Residential Property Assessed Clean Energy Financing (Regulation Z), 30388-30440 [2023-09468]

Download as PDF 30388 Federal Register / Vol. 88, No. 91 / Thursday, May 11, 2023 / Proposed Rules CONSUMER FINANCIAL PROTECTION BUREAU 12 CFR Part 1026 [Docket No. CFPB–2023–0029] RIN 3170–AA84 Residential Property Assessed Clean Energy Financing (Regulation Z) Consumer Financial Protection Bureau. ACTION: Proposed rule; request for public comment. AGENCY: 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 notice of proposed rulemaking, the Bureau proposes to implement EGRRCPA section 307 and to amend Regulation Z to address how TILA applies to PACE transactions to account for the unique nature of PACE. DATES: Comments must be received on or before July 26, 2023. ADDRESSES: You may submit comments, identified by Docket No. CFPB–2023– 0029 or RIN 3170–AA84, by any of the following methods: • Federal eRulemaking Portal: https://www.regulations.gov. Follow the instructions for submitting comments. • Email: 2023-NPRM-PACE@cfpb.gov. Include Docket No. CFPB–2023–0029 or RIN 3170–AA84 in the subject line of the message. • Mail/Hand Delivery/Courier: Comment Intake—PACE, c/o Legal Division Docket Manager, Consumer Financial Protection Bureau, 1700 G Street NW, Washington, DC 20552. Instructions: The CFPB encourages the early submission of comments. All submissions should include the agency name and docket number or Regulatory Information Number (RIN) for this rulemaking. Because paper mail in the Washington, DC area and at the CFPB is subject to delay, commenters are encouraged to submit comments electronically. In general, all comments received will be posted without change to https://www.regulations.gov. All submissions, including attachments and other supporting materials, will become part of the public record and subject to public disclosure. ddrumheller on DSK120RN23PROD with PROPOSALS2 SUMMARY: VerDate Sep<11>2014 17:44 May 10, 2023 Jkt 259001 Proprietary information or sensitive personal information, such as account numbers or Social Security numbers, or names of other individuals, should not be included. Submissions will not be edited to remove any identifying or contact information. FOR FURTHER INFORMATION CONTACT: Luke Diamond, Daniel Tingley, Counsels; Kristin McPartland, Amanda Quester, Alexa Reimelt, or Joel Singerman, Senior Counsels, Office of Regulations, at 202–435–7700. If you require this document in an alternative electronic format, please contact CFPB_ Accessibility@cfpb.gov. SUPPLEMENTARY INFORMATION: I. Summary of the Proposed Rule Section 307 of the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA) directs the Bureau to prescribe ability-to-repay (ATR) 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 notice of proposed rulemaking, the Bureau proposes to implement EGRRCPA section 307 and to amend Regulation Z to address the application of TILA to ‘‘PACE transactions’’ as defined in proposed § 1026.43(b)(15). The proposed rule would: • Clarify an existing exclusion to Regulation Z’s definition of credit that relates to tax liens and tax assessments. Specifically, the CFPB is proposing to clarify that the commentary’s exclusion to ‘‘credit,’’ as defined in § 1026.2(a)(14), for tax liens and tax assessments applies only to involuntary tax liens and involuntary tax assessments. • 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, including: Æ Eliminating certain fields relating to escrow account information; Æ Requiring the PACE transaction and other property tax payment obligations to be identified as separate components of estimated taxes, insurance, and assessments; Æ Clarifying certain implications of the PACE transaction on the property taxes; Æ Requiring disclosure of identifying information for the PACE company; Æ Requiring various qualitative disclosures for PACE transactions that would replace disclosures on the current forms, including disclosures 1 15 PO 00000 U.S.C. 1639c(b)(3)(C). Frm 00002 Fmt 4701 Sfmt 4702 relating to assumption, late payment, servicing, partial payment policy, and the consumer’s liability after foreclosure; and Æ Clarifying how unit-periods would be disclosed for PACE transactions. • 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. • Exempt PACE transactions from the requirement to establish escrow accounts for certain higher-priced mortgage loans, under proposed § 1026.35(b)(2)(i)(E). • Exempt PACE transactions from the requirement to provide periodic statements, under proposed § 1026.41(e)(7). • Apply Regulation Z’s ATR 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. • Provide that a PACE transaction is not a qualified mortgage (QM) as defined in § 1026.43. • Extend the ATR 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. • Provide clarification regarding how PACE and non-PACE mortgage creditors should consider pre-existing PACE transactions when originating new mortgage loans. The Bureau proposes that the final rule, if adopted, would take effect at least one year after publication of the final rule in the Federal Register, but no earlier than the October 1 which follows by at least six months Federal Register publication. The Bureau requests comment on all aspects of the proposed rule and on whether there are any other provisions of TILA or Regulation Z that the Bureau should address with respect to PACE transactions. II. Background A. PACE Market Overview 1. How does PACE financing work? PACE financing is a mechanism that enables property owners to finance certain upgrades to real property E:\FR\FM\11MYP2.SGM 11MYP2 Federal Register / Vol. 88, No. 91 / Thursday, May 11, 2023 / Proposed Rules 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 (PACE loans) 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 along with the consumer’s other property tax payment obligations. The assessments are typically collected through the same process as real property taxes.4 Local governments typically fund PACE transactions through bond issuance, with these bonds in turn collateralized and sold as securitized obligations. PACE assessments 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 superior 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 assessment 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. Although some local governments operate PACE financing programs directly, most contract with private PACE companies to operate the ddrumheller on DSK120RN23PROD with PROPOSALS2 2 Some States authorize PACE financing for residential and commercial property. In this proposal, 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. 163.08; Fla. Stat. 197.3632(8)(a); Mo. Stat. 67.2815(5). 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. 