``public agency officials and property owners
may enter into voluntary contractual assessments for public
improvements and to make financing arrangements'').
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Moreover, consumers who agree to PACE transactions are functionally
responsible for ensuring their repayment. PACE transactions are either
repaid, with interest, alongside regular property tax payments, or, if
those payments are not made, at a tax sale or foreclosure. Further, as
several mortgage industry stakeholders noted, before a PACE borrower
can refinance a home or sell it, they typically must pay off the
remaining balance on the PACE transaction or reduce the sales price to
account for the existing lien.\121\ In this way, transferring a home
with an outstanding PACE transaction is no different than transferring
a property subject to any other outstanding lien or mortgage.
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\121\ 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. Guidelines from both Fannie Mae and
Freddie Mac generally prohibit purchase of mortgages on properties
with outstanding first-lien PACE obligations. See Fannie Mae,
Property Assessed Clean Energy Loans (Dec. 16, 2020), <a href="https://selling-guide.fanniemae.com/sel/b5-3.4-01/property-assessed-clean-energy-loans">https://selling-guide.fanniemae.com/sel/b5-3.4-01/property-assessed-clean-energy-loans</a> and Freddie Mac, Refinance of Mortgages secured by
properties subject to an energy retrofit loan (Sept. 4, 2024),
<a href="https://guide.freddiemac.com/app/guide/section/4301.8">https://guide.freddiemac.com/app/guide/section/4301.8</a>. Similarly,
the 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. & Urb. 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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Because PACE transactions are credit secured by residential real
property, removing the exclusion in comment 2(a)(14)-1.ii as to
voluntary tax assessments and tax liens ensures that PACE loans are
subject to TILA's mortgage requirements. For example, various
disclosure and other requirements will apply to the entity that is the
``creditor'' as defined in Sec. 1026.2(a)(17), which the CFPB
understands is typically the government sponsor in a PACE
transaction.\122\ Other requirements will 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.\123\ Thus, the
clarification is necessary to effectuate the purposes of the statute,
such as ensuring the meaningful disclosure of credit terms to enable
the consumer to comparison shop.\124\ Ensuring that voluntary consumer
transactions such as PACE are subject to the same protections as other
credit products with similar characteristics strengthens competition
among financial institutions and other firms engaged in the extension
of consumer credit.\125\
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\122\ 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 CFPB's understanding,
consistent with comments in response to the proposed rule and other
research, is that these characteristics apply to government sponsors
of PACE transactions in the PACE programs that have been active.
\123\ 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 Sec. 1026.41 for discussion of servicing provisions in
Regulation Z.
\124\ See 15 U.S.C. 1601(a).
\125\ Id.
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Regarding comments raising concerns about the costs or operational
challenges that the higher-priced mortgage loan appraisal rule could
introduce, the CFPB notes that TILA section 129H(b)(4) provides the
CFPB and certain other agencies with joint rulemaking and exemption
authority with respect to the higher-priced mortgage loan appraisal
rule.\126\ As such, any future rulemaking relating to an higher-priced
mortgage loan appraisal rule exemption would need to be considered and
issued jointly by the CFPB, Board, FDIC, OCC, NCUA, and FHFA; the
agencies would need to determine that ``the exemption is in the public
interest and promotes the safety and soundness of creditors.''
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\126\ 15 U.S.C. 1639h(b)(4). Specifically, the agencies with
joint rulemaking and exemption authority for the higher-priced
mortgage loan rule are the CFPB, the Board of Governors of the
Federal Reserve System (Board), the Federal Deposit Insurance
Corporation (FDIC), the Office of the Comptroller of the Currency
(OCC), the National Credit Union Association (NCUA), and the Federal
Housing Finance Agency (FHFA). See TILA section 129H(b)(4)(A), 15
U.S.C. 1639h(b)(4)(A).
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Regarding concerns that TILA coverage would delay PACE
originations, other products that meet the statutory definition of
credit, including home equity lines of credit, personal loans, credit
cards, or second mortgages, may also be used for home improvement
projects and emergency repairs. As discussed below, work on a home
improvement project frequently does not and cannot start
immediately,\127\ and to the extent there is urgency to originate a
PACE transaction, there are regulatory mechanisms to permit consumers
to modify or waive the mandatory waiting periods and receive the PACE
loan early, including the bona fide personal financial emergency
exception to the TRID waiting periods.\128\ Moreover, many commenters
pointed to the point-of-sale business practice common to PACE financing
as contributing to increased consumer risk. TILA coverage of PACE
transactions will thus help consumers compare the various available
credit terms and ensure competition among the various financial
institutions and other firms engaged in the extension of consumer
credit.\129\
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\127\ See part VI.D.
\128\ See 12 CFR 1026.19(e)(1)(v) and (f)(1)(iv).
\129\ See 15 U.S.C. 1601(a).
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The CFPB declines to adopt other exemptions recommended by
commenters, including with regard to PACE programs administered by
governments without the assistance of private PACE companies,
government units as ``creditors'' under TILA with respect to PACE
transactions, or PACE transactions secured by subordinate liens.
Although some of these factors could lower risks for consumers, they do
not affect whether a PACE transaction is credit under TILA. PACE
consumers in these circumstances will benefit from TILA protections in
the ways Congress intended when codifying TILA's protections.
