# Residential Property Assessed Clean Energy Financing (Regulation Z) > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A2024-30628 ## Record - **Collection:** Federal Register - **Document type:** Rule - **Published:** January 10, 2025 - **Citation:** 90 FR 2434 ## Text CONSUMER FINANCIAL PROTECTION BUREAU 12 CFR Part 1026 [Docket No. CFPB-2023-0029] RIN 3170-AA84 Residential Property Assessed Clean Energy Financing (Regulation Z) AGENCY: Consumer Financial Protection Bureau. ACTION: Final rule. SUMMARY: Section 307 of the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA) directs the Consumer Financial Protection Bureau (CFPB or Bureau) to prescribe ability-to-repay rules for Property Assessed Clean Energy (PACE) financing and to apply the civil liability provisions of the Truth in Lending Act (TILA) for violations. PACE financing is financing to cover the costs of home improvements that results in a tax assessment on the real property of the consumer. In this final rule, the CFPB implements EGRRCPA section 307 and amends Regulation Z to address how TILA applies to PACE transactions. DATES: This final rule is effective March 1, 2026. FOR FURTHER INFORMATION CONTACT: George Karithanom, Regulatory Implementation and Guidance Program Analyst, Office of Regulations, at 202-435-7700 or https://reginquiries.consumerfinance.gov/. If you require this document in an alternative electronic format, please contact CFPB_Accessibility@cfpb.gov. SUPPLEMENTARY INFORMATION: Abbreviations The following abbreviations are used in this final rule: • APOR = Average Prime Offer Rate • APR = Annual Percentage Rate • Board = Board of Governors of the Federal Reserve System • CAEATFA = California Alternative Energy and Advanced Transportation Financing Authority • California DFPI = California Department of Financial Protection and Innovation • CARES Act = Coronavirus Aid, Relief, and Economic Security Act • EGRRCPA = Economic Growth, Regulatory Relief, and Consumer Protection Act • FDIC = Federal Deposit Insurance Corporation • FHA = Federal Housing Administration • FHFA = Federal Housing Finance Agency • FRFA = Final Regulatory Flexibility Analysis • FTC = Federal Trade Commission • HOEPA = Home Ownership and Equity Protection Act • HUD = U.S. Department of Housing and Urban Development • IRFA = Initial Regulatory Flexibility Analysis • LTV = Loan to Value • OCC = Office of the Comptroller of the Currency • NCUA = National Credit Union Administration • NEPA = National Environmental Policy Act • NPRM = Notice of Proposed Rulemaking • PACE = Property Assessed Clean Energy • PACE Report = Property Assessed Clean Energy (PACE) Financing and Consumer Financial Outcomes, a CFPB report published on May 1, 2023 • RESPA = Real Estate Settlement Procedures Act • RFA = Regulatory Flexibility Act • TILA = Truth in Lending Act I. Summary of the Final Rule Section 307 of the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA) directs the CFPB to prescribe ability-to-repay rules for Property Assessed Clean Energy (PACE) financing and to apply the civil liability provisions of the Truth in Lending Act (TILA) for violations. 1 In this final rule, the CFPB implements EGRRCPA section 307 and amends Regulation Z to address the application of TILA to “PACE transactions” as defined in § 1026.43(b)(15). 1 15 U.S.C. 1639c(b)(3)(C). This final rule: • Clarifies an existing exclusion to Regulation Z's definition of credit that relates to tax liens and tax assessments. Specifically, the CFPB is clarifying that the commentary's exclusion of tax liens and tax assessments from being “credit,” as defined in § 1026.2(a)(14), applies only to involuntary tax liens and involuntary tax assessments. • Makes a number of adjustments to the requirements for Loan Estimates and Closing Disclosures under §§ 1026.37 and 1026.38 that will apply when those disclosures are provided for PACE transactions, including: ○ Eliminating certain fields relating to escrow account information; ○ Requiring the disclosure of other fees and amounts not included in the principal and interest on the projected payments table in place of disclosure of mortgage insurance premiums; ○ 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 qualitative disclosures for PACE transactions that will 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 will be disclosed for PACE transactions. • Provides new model forms under H-24(H) and H-25(K) of appendix H for the Loan Estimate and Closing Disclosure, respectively, specifically designed for PACE transactions, as well as Spanish translations of those model forms under H-28(K) for the Loan Estimate and H-28(L) for the Closing Disclosure. • Exempts PACE transactions from the requirement to establish escrow accounts for certain higher-priced mortgage loans, under § 1026.35(b)(2)(i)(E). • Exempts PACE transactions from the requirement to provide periodic statements, under § 1026.41(e)(7). • Applies Regulation Z's ability-to-repay requirements in § 1026.43 to PACE transactions with a number of adjustments to account for the unique nature of PACE financing, 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 on their existing mortgage. • Provides that a PACE transaction is not a qualified mortgage as defined in § 1026.43. • Extends the ability-to-repay requirements, as well as TILA section 130, to any “PACE company,” as defined in § 1026.43(b)(14), that is substantially involved in making the credit decision for a PACE transaction. • Provides clarification regarding how PACE and non-PACE mortgage creditors should consider pre-existing PACE transactions when originating new mortgage loans. II. Background A. PACE Financing Market Overview How does PACE financing work? PACE financing enables property owners to finance upgrades to real property through an assessment on their real property. 2 Eligible upgrade types vary by locality but often include upgrades to promote energy efficiency or to help prepare for natural disasters. The voluntary financing agreements are made between the consumer and the consumer's local government or a government entity operating with the authority of several local governments, 3 and they leverage the property tax system for administration of payments. PACE financing is repaid through the property tax system alongside the consumer's other property tax payment obligations. PACE loans are typically collected through the same process as real property taxes. 4 Local governments typically fund PACE loans through bond issuance. PACE assessments are sometimes collateralized and sold as securitized obligations. 2 Some States authorize PACE financing for residential and commercial property. In this final rule, the term PACE financing refers only to residential PACE financing unless otherwise indicated. 3 Although PACE financing programs may be sponsored by individual local governments, many are sponsored by intergovernmental organizations whose membership consists of multiple local governments. 4 See, e.g., Cal. Sts. & Hwys. Code sec. 5898.30; Fla. Stat. sec. 163.081(1)(e); Fla. Stat. sec. 197.3632(8)(a); Mo. Stat. sec. 67.2815(5). PACE loans are secured by a lien on the consumer's real property. The liens securing PACE loans typically have priority under State law similar to that of other real property tax liens, which are superior to other mortgage liens on the property, including those that predated the PACE lien. 5 In a foreclosure sale, this super-priority lien position means that any amount due on the PACE loan is paid with the foreclosure sale proceeds before any proceeds will flow to other liens. The PACE loan is tied to the property, not the property owner. As such, the repayment obligation remains with the property when property ownership transfers unless paid off at the time of sale. 5 See, e.g., Cal. Sts. & Hwys. Code sec. 5898.30 (providing for “the collection of assessments in the same manner and at the same time as the general taxes of the city or county on real property, unless another procedure has been authorized by the legislative body or by statute . . . .”); Fla. Stat. sec. 163.081(7) (“The recorded agreement must provide constructive notice that the non-ad valorem assessment to be levied on the property constitutes a lien of equal dignity to county taxes and assessments from the date of recordation.”). However, authorizing statutes in some States provide for subordinated-lien status for PACE financing. See, e.g., Minn. Stat. sec. 216C.437(4); Me. Stat. tit. 35A sec. 10156(3), (4); 24 V.S.A. sec. 3255(b). The CFPB understands that there has been little to no loan volume in these programs. See, e.g., Efficiency Maine, FY2024 Annual Report, at 40, https://www.efficiencymaine.com/docs/FY2024-Annual-Report.pdf. Although some local governments operate PACE financing programs directly, most contract with private PACE companies to operate the programs. These private companies generally handle the day-to-day operations, including tasks such as marketing PACE financing to consumers, training home improvement contractors to sell PACE financing to consumers, overseeing originations, performing underwriting, and making decisions about whether to extend the loan. The PACE companies may also contract with third-party companies to administer different aspects of the loans after origination. Often, PACE companies purchase PACE bonds that are issued by local governments to fund the programs, which generate revenue for the PACE companies from interest on consumer payments. PACE companies are also sometimes involved in securitizing the bond obligations for sale as asset-backed securities. Additionally, PACE companies frequently earn various fees related to the transactions. 6 6 See, e.g., Energy Programs Consortium, R-PACE, Residential Property Assessed Clean Energy, A Primer for State and Local Energy Officials (Mar. 2017), https://web.archive.org/web/20201030223231/http:/www.energyprograms.org/wp-content/uploads/2017/03/R-PACE-Primer-March-2017.pdf. PACE companies often rely heavily on home improvement contractors to sell PACE loans to consumers and facilitate their origination. Home improvement contractors frequently market PACE financing directly to consumers while selling their home improvement services, often door-to-door. They often serve as the primary point of contact with consumers during the origination process and collect application information that the PACE companies use to make underwriting and eligibility determinations. The contractors may also deliver disclosures relating to the PACE transaction and obtain the consumer's signature on the financing agreement. Origin and Growth of PACE Programs In 2008, California passed Assembly Bill no. 811 to enable the first PACE programs. The CFPB is aware of 19 States plus the District of Columbia that currently have enabling legislation for residential PACE financing programs, but only a small number of States have had active programs, primarily California, Florida, and Missouri. 7 7 There has been pilot program activity for residential PACE financing in some States. See, e.g., DevelopOhio, Lucas County PACE program benefits homeowners (Aug. 16, 2019), https://www.brickergraydon.com/DevelopOhio/Lucas-County-PACE-program-benefits-homeowners. Some States that previously authorized residential PACE financing programs have amended their statutes such that PACE financing is no longer authorized for single-family residential properties. See, e.g., 2021 Wis. Act 175 (codified at Wis. Stat. sec. 66.0627). During the early years of PACE financing, lending activity appears to have been relatively limited, with cumulative obligations of around $200 million through 2013. 8 In 2014, PACE financing activity accelerated, peaking in 2016 with over $1.7 billion in investment. 9 This level of activity was maintained in 2017, but it declined between 2018 and 2021, dropping to an average investment of $769 million per year during those years. 10 Overall, as of December 31, 2023, the PACE financing industry had financed 371,000 home upgrades, totaling over $9.1 billion. 11 8 See PACENation, Market Data, https://www.pacenation.org/pace-market-data/ (last visited Mar. 30, 2023). 9 See id. 10 See id. The latest data available on the PACE financing industry trade association's website is for 2023. 11 See id. Common Financing Terms According to data analyzed in a report that the CFPB released concurrently with its PACE proposal (PACE Report), the term of PACE loans that were originated between July 2014 and December 2019 was most often 20 years, but ranged between five and 30 years. 12 The Report also finds that the interest rates for those loans clustered around 7 to 8 percent with annual percentage rates (APRs) averaging approximately a percentage point higher. 13 For reference, the average prime offer rate for primary mortgage loans was around 3.5 percent for most of the period studied in the PACE Report. 14 Fees vary by PACE program, but the CFPB has reviewed agreements that include fees for application, origination, tax administration, lien recordation, title, escrow, bond counsel, processing, underwriting, and fund disbursement. The CFPB is not aware of any PACE obligations that are open-end or have a negative-amortization feature. 12 See CFPB, PACE Financing and Consumer Financial Outcomes at Table 2 (May 2023), https://files.consumerfinance.gov/f/documents/cfpb_pace-rulemaking-report_2023-04.pdf. (PACE Report). The PACE Report is discussed in more detail in part II.B. 13 Id. 14 See id. at 13. Consumer Protection Concerns The structure of PACE transactions carries certain unique risks for consumers. Primarily, the risks are due to the fact that PACE companies and secondary-market participants face very low repayment risk, regardless of whether consumers can repay. 15 If a house with a PACE lien is sold through foreclosure or tax sale, the sale proceeds are generally assured to cover the outstanding amounts owed on the PACE transaction because PACE loan amounts are a fraction of the value of the property, the loans do not accelerate, and the super-priority lien means that amounts due are paid before other mortgage debts. Additionally, because PACE loans do not accelerate, the remaining balance will stay with the property for the next homeowner to pay under the terms of the original financing agreement. 