Proposed Reg Z Revisions for PACE Financing

As sometimes is the case, it takes years for regulations authorized by legislation to actually be published by regulators. A recent example of this is the Section 1071 final rule which took more than 10 years to move from legislation (Dodd-Frank: 2010) to regulation (Subpart B of Regulation B: 2023). An even more recent example involves a new proposed rule originating out of Section 307 of the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA or S.2155), passed in 2018. Comments must be received on or before July 26, 2023, or 30 days after publication in the federal register, whichever is later.

Section 307 requires the CFPB to issue regulations requiring creditors to assess a borrower’s ability to repay PACE (Property Assessed Clean Energy) financing home improvement loans. PACE financing programs allow state and local governments to issue bonds and use the funds raised to finance energy efficiency and renewable energy projects. The proceeds from PACE bonds are loaned to property owners, who use the funds to invest in energy efficient upgrades or renewable energy projects. The loans are added to property tax bills through special assessments and paid off over time.

The proposed rule offers significant changes to Regulation Z and would:

  • Clarify the Regulation Z commentary’s exclusion to the definition of “credit,” for tax liens and tax assessments to apply only to involuntary tax liens and involuntary tax assessments.
  • Make adjustments to Loan Estimates and Closing Disclosures that would apply when those disclosures are provided for PACE transactions, including:

◊  Eliminating certain fields relating to escrow account information;

◊  Requiring the PACE transaction and other property tax payment obligations to be identified
as separate components of estimated taxes, insurance, and assessments;

◊ Clarifying certain implications of the PACE transaction on the property taxes;

◊ Requiring disclosure of identifying information for the PACE company;

◊ Requiring various disclosures for PACE transactions that would 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

◊ Clarifying how unit-periods would be disclosed for PACE transactions.

  • Provide new model forms for the Loan Estimate and Closing Disclosure, specifically designed for PACE transactions.
  • Exempt PACE transactions from the requirement to establish escrow accounts for certain higher-priced mortgage loans.
  • Exempt PACE transactions from the requirement to provide periodic statements.
  • Apply Regulation Z’s ability to repay (ATR) requirements in to PACE transactions with a few adjustments, 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.
  • Provide that a PACE transaction is not a qualified mortgage (QM).
  • Extend the ATR requirements and the liability provisions of TILA to any “PACE company,” that is substantially involved in making the credit decision for a PACE transaction.
  • Provide clarification regarding how PACE and non-PACE mortgage creditors should consider pre-existing PACE transactions when originating new mortgage loans.

The CFPB proposes that the final rule, if adopted, would take effect at least one year after publication of the final rule in the Federal Register, so with the comment period running until at least the end of July, don’t expect an effective final rule until late next summer (2024) at the earliest. In the meantime, if you have any questions about this or other regulatory changes, don’t hesitate to contact us on the hotline.