Recent efforts by States and PACE industry stakeholders to enhance
consumer protections do not make TILA requirements less meaningful for
PACE consumers. Further, as the PACE industry continues to grow, some
States may not impose consumer protection requirements similar to those
under TILA, and new private participants may enter the industry that do
not share the same commitment to consumer protections as current
industry stakeholders have shown in recent years. For example, as some
commenters asserted, while PACE borrowers may have more time to come
[[Page 2450]]
current on late payments than on a traditional home mortgage, these
protections are highly variable from State to State, and the ultimate
result may be the same--the loss of one's home due to default. The PACE
Report demonstrates--and a number of industry stakeholders acknowledged
in comments--that, in previous years, PACE financing created
significant risk for consumers. Nonetheless, TILA applies regardless of
the current level of risk in any specific credit market.
In response to comments asserting the rule unconstitutionally
restricts States' tax powers, the CFPB notes that PACE transactions are
voluntary financing agreements between homeowners and creditors that do
not implicate or restrict States' sovereign taxation authority.
Moreover, Federal limits on State taxation are authorized under the
Commerce Clause, and treating PACE transactions as TILA credit does not
violate commandeering or related federalism principles. Congress
expressly directed the application of ability-to-repay rules and civil
liability provisions to PACE transactions in EGRRCPA section 307.
Rather than directing States to enact, administer, or enforce a Federal
program, the rule implements Congress's mandate in EGRRCPA section 307
to ensure that States choosing to extend PACE credit to consumers
comply with applicable Federal requirements.
The CFPB finalizes the amendment to comment 2(a)(14)-1.ii pursuant
to its authority under TILA section 105(a) and consistent with EGRRCPA
section 307. The amendment is necessary and proper to carry out TILA's
purposes and prevent circumvention or evasion thereof, including the
purposes of assuring the meaningful disclosure of credit terms and
avoiding the uninformed use of credit. Additionally, EGRRCPA section
307 directs the CFPB to prescribe certain regulations for PACE
financing under TILA, which governs credit transactions. The amendment
to comment 2(a)(14)-1.ii is necessary to remove any ambiguity that the
original comment created as to PACE transactions and to carry out
congressional intent, both as to TILA and EGRRCPA.
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) amended TILA
in 1994 to address abusive practices in refinancing and home-equity
mortgage loans with high interest rates or high fees.\130\ The
provisions of HOEPA are implemented in Regulation Z in Sec. Sec.
1026.32 and 1026.34.\131\
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\130\ Public Law 103-325, 108 Stat. 2160.
\131\ 12 CFR part 1026.
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The CFPB did not propose any changes to these provisions and is not
amending them in this final rule. Sections 1026.32 and 1026.34 will
apply to PACE transactions that are high-cost mortgages under Sec.
1026.32(a)(1) in the same way as other high-cost mortgages.\132\ The
CFPB requested comment on whether any clarification was required with
respect to how HOEPA's provisions, as implemented in Regulation Z,
apply to PACE transactions that may qualify as high-cost mortgages.
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\132\ 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 CFPB 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.
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Several commenters supported requiring HOEPA compliance for PACE
loans. A credit union trade association asserted that HOEPA should
apply, to ensure that consumers with PACE loans receive the same
protections as those with other mortgage loans. In response to the
CFPB's specific request for comment on the treatment of late fees,
consumer group commenters opposed distinguishing late fees that apply
under property tax law from those that are imposed by the PACE
contract. They recommended specifying that there is no distinction.
They asserted that such a distinction would contravene the intent of
HOEPA--to protect vulnerable consumers who receive relatively expensive
mortgage loans--because property tax late penalties can be significant
and must be paid on top of interest required by the PACE financing
agreement.
A State agency similarly stated that HOEPA's late fee limitations
should not be relaxed for PACE loans. This commenter pointed to the
HOEPA provision concerning late payment charges at Sec.
1026.34(a)(8)(iv), which the commenter characterized as punitive for
consumers who are more likely to default. The commenter also stated
that PACE lenders should not be permitted to increase interest rates
after default; it asserted that doing so could force borrowers who are
having difficulty into foreclosure or inescapable debt.
A PACE company, an industry trade association, and a PACE
government sponsor asserted that requiring HOEPA compliance would
inhibit PACE originations. A PACE company stated that HOEPA application
would make PACE lending cost-prohibitive or economically nonviable.
Several asserted that HOEPA would increase compliance costs. A PACE
industry trade association and a government sponsor asserted that PACE
programs are already costly to administer due to certain consumer
protections or consumer benefits, and that the CFPB failed to consider
these factors in proposing to subject PACE transactions to HOEPA's
requirements.
A PACE company and a government sponsor asserted that requiring
HOEPA compliance would effectively cap the price of PACE loans. A PACE
company and an industry trade association opposed HOEPA application
because PACE transactions are smaller and generate less revenue than
many other high-cost mortgage loans. The trade association stated that
lower revenue and higher origination costs make it more difficult to
originate PACE loans and come in under the high-cost thresholds. One
PACE company asserted that, if the CFPB does not exempt PACE loans, it
should raise the applicable HOEPA thresholds for PACE transactions.
Some PACE industry commenters addressed high-cost requirements in
combination with higher-priced mortgage loan requirements, generally
opposing both sets of requirements.
One PACE company commented that two high-cost requirements in
Regulation Z would make compliance difficult or impossible: the
prohibition on loan proceeds being paid to home improvement contractors
under Sec. 1026.34(a)(1), and housing counseling certification
requirements under Sec. 1026.34(a)(5).
Having considered the comments, the CFPB has determined not to
adjust the HOEPA requirements for PACE loans. As described in the
discussion of Sec. 1026.2(a)(14), the CFPB is amending commentary to
Regulation Z to clarify that voluntary transactions such as PACE are
credit under TILA notwithstanding their integration into the property
tax system. Consumers receiving high-cost PACE loans should receive
HOEPA protections just as consumers receiving other high-cost mortgage
loans do.
