Property Assessed Clean Energy (PACE) financings are an
alternative financing tool used to finance energy efficiency
upgrades or renewable energy projects in residential, commercial
and industrial properties. PACE financings allow for the payment of
the costs of the energy project over time which is tied to the
property, and not to the property owner.
In a December 7, 2017 letter, the U.S. Department of Housing and
Urban Development ("HUD") stated that the Federal Housing
Administration ("FHA") would no longer insure mortgages
for homes with PACE liens. This reverses a former HUD policy. The
effect is that homeowners who financed energy efficiency upgrades
through a PACE financing have a reduced transferability option
because they cannot sell the PACE-assessed property to a new owner
who decides to finance the property through an FHA-insured
mortgage. The HUD policy change reflects concerns regarding the
priority status of the PACE lien, as well as the lack of consumer
protections associated with PACE financings compared to traditional
financing products. It is a further blow to the future of PACE
financing since Fannie Mae and Freddie Mac each have a similar
policy.
Some states are addressing the consumer protection issues that have
been raised. California has recently enacted laws to establish
stricter standards for PACE financings, including the following
requirements:
- a written disclosure that must be provided to the property owner prior to signing a PACE financing contract;
- a three-day right to cancel;
- a recorded call with the property owner confirming the terms of the financing before the contract is signed;
- the same price quote by contractors for cash and for PACE financings;
- stronger underwriting standards of homeowners, including income verification and ability to pay;
- licensing standards for providers of PACE financing;
- training and monitoring requirements of contractors and sales representatives by providers of PACE financing; and
- the designation of the California Department of Business Oversight as the state's PACE Regulator.
The new HUD Policy may slow down the residential PACE market, but state regulation, similar to the new laws in California, may help eliminate some of the concerns.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.