15 See, e.g., Morningstar, DBRS, Rating U.S. Property Assessed Clean Energy (PACE) Securitizations, Aug. 2024, at 19, 20, app. A (“Given the seniority of the amortizing PACE lien and corresponding low [loan-to-value], in the vast majority of cases, we typically assume the liquidation proceeds from a foreclosure sale are sufficient to bring the [residential] PACE Assessment current. Based on this assumption, a main credit risk to [residential] PACE ABS transactions is a delay in cash flow receipts related to nonpayment of the R-PACE Assessments over some period of time. . . . For [residential] PACE Assessments that go through the foreclosure process, once the process has concluded and the property sold, the [residential] PACE Assessment is typically considered reperforming/performing, and collections resume according to the original amortization schedule. Furthermore, the new property owner is subject to subsequent to default. The same process is then applied to the second and subsequent round of delinquency until the [residential] PACE Assessments are paid in full.”). Consumer groups have stated that PACE companies and home improvement contractors originate PACE loans quickly, often on the spot, without regard to affordability or consumer understanding. They have reported to the CFPB, including in comments to the proposed rule, deceptive sales tactics, aggressive sales practices, and fraud. A number of PACE industry stakeholders acknowledged in comments to the proposal that some consumers experienced mistreatment before many of the current consumer protection laws and practices were put in place. Consumer advocates have criticized other aspects of PACE financing as well, such as the high cost of funding compared to other mortgage debt, excessive capitalized fees, and inadequate disclosures. They have argued that these aspects of PACE transactions can cause unexpected and unaffordable tax payment spikes that can lead to delinquency, late fees, tax defaults, and foreclosure actions. 16 Some local officials have echoed some of these concerns in discussions with CFPB staff. 16 See, e.g., Nat'l Consumer L. Ctr., Residential (PACE) Loans: The Perils of Easy Money for Clean Energy Improvements (Sept. 2017), https://www.nclc.org/images/pdf/energy_utility_telecom/pace/ib-pace-stories.pdf; see also Off. of the Dist. Att'y, Cnty. of Riverside, News Release, District Attorneys Announce $4 Million Consumer Protection Settlement (Aug. 9, 2019), https://rivcoda.org/community-info/news-media-archives/district-attorneys-announce-4-million-consumer-protection-settlement; Kirsten Grind, America's Fastest-Growing Loan Category Has Eerie Echoes of Subprime Crisis, Wall St. J. (Jan. 10, 2017), https://www.wsj.com/articles/americas-fastest-growing-loan-category-has-eerie-echoes-of-subprime-crisis-1484060984. The CFPB's PACE Report, discussed under parts II.B and VI.C, bears out some of these concerns. According to the Report, PACE loans originated between 2014 and 2019 increased consumers' property tax bills by about $2,700 per year on average, an average increase of about 88 percent. 17 The Report also finds that getting a PACE loan increased mortgage delinquency rates for consumers who had a pre-existing non-PACE mortgage by 2.5 percentage points over a two-year period following the PACE origination, which represents an increased risk of a mortgage delinquency by about 35 percent over two years. 18 17 See PACE Report at 4. 18 See id. at 3. Additionally, consumer advocates have expressed concern that some home improvement contractors involved in the origination of PACE transactions provide consumers with misleading information about potential energy savings or promote the most expensive energy improvements, regardless of their actual energy conservation benefits. 19 They have noted that such practices could result in homeowners receiving a smaller reduction in their utility bills than anticipated, making PACE financing payments more difficult to afford. Consumer advocates have also alleged that PACE financing is disproportionately targeted at older Americans, consumers with limited English proficiency or lower incomes, and consumers in predominantly Black or Hispanic neighborhoods. 19 See Claudia Polsky, Claire Christensen, Kristen Ho, Melanie Ho & Christina Ismailos, The Darkside of the Sun: How PACE Financing Has Under-Delivered Green Benefits and Harmed Low Income Homeowners, Berkeley L., Env't L. Clinic, at 8-13 (Feb. 2021), https://www.law.berkeley.edu/wp-content/uploads/2021/02/ELC_PACE_DARK_SIDE_RPT_2_2021.pdf. These advocates and mortgage-industry stakeholders have also highlighted that, although a PACE loan technically remains with the property at sale, most home buyers are unwilling to take on the remaining payment obligation for a PACE lien, or their mortgage lender prohibits them from doing so. 20 Consumer advocates have reported that PACE consumers are often unaware of these issues when agreeing to the financing, which causes an unanticipated financial burden when consumers are required to pay off the PACE loan to complete a home sale. 20 See Freddie Mac, Purchase and “no cash-out” refinance Mortgage requirements (Mar. 31, 2022), https://guide.freddiemac.com/app/guide/section/4301.4 . As of February 2023, guidelines from both Fannie Mae and Freddie Mac generally prohibit purchase of mortgages on properties with outstanding first-lien PACE obligations. Similarly, the Federal Housing Administration (FHA) updated its handbook requirements in 2017 to prohibit insurance of mortgage on properties with outstanding first-lien PACE obligations. See U.S. Dept. of Hous. & Urb. Dev., Property Assessed Clean Energy (PACE) (Dec. 7, 2017), https://www.hud.gov/sites/dfiles/OCHCO/documents/17-18ml.pdf . Mortgage industry stakeholders have also asserted in comments to the proposal and through other communications that PACE financing introduces risk to the mortgage market, as PACE liens take priority over pre-existing mortgage liens. 21 21 See, e.g., Fed. Hous. Fin. Agency (FHFA), FHFA Statement on Certain Energy Retrofit Loan Programs (July 6, 2010), https://www.fhfa.gov/news/statement/fhfa-statement-on-certain-energy-retrofit-loan-programs ; 85 FR 2736, FHFA Notice and Request for Input on PACE Financing (Jan. 16, 2020); Joint Letter from Mortgage Trade Assocs. to FHFA Director Mark Calabria (Mar. 16, 2020), https://www.housingpolicycouncil.org/_files/ugd/d315af_6cb569a5427f4e26ab4ef4d55038b3f6.pdf . Since 2015, the CFPB has received over 125 complaints related to PACE financing, primarily from consumers in California and Florida. Many of the complaints allege fraud, deceptive practices, overly high costs, or trouble with refinancing the consumer's home. Twenty-eight of the complaints involve older adults, and five of the complaints involve consumers with limited English proficiency. Consumer advocates have suggested that consumers may not be aware of their ability to submit PACE complaints to the CFPB database or may have had difficulty categorizing them, which may have resulted in a lower number of complaints reported. Consumers in California are also able to submit complaints to their State PACE regulator and submitted 313 such complaints between 2020 and 2022 alone. 22 22 Cal. Dep't of Fin. Prot. & Innovation, Annual Report of Operation of Finance Lenders, Brokers, and PACE Administrators Licensed Under the California Financing Law, at 41 (Aug. 2023) https://dfpi.ca.gov/wp-content/uploads/sites/337/2024/01/2022-Annual-Report-CFL-Aggregated.pdf . In August 2019, Renovate America, Inc. (Renovate), a major PACE company at the time, reached a $4 million settlement with six counties and one city in California. 23 The complaint, filed in State court, alleged that Renovate misrepresented the PACE program or failed to make adequate disclosures about key aspects of the program, including its government affiliation, tax deductibility, transferability of ethe obligations to subsequent property owners, financing costs, and Renovate's contractor verification policy. 24 Subsequently, in June 2021, the California State PACE regulator moved to revoke Renovate's Administrator license, required to administer a PACE program in the State, after finding that one of its solicitors repeatedly defrauded homeowners in San Diego County. 25 Renovate ultimately consented to the revocation. 26 23 See Riverside Cnty. Dist. Att'y, District Attorneys Announce $4 Million Consumer Protection Settlement With “PACE” Program Administrator Renovate America, Inc. (Aug. 9, 2019), https://rivcoda.org/community-info/news-media-archives/district-attorneys-announce-4-million-consumer-protection-settlement ; see also State of California v. Renovate America, Case No. RIC1904068 (Super. Ct. Riverside Cnty. 2019). 24 Id. 25 See Cal. Dep't of Fin. Prot. & Innovation, DFPI Moves to Revoke PACE Administrator's License After Finding Its Solicitor Defrauded Homeowners (June 4, 2021), https://dfpi.ca.gov/press_release/dfpi-moves-to-revoke-pace-administrators-license-after-finding-its-solicitor-defrauded-homeowners/ . 26 Cal. Dep't of Fin. Prot. & Innovation, Settlement Agreement (Sept. 8, 2021), https://dfpi.ca.gov/wp-content/uploads/sites/337/2021/09/Admin.-Action-Renovate-America-Inc.-Settlement-Agreement.pdf?emrc=090ca0 . In October 2022, Ygrene Energy Fund Inc. (Ygrene), a major PACE company, reached a $22 million settlement with the Federal Trade Commission (FTC) and the State of California over allegations regarding its conduct in the PACE marketplace. 27 In a joint complaint, the FTC and California alleged that Ygrene deceived consumers about the potential financial impact of its financing and unfairly recorded liens on consumers' homes without their consent. 28 The complaint further alleged that Ygrene and its contractors falsely told consumers that PACE financing would not interfere with the sale or refinancing of their homes and used high-pressure sales tactics and even forgery to enroll consumers into PACE programs. 29 27 See Fed. Trade Comm'n, FTC, California Act to Stop Ygrene Energy Fund from Deceiving Consumers about PACE Financing, Placing Liens on Homes Without Consumers' Consent (Oct. 28, 2022), https://www.ftc.gov/news-events/news/press-releases/2022/10/ftc-california-act-stop-ygrene-energy-fund-deceiving-consumers-about-pace-financing-placing-liens; see also Complaint for Permanent Injunction, Monetary Relief, Civil Penalties, and Other Relief, Fed. Trade Comm'n et al. v. Ygrene Energy Fund Inc., No. 2:22-cv-07864 (C.D. Cal. 2022), https://www.ftc.gov/system/files/ftc_gov/pdf/Complaint%20-%20Dkt.%201%20-%2022-cv-07864.pdf . 28 Id. 29 Id. State Laws and Regulations in States With Active PACE Programs California California authorized PACE programs in 2008 to finance projects related to renewable energy and energy efficiency, and later expanded the scope to include water efficiency, certain disaster hardening, and electric vehicle charging infrastructure measures. 30 Since 2008, California has passed several laws to add and adjust consumer protections for PACE programs, with major additions in a series of amendments that took effect around 2018 (collectively, 2018 California PACE Reforms). Current California law requires that, before executing a PACE contract, PACE program administrators must make a determination that the consumer has a reasonable ability to pay the annual payment obligations based on the consumer's income, assets, and current debt obligations. 31 California law also requires, among other protections, financial disclosures prior to consummation; 32 a three-day right to cancel, which is extended to five days for older adults; 33 mandatory confirmation-of-terms calls; 34 and restrictions on contractor compensation. 35 Additionally, California law imposes certain financial requirements for consumers to be eligible for PACE financing, including that consumers must be current on their property taxes and mortgage and generally not have been party to a bankruptcy proceeding within the previous four years. 36 There is also a maximum permissible loan-to-value ratio for PACE financing under California law. 37 California law exempts government agencies from some of these requirements. 38 30 See, e.g., Cal. Sts. & Hwys. Code secs. 5898.12, 5899, 5899.3. 31 Cal. Fin. Code secs. 22686 & 22687. 32 Cal. Sts. & Hwys. Code sec. 5898.17. 33 Cal. Sts. & Hwys. Code secs. 5898.16-.17. 34 Cal. Sts. & Hwys. Code sec. 5913. 35 Cal. Sts. & Hwys. Code sec. 5923. 36 Cal. Fin. Code sec. 22684(a), (d)-(e). 37 Cal. Fin. Code sec. 22684(h). 38 Cal. Fin. Code sec. 22018(a) (exempting public agencies from the definition of “program administrator” that is subject to the ability-to-pay requirements set forth under Cal. Fin. Code sec. 22687). As part of the 2018 California PACE Reforms, California significantly increased the role of what is now called California's Department of Financial Protection and Innovation (DFPI). 39 In 2019, the DFPI began licensing PACE program administrators and subsequently promulgated rules implementing some of California's statutory PACE provisions, which became effective in 2021. 40 DFPI also has certain examination, investigation, and enforcement authorities over PACE program administrators, solicitors, and solicitor agents. 41 39 Cal. AB 1284 (2017-2018), Cal. SB 1087 (2017-2018). 40 10 Cal. Code Regs. sec.1620.01 et seq. California law uses the term “program administrator” to refer to companies that are referred to here as PACE companies. See Cal. Fin. Code sec. 22018. 41 Cal. Fin. Code sec. 22690. California law uses the term “PACE solicitor” and “PACE solicitor agent” to refer to persons authorized by program administrators to solicit property owners to enter into PACE assessment contracts, often home improvement contractors. See Cal. Fin. Code sec. 22017(a)-(b). PACE program administrators must be licensed by the DFPI under the California law. They must also establish and maintain processes for the enrollment of PACE solicitors and solicitor agents, including training and background checks. 42 PACE program administrators are required to annually share certain operational data with DFPI. 43 DFPI compiles the data in annual reports on PACE lending in California, which provide aggregated information on PACE loans, PACE program administrators and solicitors, and consumer complaints. 44 42 Cal. Fin. Code secs. 22680-82. 43 Cal. Fin. Code sec. 22692. 44 See, e.g., Cal. Dep't of Fin. Prot. & Innovation, Annual Report of Operation of Finance Lenders, Brokers, and PACE Administrators Licensed Under the California Financing Law (Aug. 2022), https://dfpi.ca.gov/wp-content/uploads/sites/337/2022/08/2021-CFL-Aggregated-Annual-Report.pdf . Florida Florida authorized PACE programs in 2010 to finance projects related to energy conservation and efficiency improvements, renewable energy improvements, and wind resistance improvements. 45 The State imposed additional consumer protections for PACE transactions, which took effect July 2024 after the CFPB issued the proposed rule. 46 Florida law imposes certain financial requirements to be eligible for PACE financing, including that consumers must be current on their property taxes and all mortgage debts on the property and have not been subject to bankruptcy proceedings within the preceding five years. 