163.08(8) (‘‘The recorded agreement shall provide constructive notice that the 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 PACE States provide for subordinated-lien status for PACE financing. See, e.g., Minn. Stat. 216C.437(4); Me. Stat. tit. 35A 10156(3), (4); 24 V.S.A. 3255(b). VerDate Sep<11>2014 17:44 May 10, 2023 Jkt 259001 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 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. Typically, 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 often earn various fees related to the transactions.6 PACE companies often rely heavily upon home improvement contractors both to sell PACE loans to consumers and to facilitate the origination of those loans. Home improvement contractors frequently market PACE financing directly to consumers in the course of selling their home improvement contracts, often door-to-door. They often serve as the primary point of contact with consumers during the origination process, typically collecting any 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. 2. Origin and Growth of PACE Programs In 2008, California passed Assembly Bill no. 811 to enable the first PACE programs. The Bureau 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 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://www.energyprograms.org/wp-content/ uploads/2017/03/R-PACE-Primer-March-2017.pdf. 7 See infra note 329. 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.developohio.com/post/detail/lucascounty-pace-program-benefits-homeowners-234705. 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). PO 00000 Frm 00003 Fmt 4701 Sfmt 4702 30389 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, reaching peak production 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, with an average investment of $769 million per year during those years.10 Overall, as of December 31, 2021, the PACE financing industry had financed 323,000 home upgrades, totaling over $7.7 billion.11 3. Common Financing Terms According to data analyzed in a report that the Bureau is releasing concurrently with this proposal (‘‘PACE Report’’), the term of PACE loans that were originated between July 2014 and June 2020 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 Fees vary by program, but the CFPB has reviewed agreements that include fees for application, origination, tax administration, lien recordation, title, escrow, bond counsel, processing, title, underwriting, and fund disbursement. The Bureau is not aware of any PACE obligations that are openend or have a negative-amortization feature. 4. Consumer Protection Concerns Consumer advocates have expressed concerns that the PACE market lacks adequate consumer protections. They have indicated that the highly secure super-priority lien associated with PACE transactions creates incentives for PACE companies and home improvement contractors to originate loans quickly, often on the spot, without regard to affordability or consumer understanding. They have reported allegations of deceptive sales tactics, aggressive sales practices, and fraud. Consumer advocates have criticized other aspects of PACE financing as well, 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 2021. 11 See id. 12 See CFPB, PACE Financing and Consumer Financial Outcomes at Table 2 (May 2023), https:// files.consumerfinance.gov/f/documents/cfpb_pacerulemaking-report_2023-04.pdf (PACE Report). The PACE Report is discussed in more detail in part IV. 13 Id. E:\FR\FM\11MYP2.SGM 11MYP2 30390 Federal Register / Vol. 88, No. 91 / Thursday, May 11, 2023 / Proposed Rules ddrumheller on DSK120RN23PROD with PROPOSALS2 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 financing can result in unexpected and unaffordable tax payment spikes that can lead to delinquency, late fees, tax defaults, and foreclosure actions.14 Some local officials have echoed many of these concerns in discussions with CFPB staff. 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.15 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. Additionally, consumer advocates have 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. They have also highlighted that, although a PACE assessment 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.16 Consumer advocates 14 See, e.g., Nat’l Consumer Law 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-consumerprotection-settlement; Kirsten Grind, America’s Fastest-Growing Loan Category Has Eerie Echoes of Subprime Crisis, Wall Street Journal (Jan. 10, 2017), https://www.wsj.com/articles/americas-fastestgrowing-loan-category-has-eerie-echoes-ofsubprime-crisis-1484060984. 15 See Claudia Polsky, Claire Christensen, Kristen Ho, Melanie Ho & Christina Ismailos, The Darkside of the Sun: How PACE Financing Has UnderDelivered Green Benefits and Harmed Low Income Homeowners, Berkeley L., Env’t L. Clinic, at 8–13, https://www.law.berkeley.edu/wp-content/uploads/ 2021/02/ELC_PACE_DARK_SIDE_RPT_2_2021.pdf. 16 See Freddie Mac, Purchase and ‘‘no cash-out’’ refinance Mortgage requirements (Mar. 31, 2022), https://guide.freddiemac.com/app/guide/section/ 4606.4. 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 VerDate Sep<11>2014 17:44 May 10, 2023 Jkt 259001 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 assessment to complete a home sale. Mortgage industry stakeholders have also asserted that PACE financing introduces risk to the mortgage market, as PACE liens take priority over preexisting mortgage liens.17 Since 2015, the CFPB has received over 50 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. Six of the complaints involve older Americans, 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 385 complaints between 2019 and 2021.18 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.19 The complaint, filed in State court, alleged that Renovate America misrepresented the PACE program or failed to make adequate disclosures about key aspects of the outstanding first-lien PACE obligations, see U.S. Dept. of Hous. & Urban Dev., Property Assessed Clean Energy (PACE) (Dec. 7, 2017), https:// www.hud.gov/sites/dfiles/OCHCO/documents/1718ml.pdf. 17 See, e.g., Fed. Hous. Fin. Agency (FHFA), FHFA Statement on Certain Energy Retrofit Loan Programs (July 6, 2010), https://www.fhfa.gov/ Media/PublicAffairs/Pages/FHFA-Statement-onCertain-Energy-Retrofit-Loan-Programs.aspx; FHFA Notice and Request for Input on PACE Financing, 85 FR 2736 (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. 18 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. 2022) https:// dfpi.ca.gov/wp-content/uploads/sites/337/2022/08/ 2021-CFL-Aggregated-Annual-Report.pdf. 19 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/newsmedia-archives/district-attorneys-announce-4million-consumer-protection-settlement; see also State of California v. Renovate America, Case No. RIC1904068 (Super. Ct. Riverside Cnty. 2019). PO 00000 Frm 00004 Fmt 4701 Sfmt 4702 program, including its government affiliation, tax deductibility, transferability of assessments to subsequent property owners, financing costs, and Renovate’s contractor verification policy.20 Subsequently, in June 2021, the California State PACE regulator moved to revoke Renovate’s Administrator license, required to operate a PACE company in the State, after finding that one of its solicitors repeatedly defrauded homeowners in San Diego County.21 Renovate ultimately consented to the revocation.22 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.23 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.24 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.25 5. 