Residential PACE Market Faces a New Hurdle

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Property Assessed Clean Energy (PACE) financings are an alternative financing tool used to finance energy efficiency upgrades or renewable energy projects in residential, commercial and industrial properties. PACE financings allow for the payment of the costs of the energy project over time which is tied to the property, and not to the property owner.  

In a December 7, 2017 letter, the U.S. Department of Housing and Urban Development (“HUD”) stated that the Federal Housing Administration (“FHA”) would no longer insure mortgages for homes with PACE liens. This reverses a former HUD policy. The effect is that homeowners who financed energy efficiency upgrades through a PACE financing have a reduced transferability option because they cannot sell the PACE-assessed property to a new owner who decides to finance the property through an FHA-insured mortgage. The HUD policy change reflects concerns regarding the priority status of the PACE lien, as well as the lack of consumer protections associated with PACE financings compared to traditional financing products. It is a further blow to the future of PACE financing since Fannie Mae and Freddie Mac each have a similar policy.  

Some states are addressing the consumer protection issues that have been raised. California has recently enacted laws to establish stricter standards for PACE financings, including the following requirements:

  1. a written disclosure that must be provided to the property owner prior to signing a PACE financing contract;
  2. a three-day right to cancel;
  3. a recorded call with the property owner confirming the terms of the financing before the contract is signed;
  4. the same price quote by contractors for cash and for PACE financings;
  5. stronger underwriting standards of homeowners, including income verification and ability to pay;
  6. licensing standards for providers of PACE financing;
  7. training and monitoring requirements of contractors and sales representatives by providers of PACE financing; and
  8. the designation of the California Department of Business Oversight as the state’s PACE Regulator.

The new HUD Policy may slow down the residential PACE market, but state regulation, similar to the new laws  in California, may help eliminate some of the concerns.   

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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