47 It also includes a maximum loan-to-value ratio, 48 requires disclosures about PACE loans and the terms of the PACE transaction, 49 and requires that the estimated annual payment amount for all PACE loans on a property does not exceed 10 percent of the property owner's annual household income. 50 Additionally, Florida law requires that the property owner provide holders or servicers of any existing mortgages secured by the property with notice of their intent to enter into a PACE financing agreement together with the maximum principal amount to be financed and the maximum annual assessment necessary to repay that amount. 51 Florida law also provides that a property owner may cancel a PACE transaction agreement within three business days of consummation without incurring any financial penalty for doing so 52 and requires a written disclosure to prospective purchasers of a property subject to a PACE transaction. 53 Additionally, Florida law directs counties and municipalities to maintain processes regulating home improvement contractors 54 and third-party program administrators, 55 regulates advertising practices surrounding PACE transactions, 56 and sets forth circumstances in which PACE financing agreements may be unenforceable. 57 45 See Fla. HB 7179 (2010). 46 See Fla. SB 770 (2024), codified at Fla. Stat. sec. 163.081. 47 Fla. Stat. sec. 163.081(3)(a). 48 Id. 49 Fla. Stat. sec. 163.081(4). 50 Fla. Stat. sec. 163.081(3)(a)(12). 51 Fla. Stat. sec. 163.081(5). 52 Fla. Stat. sec. 163.081(6). 53 Fla. Stat. sec. 163.081(8). 54 Fla. Stat. sec. 163.083. 55 Fla. Stat. sec. 163.084. 56 Fla. Stat. sec. 163.085. 57 Fla. Stat. sec. 163.086. Missouri Missouri authorized PACE programs in 2010 to finance projects involving energy efficiency improvements and renewable energy improvements. 58 In 2021, Missouri enacted new legislation imposing certain consumer protection requirements for PACE transactions. The law currently requires clean energy development boards (the government entities offering PACE programs) to provide a disclosure form to homeowners that shows the financing terms, including the total amount funded and borrowed, the fixed rate of interest charged, the APR, and a statement that, if the property owner sells or refinances the property, the owner may be required by a mortgage lender or a purchaser to pay off the obligation. 59 It also requires verbal confirmation of certain provisions of the contract, imposes specific financial requirements to execute a PACE contract, and provides for a three-day right to cancel. 60 The 2021 legislation also limited the term, amount of financing, and total indebtedness secured by the property and required the clean energy development board to review and approve PACE contracts. 61 The new requirements became effective January 1, 2022. 62 58 Mo. HB 1692 (2010), codified at Mo. Rev. Stat. sec. 67.2800(2)(8) (defining projects eligible for financing). 59 Mo. HB 697, codified at Mo. Rev. Stat. sec. 67.2818(4). 60 Mo. HB 697, codified at Mo. Rev. Stat. sec. 67.2817(2) (financial requirements to execute an assessment contract); 67.2817(4) (right to cancel); 67.2818(6) (verbal confirmation). 61 Mo. HB 697, codified at Mo. Rev. Stat. secs. 67.2817(2), 67.2818(2)-(3). 62 Mo. HB 697, codified at Mo. Rev. Stat. sec. 67.2840. Self-Regulatory Efforts In addition to consumer protections mandated by State governments, in November 2021, the national trade association that advocates for the PACE financing industry announced voluntary consumer protection policy principles for PACE programs nationwide. 63 According to the trade association, the 22 principles are designed to establish a national framework for enhanced accountability and transparency within PACE programs and to offer greater protections for all consumers, as well as additional protections for low-income homeowners, based on stated income, and those over the age of 75. 64 They include provisions relating to ability-to-pay, financing disclosures, a right to cancel, and foreclosure-avoidance protections, among others. 63 See PACENation, PACENation Unveils 22 New Consumer Protection Policies for Residential PACE Programs Nationwide (Nov. 5, 2021), https://www.pacenation.org/pacenation-unveils-22-consumer-protection-policies-for-residential-pace-programs-nationwide/ . 64 Id. In comments to the proposal, PACE industry stakeholders enumerated consumer protections that they said the industry has adopted. These commenters noted the use of certain disclosures by PACE originators, as well as other activities intended to enhance consumers' understanding of PACE transactions, such as confirmation-of-terms calls. PACE industry commenters also described industry underwriting standards, including loan-to-value limitations, and mandatory confirmation that the property owner is not in bankruptcy proceedings or delinquent on property taxes or mortgage payments. Industry commenters further described industry efforts to oversee contractors, including efforts to verify contractors' licensing and insurance status, conduct background checks for contractors, require contractors to certify compliance with program policies and marketing standards, provide training to contractors, monitor contractor performance, terminate contractors who violate program policies, and withhold funds from the contractor for the project until the project is certified as complete by the homeowner and contractor. These commenters stated that industry actors closely monitor delinquency trends and provide consumers with a right to cancel and other protections following consummation. B. Summary of the Rulemaking Process Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 The Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA) was signed into law on May 24, 2018. 65 EGRRCPA section 307 amended TILA to mandate that the CFPB take regulatory action on PACE financing, which it defines as “financing to cover the costs of home improvements that results in a tax assessment on the real property of the consumer.” It requires the CFPB to prescribe regulations that (1) carry out the purposes of TILA section 129C(a), and (2) apply TILA section 130 with respect to violations under TILA section 129C(a) with respect to PACE financing. It also requires that the regulations account for the unique nature of PACE financing. 66 TILA section 129C(a) contains TILA's ability-to-repay provisions for residential mortgage loans, and TILA section 130 contains civil liability provisions. Thus, section 307 requires the CFPB to apply TILA's ability-to-repay provisions to PACE financing, and to apply TILA's civil liability provisions for violations of those ability-to-repay provisions, all in a way that accounts for the unique nature of PACE financing. This final rule discusses the implementation of the ability-to-repay and civil liability requirements further in the section-by-section analysis of § 1026.43. 65 Public Law 115-174, 132 Stat. 1296 (2018). 66 EGRRCPA section 307, amending TILA section 129C(b)(3)(C)(ii), 15 U.S.C. 1639c(b)(3)(C)(ii). EGRRCPA section 307 also includes amendments authorizing the CFPB to “collect such information and data that the CFPB determines is necessary” in prescribing the regulations and requiring the CFPB to “consult with State and local governments and bond-issuing authorities.” Outreach To learn about PACE transactions and the industry, the CFPB has engaged with a wide variety of stakeholders since 2015, including consumer advocates, a range of public and private participants in the PACE financing industry, mortgage industry stakeholders, and representatives from energy and environmental groups. The engagement has included listening sessions, roundtable discussions, question-and-answer sessions, consultation calls soliciting stakeholder input, briefings of external stakeholders, panel appearances by CFPB staff, and written correspondence. The CFPB's outreach relating to PACE financing is summarized at a high level below. 67 The outreach has supplemented information on PACE financing that the CFPB has gleaned from independent research; the comments responding to the Advance Notice of Proposed Rulemaking and the proposed rule, discussed below; the data collection described below in this in part; and information from publicly available sources such as news reports, research and analysis, and litigation documents. The CFPB also consulted with the Board and several other Federal agencies, as addressed in part VI.A. 67 The CFPB also engaged in extensive outreach with numerous stakeholders to design and complete the CFPB data collection on PACE financing that is discussed below. 1. Consumer Advocates The CFPB began corresponding with consumer advocates regarding PACE financing in 2016. These stakeholders have shared their concerns about consumer risks in the PACE financing market and stories of PACE financing resulting in financial harm to consumers. The CFPB continued the engagement after EGRRCPA section 307 passed, meeting on numerous occasions with individual consumer advocates and consumer advocacy groups to discuss a range of topics related to PACE financing. For example, these stakeholders have shared their understanding of how the PACE financing industry functions, including the structure of the financial obligation, the different roles of government units and private parties, industry trends, and the effects of State legislation on PACE financing. They have also voiced consumer protection concerns and shared legal and policy analysis regarding the implementation of EGRRCPA section 307 and the application of TILA to PACE transactions. 2. Private PACE Industry Stakeholders Since 2015, the CFPB has engaged on many occasions with various private PACE industry stakeholders, including private PACE companies, a national trade association, private companies that help administer the assessments (assessment administrators), and at least one bond counsel. These stakeholders have provided the CFPB a great deal of information about PACE transactions, industry business practices, market trends, and the roles of different industry participants. Additionally, the PACE companies, assessment administrators, and the national trade association have shared industry trends and their views on how the industry has been developing in different jurisdictions. They have also shared their views on some of the challenges and progress the industry has experienced as the programs have evolved, including, for example, the causes of fluctuations in loan volumes, industry efforts to improve the consumer experience, benefits of PACE financing, and the effects of consumer protection requirements in particular States. Some of these stakeholders have also shared their perspectives on EGRRCPA section 307 and this rulemaking. 3. State and Local Governments and Bond-Issuing Authorities The CFPB has conferred on numerous occasions with State and local governments and bond-issuing authorities involved in PACE financing to gather information about PACE financing and this rulemaking, beginning before EGRRCPA section 307 and accelerating after it took effect given its mandate for the CFPB to “consult with State and local governments and bond-issuing authorities.” 68 The CFPB has consulted with government sponsors of PACE financing programs, agencies involved in different aspects of the programs, local property tax collectors, public PACE financing providers, and county and city officials. The CFPB has engaged with bond-issuing authorities on a number of occasions, including discussions over the phone and in person, and through written correspondence. The CFPB has also conferred on a number of occasions with membership organizations representing municipalities. 68 15 U.S.C. 1639c(b)(3)(C)(iii)(II). In the course of developing the final rule, CFPB staff also conducted a series of consultation calls to promote awareness about the CFPB rulemaking and gather input on topics that the CFPB was considering addressing in this rulemaking, including, for example, whether the CFPB should use the same ability-to-repay framework for PACE financing that currently applies to mortgage credit or a different framework, what changes should be made to account for the unique nature of PACE financing, whether to apply any existing qualified mortgage definitions to PACE financing, how to apply TILA's general civil liability provisions to violations of the ability-to-repay requirements for PACE financing, and the implications of this rulemaking for PACE financing bonds. Before the CFPB issued the proposal, it held a series of calls with several stakeholder groups, including: (1) State agencies in the three States that currently offer PACE, (2) California local government officials, (3) Missouri local government officials, (4) Florida local government officials, and (5) State and local officials from states that do not currently offer PACE. CFPB staff held additional consultation calls with State and local governments and bond-issuing authorities after the NPRM's comment period closed, to solicit additional information and perspectives about this rulemaking and recent market developments. During these outreach and consultation efforts, public entities involved in the operation of PACE financing and third parties operating on their behalf expressed divergent views on PACE financing. For example, some individuals from local tax collectors' offices and other government units expressed concern about the risks or challenges that PACE financing can create for consumers or local taxing authorities. In part because of these concerns, some government representatives shared consumer protection recommendations and background information about how the PACE financing industry operates in particular jurisdictions. Several localities with active PACE financing programs expressed consumer protection concerns and informed the CFPB that they would welcome application of TILA's ability-to-repay provisions to PACE, or that they have implemented certain consumer protection standards themselves. A nonprofit organization that administered a PACE financing program on behalf of a local government informed the CFPB that the locality ended its PACE financing program, largely due to consumer protection concerns. One stakeholder from a tax collector's office asserted that, while there are limits to PACE loan amounts relative to the market value of the home, standards for obtaining a home's market value are insufficient. This stakeholder asserted that, as a result, PACE consumers could owe more than the market value of the property. This stakeholder also asserted that interest rates and APRs for PACE transactions are relatively high and do not reflect the fact that they are secure for investors and carry relatively low administrative costs, given that PACE transactions are repaid through the property tax system. Other local governments (and third parties they work with) shared views that reflect more positive assessments of the industry. For example, representatives from one government sponsor of PACE financing (that later ceased sponsoring new PACE financing originations 69 ) told the CFPB that the program carries important consumer benefits, including that it provides a financing option for home improvement projects that have energy and environmental benefits, and creates jobs. Local government representatives in certain jurisdictions expressed enthusiasm about aspects of PACE financing such as increased solar panel installations and indicated that they think PACE financing programs generally function well. Some government sponsors indicated that their PACE financing programs had instituted a number of practices that were consumer-protective, such as repayment analysis, low fees, contractor screening, or monitoring and oversight of private entities involved in the originations. Some government sponsors expressed concern that Federal regulation could negatively impact PACE programs, and that the CFPB should not apply TILA's ability-to-repay provisions or other consumer protections to PACE financing. Several State and local entities also informed the CFPB that consumer complaints had declined significantly in recent years. 