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 20 Id. 21 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/2021/06/04/dfpimoves-to-revoke-pace-administrators-license-afterfinding-its-solicitor-defrauded-homeowners/. 22 Cal. Dep’t of Fin. Prot. & Innovation, Settlement Agreement (Sept. 8, 2021), https://dfpi.ca.gov/wpcontent/uploads/sites/337/2021/09/Admin.-ActionRenovate-America-Inc.-SettlementAgreement.pdf?emrc=090ca0. 23 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/pressreleases/2022/10/ftc-california-act-stop-ygreneenergy-fund-deceiving-consumers-about-pacefinancing-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. 24 Id. 25 Id. E:\FR\FM\11MYP2.SGM 11MYP2 Federal Register / Vol. 88, No. 91 / Thursday, May 11, 2023 / Proposed Rules infrastructure measures.26 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 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.27 Additionally, California law requires, among other protections, financial disclosures prior to consummation; 28 a three-day right to cancel, which is extended to five days for older adults; 29 mandatory confirmation-of-terms calls; 30 and restrictions on contractor compensation.31 California law also 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.32 There is also a maximum permissible loan-tovalue ratio for PACE financing under California law.33 California law exempts government agencies from some of these requirements.34 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).35 In 2019, the DFPI began licensing PACE administrators and subsequently promulgated rules implementing some of California’s statutory PACE provisions, which became effective in 2021.36 DFPI also has certain examination, investigation, and enforcement authorities over PACE ddrumheller on DSK120RN23PROD with PROPOSALS2 26 See, e.g., Cal. Sts. & Hwys. Code secs. 5898.12, 5899, 5899.3. 27 Cal. Fin. Code sec. 22686–87. 28 Cal. Sts. & High. Code sec. 5898.17. 29 Cal. Sts. & High. Code sec. 5898.16–17. 30 Cal. Sts. & High. Code sec. 5913. 31 Cal. Sts. & High. Code sec. 5923. 32 Cal. Fin. Code sec. 22684(a), (d)–(e). 33 Cal. Fin. Code sec. 22684(h). 34 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). 35 Cal. AB 1284 (2017–2018), Cal. SB 1087 (2017– 2018). 36 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. VerDate Sep<11>2014 17:44 May 10, 2023 Jkt 259001 administrators, solicitors, and solicitor agents.37 PACE administrators must be licensed by the DFPI under the California Financing Law. They must also establish and maintain processes for the enrollment of PACE solicitors and solicitor agents, including training and background checks.38 PACE administrators are required to annually share certain operational data with DFPI.39 DFPI compiles the data in annual reports on PACE lending in California, which provide aggregated information on PACE loans, PACE administrators and solicitors, and consumer complaints.40 Florida Florida authorized PACE programs in 2010 to finance projects related to energy conservation and efficiency improvements, renewable energy improvements, and wind resistance improvements.41 The authorizing legislation 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.42 It also includes a maximum loan-to-value ratio and requires a short general disclosure about PACE assessments.43 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.44 Missouri Missouri authorized PACE programs in 2010 to finance projects involving energy efficiency improvements and renewable energy improvements.45 In 37 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. sec. 22017(a)–(b). 38 Cal. Fin. Code secs. 22680–82. 39 Cal. Fin. Code sec. 22692. 40 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. 41 See Fla. HB 7179 (2010), codified at Fla. Stat. 163.08 et seq. 42 Fla. Stat. sec. 163.08(9). 43 Fla. Stat. sec. 163.08(12), (14). 44 Fla. Stat. sec. 163.08(13). 45 Mo. HB 1692 (2010), codified at Mo. Rev. Stat. 67.2800(8) (defining projects eligible for financing). PO 00000 Frm 00005 Fmt 4701 Sfmt 4702 30391 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 of the assessment contract, 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 assessment.46 It also requires verbal confirmation of certain provisions of the assessment contract, imposes specific financial requirements to execute an assessment requirement, and provides for a three-day right to cancel.47 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 assessment contracts.48 The new requirements became effective January 1, 2022.49 6. 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.50 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 75.51 They include provisions relating to ability-topay, financing disclosures, a right to cancel, and foreclosure-avoidance protections, among others. B. EGRRCPA The Economic Growth, Regulatory Relief, and Consumer Protection Act of 46 Mo. HB 697, codified at Mo. Rev. Stat. 67.2818(4). 47 Mo. HB 697, codified at Mo. Rev. Stat. 67.2817(2) (financial requirements to execute an assessment contract); 67.2817(4) (right to cancel); 67.2817(6) (verbal confirmation). 48 Mo. HB 697, codified at Mo. Rev. Stat. 67.2817(2), 67.2818(2)–(3). 49 Mo. HB 697, codified at Mo. Rev. Stat. 67.2840. 50 See PACENation, PACENation Unveils 22 New Consumer Protection Policies for Residential PACE Programs Nationwide (Nov. 5, 2021), https:// www.pacenation.org/pacenation-unveils-22consumer-protection-policies-for-residential-paceprograms-nationwide/. 51 Id. E:\FR\FM\11MYP2.SGM 11MYP2 30392 Federal Register / Vol. 88, No. 91 / Thursday, May 11, 2023 / Proposed Rules 2018 (EGRRCPA) was signed into law on May 24, 2018.52 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.’’ Specifically, it provides in relevant part that the CFPB must 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, and requires that the regulations account for the unique nature of PACE financing.53 TILA section 129C(a) contains TILA’s ATR provisions for residential mortgage loans and TILA section 130 contains TILA’s civil liability provisions. Thus, section 307 requires the Bureau to apply TILA’s ATR provisions to PACE financing, and to apply TILA’s civil liability provisions for violations of those ATR provisions, all in a way that accounts for the unique nature of PACE financing. This proposal discusses the proposed implementation of the ATR and civil liability requirements further in the section-bysection analysis of proposed § 1026.43. ddrumheller on DSK120RN23PROD with PROPOSALS2 III. Advance Notice of Proposed Rulemaking On March 4, 2019, the CFPB issued an Advance Notice of Proposed Rulemaking (ANPR) to solicit information relating to residential PACE financing.54 The purpose of the ANPR was to gather information to better understand the PACE financing market and other information to inform a proposed rulemaking under EGRRCPA section 307. The ANPR sought five categories of information related to PACE financing: (1) written materials associated with PACE transactions; (2) descriptions of current standards and practices in the PACE financing origination process; (3) information relating to civil liability under TILA for violations of the ATR requirements in connection with PACE financing, as well as rescission and borrower delinquency and default; (4) information about what features of PACE financing make it unique and 52 Public Law 115–174, 132 Stat. 1296 (2018). 