The U.S. Federal Housing Finance Agency ("FHFA") is continuing to consider how its regulated entities should address Property Assessed Clean Energy ("PACE") programs. In its recent Request for Input ("RFI"), the FHFA seeks feedback on honing its PACE policies in connection with loans financed by Fannie Mae and Freddie Mac (the "Enterprises") or by the Federal Home Loan Banks.1
PACE loans are an alternative to traditional credit for homeowners to finance energy-efficient projects such as solar panels, insulation and window upgrades. Instead of paying through installment contracts or loans or taking out a home equity line of credit, the homeowner pays for the improvements through special property tax assessments. States and municipalities have established varying terms and conditions for PACE programs, but they typically result in a property tax lien, and in many jurisdictions that lien takes priority over existing and future liens on the property (including a lender's mortgage lien).
Despite PACE's facilitation of clean energy home improvements and its promotion by local jurisdictions, the programs have presented concerns for policymakers from the standpoint of institution safety and soundness.2 The priority lien status of a PACE loan may erode the value of a lender's or investor's security interest if the borrower defaults. Additionally, it is not always easy for a lender, when considering whether to make a new mortgage loan, to determine whether a property currently has a PACE lien. The FHFA indicates that the loans are not recorded in local land records and thus are not part of ordinary mortgage record searches. Instead, the liens are discoverable through tax records and may not be clearly denominated. Even though standard first-lien mortgage instruments generally prohibit a homeowner from granting a superior lien, that has not prevented homeowners from obtaining super-lien PACE financing.
The FHFA asserts that certain characteristics of PACE financing exacerbate the concerns about potential homeowner defaults. First, PACE loan underwriting does not always involve a standard analysis of the borrower's ability to repay, relying merely on the borrower's property value. Second, the transactions often are originated through sales efforts of dealers and contractors that take applications electronically, reportedly leaving some borrowers unclear about the transactions' terms and risks. The FHFA indicates that in addition to certain administrative fees under the programs, interest rates charged to borrowers for PACE are typically substantially higher than for a first-lien mortgage on the property. The loans may have repayment terms of up to 20 years.
Back in 2010, the FHFA directed Fannie Mae and Freddie Mac not to purchase or refinance mortgages with PACE liens and urged caution by the Federal Home Loan Banks in accepting collateral for advances that may have PACE liens attached.3 Similarly, the Federal Housing Administration ("FHA") flipped its position in December 2017, announcing that it would stop insuring mortgages on properties encumbered with PACE liens.4
Policymakers also have expressed concerns about PACE financing from a consumer protection standpoint. As Mayer Brown described in a March 2019 Legal Update, the Consumer Financial Protection Bureau ("CFPB") is considering, through an Advanced Notice of Proposed Rulemaking ("ANPR"), how to impose ability-to-repay requirements similar to those for residential mortgage loans.5 The CFPB also appears to be considering the extent and impact of any oral or written information consumers receive before they sign a PACE financing agreement.
As the FHFA remains concerned about these issues, it is now considering policies not just regarding loans secured by properties with PACE loans, but all mortgage loans in jurisdictions with PACE programs. (According to the FHFA, California and Florida are the two most active residential PACE jurisdictions). The FHFA's recent RFI specifically seeks comments6 on the following issues (on which the FHFA expands in its RFI):
- Should the FHFA direct the Enterprises to decrease the loan-to-value ratios for all new loan purchases in jurisdictions with PACE programs?
- Should the FHFA direct the Enterprises to increase their Loan Level Price Adjustments or require other credit enhancements for mortgage loans and re-finances in jurisdictions with PACE programs?
- Should the FHFA consider additional actions regarding Enterprise purchase or servicing requirements in jurisdictions with PACE programs?
- Should the FHFA establish safety and soundness standards for the Federal Home Loan Banks to accept as eligible advance collateral mortgage loans in jurisdictions with PACE programs?
- How might the Enterprises best collect information on existing mortgage loan portfolios to understand which loans have PACE liens and in what amount, and should servicers be required to gather and report this information to the Enterprises periodically?
- Should jurisdictions that offer PACE programs require a registry of PACE lending?
- Should the Enterprises' mortgage loan servicers be required to provide periodic notices to existing borrowers in jurisdictions with PACE programs that, under the terms of their mortgages, PACE liens are not permitted?
- What consumer impacts do PACE liens have, aside from the issues raised in the CFPB's ANPR concerning ability-to-repay?
- What information regarding experiences under HUD programs relating to PACE should the FHFA consider?
Comments are due to the FHFA by March 16, 2020.
2. The Office of the Comptroller of the Currency also issued guidance to national banks about PACE programs, urging banks to ascertain if such programs exist in jurisdictions where they do business, determine whether the programs alter banks' lien positions, and carefully consider the programs' impact on the banks' current mortgage portfolios and their ongoing mortgage lending activities. See Property Assessed Clean Energy (PACE) Programs: Supervisory Guidance, OCC Bulletin 2010-25 (July 6, 2010), available at https://www.occ.gov/news-issuances/bulletins/2010/bulletin-2010-25.html.
3. See, e.g., https://www.fanniemae.com/content/guide/selling/b5/3.4/01.html. Proponents of the programs were unsuccessful in their legal challenges to that directive. See County of Sonoma v. FHFA, 710 F.3d 987 (9th Cir. 2013); Leon County v. FHFA, 700 F.3d 1273 (11th Cir. 2012); Town of Babylon v. FHFA, 699 F.3d 221 (2nd Cir. 2012).
4. Mayer Brown's Consumer Financial Services Review blog summarized the FHA's decision. See https://www.cfsreview.com/2017/12/fha-changes-course-on-pace-obligations/.
6. The FHFA appears, in this current RFI, to be following a path more akin to notice-and-comment rulemaking. However, while the agency is a regulator, it is also currently the Enterprises' conservator. As such, courts have held that it has broad powers to issue directives necessary to "preserve and conserve" the Enterprises' assets and property, and its conservatorship actions are not subject to the Administrative Procedures Act or judicial review. See County of Sonoma v. FHFA, 710 F.3d 987 (9th Cir. 2013); Leon County v. FHFA, 700 F.3d 1273 (11th Cir. 2012); Town of Babylon v. FHFA, 699 F.3d 221 (2nd Cir. 2012).
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