69 The CFPB understands that a number of government sponsors, some of which participated in the CFPB's outreach, have stopped participating in new originations. See, e.g., Jeff Horseman, Riverside-based agency to end controversial PACE loans for energy improvements, The Press-Enterprise (Dec. 12, 2022); Andrew Khouri, L.A. County ends controversial PACE home improvement loan program, L.A. Times (May 21, 2020), https://www.latimes.com/homeless-housing/story/2020-05-21/la-fi-pace-home-improvement-loans-la-county . A public PACE provider asserted that PACE is an important public policy tool that provides financing to retrofit properties that are at risk of natural disaster, in particular wildfires. This stakeholder asserted that PACE financing helps homeowners maintain homeowners' insurance, and that its PACE program does not pose significant consumer risk. It requested that public PACE providers be exempt from the final rule. 4. Other Stakeholders The CFPB's outreach has also included other stakeholders with an interest in PACE financing. For example, several times since 2016, the CFPB has discussed PACE financing with national and State-level mortgage industry trade organizations. These stakeholders have provided updates on, for example, State-level developments in the PACE financing industry and analysis of Federal policy involving PACE financing. Some have also shared concerns, in comments to the proposal and through other channels, about the potential impact of PACE financing on mortgage industry participants, noting, for example, the priority position of liens securing PACE transactions relative to non-PACE mortgage liens, the challenges that non-PACE mortgage industry stakeholders have in obtaining information about PACE transactions and attendant risks, and that non-PACE mortgage servicers may need to collect PACE transactions through an escrow account, which may include advancing their own funds if the consumer is unable to afford the PACE financing payment. Some mortgage industry stakeholders have also raised consumer protection concerns, sharing anecdotal reports of consumer harm and asserting that, in practice, consumers have often had to repay the full PACE financing balance before they have been able to sell properties encumbered with a PACE financing lien. Some suggested that the CFPB should treat PACE like a non-PACE mortgage or apply TILA more generally to PACE. Advance Notice of Proposed Rulemaking in 2019 On March 4, 2019, the CFPB issued an Advance Notice of Proposed Rulemaking to solicit information relating to residential PACE financing. 70 The purpose of the Advance Notice of Proposed Rulemaking was to gather information to better understand the PACE financing market and other information to inform a proposed rulemaking under EGRRCPA section 307. 70 Advance Notice of Proposed Rulemaking on Residential Property Assessed Clean Energy Financing, 84 FR 8479 (Mar. 8, 2019). In response to the Advance Notice of Proposed Rulemaking, the CFPB received over 115 comments, which were submitted by a variety of entities, including individual consumers, consumer groups, private PACE industry participants, mortgage stakeholders, energy and environmental groups, and government entities, among others. A summary of some of the legal and policy positions reflected in the Advance Notice of Proposed Rulemaking comments is included in the proposal. 71 71 88 FR 30388, 30392. Data Collection and PACE Report EGRRCPA section 307 authorizes the CFPB to “collect such information and data that the CFPB determines is necessary” to support the PACE rulemaking required by the section. 72 In October 2020, the CFPB requested PACE financing data from all companies providing PACE financing at that time. The request was voluntary and was intended to gather information on PACE transaction applications and originations between July 1, 2014, and December 31, 2019, including basic underwriting information used for applications, application outcomes, and loan terms. The CFPB also contracted with one of the three nationwide consumer reporting agencies to obtain credit record data for the PACE consumers in the PACE transaction data. 72 15 U.S.C. 1639c(b)(3)(C)(iii)(I). In August 2022, the CFPB received from its contractor de-identified PACE data from the four PACE companies that were active in the PACE market at the time of submission and matching de-identified credit record data for the consumers involved in the PACE transactions. 73 The PACE company data encompassed about 370,000 PACE transaction applications submitted in California and Florida from 2014 to 2019 and about 128,000 resulting PACE transaction originations. The CFPB's contractor was able to provide matching credit data for about 208,000 individual PACE consumers, which included periodic credit snapshots for each consumer between June 2014 and June 2022. In total, the matched consumers submitted about 286,000 PACE applications and entered into approximately 100,000 PACE transactions. 74 73 The CFPB received data from FortiFi Financial, Home Run Financing, Renew Financial, and Ygrene Energy Fund. 74 Matched consumers resided in census tracts with smaller Hispanic populations, higher median income, and lower average education compared to consumers who were not matched. The PACE Report verifies that weighting the sample to be more like the full population of PACE consumers has no meaningful effect on the main results of the Report. PACE Report, supra note 12, at 11. The CFPB used the acquired data to develop a report that analyzes the impact of PACE transactions on consumer outcomes, with a particular focus on mortgage delinquency. In addition to other analyses, the Report examines consumers who obtained originated PACE transactions and compares them to those who applied for PACE transactions and were approved but did not proceed. The report, entitled “PACE Financing and Consumer Financial Outcomes” was published concurrently with the NPRM. 75 75 See PACE Report, supra note 12. Among other findings, the PACE transactions analyzed in the PACE Report led to an increase in negative credit outcomes, particularly 60-day mortgage delinquency, with an increase of 2.5 percentage points over a two-year span following PACE transaction origination. Additionally, the PACE borrowers discussed in the PACE Report resided in census tracts with higher percentages of Black and Hispanic residents than the average for their States. 76 However, the effect of PACE transactions on non-PACE mortgage delinquency was statistically similar for PACE borrowers in majority-white census tracts compared to those in census tracts that were not majority white. 77 The PACE Report also assesses the impact of the 2018 California PACE Reforms, discussed in part II.A. The analysis finds that these laws improved consumer outcomes while substantially reducing the volume of PACE lending. 78 76 Id. at 4. 77 Id. at 38-39, Figure 11. 78 Id. at 4-5. The CFPB discusses comments that addressed the PACE Report in part VI. Notice of Proposed Rulemaking The CFPB issued a proposed rule on PACE financing on May 1, 2023, concurrent with the PACE Report described in this part above. The NPRM was published in the Federal Register on May 11, 2023, 79 and the public comment period closed on July 26, 2023. 80 The CFPB proposed the following under Regulation Z: 79 88 FR 30388. 80 The CFPB received several written requests to extend the comment period. The CFPB believes that interested parties had sufficient time to consider the CFPB's proposal and prepare their responses and did not extend the comment period beyond July 26, 2023. Seventy-six days elapsed between the date the NPRM was published in the Federal Register and the comment deadline, and ten additional days elapsed between the CFPB's issuance of the NPRM and its publication in the Federal Register . Additionally, the CFPB has received a number of ex parte comments after the close of the comment period. It has added these comments to the rulemaking docket and considered them in developing this final rule. • To clarify an existing exclusion to Regulation Z's definition of credit that relates to tax liens and tax assessments. Specifically, the CFPB proposed to clarify that the commentary's exclusion of tax liens and tax assessments from being “credit,” as defined in § 1026.2(a)(14), applies only to involuntary tax liens and involuntary tax assessments. • To make a number of adjustments to the requirements for Loan Estimates and Closing Disclosures under §§ 1026.37 and 1026.38 that would apply when those disclosures are provided for PACE transactions. • To provide new model forms under H-24(H) and H-25(K) of appendix H for the Loan Estimate and Closing Disclosure, respectively, specifically designed for PACE transactions. • To exempt PACE transactions from the requirement to establish escrow accounts for certain higher-priced mortgage loans, under proposed § 1026.35(b)(2)(i)(E). • To exempt PACE transactions from the requirement to provide periodic statements, under proposed § 1026.41(e)(7). • To apply the ability-to-repay requirements in § 1026.43 to PACE transactions with a number of specific adjustments to account for the unique nature of PACE financing, 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. • To provide that a PACE transaction is not a qualified mortgage as defined in § 1026.43. • To extend the ability-to-repay requirements and the liability provisions of TILA section 130 to any “PACE company,” as defined in proposed § 1026.43(b)(14), that is substantially involved in making the credit decision for a PACE transaction. • To provide clarification regarding how PACE and non-PACE mortgage creditors should consider pre-existing PACE transactions when originating new mortgage loans. The CFPB received over 130 comments on the proposal. A variety of stakeholders submitted comment, including consumers and consumer groups, PACE companies, a public PACE provider, government sponsors of PACE programs, local government entities or their membership organizations, State agencies, a PACE industry trade association, an assessment administrator, home improvement contractor stakeholders, bond counsel, credit union stakeholders, mortgage industry stakeholders, environmental and energy stakeholders, chambers of commerce, Members of the U.S. Congress, the U.S. Small Business Administration Office of Advocacy, and State attorneys general. The CFPB has considered the comments and is adopting the proposal with certain adjustments as described in the sections below. III. Legal Authority The CFPB is finalizing amendments to Regulation Z pursuant to its authority under the Consumer Financial Protection Act of 2010 (CFPA) and other provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), 81 EGRRCPA section 307, TILA, and the Real Estate Settlement Procedures Act of 1974 (RESPA). 82 81 Public Law 111-203,124 Stat. 1376 (2010). 82 12 U.S.C. 2601 et seq. A. Dodd-Frank Act Section 1022(b)(1) of the CFPA authorizes the CFPB to prescribe rules “as may be necessary or appropriate to enable the CFPB to administer and carry out the purposes and objectives of the Federal consumer financial laws, and to prevent evasions thereof.” 83 Among other statutes, TILA, RESPA, and the CFPA are Federal consumer financial laws. 84 Accordingly, the CFPB is exercising its authority under CFPA section 1022(b) to prescribe rules that carry out the purposes and objectives of TILA, RESPA, and the CFPA and prevent evasion of those laws. 83 12 U.S.C. 5512(b)(1). 84 CFPA section 1002(14), 12 U.S.C. 5481(14) (defining “Federal consumer financial law” to include the “enumerated consumer laws” and the provisions of CFPA); CFPA section 1002(12), 12 U.S.C. 5481(12) (defining “enumerated consumer laws” to include TILA and RESPA). Section 1405(b) of the Dodd-Frank Act provides that, notwithstanding any other provision of title XIV of the Dodd-Frank Act, in order to improve consumer awareness and understanding of transactions involving residential mortgage loans through the use of disclosures, the CFPB may exempt from or modify disclosure requirements, in whole or in part, for any class of residential mortgage loans if the CFPB determines that such exemption or modification is in the interest of consumers and in the public interest. 85 Section 1401 of the Dodd-Frank Act, which amends TILA section 103(cc)(5), generally defines a residential mortgage loan as any consumer credit transaction that is secured by a mortgage on a dwelling or on residential real property that includes a dwelling, other than an open-end credit plan or an extension of credit secured by a consumer's interest in a timeshare plan. 86 Notably, the authority granted by section 1405(b) applies to disclosure requirements generally and is not limited to a specific statute or statutes. Accordingly, Dodd-Frank Act section 1405(b) is a broad source of authority to exempt from or modify the disclosure requirements of TILA and RESPA. In developing this final rule, the CFPB has considered the purposes of improving consumer awareness and understanding of transactions involving residential mortgage loans through the use of disclosures and the interests of consumers and the public. The CFPB is finalizing these amendments pursuant to its authority under Dodd-Frank Act section 1405(b). For the reasons discussed below and in the 2013 TILA-RESPA Rule, the CFPB believes the final rule is in the interest of consumers and in the public interest, consistent with Dodd-Frank Act section 1405(b). 