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 Bureau to ‘‘collect such information and data that the Bureau determines is necessary’’ in prescribing the regulations and requiring the Bureau to ‘‘consult with State and local governments and bond-issuing authorities.’’ 54 Advance Notice of Proposed Rulemaking on Residential Property Assessed Clean Energy Financing, 84 FR 8479 (Mar. 8, 2019). 53 EGRRCPA VerDate Sep<11>2014 17:44 May 10, 2023 Jkt 259001 how the CFPB should address those unique features in this rulemaking; and (5) views concerning the potential implications of regulating PACE financing under TILA. In response to the ANPR, the CFPB received over 115 comments, which were submitted by a diverse group 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 ANPR comments is included below, and additional information from the ANPR comments is referenced throughout this proposal. Regarding the need for PACE regulation, consumer groups and mortgage industry stakeholders generally agreed that PACE transactions require Federal regulation, advocating for strong ATR rules, in particular. Some also supported further application of TILA to PACE financing, including disclosure requirements, rescission rights, loan originator compensation requirements, and protections for highcost PACE transactions. These commenters indicated that PACE financing is consumer credit, and should be regulated similar to a traditional mortgage because it is voluntary financing that is secured by the consumer’s home and because delinquency can lead to penalties, additional interest, and foreclosure. Some argued for more stringent regulations than currently apply to traditional mortgages due to what they asserted was the dangerous nature of PACE financing, citing problematic lending incentives, alleged abuses by home improvement contractors, and alleged targeting of PACE to vulnerable populations. On the other hand, PACE industry participants generally opposed the imposition of additional or stringent regulations. Many argued that PACE financing is safe for consumers, citing the involvement of State and local governments, the relatively small size of the debt obligation, existing State and local requirements, low delinquency rates, and other features of PACE financing. Some expressed concern that overly broad rules could infringe on the fundamental taxing authority of State and local governments, undermine PACE’s public purpose of reducing barriers to green energy financing, decrease access to private capital, and potentially lead to the termination of PACE programs. Some were also worried that regulations would erode PACE’s point-of-sale nature, causing PO 00000 Frm 00006 Fmt 4701 Sfmt 4702 consumers and contractors to turn to more dangerous unsecured credit products and decrease new applications. Many argued that PACE financing is not consumer credit subject to TILA, and that the CFPB lacks authority to impose TILA’s requirements beyond its ATR rules. In regard to application of TILA’s ATR requirements to PACE financing, there were again differing opinions among commenters. Consumer groups and mortgage industry stakeholders generally agreed that TILA’s existing ATR requirements should be applied, but some suggested adjusting them to account for factors such as the cadence of property tax payments, which tend to be due on an annual or semi-annual basis, and the potential for payment shocks related to PACE financing’s impact on the consumer’s existing mortgage escrow account. Some called for verification of consumers’ financial information, and for the ATR rules to account for pre-existing and simultaneous PACE financing to prevent loan stacking or loan splitting. In contrast, some PACE industry participants opposed application of TILA’s existing ATR requirements, stating that it would be unnecessary and too burdensome, and would lead to decreased consumer participation in PACE programs. Some also argued that mandatory income verification for all consumers would interfere with the point-of-sale nature of PACE financing, and that a modeled income requirement would be sufficient. Some recommended an emergency exception to any ATR requirement. Still others recommended that the CFPB structure any ATR rules to avoid conflict with existing California regulations. A few commenters provided their opinions on whether certain PACE transactions should be entitled to a presumption of compliance with the CFPB’s ATR requirements similar to QM status. One PACE company suggested that a reasonable safe harbor is necessary to ensure that private capital continues to invest in PACE financing. However, some consumer groups opposed offering a presumption of compliance, stating that PACE is structurally unsafe and a source of abuse for some populations. A mortgage trade association recommended that, if the CFPB decides to permit such a presumption, subordination of the PACE lien should be required. Regarding the application of TILA section 130 to PACE financing, some consumer groups suggested that PACE companies should be held liable under TILA section 130 because they are responsible for operating the PACE E:\FR\FM\11MYP2.SGM 11MYP2 Federal Register / Vol. 88, No. 91 / Thursday, May 11, 2023 / Proposed Rules programs. Some PACE industry participants expressed concern that, if government entities become subject to civil liability, they might stop operating PACE programs. Finally, one PACE company recommended capping civil liability at the amount of the assessment, to prevent TILA’s statutory damages from exceeding the principal amount of the average PACE transaction. ddrumheller on DSK120RN23PROD with PROPOSALS2 IV. Data Collection EGRRCPA section 307 authorizes the CFPB to ‘‘collect such information and data that the Bureau determines is necessary’’ to support the PACE rulemaking required by the section.55 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 2014 and June 2020, 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. 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 deidentified credit record data for the consumers involved in the PACE transactions.56 The PACE company data encompassed about 370,000 PACE transaction applications submitted in California and Florida from 2014 to 2020 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.57 The CFPB utilized the acquired data to develop a report that analyzes the 55 15 U.S.C. 1639c(b)(3)(C)(iii)(I). Bureau received data from FortiFi Financial, Home Run Financing, Renew Financial, and Ygrene Energy Fund. 57 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. 