For example, the additional disclosures and credit counseling
[[Page 2451]]
requirements will ensure consumers are provided information to inform
their credit decisions,\133\ and restrictions on certain riskier loan
features will enhance the safety of the loans.\134\ Additionally, the
limitations on fees that can be charged for payoff statements may make
it easier for consumers who receive high-cost PACE loans to access loan
information at minimal cost, which could be useful in light of the
final rule's exemption of PACE loans from the periodic statement
requirement under Sec. 1026.41.\135\
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\133\ See 12 CFR 1026.32(c) (disclosure requirements); 34(a)(5)
(pre-loan counseling requirements).
\134\ See 12 CFR 1026.32(d).
\135\ See 12 CFR 1026.34(a)(9).
---------------------------------------------------------------------------
More generally, weakening the HOEPA requirements for PACE loans
would be inconsistent with the governing statute. Under TILA section
129(p), the CFPB may exempt specific mortgage products or categories of
mortgages from certain HOEPA prohibitions if the CFPB finds that the
exemption (1) is in the interest of the borrowing public, and (2) will
apply only to products that maintain and strengthen homeownership and
equity protection.\136\
---------------------------------------------------------------------------
\136\ 15 U.S.C. 1639(p).
---------------------------------------------------------------------------
Limiting HOEPA application would neither be in the interest of the
borrowing public nor maintain and strengthen homeownership and equity
protection. As described in part II.A, the super-priority status of
liens securing PACE loans means that the parties involved in
originating PACE loans have limited incentive to ensure consumer
understanding and affordability. This leaves consumers at risk.
The findings in the PACE Report bear out these concerns. The PACE
Report finds that more than 70 percent of PACE borrowers had pre-
existing non-PACE mortgages, and PACE industry commenters suggested
that the true figure is closer to 90 percent. The PACE Report finds
that PACE lending increased mortgage delinquency rates by 2.5
percentage points over a two-year period--getting a PACE loan increased
the risk of mortgage delinquency by about 35 percent.\137\ The PACE
Report further finds that the probability of delinquency on a pre-
existing mortgage loan was substantially higher for PACE consumers with
low credit scores--consumers in the sub-prime credit score group
experienced an increase in mortgage delinquency almost two and a half
times the average effect.\138\
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\137\ See PACE Report, supra note 12, at 4, 26-27.
\138\ See id. at 36-37.
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The CFPB also notes that the exemption authority in TILA section
129(p) does not apply to certain HOEPA requirements.
The CFPB acknowledges, as industry commenters have noted, that
lending practices and State law have evolved since the origination of
the PACE loans reflected in the PACE Report, that consumers may choose
to select PACE financing despite the higher costs relative to other
forms of financing, and that PACE financing may help some consumers
access credit or may advance public policy purposes. These
considerations do not provide a basis for limiting HOEPA protections.
Although some commenters asserted that the application of HOEPA
protections would inhibit PACE lending or make it infeasible, the CFPB
estimated that nearly two-thirds of PACE loans studied in the PACE
Report would not have exceeded HOEPA thresholds (including nearly 90
percent of PACE loans in Florida).\139\
---------------------------------------------------------------------------
\139\ See id. at 15-16.
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One PACE company asserted that HOEPA application would prevent
payment of home improvement contractors with funds from the PACE loan.
However, Regulation Z specifically allows for payment of home
improvement contracts with loan proceeds in certain circumstances.\140\
Although one commenter expressed concern that HUD has not approved
housing counseling for PACE loans, in general HUD does not approve
housing counseling for particular types of mortgage loans. Current
housing counseling requirements include counseling on topics such as
financial literacy and budget planning, which are applicable
irrespective of the loan product.\141\
---------------------------------------------------------------------------
\140\ Section 1026.34(a)(1) prohibits payment to a contractor
under a home improvement contract from the proceeds of a high-cost
mortgage, other than (1) by an instrument payable to the consumer or
jointly to the consumer and the contractor, or (2) at the election
of the consumer, through a third-party escrow agent in accordance
with terms established in a written agreement signed by the
consumer, the creditor, and the contractor prior to the
disbursement.
\141\ Dep't of Hous. & Urb. Dev., Housing Counseling Program
Handbook (7610.1) (Apr. 2024), <a href="https://www.hud.gov/program_offices/administration/hudclips/handbooks/hsgh/7610.1">https://www.hud.gov/program_offices/administration/hudclips/handbooks/hsgh/7610.1</a>.
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1026.35 Escrow Accounts
1026.35(b) Exemptions
1026.35(b)(2)(i)
1026.35(b)(2)(i)(E)
TILA section 129D generally requires creditors to establish escrow
accounts for certain higher-priced mortgage loans.\142\ Regulation Z
implements this requirement in Sec. 1026.35(a) and (b). The CFPB
proposed to exempt PACE transactions from this higher-priced mortgage
loan escrow requirement. For the reasons discussed in this section, the
CFPB is finalizing the proposed exemption.
---------------------------------------------------------------------------
\142\ 15 U.S.C. 1639d.
---------------------------------------------------------------------------
Regulation Z defines a higher-priced mortgage loan as a closed-end
consumer credit transaction secured by the consumer's principal
dwelling with an APR exceeding the average prime offer rate (APOR)
\143\ for a comparable transaction by a certain number of percentage
points.\144\ With certain exemptions, Regulation Z Sec. 1026.35(b)
prohibits creditors from extending higher-priced mortgage loans secured
by first liens on consumers' principal dwellings unless an escrow
account is established before consummation for payment of property
taxes, among other charges (higher-priced mortgage loan escrow
requirement).
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\143\ 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.