85 Public Law 111-203, 124 Stat. 1376, 2142 (2010) (codified at 15 U.S.C. 1601 note). 86 Public Law 111-203, 124 Stat. 1376, 2138 (2010) (codified at 15 U.S.C. 1602(cc)(5)). B. TILA TILA section 105(a) directs the CFPB to prescribe regulations to carry out the purposes of TILA and provides that such regulations may contain additional requirements, classifications, differentiations, or other provisions and may further provide for such adjustments and exceptions for all or any class of transactions that the CFPB judges are necessary or proper to effectuate the purposes of TILA, to prevent circumvention or evasion thereof, or to facilitate compliance therewith. 87 A purpose of TILA is to assure a meaningful disclosure of credit terms so that the consumer will be able to compare more readily the various available credit terms and avoid the uninformed use of credit. 88 Additionally, a purpose of TILA sections 129B and 129C is to assure that consumers are offered and receive residential mortgage loans on terms that reasonably reflect their ability to repay the loans and that are understandable and not unfair, deceptive, or abusive. 89 87 15 U.S.C. 1604(a). 88 15 U.S.C. 1601(a). 89 15 U.S.C. 1639b(a)(2). TILA section 105(b), amended by the CFPA, requires publication of an integrated disclosure for mortgage loan transactions covering the disclosures required by TILA and the disclosures required by sections 4 and 5 of RESPA. 90 The purpose of the integrated disclosure is to facilitate compliance with the disclosure requirements of TILA and RESPA and to improve borrower understanding of the transaction. The CFPB provided additional discussion of this integrated disclosure mandate in the 2013 TILA-RESPA Rule. 91 90 Public Law 111-203, 124 Stat. 1376, 2108 (2010) (codified at 15 U.S.C. 1604(b)). 91 78 FR 79730, 79753-54 (Dec. 31, 2013). Section 105(f) of TILA, 15 U.S.C. 1604(f), authorizes the CFPB to exempt from all or part of TILA any class of transactions if the CFPB determines after the consideration of certain factors that TILA coverage does not provide a meaningful benefit to consumers in the form of useful information or protection. TILA section 129C(b)(3)(A) directs the CFPB to prescribe regulations to carry out the purposes of the subsection. 92 In addition, TILA section 129C(b)(3)(B)(i) authorizes the CFPB to prescribe regulations that revise, add to, or subtract from the criteria that define a qualified mortgage upon a finding that such regulations are necessary or proper to ensure that responsible, affordable mortgage credit remains available to consumers in a manner consistent with the purposes of TILA section 129C; or are necessary and appropriate to effectuate the purposes of TILA sections 129B and 129C, to prevent circumvention or evasion thereof, or to facilitate compliance with such sections. 93 92 15 U.S.C. 1639c(b)(3)(A). 93 15 U.S.C. 1639c(b)(3)(B)(i). In section 307 of the EGRRCPA, codified in TILA section 129C(b)(3)(C), Congress directed the CFPB to conduct a rulemaking to “prescribe regulations that carry out the purposes of [TILA's ATR requirements] and apply section 130 [of TILA] with respect to violations [of the ATR requirements] with respect to [PACE] financing, which shall account for the unique nature of [PACE] financing.” 94 94 15 U.S.C. 1639c(b)(3)(C)(ii). C. RESPA RESPA section 4(a), amended by the CFPA, requires publication of an integrated disclosure for mortgage loan transactions covering the disclosures required by TILA and the disclosures required by sections 4 and 5 of RESPA. 95 95 Public Law 111-203, 124 Stat. 1376, 2103 (2010) (codified at 12 U.S.C. 2603(a)). See discussion of integrated disclosure above. Section 19(a) of RESPA authorizes the CFPB to prescribe such rules and regulations and to make such interpretations and grant such reasonable exemptions for classes of transactions as may be necessary to achieve the purposes of RESPA. 96 One purpose of RESPA is to effect certain changes in the settlement process for residential real estate that will result in more effective advance disclosure to home buyers and sellers of settlement costs. 97 In addition, in enacting RESPA, Congress found that consumers are entitled to greater and more timely information on the nature and costs of the settlement process and to be protected from unnecessarily high settlement charges caused by certain abusive practices in some areas of the country. 98 In developing rules under RESPA section 19(a), the CFPB has considered the purposes of RESPA, including to effect certain changes in the settlement process that will result in more effective advance disclosure of settlement costs. 96 12 U.S.C. 2617(a). 97 12 U.S.C. 2601(b). 98 12 U.S.C. 2601(a). In the past, RESPA section 19(a) has served as a broad source of authority to prescribe disclosures and substantive requirements to carry out the purposes of RESPA. IV. Discussion of the Final Rule A. General Comments on the NPRM The CFPB received comments addressing several topics other than those discussed in the section-specific analyses below. These topics are largely outside the scope of this rulemaking. Super-Priority Lien Status Many mortgage industry stakeholders and consumer groups expressed concerns about the super-priority status held by liens securing PACE transactions. Several commenters stated that the super-priority status of PACE liens increases risks for borrowers, mortgage lenders, communities, and secondary mortgage market participants. A mortgage industry trade association asserted that PACE transactions violate the first-lien status of mortgages and create risk for consumers and communities. One mortgage industry trade association stated that the super-priority lien status undermines mortgage lenders' underwriting by increasing the loss severity during foreclosure for the mortgage lender in a way that was not priced in, limits saleability of mortgages, and requires mortgage servicers to advance funds to secure the security interest when consumers go delinquent on property taxes and PACE obligations. A credit union stated that the super-lien priority decreases home marketability, and an escrow association stated that consumers have not understood the priority status of PACE liens. Some commenters, including a credit union and other mortgage industry stakeholders, described challenges with identifying the presence of existing PACE liens. Some commenters, including a community bankers association, a credit union trade association, and a group of mortgage industry and consumer group stakeholders, asked the CFPB to work with State and local governments to find solutions to better identifying PACE liens or downgrading their priority status. In contrast to these comments, a PACE company asserted that a PACE transaction's super-priority lien status makes PACE transactions more secure, which allows capital markets to embrace lower interest rates, with the savings passed on to consumers. Another PACE company stated that, in California, there is a loss reserve in place and only two claims have ever been made, showing the concerns related to whether the lien status would impair the security of first mortgage loans have not materialized. Requests for Additional Regulatory Requirements Several commenters suggested additional regulation of PACE financing that was not contemplated in the proposed rule. For instance, a State housing agency association suggested requiring PACE companies to report PACE transactions to credit bureaus, prohibiting prepayment penalties on PACE transactions if the first mortgage does not impose prepayment penalties, regulating the types of fees allowed on PACE transactions, and imposing conflict-of-interest provisions on PACE transactions like those found under RESPA. A PACE company recommended prohibiting payments to home improvement contractors for marketing services and for work done prior to project completion. This commenter also suggested the CFPB craft protections against antitrust or defamation claims for PACE companies, similar to those available to financial institutions who file Suspicious Activity Reports, so that they can more effectively share information about problematic home improvement contractors. A consumer group suggested the CFPB require independent verification before PACE-financed work begins (specifically, an energy audit to verify the need for cost-effective improvements and verifying the consumer understands related costs and risks) and after work is completed but before the contractor is paid. Another consumer group urged the CFPB to prohibit false assertions made on social media websites. A consortium of consumer groups stated that the CFPB should finalize the proposal quickly and should monitor and incorporate consumer protections into other emerging lending products intended to be environmentally friendly ( i.e., “green” lending products, such as those being implemented under Inflation Reduction Act programs), to minimize what they characterized as public harm and negative consequences that resulted from the problematic design and predatory practices of PACE financing. A few other consumer and environmental groups echoed the need for collaboration among Federal agencies on green lending products to share lessons learned from PACE financing and to ensure these products are fair, safe, affordable, and sustainable for consumers. National Environmental Policy Act Two PACE companies and a PACE industry trade association stated that the National Environmental Policy Act (NEPA) applies to the CFPB's PACE financing rulemaking. These commenters asserted that the CFPB should complete an environmental impact statement under NEPA. Specifically, commenters expressed concerns that the proposed rule would have a significant adverse impact on the quality of the human environment by causing fewer PACE loans to be originated, thereby reducing the environmental benefits associated with PACE financing, including benefits related to the reduction of water and energy consumption. The CFPB has prepared an environmental assessment and finding of no significant impact regarding the proposed rule, to be published in the Federal Register concurrently with this final rule. The environmental assessment provides the basis for the conclusion that the proposed rule, which the CFPB is adopting in this final rule with small changes described below, will not have a significant effect on the human environment. 99 In developing the environmental assessment, the CFPB considered commenters' estimates of the environmental benefits associated with PACE financing. As discussed in the environmental assessment, the CFPB found that those estimates likely overstate the impacts on energy and water consumption that PACE loans provide. It also found, however, that even assuming that the proposal would entirely eliminate PACE financing (an outcome the CFPB does not expect to occur), the proposed rule would not result in significant effects on the human environment. Based on the finding of no significant impact, the CFPB determined that an environmental impact statement need not be prepared as some commenters suggested. 99 CFPB, Environmental Assessment and Finding of No Significant Impact (Dec. 17, 2024). B. Section-by-Section Analysis 1026.2 Definitions and Rules of Construction 1026.2(a) Definitions 1026.2(a)(14) Credit Section 1026.2(a)(14) defines “credit” to mean “the right to defer payment of debt or to incur debt and defer its payment.” The CFPB proposed to clarify that comment 2(a)(14)-1.ii's exclusion of tax liens and tax assessments from the definition of credit applies only to involuntary tax liens and involuntary tax assessments, and not to voluntary ones, such as PACE transactions. The CFPB proposed to change the comment by adding the word “involuntary” to clarify which tax liens and tax assessments are not considered credit. Without an exclusion for voluntary tax liens and voluntary tax assessments, the proposal separately recognized that PACE transactions would meet TILA's definition of “credit.” For the reasons discussed below, the CFPB is finalizing comment 2(a)(14)-1.ii as proposed, to clarify that involuntary tax liens, involuntary tax assessments, court judgments, and court approvals of reaffirmation of debts in bankruptcy are not considered credit for purposes of the regulation. 