A Drive for More PACE Oversight in California
LOS ANGELES — California efforts to embed more consumer protections into PACE loans are advancing on two tracks.
The largely unregulated Property Assessed Clean Energy industry has faced criticism in recent months that homeowners are not being adequately informed about how the program works before they agree to the tax liens.
PACE allows homeowners and commercial property owners to finance energy efficiency and safety projects like solar panels, windows, dishwasher, or earthquake proofing for up to 25 years through tax assessments on their properties. The tax payments are structured to stay with a property until paid even if it is sold to a new owner.
As one of the authors of California's original PACE legislation, state Sen. Nancy Skinner, D-Berkeley, who was elected to the upper house after three terms in the Assembly, said she wants to make sure the program works as intended. She introduced legislation on Feb. 6 to add further safeguards for consumers.
"We have this great program that has helped homeowners and commercial building owners finance an incredible number of water and energy renewal upgrades since it started nine years ago," Skinner said.
The California Alternative Energy and Advanced Transportation Financing Authority held a public hearing Friday on underwriting changes it has proposed. CAEATFA runs a statewide PACE program.
Residential PACE has grown rapidly since its inception in 2008 with $3.4 billion in financing resulting in improvements to 130,000 homes in three states, according to PACE Nation, an industry advocacy group.
Commercial PACE programs exist in 32 states.
Skinner said her Senate Bill 242 will help codify best practices for residential PACE programs recommended by the U.S. Department of Energy in November and by PACE Nation a few weeks ago.
"The providers themselves are saying: 'here are good concepts that should be put into statute to strengthen the program,'" she said.
The PACE idea was conceived to make it more affordable for homeowners and business owners to alter their properties to make them more environmentally friendly.
The DOE and PACE Nation have recommended more consumer protection policies, like giving consumers three days to cancel financing, a disclosure form modeled on the Know-Before-You-Owe form adopted by the mortgage industry after the 2008 crash, confirmation of financial terms by phone, and standards for contractors around marketing practices and workmanship issues.
Gov. Jerry Brown already signed some protections into law in September to make lending terms closer to those for mortgages.
That law, for instance, gives homeowners three days to back out of the loan – one of the DOE recommendations.
Underwriting for PACE has focused more on such caveats as how much equity there is on the property without requiring credit scores for homeowners. Restrictions have included maximum lien-to-value ratios for PACE assessments that don't exceed 15%.
The characteristics of the credit class and a low default rate make the asset-backed securities popular with investors.
The state set up a $10 million reserve to back the PACE program run by CAEATFA created through legislation in 2014 and it has never had to draw on that reserve, said Cliff Staton, executive vice president with Renew Financial, an Oakland-based PACE financial company.
"In 2016, there was not a PACE-initiated foreclosure and the delinquency rate is very low on the properties that have PACE assessments," Staton said.
Renovate America's investor base has more than doubled year-over-year, said Greg Frost, national communications director for the company. The investor base is primarily comprised of insurance companies, but also includes money managers, hedge funds, pension funds and banks.
Last year it sold a triple-B-rated tranche along with its double-A-rated securities.
"By inserting the BBB-rated tranche, we have been able to diversify our investor base by adding more money managers and hedge funds," Frost said. "We also have a couple of dedicated green bond buyers in our investor base."
Credit spreads have tightened.
The coupons for Renovate America's senior par bonds in HERO 2015-1 and HERO 2016-4 were 3.84% and 3.57%, respectively.
Staton is working with Skinner's staff on legislation to set standards for the industry, but he doesn't think the changes proposed by CAEATFA are the answer.
"There is no data indicating that there is a problem with the current underwriting standards – and, if there were a problem, I don't see any indication that the proposed regulations will solve the problem."
During Friday's hearing on the agency's proposed regulations, Staton criticized the agency's proposed requirement that borrowers not have had any bankruptcy within the last seven years and the requirement that financing not exceed 96.5% of value on the property. He thinks the former might lower the number of people who qualify, when the idea behind the program is to make it available to as many people as possible.
The state already has underwriting standards including that all property taxes must be current, the property not be subject to any lien in excess of $1,000 and the property not be subject to notices of default, he said.
Changes Staton supports that he would like to see in Skinner's bill are details about what products are eligible to be financed and requirements that contractors be licensed.
He said the bill signed by Brown in September already dealt with disclosure to property owners. He does support adding underwriting qualifications for property owners that include income and debt level, which he says would get at any issues of future default.
CAEATFA's changes would also include PACE companies tracking how much energy savings property owners have realized from modifications funded through PACE and providing that data to the agency.
PACE assessments are senior to all non-tax liens, including mortgages.
But concerns have arisen about the potential for consumers to be taken advantage of.
PACE loans can range from $5,000 to $100,000, but the average is about $25,000. Interest rates typically run 6% to 9% in a repayment period of five to 25 years.
Borrowers pay twice a year when they make tax payments. Cities and counties collect the money and pay bondholders.
"There is a concern with us potentially putting California homeowners underwater," CAEATFA Director Deana Carrillo said during Friday's hearing.
Given that the state is recovering from the worst recession she has ever seen, Carrillo said it is important that homeowners preserve the equity in their homes.
"Our goal is not to hinder PACE and be a bucket of cold water on the program; and if that is what this represents, we need to have a conversation in finding a balance," Carrillo said.
Stakeholders have until March 7 to make written suggestions to the agency. The agency will then release a second draft by the end of March with the aim of having the board review a final draft in May or June and approve the regulations by July.
Renovate America, which began expanding into Florida last year, has done more than $1.9 billion in securitizations since it launched its Home Energy Renovation Opportunity program five years ago, Frost said. Renew Financial announced in January it hit $1 billion in funded projects from its PACE and EnergyLoan financing programs.
Skinner is working with third-party financial providers like Renew Financial and Renovate America on language for the bill. At this point, the legislation introduced Feb. 6 is a placeholder, but Skinner expects to add more details over the next two weeks.
"We are working proactively with Sen. Skinner to ensure that PACE financing can continue to grow in a responsible way," Frost said. "We think PACE is an innovative instrument allowing cities and local governments to meet public policy objectives that doesn't involve the use of any public budgets."