\144\ 12 CFR 1026.35(a)(1) defines higher-priced mortgage loan
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.
---------------------------------------------------------------------------
The CFPB received comments on the proposed exemption from the
higher-priced mortgage loan escrow requirement from consumer groups and
public and private PACE industry stakeholders, none of which advocated
for retaining the requirement for PACE transactions. A PACE company
suggested increasing applicable thresholds to avoid higher-priced
mortgage loan requirements generally, since PACE originators would have
to do the same amount of work as non-PACE mortgage originators but
receive only a fraction of the revenue. An industry trade association
made a similar point, stating that the revenue from fees and interest
from PACE loans is significantly smaller than that of non-PACE mortgage
loans and that the higher-priced mortgage loan requirements would be
unduly costly for PACE loans.
The CFPB concludes that requiring escrow accounts for PACE
transactions that would be subject to the higher-priced mortgage loan
escrow requirement would provide little or no benefit to consumers and
would introduce unnecessary challenges and costs associated with
implementation and compliance.
[[Page 2452]]
Many PACE borrowers already have escrow accounts through their pre-
existing mortgage loan.\145\ For these consumers, PACE payments are
already incorporated into the mortgage escrow accounts as part of the
property tax payment. The CFPB has determined that TILA's higher-priced
mortgage loan escrow requirements are not warranted for PACE borrowers
who do not have an escrow account with a pre-existing mortgage loan.
---------------------------------------------------------------------------
\145\ The PACE Report estimated that nearly three-fourths of
PACE borrowers had a mortgage loan at the time the PACE loan was
consummated. See PACE Report, supra note 12, at 12. Several PACE
industry commenters stated that the figure is closer to 90 percent.
---------------------------------------------------------------------------
If PACE transactions had escrow accounts, those escrow accounts
would be governed by rules in Regulation X.\146\ The rules include a
variety of requirements governing, for example, escrow account
analyses, escrow account statements, and the treatment of surpluses,
shortages, and deficiencies in escrow accounts.\147\ Although these
protections serve important consumer protection purposes with respect
to the administration of escrow accounts for non-PACE mortgages, the
consumer benefit for PACE loans is significantly reduced. Therefore,
the CFPB has determined that requiring compliance would not be
warranted for PACE loans given the lack of consumer benefit.\148\
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\146\ See generally Regulation X, 12 CFR 1024.17.
\147\ Id.
\148\ Commenters to the 2008 higher-priced mortgage loan escrows
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, certain escrow account disclosures required under
Regulation X \149\ and Regulation Z \150\ could be confusing in the
context of PACE transactions. 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 for the PACE loan as
part of the property tax payment. Additionally, the escrow account
disclosures, if required for PACE transactions, might create
uncertainty about whether the PACE transaction affects the consumer's
pre-existing mortgage escrow account, when applicable.
---------------------------------------------------------------------------
\149\ See 12 CFR 1024.17(g)-(j).
\150\ See 12 CFR 1026.37, .38.
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To the extent consumers lack information about their overall
payment obligations, and to the extent this could lead to them
receiving unaffordable PACE loans, such concerns are better addressed
through other TILA provisions, including the TILA-RESPA integrated
disclosures and ability-to-repay requirements that are tailored to PACE
as discussed further below.\151\ While an escrow account can help
spread out payments and thereby reduce the risk of payment shock or
default, the CFPB at this time concludes that the cost and complexity
of doing so for the share of PACE borrowers without an existing escrow
account outweigh the potential consumer benefits.
---------------------------------------------------------------------------
\151\ See section-by-section analyses of Sec. Sec. 1026.37,
1026.38, and 106.43, infra.
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The CFPB is adopting this exemption pursuant to TILA sections
105(a) and 105(f). Exempting PACE transactions from the requirements of
TILA section 125D is necessary or proper to effectuate the purposes of
TILA. Having considered the factors enumerated in TILA section 105(f),
the CFPB has determined that the requirements of TILA section 125D
would not provide a meaningful benefit to consumers in the form of
useful information or protection. In particular, the requirements of
TILA section 125D would significantly complicate, hinder, and make more
expensive the credit process for PACE transactions, and 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 CFPB to integrate the mortgage loan
disclosures required under TILA and RESPA sections 4 and 5, and to
publish model disclosure forms to facilitate compliance.\152\ The CFPB
issued regulatory requirements and model forms to satisfy these
statutory obligations in 2013 (2013 TILA-RESPA Rule).\153\ 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.\154\
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\152\ CFPA sections 1098 & 1100A, codified at 12 U.S.C. 2603(a)
& 15 U.S.C. 1604(b), respectively.
\153\ 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>.
\154\ See Sec. 1026.19(e)(1) and (f)(1).
---------------------------------------------------------------------------
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. The Closing
Disclosure is a final disclosure reflecting the actual terms of the
transaction.
As the CFPB explained in the 2013 TILA-RESPA Rule, the TILA-RESPA
integrated disclosure forms are designed to make it easier for
consumers to locate key cost information to help consumers decide
whether they can afford the loan.\155\ The forms also provide
information to compare different loan offers.\156\ The benefits of
these forms are important for PACE borrowers just as they are for other
mortgage borrowers.
---------------------------------------------------------------------------
\155\ 78 FR 79730, 80225 (Dec. 31, 2013).
\156\ Id.
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The CFPB has determined that certain elements of the current TILA-
RESPA integrated disclosures should be adapted so that the forms more
effectively disclose information about PACE transactions. After
proposing amendments and considering comments, the CFPB is finalizing
the modifications to the Loan Estimate and Closing Disclosure described
below. Where this final rule does not provide a PACE-specific version
of a particular provision, the existing requirements in Sec. Sec.