100 100 The CFPB is also finalizing a conforming change later in the comment, inserting the word “involuntary” before “tax lien” in an illustrative example of third-party financing that is credit for purposes of the regulation notwithstanding the exclusion. Many commenters addressed this part of the proposal. Consumer groups, mortgage industry stakeholders, and a State agency were generally supportive of amending the comment, as well as recognizing PACE transactions as credit. Some of these commenters asserted that PACE transactions meet the definition of consumer credit under TILA and Regulation Z and should be treated as such. Several consumer groups stated that Congress's directive to prescribe rules for PACE financing under TILA assumes that PACE transactions will be treated as credit because the CFPB would otherwise have no authority to issue regulations under TILA, as TILA governs consumer credit. A State agency stated that PACE transactions are clearly a form of consumer credit, and that the proposed amendment appears to be the simplest and most efficient means of allowing PACE transactions to be subject to the requirements of TILA and Regulation Z. Some mortgage industry stakeholders and consumer groups stated that, as voluntary home-secured financing, PACE transactions are mortgages or their functional equivalents and should be treated the same under TILA. A number of consumer groups and mortgage industry stakeholders stated that applying TILA's mortgage requirements to PACE transactions would curb abuses and help ensure consumers qualify and understand repayment obligations. Two consumer groups expressed support for applying the mortgage requirements under TILA and Regulation Z to PACE transactions and suggested a number of adjustments to enhance consumer protections. One credit union trade association stated that it was critical that consumers with PACE transactions have the same rights and protections as with other home-secured lending, particularly because foreclosure related to unpaid municipal levies may involve a faster process than a civil mortgage foreclosure. A number of commenters suggested covering PACE transactions as TILA credit would be important because the structure of PACE transactions creates risk for consumers or other stakeholders. Some consumer groups and mortgage industry stakeholders asserted that the role of private contractors in PACE transactions has spurred predatory practices. A few commenters indicated that alternatives to PACE financing, such as solar funds, home equity lines of credit, or second mortgages may be safer for consumers or carry lower fees or interest rates. One credit union league asserted various concerns about PACE financing, such as high interest rates, exploitation and targeting of vulnerable consumers, risks of losing homes, deceptive marketing practices, and a lack of disclosures. A few commenters made assertions about possible negative impacts of PACE financing on certain groups of consumers, including older Americans, lower-income consumers, consumers with limited English proficiency, and majority Black or Hispanic communities. Several commenters, including consumer groups, mortgage industry stakeholders, and environmental groups, asserted that treating PACE transactions like mortgages would ensure a level playing field for market participants. Some mortgage industry and consumer group stakeholders stated that the proposal would ensure that PACE transactions receive the same level of scrutiny and safeguards as non-PACE mortgage products. One consumer group and one title insurance trade association stated that PACE transactions tend to come with higher costs, fees, and interest rates than non-PACE mortgage products, warranting scrutiny for the market. One environmental group commented that PACE companies effectively act like mortgage bankers without having to comply with banking or lending regulations. Many PACE industry stakeholders objected to treating PACE transactions as credit under TILA. Some commenters stated that PACE transactions are legally distinguishable from consumer credit. Several commenters, including PACE companies and a government sponsor, referred to State law or case law to assert that PACE transactions are not consumer credit or are property tax assessments. A PACE company stated that there is no legal difference between voluntary and involuntary tax assessments, and that voluntariness does not render a tax assessment consumer credit. This commenter also asserted that the proposal did not distinguish between voluntary and involuntary court judgments, which, like tax assessments and tax liens, were excluded from “credit” under existing comment 2(a)(14)-1.ii. PACE companies, trade associations, and a government sponsor of PACE programs asserted that covering PACE transactions as consumer credit under TILA would not be supported by EGRRCPA section 307 or other TILA provisions. Several commenters stated that treating PACE transactions as credit would be overreach because, they asserted, it would exceed Congress's narrow directive in EGRRCPA section 307 by applying TILA to all voluntary tax assessments and tax liens. Some commenters stated that the CFPB lacks statutory authority to regulate PACE transactions as proposed because they are tax assessments subject to State law and are not credit under TILA. A few commenters stated that EGRRCPA section 307's mandate was narrow, and that the term “consumer credit” cannot be reasonably interpreted to include PACE transactions. A few commenters asserted that, if Congress had intended to make definitional changes and subject PACE transactions to further regulation beyond ability to repay and civil liability, it would have said so explicitly. A PACE company stated that EGRRCPA section 307 would be superfluous if PACE transactions were TILA credit because they would already be covered. A few commenters asserted that TILA's preservation of governmental immunity from certain remedies is evidence that Congress did not intend TILA to apply generally to PACE transactions, since TILA liability generally attaches to creditors, and local governments would be creditors in PACE transactions. Several commenters took issue with the coverage of government sponsors of PACE programs. Eight Members of the U.S. Congress stated that local governments that levy PACE financing as property tax assessments are not “creditors.” Two membership organizations for local governments asserted that, since PACE government sponsors are plausibly the “creditors” in PACE transactions but are protected from civil and criminal penalties under TILA, the text of TILA itself forbids including PACE financing in the definition of credit. Another government association asserted that, while the public agency is the entity entering into the financing agreements, issuing bonds secured by the obligations, and bearing ultimate responsibility for their administration and enforcement, the public agency should not be treated as a creditor. One government sponsor asserted that the rule would have a disproportionate effect on its State and would significantly reduce PACE originations. Many local governments and a public PACE provider requested an exclusion for government-operated PACE programs. One public PACE provider stated, among other things, that such programs are designed to achieve public policy objectives, are subject to rigorous underwriting standards and other robust consumer protections, are not driven by a profit motive, and have not resulted in claims of abuse or negative outcomes. One nonprofit commenter asserted that the likelihood of fraud, deception, and abuse is virtually nil where a government entity alone administers a PACE program. Several commenters took issue with TILA coverage on the ground that PACE transactions run with the underlying property and are not personal liabilities. One PACE company asserted that, while TILA defines “credit” to mean, in part, a “right granted by a creditor to a debtor . . . , ” there are no “debtors” in PACE transactions—that “debtors” are natural persons to whom the credit is extended, whereas PACE transactions are attached to the property and are not personal liabilities. Eight Members of the U.S. Congress, several PACE companies, trade associations, and a local government organization asserted that PACE transactions are not personal debts but rather tax assessments that are levied against and run with the land. One PACE company asserted that PACE transactions are not consumer credit because their primary purpose is to advance State environmental and economic policies, whereas TILA and Regulation Z define “consumer credit” in part to mean credit that is primarily for personal, family, or household purposes. This commenter also stated that PACE transactions are attached to the property and are not personal debts. PACE companies, government sponsors, local government trade groups, a PACE industry trade association, an energy industry stakeholder, and eight Members of U.S. Congress opposed treating PACE transactions as mortgages under TILA. A PACE company stated that PACE does not meet TILA's definition of residential mortgage loan, in part because the lien will arise as a matter of State law pursuant to governments' power of taxation. A different PACE company stated that PACE transactions are not residential mortgage loans as defined in TILA. Several commenters, including PACE companies and a government sponsor, asserted that EGRRCPA section 307's directive to “account for the unique nature” of PACE transactions in prescribing regulations indicates that Congress did not intend to treat them as mortgage loans. One PACE company stated that the distinctions between principal and interest payments and property tax payments under TILA point to PACE transactions being distinct from mortgage loans. A PACE industry trade association and a PACE company, among others, asserted several differences between PACE transactions and mortgages, including that PACE transactions do not accelerate, are nonrecourse, and have longer foreclosure timelines. One PACE company stated that TILA's requirements are designed for higher dollar amount mortgages. The PACE company stated that PACE transactions are functionally and practically distinguishable from mortgages, and that they are significantly smaller than mortgages and therefore less risky for consumers. An environmental group and a PACE industry trade association stated that PACE assessments have structural protections that mortgages do not, including that consumers have years (versus months) for consumers to come current on their property taxes before local governments can initiate a foreclosure or tax sale. Numerous commenters, including eight Members of the U.S. Congress, home improvement contractors, and an environmental group, stated that treating PACE financing like a mortgage loan would disregard the unique nature of PACE transactions. The eight Members of the U.S. Congress characterized PACE transactions as land-secured municipal finance, and other commenters, including a PACE company, a government sponsor, and another industry stakeholder, characterized them as property tax assessments imposed by government entities to advance important public policy purposes as mandated by State law. Some commenters stated that State and local governments have authorized similar transactions for some time, and that such transactions have only been authorized for projects that advance public purposes dictated by State and local governments. Numerous commenters, including PACE companies, government sponsors, membership organizations for local governments, home improvement contractors, energy stakeholders, and others, expressed a wide variety of concerns about PACE transactions being subject broadly to TILA. They stated, for example, that broad TILA coverage would (1) exceed the mandate in EGRRCPA section 307, which required only ability-to-repay and civil liability regulations; (2) introduce substantial burden that would be unwarranted given the industry's progress on consumer protections in recent years; (3) deter industry actors from participating and render the programs nonviable or reduce PACE originations, which they stated would reduce access to credit, push consumers into more expensive forms of financing, or limit revenue options for State and local governments. Some commenters asserted that broad TILA coverage would be unwarranted. Some stated, for example, that the CFPB lacked sufficiently reliable, recent data or anecdotes to justify broad application of TILA to PACE transactions. Several commenters stated that data sources, including the data discussed in the PACE Report, reports issued by the California Department of Financial Protection and Innovation (California DFPI), and analysis from private bond rating agencies, for example, do not support the conclusion that PACE transactions are particularly harmful. Some commenters asserted that available data in fact demonstrates, for example, that PACE financing correlates with a negligible impact on credit outcomes; that PACE financing has relatively low delinquency rates, sometimes lower than general aggregate property taxes and mortgages; or that foreclosure rates for homes with a PACE lien are quite low. A PACE company asserted that only two claims have been made on the California Alternative Energy and Advanced Transportation Financing Authority (CAEATFA) loan loss reserve, which the commenter interpreted to mean that mortgage industry concerns relating to the priority status of PACE liens are overblown. Some commenters, including PACE companies and home improvement contractors, pointed to specific TILA requirements that they asserted would pose particular challenges if applied to PACE transactions. For example, a PACE company and a home improvement contractor stated that TILA's disclosure and appraisal requirements do not make sense or are overly costly for PACE transactions compared to other mortgages, in part because the time to close on a non-PACE mortgage is longer and the transaction is for a much larger dollar amount. PACE companies and home improvement contractors asserted that loan originator requirements would impose undue costs and could cause home improvement contractors to stop offering PACE financing to consumers, either by choice or because they could not satisfy applicable requirements under State law. A PACE company also stated that Regulation Z requirements as to the treatment of credit balances would inhibit prepayment of property taxes. Numerous commenters opposed PACE transactions being subject to the higher-priced mortgage loan appraisal requirement, including public and private industry stakeholders, home improvement contractors, and energy groups. A PACE company, an energy industry stakeholder, and home improvement contractor firms asserted that the higher-priced mortgage loan appraisal requirement would increase cost or delay and deter home improvement contractor participation in PACE programs. The PACE company stated that the higher-priced mortgage loan appraisal requirement and TILA's high-cost mortgage protections 101 would effectively cap the rates and fees for PACE transactions, which could make PACE financing economically nonviable. One home improvement contractor firm stated that the cost of an appraisal, estimated to be $300-$500, is unnecessary because the current valuation process used by industry stakeholders is more conservative than receiving an appraisal. Two PACE companies and an industry trade association recommended permitting the use of automated valuation models (AVMs) instead of appraisals—they asserted that AVMs are effective and more efficient than appraisals and already permitted under California law. 101 See the discussion of §§ 1026.32 and 1026.34 for a full discussion of comments pertaining to the application of TILA's high-cost mortgage protections. Some commenters stated that applying TILA to PACE transactions would delay PACE originations. Comments about delay in the context of specific TILA requirements, such as the TILA-RESPA integrated disclosure requirements for which there is a mandatory waiting period between disclosure and consummation, are discussed below. One home improvement contractor asserted that a delay would result in financial hardship for contractors who do not get paid until the consumer signs off on the project. Another commenter stated that this delay threatens the point-of-sale nature of PACE transactions, which would be detrimental because PACE transactions allow for emergency repairs and upgrades to help consumers obtain homeowners insurance. One PACE company asserted that TILA's right of rescission would not benefit consumers and would be confusing for consumers and burdensome for States. The commenter stated that PACE transactions are already subject to a right to