56 The VerDate Sep<11>2014 17:44 May 10, 2023 Jkt 259001 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’’ (PACE Report) is being published concurrently with this NPRM.58 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.59 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 majority-non-white census tracts.60 The PACE Report also assesses the impact of the 2018 California PACE Reforms, discussed in part II.A.5. The analysis finds that these laws improved consumer outcomes while substantially reducing the volume of PACE lending.61 V. Outreach To learn about the industry and the unique nature of PACE financing, the Bureau 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 on the ANPR, panel appearances by CFPB staff, and written correspondence. The CFPB’s outreach relating to PACE financing is summarized at a high level below.62 The outreach has supplemented information on PACE financing that the CFPB has gleaned from independent research; the detailed 58 See PACE Report, supra note 12. at 4. 60 Id. at 38–39, Figure 11. 61 Id. at 4–5. 62 The CFPB also engaged in extensive outreach with numerous stakeholders to design and complete the Bureau data collection on PACE financing that is discussed in part IV. 59 Id. PO 00000 Frm 00007 Fmt 4701 Sfmt 4702 30393 comments responding to the ANPR, discussed in part III; the data collection described in part IV; and information from publicly available sources such as news reports, research and analysis, and litigation documents. A. 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 has continued the engagement since EGRRCPA section 307 was 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. Similar to the perspectives they shared in ANPR comments, discussed in part III, 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. B. Private PACE Industry Stakeholders Since 2015, the CFPB has engaged on dozens of occasions with various private PACE industry stakeholders, including private PACE companies, a national trade organization, 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 financing providers, assessment administrators, and a national trade organization 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 developed, 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 E:\FR\FM\11MYP2.SGM 11MYP2 30394 Federal Register / Vol. 88, No. 91 / Thursday, May 11, 2023 / Proposed Rules ddrumheller on DSK120RN23PROD with PROPOSALS2 requirements in particular States. Some of these stakeholders have also shared their perspectives on EGRRCPA section 307 and considerations the CFPB should bear in mind in this rulemaking. C. State and Local Governments and Bond-Issuing Authorities As part of the CFPB’s PACE rulemaking, EGRRCPA section 307 requires that the CFPB ‘‘consult with State and local governments and bondissuing authorities.’’ 63 Consistent with this requirement, the CFPB has conferred on numerous occasions with State and local governments and bondissuing authorities involved in PACE financing to gather information about PACE for the rulemaking. Entities with which the CFPB has consulted over the years include 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 engagements with bond-issuing authorities occurred on a number of occasions, including discussions over the phone and in-person, and through written correspondence. The CFPB also conferred on a number of occasions with membership organizations representing municipalities. In the course of developing the NPRM, 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 proposal, including, for example, whether the CFPB should use the same ATR 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 QM definitions to PACE financing, how to apply TILA’s general civil liability provisions to violations of the ATR requirements for PACE financing, and the implications of this rulemaking for PACE financing bonds. Each call was targeted to specific 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. In addition to feedback provided during the calls, some participants provided input after the calls. Public entities involved in the operation of PACE financing and third 63 15 U.S.C. 1639c(b)(3)(C)(iii)(II). VerDate Sep<11>2014 17:44 May 10, 2023 Jkt 259001 parties operating on their behalf have expressed divergent views on PACE financing. For example, some individuals from local tax collectors’ offices and other government units have 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 have shared consumer protection recommendations and background information about how the PACE financing industry operates in particular jurisdictions. Several localities with active PACE financing programs have expressed consumer protection concerns and informed the CFPB that they would welcome application of TILA’s ATR 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. Other local governments (and third parties they work with) have 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 64) 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 creating jobs. Local government representatives in certain jurisdictions have expressed enthusiasm about aspects of PACE financing such as increased solar panel installations, and have 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 64 The Bureau understands that a number of government sponsors, some of which participated in the Bureau’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-improvementloans-la-county#:∼:text=Los%20Angeles %20County%20has%20ended,risk%20of %20losing%20their%20homes. PO 00000 Frm 00008 Fmt 4701 Sfmt 4702 the originations. Some government sponsors expressed concern that Federal regulation could negatively impact PACE programs, and that the CFPB should not apply TILA’s ATR 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. D. Other Stakeholders The CFPB 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, Statelevel developments in the PACE financing industry and analysis of Federal policy involving PACE financing. Some have also shared concerns 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 nonPACE 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 standard mortgage or apply TILA more generally to PACE. The CFPB has also met with representatives from environmental and energy groups. These representatives shared general views on, for example, the role of PACE financing in the marketplace, industry trends, and potential risks to consumers. As discussed in part IX, the CFPB has also consulted with Federal government entities. VI. Legal Authority The Bureau is proposing to amend 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 E:\FR\FM\11MYP2.SGM 11MYP2 Federal Register / Vol. 88, No. 91 / Thursday, May 11, 2023 / Proposed Rules Act (Dodd-Frank Act),65 EGRRCPA section 307, TILA, and Real Estate Settlement Procedures Act of 1974 (RESPA).66 A. Dodd-Frank Act CFPA section 1022(b)(1). Section 1022(b)(1) of the CFPA authorizes the Bureau to prescribe rules ‘‘as may be necessary or appropriate to enable the Bureau to administer and carry out the purposes and objectives of the Federal consumer financial laws, and to prevent evasions thereof.’’ 