1026.37 and 1026.38 will apply. As with other mortgage transactions,
elements of the forms that are not applicable for PACE transactions may
generally be left blank.\157\
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\157\ See comments 37-1 & 38-1.
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Requiring the Disclosures for PACE Transactions
Many commenters supported implementation of the CFPB's proposed
Loan Estimate and Closing Disclosure for PACE transactions, including
consumer groups, mortgage industry trade associations, a credit union
league, and a banking trade association. Several consumer groups and
credit union leagues stated that TILA-RESPA integrated disclosure forms
would provide consumers with detailed information about PACE
transactions, which would improve transparency and consumers' ability
to comparison shop. Several mortgage industry trade associations and
consumer groups stated that TILA-RESPA integrated disclosure forms
would improve the process through which PACE is marketed to consumers.
Commenters raised a number of issues with the information that
consumers currently receive during the marketing and origination
process. For example, some stated that PACE transactions are often
marketed through door-to-door solicitations and are sometimes
accompanied by insufficient disclosures. Several mortgage industry
trade associations and consumer groups stated that some PACE
solicitations
[[Page 2453]]
include pressure to sign up and misrepresentations of various features
of the PACE loan, including projected energy savings.
Some commenters suggested that these problems can contribute to
consumers' inability to afford a PACE loan. One consumer group
indicated that inadequate disclosures and the lack of standardized TILA
disclosure forms often lead to unexpected and unaffordable tax payment
spikes, which may cause delinquency and late fees. Many commenters
stated that requiring a Loan Estimate and Closing Disclosure for PACE
transactions would alleviate these problems and improve consumers'
experience during PACE originations.
One government sponsor of PACE programs and one PACE company
expressed concern regarding the cost of implementing the TILA-RESPA
integrated disclosures, particularly because the Loan Estimate and
Closing Disclosure have what the commenters stated are duplicative
fields, and because the forms contain fields that are irrelevant for
PACE transactions. The government sponsor and PACE company also
asserted that requiring the TILA-RESPA integrated disclosures would be
ill-advised because the CFPB did not test the proposed modifications.
PACE companies and one PACE industry trade association asserted that
the current PACE disclosure regime, which includes among other things
disclosures and calls with the consumer to confirm their understanding
of the transaction, is sufficient. Commenters also stated that TILA-
RESPA integrated disclosures are better suited to non-PACE mortgage
transactions, which are larger than PACE transactions. One PACE company
asserted that implementing TILA-RESPA integrated disclosure forms would
be burdensome for financing transactions involving home improvement
projects, which often involve change orders, because re-disclosure
would be required for every change.
In this final rule, the CFPB is requiring TILA-RESPA integrated
disclosures for PACE loans, with modifications from the proposal as
described below. The CFPB is also finalizing model forms in appendix H-
24(H) (Loan Estimate) and appendix H-25(K) (Closing Disclosure) and
Spanish-language versions in appendix H-28(K) (Loan Estimate) and
appendix H-28(L) (Closing Disclosure).
The CFPB reiterates that the Loan Estimate and Closing Disclosure
provide uniform mortgage disclosures that help consumers readily
compare financing options, across financing products. Disclosures
provided under State law or voluntarily by PACE companies, while
potentially useful for consumers, would not be a substitute. Further,
with respect to concerns that certain fields on the TILA-RESPA
integrated disclosures would not pertain to PACE transactions, as with
other mortgage transactions, fields that are irrelevant to particular
PACE transactions may generally be left blank. With respect to the
comment that the forms were not tested by the CFPB, the CFPB notes
that, while the PACE-specific modifications were not tested, the
current TILA-RESPA integrated disclosure forms, on which the PACE forms
were based, were tested by the CFPB.
With respect to the comment that TILA-RESPA integrated disclosure
forms are particularly burdensome for PACE home improvement projects
because change orders would require re-disclosure, the CFPB notes that
many non-PACE home improvement loans, including those with change
orders, use the TILA-RESPA integrated disclosure forms. Also, a revised
Loan Estimate is not required for changes in the amounts of estimated
charges for third-party services not required by the creditor; rather,
that original estimated charge is in good faith under the rule so long
as it was based on the best information reasonably available to the
creditor at the time the disclosure was provided. Further, the TILA-
RESPA integrated disclosure requirements apply to disclosures made
before or at consummation. The rule only requires re-disclosure post-
consummation in limited instances, primarily if an event in connection
with the settlement occurs during the 30-calendar-day period after
consummation and that event causes the Closing Disclosure to become
inaccurate and results in a change to an amount paid by the consumer
from what was previously disclosed.\158\
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\158\ See 12 CFR 1026.19(f)(2)(iii).
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The CFPB is implementing the disclosure requirements described in
the section-by-section analyses of 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 CFPB has determined that the
implementation would be necessary and proper to carry out the purposes
of TILA and RESPA. The provisions that 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 changes are intended to make the Loan Estimate and Closing
Disclosure more effective and understandable for PACE borrowers, and to
facilitate compliance given the common features of PACE transactions.
The CFPB has determined that the provisions that implement the
disclosure requirements under RESPA section 19(a), including
interpretations discussed in the applicable section-by-section
analysis, further the purposes of RESPA and are consistent with the
CFPB's authority under RESPA section 19(a).
For the reasons discussed in the respective section-by-section
analyses, the CFPB is finalizing 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 CFPB has
determined that the exemptions are 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 CFPB's determination, after
considering the factors in TILA section 105(f)(2), is that the
disclosures exempted under this final rule would not provide meaningful
benefit to consumers in the form of useful information or protection.