cancel under State law and industry practice, including a five-day right for senior citizens under California law. A number of commenters, including an assessment administrator, PACE companies, government sponsors, bond counsel, a trade association for special districts, and a public PACE provider stated that the proposal would extend TILA coverage to many assessment financing transactions that are not commonly known as PACE. These commenters stated that this coverage would create concern and uncertainty for non-PACE financing. Some of these commenters asserted that coverage of non-PACE transactions would exceed the congressional mandate provided in EGRRCPA section 307 and impede State and local governments' ability to use their taxing and bonding authorities as they see fit. A public PACE provider recommended covering voluntary contractual assessments, instead of simply voluntary assessments, to avoid covering obligations arising from what the commenter referred to as traditional voluntary assessment districts. Many commenters, including PACE companies, a public PACE provider, home improvement contractors, eight Members of the U.S. Congress, an assessment administrator, an industry trade association, bond counsel, and a group of State attorneys general, stated that PACE transactions already have sufficient consumer protections in place. Some of these commenters stated that PACE transactions are already sufficiently regulated at the State and local levels. One trade association representing special districts stated that State and local regulations strike an effective balance of consumer protection and enabling PACE financing to achieve its objectives. Many commenters stated that PACE companies have instituted a series of additional consumer protections as well, including verifying project completion before payment, various consumer communications, and oversight of home improvement contractors. One environmental group stated that PACE programs are accountable to local government oversight. PACE industry stakeholders also stated that the rate of consumer complaints involving PACE transactions has been low. A PACE company and an industry trade association asserted that approximately one in 1,000 PACE loans have prompted consumer complaints across several years. A different trade association stated that a California DFPI report on PACE showed only 69 complaints, and that all but two were resolved. Two PACE companies stated that the number of complaints has been trending down, suggesting that industry reforms have been effective at addressing the consumer protection issues from prior years. Many commenters stated that the proposal was premised on outdated concerns, and that the CFPB should have relied more heavily on more recent trends and information. Some commenters, including PACE companies, a State agency, and a government sponsor, stated that evidence, including evidence from the PACE Report and California DFPI reports, for example, demonstrates that consumer outcomes improved after California's and Missouri's consumer-protection legislation took effect. Citing to data from CAEATFA and the Institutional Investor Journal of Structured Finance, one PACE company asserted that PACE financing does not prevent subsequent home sales. This commenter also stated that PACE delinquency rates are improving, and that PACE customers are usually able to catch up on delinquent tax payments, noting that 461 PACE delinquencies were reflected in a 2021 annual report, down from 889 delinquencies in the previous year's report. Eight Members of the U.S. Congress stated that the delinquency rate in Florida is lower than in California after its 2018 California PACE Reforms. A number of these commenters acknowledged that, before States and private industry stakeholders instituted consumer protection measures, there were concerns associated with PACE financing. Several commenters acknowledged that malfeasance by some home improvement contractors created risk and harm for consumers. One PACE company and a government sponsor stated that home improvement contractor malfeasance included, for example, misrepresentation, forging signatures on the loan contracts or completion certificates, creating false business records or contact information, and simply disappearing after the proceeds were disbursed. One State regulator stated that around 45 percent of claimants under a State-established financial restitution program for consumer fraud in residential solar purchases from licensed contractors were PACE customers, and that most of the relevant contracts were executed before the 2018 California PACE Reforms took effect. Several consumers who reported receiving a PACE transaction described various protections and benefits that they received associated with the loan. They asserted, for example, that the PACE transactions provided financing for home improvements on a short timeline and lowered their homeowner's insurance premiums. One home improvement contractor estimated that 90 percent of homeowners that the company has helped secure a PACE loan have benefited from the program. Several commenters asserted positive impacts and benefits of PACE transactions, which they asserted the proposed rule would diminish. Examples included (1) increased home values, (2) increased access to homeowner's insurance, (3) better access to credit for some consumers, (4) job creation, (5) environmental benefits, (6) lower utility bills, and (7) positive impacts for small businesses. One environmental group commented that PACE transactions are unique because they provide affordable, equitable, fixed-rate financing for homeowners to achieve public policy goals. Some commenters stated that PACE programs are uniquely designed to help the environment and communities by facilitating green and disaster-resilient homes. One public PACE provider, in discussing a recent history of natural disasters, characterized PACE financing as a critical public policy and public safety tool. One PACE company stated that local governments can tailor their PACE programs to serve the individual community needs. Several commenters also stated that PACE transactions represent a better alternative to other financing options. An individual commenter stated that PACE financing provides low-cost private capital funding to consumers, and that given current high interest rates on credit cards, a reduction in the availability of PACE financing would be troubling for their State. An environmental group stated that the proposal would reduce PACE funding access, which would push homeowners into more expensive, less equitable financing options that do not vet or monitor contractors or contain anti-consumer clauses like variable rates or prepayment penalties. PACE industry stakeholders also identified certain elements of the transactions that the commenters asserted make PACE transactions more affordable, understandable, or secure. These included assertions that PACE transactions are nonrecourse and do not accelerate upon default, and that the total loan amount correlates to the property value and a loan term that cannot exceed the useful life of the home improvement that is financed with the PACE loan. Commenters asserted that PACE transactions carry a relatively low fixed interest rate, require no downpayment, have no prepayment penalty, and fully amortize. Commenters noted that home improvement contractors typically receive no payment until the project is complete, and that PACE transactions can help lower insurance premiums for homes that have been improved with a completed PACE financed project. An industry trade association for the PACE industry asserted that PACE financing is less risky than home equity lines of credit or a second mortgage, which the commenter said can strip equity without a corresponding home improvement project that would increase property value. At least three commenters expressed concern that the proposed rule, if finalized, would interfere with State consumer protection laws that apply to PACE transactions. A PACE company, a government sponsor, and a trade association asserted that the proposed rule would complicate or conflict with existing State laws, or interfere with States' ability to adjust their laws to address concerns over time. One commenter suggested this could possibly result in preemption of State laws. A number of commenters, including State attorneys general, PACE companies, and bond counsel, stated that regulating PACE transactions in this rulemaking would be unconstitutional under principles of federalism, sovereign immunity, and commandeering. Several commenters asserted that the CFPB's proposal would encroach on States' rights to use local taxing and bonding authorities as they see fit. Numerous commenters asserted that the proposal could have an impact on access to credit for home improvements to improve energy efficiency of homes or to strengthen homes' resilience to withstand natural disasters. A bank that provides PACE funding stated that PACE financing provides access to capital to many borrowers who would otherwise be unable to pay for energy efficiency, renewable energy, or resilience home improvements. Members of the U.S. Congress stated that PACE transactions provide low-to-moderate income families with access to affordable financing for retrofits and energy efficient home improvements. Numerous commenters, including but not limited to eight Members of the U.S. Congress, PACE companies, and a government association, stated that PACE financing helps consumers obtain, maintain, or reduce the cost of homeowner's insurance. A home improvement contractor asserted that the homeowners that use PACE financing are the most vulnerable to high energy bills and/or catastrophic damage to their homes during a strong storm or hurricane. One environmental group asserted that California protections caused reduced PACE originations at a time when there are not enough financing opportunities to meet what they cast as overwhelming needs. For the reasons set forth herein, the CFPB is finalizing its proposed amendment to comment 2(a)(14)-1.ii. As finalized, amended comment 2(a)(14)-1.ii states that involuntary tax liens, involuntary tax assessments, court judgments, and court approvals of reaffirmation of debts in bankruptcy are not considered credit for purposes of the regulation. By adding the word “involuntary” in several places to modify the tax assessments and tax liens excluded under comment 2(a)(14)-1.ii, the CFPB clarifies that the comment does not exclude tax liens and tax assessments that arise from voluntary contractual agreements, such as PACE transactions. Thus, tax liens and tax assessments that are voluntary will be credit subject generally to TILA if they meet the definition of credit under TILA and Regulation Z and are not otherwise excluded. 102 102 Under the finalized amendment, tax liens and tax assessments that are not voluntary for the consumer would continue to be excluded. The amendment brings the exclusion in comment 2(a)(14)-1.ii in line with the plain text definition of credit in TILA. TILA defines “credit” to mean the “right granted by a creditor to a debtor to defer payment of debt or to incur debt and defer its payment,” and Regulation Z defines “credit” as “the right to defer payment of debt or to incur debt and defer its payment.” 103 103 15 U.S.C. 1602(f); 12 CFR 1026.2(a)(14). PACE transactions easily fit these definitions—the agreements provide for consumers to receive funding for home improvement projects and repay those funds over time in installments. 104 Consumers voluntarily incur these financial obligations and are signatories to the financing agreements. In brief, consumers choose to take out the PACE debt obligation and must repay it over time. 105 104 Treating PACE transactions as TILA credit is consistent with the FTC's assertion of claims against a PACE company under the CFPB's Regulation N, 12 CFR part 1014, which the parties settled pursuant to a proposed court order. See Stipulation as to Entry of Order for Permanent Injunction, Monetary Judgement, and Other Relief (Oct. 28, 2022), https://www.ftc.gov/system/files/ftc_gov/pdf/Stipulation%20-%20Dkt.%202%20-%2022-cv-07864.pdf ; see also part II.A (describing the settlement). Regulation N, also known as the Mortgage Acts and Practices—Advertising Rule, implements section 626 of the Omnibus Appropriations Act, 2009, as amended. 12 U.S.C. 5538. Regulation N applies to the advertising, marketing, and sale of a “mortgage credit product,” defined as “any form of credit that is secured by real property or a dwelling and that is offered or extended to a consumer primarily for personal, family, or household purposes.” 12 CFR 1014.2. Regulation N defines “credit” identically to Regulation Z but does not include any commentary analogous to comment 2(a)(14)-1.ii to Regulation Z. 105 See also, 89 FR 68086, 68087 (Aug. 23, 2024); 89 FR 61358, 61360 (July 31, 2024). That PACE transactions are repaid alongside property tax payments, do not accelerate, are nonrecourse, or can remain with the property after the consumer sells the home does not change the fundamental nature of the transaction. Nor do other reasons commenters asserted for why PACE transactions should not be treated as TILA credit—including that PACE financing is authorized for important public policy purposes under State law, may have characteristics that differ from other types of mortgage obligations, or has produced benefits for industry participants and communities. That States may also have laws in place for PACE financing is similarly immaterial. 106 106 States have rules in place governing transactions that may also be subject to TILA, including, for example, door-to-door sales ( see, e.g., Idaho Admin. Code r. 04.02.01.160; Ohio Admin. Code 109:4-3-11; Utah Admin. Code r. R152-11-9; Wis. Admin. Code ATCP § 127.62) and home improvement contractor work ( see, e.g., Haw. Rev. Stat. secs. 444-1 to 444-36; Haw. Code R. secs. 16-77-1 to 16-77-117; La. Stat. secs. 37:2150 to 37:2764; N.J. Stat. secs. 17:16C-62 to 17:16C-94; N.J. Stat. secs. 17:16C-95 to 17:16C-103; N.J. Stat. sec. 56:8-151; Wash. Rev. Code secs. 19.186.005 to 19.186.060). In response to commenters' concerns that the proposed rule, if finalized, would interfere with State consumer-protection laws that apply to PACE transactions, the CFPB notes that TILA preempts State disclosure laws only if they are “inconsistent” with it. TILA section 11(a), 15 U.S.C. 1610(a); 12 CFR 1026.28(a)(1). Additionally, any State may apply to the CFPB to exempt a class of transactions within the State from certain TILA and Regulation Z provisions if the State's law is substantially similar to the Federal law (or, for credit billing provisions, affords the consumer greater protection than the Federal law) and there is adequate provision for enforcement. 