67 Among other statutes, TILA, RESPA, and the CFPA are Federal consumer financial laws.68 Accordingly, the Bureau proposes 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. Dodd-Frank Act section 1405(b). Section 1405(b) of the Dodd-Frank Act provides that, notwithstanding any other provision of title XIV of the DoddFrank Act, in order to improve consumer awareness and understanding of transactions involving residential mortgage loans through the use of disclosures, the Bureau may exempt from or modify disclosure requirements, in whole or in part, for any class of residential mortgage loans if the Bureau determines that such exemption or modification is in the interest of consumers and in the public interest.69 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.70 Notably, the authority granted by section 1405(b) applies to disclosure requirements generally and is not limited to a specific statute or statutes. Accordingly, DoddFrank 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 proposed rule, the Bureau has considered the purposes of improving ddrumheller on DSK120RN23PROD with PROPOSALS2 65 Public Law 111–203, 124 Stat. 1376 (2010). U.S.C. 2601 et seq. 67 12 U.S.C. 5512(b)(1). 68 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). 69 Public Law 111–203, 124 Stat. 1376, 2142 (2010) (codified at 15 U.S.C. 1601 note). 70 Public Law 111–203, 124 Stat. 1376, 2138 (2010) (codified at 15 U.S.C. 1602(cc)(5)). 66 12 VerDate Sep<11>2014 17:44 May 10, 2023 Jkt 259001 consumer awareness and understanding of transactions involving residential mortgage loans through the use of disclosures and the interests of consumers and the public. The Bureau proposes 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 Bureau believes the proposal is in the interest of consumers and in the public interest, consistent with Dodd-Frank Act section 1405(b). B. TILA TILA section 105(a). TILA section 105(a) directs the Bureau 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 Bureau judges are necessary or proper to effectuate the purposes of TILA, to prevent circumvention or evasion thereof, or to facilitate compliance therewith.71 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.72 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.73 TILA section 105(b). 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.74 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 Bureau provided additional discussion of this integrated disclosure mandate in the 2013 TILA– RESPA Rule.75 TILA section 105(f). Section 105(f) of TILA, 15 U.S.C. 1604(f), authorizes the Bureau to exempt from all or part of TILA any class of transactions if the Bureau 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), (B)(i). TILA section 129C(b)(3)(A) directs the Bureau to prescribe regulations to carry out the purposes of the subsection.76 In addition, TILA section 129C(b)(3)(B)(i) authorizes the Bureau to prescribe regulations that revise, add to, or subtract from the criteria that define a QM 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.77 TILA section 129C(b)(3)(C)(ii). In section 307 of the EGRRCPA, codified in TILA section 129C(b)(3)(C), Congress directed the Bureau 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.’’ 78 C. RESPA RESPA section 4(a). 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.79 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 Bureau provided additional discussion of this integrated disclosure mandate in the 2013 TILA– RESPA Rule.80 RESPA section 19(a). Section 19(a) of RESPA authorizes the Bureau 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.81 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 76 15 71 15 U.S.C. 1604(a). 72 15 U.S.C. 1601(a). 73 15 U.S.C. 1639b(a)(2). 74 Public Law 111–203, 124 Stat. 1376, 2108 (2010) (codified at 15 U.S.C. 1604(b)). 75 78 FR 79730, 79753–54 (Dec. 31, 2013). PO 00000 Frm 00009 Fmt 4701 Sfmt 4702 30395 U.S.C. 1639c(b)(3)(A). U.S.C. 1639c(b)(3)(B)(i). 78 15 U.S.C. 1639c(b)(3)(C)(ii). 79 Public Law 111–203, 124 Stat. 1376, 2103 (2010) (codified at 12 U.S.C. 2603(a)). 80 78 FR 79730, 79753–54 (Dec. 31, 2013). 81 12 U.S.C. 2617(a). 77 15 E:\FR\FM\11MYP2.SGM 11MYP2 30396 Federal Register / Vol. 88, No. 91 / Thursday, May 11, 2023 / Proposed Rules home buyers and sellers of settlement costs.82 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.83 In developing proposed rules under RESPA section 19(a), the Bureau 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. VII. Section-by-Section Analysis 1026.2 Definitions and Rules of Construction. 1026.2(a) Definitions ddrumheller on DSK120RN23PROD with PROPOSALS2 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.’’ Currently, comment 2(a)(14)– 1.ii states, in part, that ‘‘tax liens’’ and ‘‘tax assessments’’ are not considered credit for purposes of the regulation. The Bureau proposes to amend comment 2(a)(14)–1.ii to add the word ‘‘involuntary’’ to clarify which tax liens and tax assessments are not considered credit. Amended as proposed, comment 2(a)(14)–1.ii would provide 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.84 The proposed amendment would resolve ambiguity in the existing comment and bring the exclusion in line with the definition of credit in TILA and congressional intent with respect to TILA coverage. For a number of years, stakeholders have expressed disagreement in litigation, ANPR comments, and other communications about whether comment 2(a)(14)–1.ii excludes PACE transactions from TILA coverage. The ambiguity derives largely from the text of the comment in light of the structure of PACE transactions. The comment excludes tax assessments and tax liens, and PACE transactions have attributes 82 12 U.S.C. 2601(b). 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. 84 The proposed rule would also make 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. 