S. E. Williams
In recent years, The Voice/Black Voice News has published several reports about the PACE Program and its related residential finance option, HERO. The program, a public-private partnership, has been adopted by 433 communities in 48 of the state’s 58 counties.
The Property Assessed Clean Energy Program (PACE) provides financing for energy and water efficient improvements and renewable energy products, while the Home Energy Renovation Opportunity (HERO) program provides the loans for nearly 95 percent of all residential PACE projects.
Since the program’s implementation in 2008, consumers have continued to complain about the program particularly in relation to the quality of work performed by some contractors, as well as the financing process that attaches the loan assessment to the property’s taxes.
In addition, as previously reported by this news source, consumers continue to experience misunderstandings over how the PACE/ HERO assessment can be passed along to a new owner when a PACE/HERO encumbered property is sold; while others have focused on the loan qualifications that do not consider the applicant’s income or ability to repay the debt thus leaving the property vulnerable to eventual loss due to the borrower’s inability to pay the loan assessment amount that becomes part of their property taxes.
Feedback and frustration shared by local homeowners and real estate professionals with this publication are mirrored up and down the state by consumer advocates and others who are critical of PACE/ HERO for reasons that include the fact that far too many consumers participate in the program who do not have a complete understanding of how HERO financing works.
In late September 2016, California legislators passed AB 2693. When the legislation took effect January 1, it codified several consumer protections into the program. In addition, it added a disclosure form to the loan process. The form was designed to help borrowers understand terms for PACE/HERO loans.
AB 2694 also required consumers be provided with the interest and fees associated with the loan/assessment and advised that it will appear as a line item on their property tax lien; that it is different from traditional financing options; that the loan stays with the property and can be transferred to the next property owner when the home is sold (although some lenders may require the HERO assessment be paid in full when the property is sold). Also last year, the program introduced the HERO Protect™ team whose members are available to consult with HERO program participants free of charge.
Despite the best efforts of AB 2694 and the added support of the HERO Protect™ team, consumer advocates saw the need for added protections. In response to their continued concerns, on Friday, California legislators moved two HERO related bills to the governor’s desk for signature.
According to advocates of the legislation, far too many homeowners continue to take out unaffordable HERO loans for energy and/or water efficient projects, largely because contractors have misrepresented how financing for PACE projects through the HERO program works.
Effective January 1, 2017, AB 2693, codified existing protections for all PACE providers, including requiring a new disclosure modeled after the federal mortgage Know-Before-You-Owe disclosure form, so that customers can easily understand all of the terms associated with PACE financing.
AB 1284, which includes the income and training requirements and makes the Department of Business Oversight responsible for regulating PACE lenders. something Dababneh called critical to the success of the new rules. Assemblyman Matt Dababneh (D-Woodland Hills) who authored the legislation said, “We want people to benefit from water and energy efficiency, but they shouldn’t have to sacrifice consumer protections.”
Dababneh also sees the role of the Department of Business Oversite in the PACE/HERO process as critical. “We were able to make sure there is some enforcement. We have a referee.”
AB 1284 will also mandate that lenders good faith efforts to help ensure borrowers can repay their loans. In addition, income, assets and current debt obligations would be considered during the loan approval process. Today, HERO eligibility is primarily based on the amount of equity in the home.
A staff attorney for the National Consumer Law Center, expressed concern about the legislation to reporter Andrew Khouri. She pointed to one example where a borrower can be approved for financing before an “ability-to-pay assessment is completed. However, if the lender later determines the homeowner cannot afford the payments, the lender will be required to cover the difference. There is an exception for intentional if the borrower has intentionally mispresented information to the lender.
The attorney expressed further concern that SB 1284 is retaining a troublesome business model and the process for how it will work is unclear. “This whole process is backwards. The setup allows the contractor to pressure the homeowner at the door because they don’t have to do the affordability analysis until after.”
Another piece of PACE/HERO related legislation, SB 242 also awaits Governor Brown’s signature. SB 242 makes it a requirement that all PACE providers conduct calls with every homeowner before a loan is submitted. The purpose of the call will be to assure homeowners fully understand the terms of the loan. In the beginning, not all providers did this though most claim they now do so as part of their normal process.
When SB242 passed, the bill’s sponsor Senator Nancy Skinner (D-Berkeley) noted the legislation was designed to strengthen consumer protections. “California is the national leader in PACE financing,” stated Senator Skinner, “SB 242 adds consumer safeguards so homeowners can continue to enjoy a convenient tool to finance energy, water and earthquake safety upgrades to their homes and properties.”
According to Skinner, SB 242 adds important consumer protections to ensure that owners are fully aware of loan terms and understand that loan payments are made through their property tax bills. SB 242 additionally provides a 3-day right to cancel, and as PACE programs often rely on contractors to promote this financing opportunity, SB 242 makes it illegal for any “kickbacks” or other marketing incentives to be paid to contractors by the lenders.
“Home improvements that lower bills are good for everyone, from families struggling to make ends meet to people working to upgrade buildings so they waste less energy,” said Environmental Defense Fund (EDF) Senior Policy Manager, California Clean Energy, Lauren Navarro. “Adopting consumer protections for PACE financing allows more Californians to invest in energy- and cost-saving technologies.”
The PACE/HERO program has gained in popularity in recent years. Some even consider it the most successful energy-efficiency financing program in the nation’s history; however, mounting concerns over consumer protections and accountability regarding actual energy savings has fueled ongoing concerns. Here in California, government and industry have worked to address these concerns and the most recent legislation is the result of those efforts.
Now, it appears they have taken notice at the national level. In April, Senator Tom Cotton (R-Arkansas), introduced the Protecting Americans From Credit Exploitation (PACE) Act. The bill would require PACE/HERO issuers to follow the same regulations and disclosures as banks and mortgage lenders. The program would be subjected to the rigors of the nation’s laws which mandates certain disclosures for mortgage loans.
In April, Cotton explained how the legislation seeks to “protect Americans from credit exploitation.” He further advised it would, “reduce the advantage that PACE loan sharks have over hard-working Americans.”
Here in California, the PACE/HERO program has been described as a money-making tool for local governments because they receive fees for collecting the loan payments through property taxes on behalf of the lenders. In Southern California, in addition to Riverside and San Bernardino, the counties of Los Angeles, Orange and San Diego also participate in the HERO/ PACE programs.