15 U.S.C. 1633; 12 CFR 1026.29(a). Covering PACE transactions as credit under TILA notwithstanding these characteristics is consistent with the treatment of other covered credit transactions. For example, TILA explicitly treats other nonrecourse obligations as consumer credit, 107 and many mortgages are effectively nonrecourse under State anti-deficiency statutes. 108 Other forms of TILA-covered financing may also advance important public policy purposes under State law. To the extent there are unique aspects of PACE transactions that warrant adjustments, as mandated by EGRRCPA, the CFPB is codifying amendments or exemptions to that end, as described below. 109 The amendment to comment 2(a)(14)-1.ii does not specifically address the coverage or characteristics of PACE transactions; it merely removes ambiguity that the existing regulatory comment may have created, and that is not reflected in the statute's definition of “credit.” Indeed, the original text of comment 2(a)(14)-1.ii was not intended to impinge on the statutory coverage of voluntary transactions, such as PACE. The Board of Governors of the Federal Reserve System (Board) issued the comment in 1981 when it officially “adopted, in substance” existing staff opinion letters regarding Regulation Z. 110 In preamble and in several such letters preceding issuance of the 1981 official staff interpretation, the Board was clear that in addressing only whether certain involuntary tax and assessment obligations were credit under TILA and Regulation Z. In one letter, the Board stated that the definition of “credit” “necessarily assumes the right to avoid incurring debt. That is, the debt must arise from a contractual relationship, voluntarily entered into, between the debtor and creditor.” 111 Because “such a relationship [did] not exist in the delinquent tax arrangement case,” the Board found that TILA and Regulation Z “would not govern the transaction.” 112 107 See e.g., 12 CFR 1026.33 (requirements applicable to nonrecourse reverse mortgages). 108 See generally Alaska Stat. sec. 34.20.090; Ariz. Rev. Stat. secs. 33-814(G), 33-729(A); Cal. Civ. Proc. Code secs. 580a-580d; Haw. Rev. Stat. sec. 667-38; Minn. Stat. sec. 582.30; Mont. Code secs. 71-1-232, 71-1-317; Nev. Rev. Stat. secs. 40.455, 40.458, 40.459; N.C. Gen. Stat. secs. 45-21.36, 45-21.38, 45-21.38A; N.D. Cent. Code sec. 32-19-03; Okla. Stat. tit. 12, secs. 686, 765, 773; Okla. Stat. tit. 46, sec. 43; Or. Rev. Stat. sec. 86.797(2); Wash. Rev. Code secs. 61.24.100. 109 The considerations discussed in this section as to why PACE transactions should not be subject to TILA also generally apply with respect to other voluntary transactions that involve an assessment on the property and are repaid through the property tax system, even when they are not commonly known as PACE transactions. 110 See 46 FR 50288, 50288, 50292 (Oct. 9, 1981). 111 Fed. Rsrv. Bd., Public Information Letter No. 166 (1969). 112 Id. Other staff opinion letters contained similar analyses, 113 and the Board reiterated this reasoning in final rule preamble shortly before issuing the 1981 official staff interpretation, again focusing on the involuntary nature of the obligations as the reason they were not credit. 114 The Board explained: 113 See Fed. Rsrv. Bd., Public Information Letter No. 153 (1969) (finding that sewer assessment installment payments did not arise “from a contractual relationship voluntarily entered into, between debtor and creditor” and thus, that TILA and Regulation Z would not apply); Fed. Rsrv. Bd., Public Information Letter No. 40 (1969) (“[T]he term `credit', for the purposes of Truth-in-Lending, assumes a contractual relationship, voluntarily entered, between creditor and debtor. Since such a relationship [did] not exist in the case of tax assessments by the Sewer District (and, similarly in the case of ad valorem taxes imposed by a city), . . . such assessments (and city taxes) would not fall within the coverage of [TILA] or Regulation Z.”). 114 46 FR 20848, 20851 (Apr. 7, 1981). Certain transactions do not involve the voluntary incurring of debt; others do not involve the right to defer a debt. Tax liens, tax assessments and court judgments (including reaffirmations of a debt discharged in bankruptcy, if approved by a court) fall into this category and are therefore not covered by the regulation. 115 115 Id. Moreover, in this preamble and in the 1981 official staff interpretation, the Board specifically juxtaposed the excluded obligations with voluntary ones, stating that, while the obligations it was excluding are not credit, “third-party financing of such obligations (for example, obtaining a bank loan to pay off a tax lien) would constitute credit for Truth in Lending purposes.” 116 There is no indication that, in issuing the comment excluding tax liens and tax assessments, the Board had considered any tax lien or tax assessment that had originally arisen from a voluntary contractual agreement. 117 116 Id.; see also 46 FR 50288, 50292 (Oct. 9, 1981) (adopting the relevant comment with the same language). In 2011, the authority to interpret TILA and implement Regulation Z transferred to the CFPB, which republished the 1981 Board interpretation as an official CFPB interpretation in comment 2(a)(14)-1.ii with no substantive changes. 117 With regard to the comment noting that the proposal did not distinguish between voluntary and involuntary court judgments, which are also discussed in comment 2(a)(14)-1.ii, those transactions are distinct from PACE transactions and are outside the scope of this rulemaking. Recognizing PACE financing as TILA credit is consistent not only with TILA's definition of “credit,” but with the goals of EGRRCPA section 307. By directing the CFPB to prescribe certain regulations for PACE financing under TILA, in EGRRCPA section 307, Congress evinced its intent for PACE transactions to be covered as TILA credit, in line with the text of the statute. To the extent there has been uncertainty as to whether PACE financing is credit under TILA, EGRRCPA section 307's explicit choice to address PACE financing using TILA resolves the question. More generally, Congress enacted TILA in part to enable consumers “to compare more readily the various credit terms available” to them, and to “avoid the uninformed use of credit.” 118 Many commenters noted that PACE financing can be used in place of other forms of consumer credit (including home equity lines of credit, personal loans, credit cards, and mortgage loans) but there was no consensus on which product was best for the consumer. Ensuring that consumers can compare these alternatives promotes competition and falls squarely within the congressional intent and purpose of TILA. Commenters concerned about coverage of PACE transactions under TILA provided no compelling reason why consumers should not receive the same disclosures and protections when entering into a PACE transaction as when entering into any other financing transaction that could result in the loss of their home. Additionally, clarifying that voluntary tax liens and tax assessments may still qualify as TILA credit is necessary to prevent circumvention or evasion of TILA's purposes, including as to PACE transactions. 118 TILA section 102(a), 15 U.S.C. 1601(a). Regarding comments opposing TILA coverage because PACE transactions attach to the property, the CFPB notes that PACE transactions are offered or extended to consumers. Unlike involuntary tax assessments and liens, 119 which are imposed upon real property as a function of ownership and without the owner's specific consent, PACE transactions cannot be completed without a natural person (the homeowner) signing a voluntary financing agreement secured by their home; these transactions, like other mortgage transactions, are always offered or extended to consumers and are secured by residential real property that they personally own. 120 119 In response to the suggestion to carve out voluntary contractual assessments from the credit exclusion, the CFPB concludes that adding the word “involuntary” into comment 2(a)(14)-1.ii appropriately distinguishes between transactions that the consumer chooses to enter into and transactions that are not voluntary for the consumer. 120 See 12 CFR 1026.1(c)(1)(i) (stating one of the four conditions of Regulation Z coverage is when “[t]he credit is offered or extended to consumer”); see also 12 CFR 1026.2(a)(12) (defining “consumer credit” as that which is “offered or extended to a consumer primarily for personal, family, or household purposes”); see also Fla. Stat. sec. 163.081(2) (“The owner of record of the residential property within the jurisdiction of an authorized program may apply to the authorized program administrator to finance a qualifying improvement. The program administrator may only enter into a financing agreement with the property owner.”); Cal. Sts. & Hwys. Code sec. 5898.20 (authorizing the creation of PACE programs whereby “public agency officials and property owners may enter into voluntary contractual assessments for public improvements and to make financing arrangements”). Moreover, consumers who agree to PACE transactions are functionally responsible for ensuring their repayment. PACE transactions are either repaid, with interest, alongside regular property tax payments, or, if those payments are not made, at a tax sale or foreclosure. Further, as several mortgage industry stakeholders noted, before a PACE borrower can refinance a home or sell it, they typically must pay off the remaining balance on the PACE transaction or reduce the sales price to account for the existing lien. 121 In this way, transferring a home with an outstanding PACE transaction is no different than transferring a property subject to any other outstanding lien or mortgage. 121 Most home buyers are unwilling to take on the remaining payment obligation for a PACE lien, or their mortgage lender prohibits them from doing so. Guidelines from both Fannie Mae and Freddie Mac generally prohibit purchase of mortgages on properties with outstanding first-lien PACE obligations. See Fannie Mae, Property Assessed Clean Energy Loans (Dec. 16, 2020), https://selling-guide.fanniemae.com/sel/b5-3.4-01/property-assessed-clean-energy-loans and Freddie Mac, Refinance of Mortgages secured by properties subject to an energy retrofit loan (Sept. 4, 2024), https://guide.freddiemac.com/app/guide/section/4301.8. Similarly, the FHA updated its handbook requirements in 2017 to prohibit insurance of mortgage on properties with outstanding first-lien PACE obligations, see U.S. Dept. of Hous. & Urb. Dev., Property Assessed Clean Energy (PACE) (Dec. 7, 2017), https://www.hud.gov/sites/dfiles/OCHCO/documents/17-18ml.pdf. Because PACE transactions are credit secured by residential real property, removing the exclusion in comment 2(a)(14)-1.ii as to voluntary tax assessments and tax liens ensures that PACE loans are subject to TILA's mortgage requirements. For example, various disclosure and other requirements will apply to the entity that is the “creditor” as defined in § 1026.2(a)(17), which the CFPB understands is typically the government sponsor in a PACE transaction. 122 Other requirements will apply to any entity that operates as a “loan originator” for a PACE transaction, which could include a PACE company or home improvement contractor depending on the roles those entities play in a particular transaction. 123 Thus, the clarification is necessary to effectuate the purposes of the statute, such as ensuring the meaningful disclosure of credit terms to enable the consumer to comparison shop. 124 Ensuring that voluntary consumer transactions such as PACE are subject to the same protections as other credit products with similar characteristics strengthens competition among financial institutions and other firms engaged in the extension of consumer credit. 125 122 Implementing TILA section 103(g), § 1026.2(a)(17) defines “creditor” generally as a person who regularly extends consumer credit that is subject to a finance charge or is payable by written agreement in more than four installments, and to whom the obligation is initially payable. The CFPB's understanding, consistent with comments in response to the proposed rule and other research, is that these characteristics apply to government sponsors of PACE transactions in the PACE programs that have been active. 123 Section 1026.36(a)(1) generally defines a “loan originator” as a person who, in expectation of direct or indirect compensation or other monetary gain or for direct or indirect compensation or other monetary gain, performs any of the following activities: takes an application, offers, arranges, assists a consumer in obtaining or applying to obtain, negotiates, or otherwise obtains or makes an extension of consumer credit for another person; or through advertising or other means of communication represents to the public that such person can or will perform any of these activities. See the section-by-section analysis of § 1026.41 for discussion of servicing provisions in Regulation Z. 124 See 15 U.S.C. 1601(a). 125 Id. Regarding comments raising concerns about the costs or operational challenges that the higher-priced mortgage loan appraisal rule could introduce, the CFPB notes that TILA section 129H(b)(4) provides the CFPB and certain other agencies with joint rulemaking and exemption authority with respect to the higher-priced mortgage loan appraisal rule. 126 As such, any future rulemaking relating to an higher-priced mortgage loan appraisal rule exemption would need to be considered and issued jointly by the CFPB, Board, FDIC, OCC, NCUA, and FHFA; the agencies would need to determine that “the exemption is in the public interest and promotes the safety and soundness of creditors.” 126 15 U.S.C. 1639h(b)(4). Specifically, the agencies with joint rulemaking and exemption authority for the higher-priced mortgage loan rule are the CFPB, the Board of Governors of the Federal Reserve System (Board), the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), the National Credit Union Association (NCUA), and the Federal Housing Finance Agency (FHFA). See TILA section 129H(b)(4)(A), 15 U.S.C. 1639h(b)(4)(A). Regarding concerns that TILA coverage would delay PACE originations, other products that meet the statutory definition of credit, including home equity lines of credit, personal loans, credit cards, or second mortgages, may also be used for home improvement projects and emergency repairs. As discussed be [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2024-30628. Public record. Not legal advice.