83 12 VerDate Sep<11>2014 17:44 May 10, 2023 Jkt 259001 of both involuntary special property tax assessments that are not subject to TILA and voluntary mortgage transactions that are. As described in part II.A, PACE transactions have been treated as assessments under State law, are collected through local property tax systems, and are secured by liens treated similarly to property tax liens; but PACE transactions arise through voluntary contractual agreement, similar to other credit transactions that are subject to TILA. In general, PACE industry stakeholders have argued that PACE transactions are not TILA credit, in part because the text of the comment states that tax liens and tax assessments are not credit without explicitly distinguishing between voluntary and involuntary obligations; and consumer advocates and mortgage industry stakeholders have argued that PACE transactions are TILA credit because, unlike other tax liens and assessments, PACE transactions are voluntary for consumers. One Federal district court has directly addressed the question, ruling that PACE financing is not credit for purposes of TILA in part due to the text of comment 2(a)(14)–1.ii.85 The Bureau proposes to amend the commentary to clarify that PACE transactions are credit under TILA and Regulation Z. Amended as proposed, comment 2(a)(14)–1.ii would state 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’’ to comment 2(a)(14)–1.ii, the Bureau 85 See In re HERO Loan Litig., 017 WL 3038250 (C.D. Cal. 2017); see also Burke v. Renew Fin. Grp., Inc., 2021 WL 5177776 (C.D. Cal. 2021) (ruling that PACE transactions are not consumer credit under TILA). The In re HERO and Burke courts suggested that PACE assessments are not ‘‘consumer credit transactions’’ for purposes of TILA. 2017 WL 3038250, at *2–*3; 2021 WL 5177776, at *3. TILA defines ‘‘consumer credit transactions’’ to mean that a credit transaction is ‘‘one in which the party to whom credit is offered or extended is a natural person, and the money, property, or services which are the subject of the transaction are primarily for personal, family, or household purposes.’’ 15 U.S.C. 1602(i). Consistent with this, Regulation Z defines ‘‘consumer credit’’ to mean ‘‘credit offered or extended to a consumer primarily for personal, family, or household purposes.’’ 12 CFR 1026.2(a)(12). Residential PACE transactions satisfy these definitions. Notwithstanding the rulings in Burke and In re HERO, such Residential PACE transactions satisfy these definitions. Notwithstanding the rulings in Burke and In re HERO, such transactions are ‘‘offered or extended’’ to consumers, who as natural persons are the targets of marketing and sales efforts, are offered the loans and decide whether to sign up, and are signatories to the financing agreements, which are for money to fund home improvement services that are primarily for personal, family, or household purposes. PO 00000 Frm 00010 Fmt 4701 Sfmt 4702 would clarify that the comment does not exclude tax liens and tax assessments that arise from voluntary contractual agreements, such as PACE transactions. Thus, under the proposed amendments, tax liens and tax assessments that are voluntary would be credit if they meet the definition of credit under TILA and Regulation Z and are not otherwise excluded.86 The proposed amendment would bring the exclusion in comment 2(a)(14)–1.ii in line with the definition of credit in TILA and Regulation Z. TILA defines ‘‘credit’’ to mean the ‘‘right granted by 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.’’ 87 In general, PACE transactions appear to easily fit these definitions—the agreements provide for consumers to receive funding for home improvement projects and repay those funds over time in installments.88 The proposed amendments to comment 2(a)(14)–1.ii would also be in line with congressional intent. 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.’’ 89 To that end, relevant legislative history indicates that TILA was intended to require ‘‘all creditors to disclose credit information in a uniform manner’’ so that ‘‘the American 86 Under the proposed amendments, tax liens and tax assessments that are not voluntary for the consumer would continue to be excluded. 87 15 U.S.C. 1602(f); 12 CFR 1026.2(a)(14). Regulation Z further 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 (not including a down payment), and to whom the obligation is initially payable, either on the face of the note or contract, or by agreement when there is no note or contract.’’ 12 CFR 1026.2(a)(17). 88 Treating PACE transactions as TILA credit is consistent with the FTC’s assertion of claims against a PACE company under the Bureau’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.4 (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. 89 TILA section 102(a), 15 U.S.C. 1601(a). E:\FR\FM\11MYP2.SGM 11MYP2 Federal Register / Vol. 88, No. 91 / Thursday, May 11, 2023 / Proposed Rules consumer will be given the information he needs to compare the cost of credit and to make the best informed decision on the use of credit.’’ 90 Clarifying that voluntary tax liens and tax assessments can be credit, such that PACE transactions are subject to TILA’s uniform disclosure requirements, would squarely align with these goals. Consumers have a number of financing options for home improvement projects, such as home equity lines of credit, personal loans, and credit cards. Just like these other financing options, PACE transactions carry certain costs, terms, and conditions that consumers must be aware of in order to make informed credit decisions. Requiring TILA disclosures for PACE transactions allows consumers to shop among different options and across creditors. Notably, it appears that the current text of comment 2(a)(14)–1.ii was not intended to exclude voluntary transactions such as PACE. The Board of Governors of the Federal Reserve System (Board) first issued the comment in 1981 as part of a broader rulemaking issuing commentary to Regulation Z.91 In preamble preceding that issuance and in several public information letters that were forerunners to the 1981 rule, it is clear that the Board was addressing whether certain types of 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.’’ 92 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.’’ 93 Other letters contained similar analysis,94 and the Board reiterated this reasoning in preamble predating the commentary in which it explained its rationale for the comment, again focusing on the involuntary nature of 90 H.R. Rep. No. 1040, 90th Cong. (1967). 46 FR 50288, 50292 (Oct. 9, 1981). 92 Fed. Rsrv. Bd., Public Information Letter No. 166 (1969). 93 Id. 94 See Fed. Rsrv. Bd., Public Information Letter No. 153 (1969) (similar with regard to sewer assessment installment payments); 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.’’). ddrumheller on DSK120RN23PROD with PROPOSALS2 91 See VerDate Sep<11>2014 17:44 May 10, 2023 Jkt 259001 the obligations as the reason they were not credit.95 The Board explained: 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.96 Moreover, in this preamble and in the commentary to Regulation Z that it adopted later that year, 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.’’ 