In the CFPB's analysis, the exempted disclosure requirements would
significantly complicate, hinder, or make more expensive credit for
PACE transactions, and the exemptions do not undermine the goal of
consumer protection. Where doing so would help assure the meaningful
disclosure of credit terms and avoid the uninformed use of credit, the
final rule replaces the exempted disclosures with disclosures that
serve similar purposes to the existing disclosures, but that better fit
the context of PACE transactions.
Specific Recommendations for Changes to Existing Forms
Some commenters asserted that certain aspects of the existing Loan
Estimates or Closing Disclosures could be confusing to consumers under
the proposal. For example, a PACE company suggested that disclosure of
loan purpose, required under Sec. 1026.37(a)(9) for the Loan Estimate
and Sec. 1026.38(a)(5)(ii) for the Closing Disclosure, could be
confusing to consumers. Consumer groups and a PACE company made similar
assertions about the loan type, required under Sec. 1026.37(a)(11) for
the Loan Estimate and Sec. 1026.38(a)(5)(iv) for the Closing
[[Page 2454]]
Disclosure. A PACE company stated that the information required under
Sec. 1026.37(g)(3) pertaining to escrow costs should be removed,
consistent with other aspects of the proposed form as explained below,
in part to avoid consumer confusion. Two consumer groups made a similar
point about the similar disclosure on the Closing Disclosure as
discussed under Sec. 1026.38(u) below.
The CFPB did not propose to amend these requirements and is not
making changes in the final rule. The existing provisions are not
likely to cause confusion. Additionally, with respect to the loan type
and loan purpose disclosures, referring to PACE loans in a disclosure
using mortgage terminology, such as disclosing the loan purpose as a
``home equity loan,'' will not likely cause consumer confusion and
instead will help reinforce that PACE loans are mortgages. The CFPB
also expects that consumers are less likely to be confused by the
escrow-related fields under Sec. Sec. 1026.37(g)(3) and 1026.38(g)(3)
than fields referencing escrow payments elsewhere on the form because
of their content and location on the form. To the extent that
Sec. Sec. 1026.37(g)(3) or 1026.38(g)(3) do not apply to a particular
transaction, creditors may leave the fields blank.
The CFPB likewise is not adopting recommendations to remove
references to PACE transactions as ``loans'' or to limit the length of
the TILA-RESPA integrated disclosure forms, as PACE industry
stakeholders suggested. The term ``loan'' accurately describes PACE
transactions, so its use helps avoid the uninformed use of credit. And
changing the length requirements for PACE forms would make them
dissimilar to those used in non-PACE transactions, which would
frustrate the purposes of TILA to assure meaningful disclosure of
credit terms to enable consumers to compare more readily the various
credit terms available and avoid the uninformed use of credit.
Waiting Period
The CFPB is not amending the timing requirements for the Loan
Estimate and Closing Disclosure for PACE transactions. The CFPB
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.\159\ The CFPB 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.\160\ As explained in the 2013
TILA-RESPA Rule, it is important for consumers to have a meaningful
opportunity to shop for a mortgage loan, compare the different
financing options available, and negotiate for favorable terms, and the
waiting period should only be waived in the most stringent of
circumstances.\161\
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\159\ 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).
\160\ 78 FR 79730, 79847 (Dec. 31, 2013).
\161\ Id. at 79806-07.
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Numerous consumer groups and mortgage industry trade associations
expressed support for adopting the TILA-RESPA integrated disclosure
timing requirements for PACE transactions. These commenters stated that
the waiting periods will provide consumers time to review detailed
information and make informed financial decisions. These commenters
asserted that consumers often feel rushed through the origination
process for PACE transactions because they are faced with door-to-door
solicitations from contractors who pressure them to sign up quickly and
do not provide adequate time to review applicable information. Several
consumer groups stated that the mandatory waiting periods are necessary
for consumers to consider the impact of the loan on future
transactions. For example, these groups indicated that PACE
transactions may affect a consumer's ability to refinance or sell their
home in the future.
Several home improvement contractors and one PACE trade association
opposed imposing TILA-RESPA integrated disclosure timing requirements
on PACE transactions. These commenters stated that the mandatory
waiting periods would have adverse effects for PACE businesses as well
as consumers. Specifically, these commenters asserted that PACE-related
home improvements are often for emergency situations, and that the
TILA-RESPA timing requirements would prevent PACE companies from
starting work quickly, which would cause harm to consumers. Some
commenters expressed concern that the mandatory waiting periods would
impede PACE companies' ability to attract customers, particularly
because they would impede the point-of-sale financing model that PACE
customers prefer.
Two PACE providers asserted that the mandatory waiting period
should not apply to PACE loans because the mandatory timelines were
created for non-PACE mortgages, many of which are larger transactions
than PACE loans. One PACE company stated that waiting periods are not
required for most financing transactions, including auto loans, which
are usually costlier than PACE transactions. One PACE company stated
that Regulation Z provides an exception to the timing requirements for
loans secured by a timeshare interest, and that the regulation should
similarly make exceptions for PACE loans because of similarities
between the two types of obligations.
One home improvement contractor and one PACE company commented
that, because California law already provides a right to cancel for
PACE transactions, the TILA-RESPA integrated disclosure waiting period
is unnecessary. One PACE company stated that the waiting period is
unnecessary because the FTC's Cooling-Off Rule gives consumers three
days to cancel certain sales, including sales made at consumer's homes.
As with the substantive disclosures, the waiting periods associated
with the TILA-RESPA integrated disclosures will be important for 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.\162\ As explained in
part II.A, PACE loans are highly secure for investors even when
consumers cannot afford to pay. This structure can affect incentives of
originators, making it important for PACE consumers to have enough time
to consider the uniform disclosures. Point-of-sale originations have
long been a source of concern--many States require a cooling-off period
before home improvement loans based on point-of-sale originations, and
this precise concern was at the root of many of HOEPA's original
purposes.\163\
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\162\ See part II.A, supra.
\163\ See To Protect Home Ownership and Equity through Enhanced
Disclosure of the Risks Associated with Certain Mortgages: Hearings
on The Home Ownership and Equity Protection Act of 1993, Hearing on
S. 924 before the S. Comm. on Banking, Fin. & Urb. Affs., 103d Cong.
(1993); The Home Equity Protection Act of 1993, Hearings on H.R.
3153 before the Subcomm. on Consumer Credit & Ins. of the H. Comm.
on Banking, Fin. & Urb. Affairs, 103d Cong. (1994); Reverse
Redlining; Problems in Home Equity Lending, Hearings before the S.
Comm. on Banking, Hous., & Urb. Affs., 103d Cong. (1993) (describing
potential targeting of a widowed immigrant consumer by point-of-sale
loan originators who ``came door to door trying to sell home
improvements at an inflated price, on very severe credit terms'');
see, e.g., Home Solicitation Sales Act of 1971, Cal. Civ. Code secs.
1689.5-1689.13 (allows the buyer in almost any consumer transaction
involving $25 or more, which takes place in the buyer's home or away
from the seller's place of business, to cancel the transaction
within three business days after signing the contract).
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[[Page 2455]]
The CFPB notes that Regulation Z allows consumers to modify or
waive applicable waiting periods if the consumer has a bona fide
personal financial emergency.\164\ Some commenters stated that
consumers may face emergency situations necessitating swifter
originations--to the extent the emergency is a bona fide personal
financial emergency, Regulation Z already provides an exception.
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\164\ 12 CFR 1026.19(e)(1)(v), (f)(1)(iv).
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With respect to the comment that the mandatory waiting periods are
not appropriate for PACE loans because PACE loans are smaller than
other mortgage loans, the CFPB notes that neither TILA nor Regulation Z
impose different waiting periods for mortgage loans under a certain
size. Indeed, the waiting periods under the current rule apply to home
equity loans of a similar size to PACE transactions, many of which may
not have the same structural risks as PACE transactions.
As to the comment that waiting periods are not required for other
types of transactions, such as auto loans, the CFPB notes that, unlike
mortgage loans subject to the waiting period, auto lending is not
secured by the consumer's real property. TILA explicitly requires
waiting periods for credit secured by a dwelling.\165\ Congress
specifically intended for transactions subject to the TILA-RESPA
integrated disclosure rule to be subject to certain waiting periods.
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\165\ 15 U.S.C. 1638(b)(2)(A).
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Regarding the comment that the CFPB should provide for exceptions
to the timing requirements for PACE loans because Regulation Z already
does so for timeshare loans, the CFPB notes that PACE loans have
structural risks as described above that waiting periods would directly
address. Also, timeshare loans are secured only by the consumer's
fractional interest in a timeshare unit, so the financial stakes, while
significant, are somewhat lower. The CFPB also notes that TILA section
128(b)(2)(G)(i)(1) specifically excludes timeshare plans from the
statutory TILA-RESPA waiting period requirements but provides no
similar exclusion for other types of credit secured by a dwelling.\166\
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\166\ See 15 U.S.C. 1638(b)(2)(G)(i)(1) (referring to ``a plan
described in'' 11 U.S.C. 101(53D)).
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In response to the comments that the TILA-RESPA waiting period is
unnecessary because State law or the FTC's Cooling-Off Rule already
provides a right to cancel PACE loans, the CFPB notes that the waiting
period applies to other home equity loans that involve door-to-door
solicitation, and there is no reason to exempt PACE home improvement
contractors in particular. Also, a waiting period and a right to cancel
provide different consumer protections. The TILA-RESPA waiting period
ensures that consumers have time to understand the obligation and shop
before signing up, whereas rights to cancel or rescission rights apply
after consummation. Additionally, the final rule will provide a
nationwide baseline waiting period for PACE transactions under
Regulation Z.
Section 1026.37 Content of Disclosures for Certain Mortgage
Transactions (Loan Estimate)
1026.37(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) sets 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. The CFPB is
finalizing Sec. 1026.37(p) largely as proposed.
1026.37(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, Sec. 1026.37(c)(2) requires the itemization
of each separate periodic payment or range of payments disclosed on the
periodic payments table. The CFPB is finalizing changes to certain of
these requirements under Sec. 1026.37(p)(1)(i) and (ii) as explained
below.
1026.37(p)(1)(i) Other Fees and Amounts
Section 1026.37(c)(2)(ii) requires the disclosure of the maximum
amount payable for mortgage insurance premiums corresponding to the
principal and interest payment disclosed on the projected payments
table, labeled ``Mortgage Insurance.''
Two consumer groups, a PACE company, and a government sponsor of
PACE programs suggested that the field for ``Mortgage Insurance'' that
currently appears in the projected payments table does not fit because
PACE transactions do not carry mortgage insurance. The consumer groups
also suggested adding a field titled ``Annual Administrative Fee'' to
capture a fee that consumers must often pay that would not be
considered part of their principal or interest payment.
The CFPB is adding Sec. 1026.37(p)(1)(i) to ensure the projected
payments table accurately discloses payment information relevant to the
PACE transaction. Section 1026.37(p)(1)(i) removes the mortgage
insurance field from the projected payments table for PACE transactions
because that field is not applicable to PACE transactions as some
commenters asserted--the CFPB is unaware of any PACE transactions that
carry mortgage insurance. In place of the mortgage insurance field,
Sec. 1026.37(p)(1)(i) requires the disclosure of ``Fees and Other
Amounts,'' which includes the maximum amount payable for any fees or
other amounts corresponding to the periodic payment for the PACE
transaction that are not disclosed as part of the principal and
interest disclosure under Sec. 1026.37(c)(2)(i). Section
1026.37(p)(1)(i) requires that the amount disclosed under the ``Fees
and Other Amounts'' field be included in the calculation of the total
periodic payment under Sec. 1026.37(c)(2)(iv) in place of the amount
disclosed for mortgage insurance under Sec. 1026.37(c)(2)(ii).
1026.37(p)(1)(ii) Escrow
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. The CFPB
proposed to exempt PACE transactions from the escrow account payment
disclosure requirements under Sec. 1026.37(c)(2)(iii).
As discussed in the analysis of Sec. 1026.35(b)(2)(i)(E), the CFPB
is unaware of any PACE transactions that
[[Page 2456]]
carry their own escrow accounts. Thus, absent an exemption, the escrow
account payment field under Sec. 1026.37(c)(2)(iii) would have
generally been disclosed as ``0'' if this field were included on the
Loan Estimate associated with any PACE transaction.\167\ This entry
would likely 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 would likely create doubt for the
consumer about whether the PACE transaction will be repaid through the
existing escrow account. The exemption in this final rule will mitigate
this risk.
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\167\ See existing comment 37(c)(2)(iii)-1.
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The CFPB did not receive any comments and is finalizing proposed
Sec. 1026.37(p)(1), renumbered as Sec. 1026.37(p)(1)(ii), to
accommodate the addition of Sec. 1026.37(p)(1)(i), as described above.
1026.37(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 \168\ 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.\169\ Section
1026.37(c)(4)(iii) through (vi) requires various statements about this
disclosure. Under Sec. 1026.37(p)(2)(i) and (ii), the CFPB proposed to
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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\168\ As noted in the section-by-section analysis of 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.''
\169\ 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 Sec. 1026.37(p)(7)(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.\170\ The CFPB proposed Sec.
1026.37(p)(2)(i) to provide specificity as to the PACE payment. The
CFPB proposed to 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 CFPB proposed to require
the statement about the PACE loan payment to be labeled ``PACE
Payment,'' and the statement about the other property taxes ``Property
Taxes (not including PACE loan).'' The proposed changes were intended
to help consumers understand that the PACE transaction will increase
the consumer's property tax payment.
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\170\ 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 CFPB 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
CFPB is also clarifying in this final rule 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.
The CFPB proposed under Sec. 1026.37(p)(2)(i) to eliminate this
requirement for PACE transactions. The CFPB reasoned in the proposal
that omitting this information would avoid potential consumer confusion
for similar reasons as explained in the discussion of proposed Sec.
1026.37(p)(1).
The CFPB also proposed 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. The CFPB proposed to 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 proposed
disclosures were intended to 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.
One credit union league supported requiring the disclosure of PACE
loans separately from other property tax obligations among the
disclosure of estimated taxes, insurance, and assessments under
proposed Sec. 1026.37(p)(2)(i). The commenter stated that homeowners
would benefit from this requirement and, more generally, from
clarification of the implications of the PACE transaction on property
taxes.
Two consumer groups also suggested adjusting the qualitative
disclosures proposed under Sec. 1026.37(p)(2)(ii). They recommended
including a statement that the PACE loan would increase the consumer's
monthly escrow payment by a certain specific amount, as well as a
prompt for the consumer to notify their mortgage servicer of the change
and request a short-year escrow account analysis so that the escrow
amount can be adjusted to account for the change.
The CFPB is finalizing the proposed changes to Sec.
1026.37(p)(2)(i) and (ii) with modifications. As finalized, section
Sec. 1026.37(p)(i) contains a small change for precision. Section
1026.37(p)(2)(ii) requires, in addition to the proposed disclosure, a
statement that, if the consumer has a pre-existing mortgage with an
escrow account, the PACE loan will increase the consumer's escrow
payment. The CFPB agrees with consumer group commenters that an
explicit disclosure of the impact of the PACE loan on the consumer's
escrow payment will be useful for consumers. However, the
recommendation to include a prompt for the consumer to notify their
mortgage servicer of the change and to request an escrow
[[Page 2457]]
account analysis could be confusing or too technical to be useful for
some consumers.
1026.37(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.'' \171\ In
general, a creditor must disclose: (1) the name and NMLSR ID,\172\
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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\171\ Section 1026.37(k) also integrates the disclosure of
certain information required under appendix C to Regulation X.
\172\ Under Sec. 1026.37(k)(1), the NMLS ID refers to the
Nationwide Mortgage Licensing System and Registry identification
number.
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The CFPB proposed to additionally require similar disclosures for
PACE companies if such information was not disclosed under the
requirements described above. Specifically, under Sec. 1026.37(p)(3),
the CFPB proposed to 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,'' a term defined
under Sec. 1026.37(b)(14)). The CFPB proposed, similar to Sec.
1026.37(k)(1) through (3)'s existing requirements with respect to
creditors, mortgage brokers, and loan officers, 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. The CFPB proposed commentary to clarify that these disclosures
would not be required under the proposal if the PACE company's contact
information was otherwise disclosed pursuant to Sec. 1026.37(k)(1)
through (3). As proposed in comment 37(p)(3)-1, for example, if the
PACE company is a
[…truncated; see source link]Indexed from Federal Register on January 10, 2025.
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.