97 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. PACE industry stakeholders have asserted a number of additional reasons PACE transactions should not be treated as TILA credit, including that PACE financing serves important public policy purposes as mandated by State law, and that PACE transactions are special assessments that are repaid through the property tax system and are secured by liens enforced similar to property tax liens under State law. The Bureau is not aware of any indication that Congress intended for TILA to exclude voluntary transactions like PACE financing on account of their being processed through property tax systems or because they are intended to further certain public policy purposes. The Bureau recognizes that clarifying the exclusion in comment 2(a)(14)–1.ii as limited to involuntary tax assessments and involuntary tax liens would ensure that TILA applies generally to PACE transactions. As a result, it would ensure that certain participants in PACE transactions would be subject to TILA requirements. For example, various disclosure and other requirements would apply to the entity that is the ‘‘creditor’’ as defined in § 1026.2(a)(17), which the Bureau understands is typically the government 95 46 FR 20848, 20851 (Apr. 7, 1981). 96 Id. 97 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 Bureau, which republished the 1981 Board interpretation as an official Bureau interpretation in comment 2(a)(14)–1.ii with no substantive changes. PO 00000 Frm 00011 Fmt 4701 Sfmt 4702 30397 sponsor in a PACE transaction.98 Other requirements would 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.99 In the Bureau’s view, PACE transactions share relevant characteristics with other credit transactions, as described above. If they were not subject to TILA and Regulation Z, consumers would be at risk, and it would run counter to the purposes for enacting TILA expressed by Congress. The Bureau understands, however, that certain existing requirements in Regulation Z might warrant adjustment to better accommodate the unique structure of PACE transactions. The Bureau is proposing amendments to that end, as described in the relevant section-by-section analyses in this proposal. The Bureau seeks comment on the proposed amendments to comment 2(a)(14)–1.ii. The Bureau also seeks comment on whether any TILA provisions not addressed in this proposal warrant amendment for PACE transactions. 1026.32 Requirements for High-Cost Mortgages and 1026.34 Prohibited Acts or Practices in Connection With High-Cost Mortgages The Home Ownership and Equity Protection Act (HOEPA) was enacted in 1994 as an amendment to TILA to address abusive practices in refinancing and home-equity mortgage loans with high interest rates or high fees.100 Loans that meet HOEPA’s high-cost coverage tests are subject to special disclosure requirements and restrictions on loan terms, and borrowers in high-cost 98 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 Bureau’s understanding, consistent with ANPR comments and other research, is that these characteristics apply to government sponsors of PACE transactions in the PACE programs that have been active. 99 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 proposed § 1026.41 for discussion of servicing provisions in Regulation Z. 100 Public Law 103–325, 108 Stat. 2160. E:\FR\FM\11MYP2.SGM 11MYP2 30398 Federal Register / Vol. 88, No. 91 / Thursday, May 11, 2023 / Proposed Rules mortgages have enhanced remedies for violations of the law.101 The provisions of HOEPA are implemented in Regulation Z in §§ 1026.32 and 1026.34.102 The Bureau is not proposing any changes to § 1026.32 or § 1026.34 in this proposed rule. Thus, if the proposed rule is finalized as proposed, the highcost loan requirements implemented in §§ 1026.32 and 1026.34 would apply to PACE transactions that meet the definition of high-cost mortgage in § 1026.32(a)(1) in the same way that they apply to other high-cost mortgages.103 The Bureau requests comment on whether any clarification is required through rulemaking or otherwise with respect to how HOEPA’s provisions as implemented in Regulation Z apply to PACE transactions that may qualify as highcost mortgages. In particular, the Bureau requests comment on the interest rates and late fees that consumers may have to pay in connection with their PACE transactions both before and after default, and whether, for example, late fees that apply to all property taxes should be treated differently from contractually-imposed late fees for purposes of HOEPA’s limitations on late fees 104 as implemented in § 1026.34(a)(8). 1026.35 Requirements for HigherPriced Mortgage Loans 35(b) Escrow Accounts 35(b)(2) Exemptions 35(b)(2)(i) 35(b)(2)(i)(E) TILA section 129D generally requires creditors to establish escrow accounts for certain higher-priced mortgage loans (HPMLs).105 Regulation Z implements this requirement in § 1026.35(a) and (b), defining an HPML as a closed-end consumer credit transaction secured by 101 See 15 U.S.C. 1602(bb), 1639. CFR part 1026. 103 A mortgage is generally a high-cost mortgage if (1) the spread between the APR and the average prime offer rate (APOR) is greater than 6.5 percentage points for a first-lien transaction or 8.5 percentage points for a subordinate-lien transaction, (2) points and fees exceed 5 percent of the total loan amount (for loans under $20,000) or the lesser of 8 percent or $1,000 (for loans over $20,000), or (3) the creditor can charge prepayment penalties more than 36 months after consummation or in an amount exceeding 2 percent of the amount prepaid. 12 CFR 1026.32(a)(1). As discussed in the PACE Report, the Bureau estimates that a small percentage of PACE transactions would exceed the APR–APOR spread trigger, while over one-third of existing PACE transactions have points and fees that would exceed the HOEPA points and fees coverage trigger. PACE Report, supra note 12, at 15. 104 15 U.S.C. 1639(k). 105 15 U.S.C. 1639d. ddrumheller on DSK120RN23PROD with PROPOSALS2 102 12 VerDate Sep<11>2014 17:44 May 10, 2023 Jkt 259001 the consumer’s principal dwelling with an APR exceeding the average prime offer rate (APOR) 106 for a comparable transaction by a certain number of percentage points.107 With certain exemptions, Regulation Z § 1026.35(b) prohibits creditors from extending HPMLs secured by first liens on consumers’ principal dwellings unless an escrow account is established before consummation for payment of property taxes, among other charges (HPML escrow requirement). The Bureau is unaware of any PACE transactions that require consumers to escrow property tax payments or other charges, whether or not the PACE transaction could be characterized as an HPML. The Bureau believes that requiring escrow accounts for PACE transactions that would be subject to the HPML escrow requirement would provide little or no benefit to consumers while imposing substantial burden on industry. The Bureau proposes to add § 1026.35(b)(2)(i)(E) to exempt PACE transactions from the HPML escrow requirement. The Bureau believes that a mandatory escrow requirement would provide little or no benefit to PACE borrowers. According to the Bureau’s PACE data, nearly three-fourths of PACE borrowers had a mortgage at the time their PACE transactions were funded.108 As a result, a large proportion of PACE borrowers already may have escrow accounts through their pre-existing mortgage loan.109 For PACE borrowers for whom this is true, PACE payments are already incorporated into the mortgage escrow accounts as part of the property tax payment. Those borrowers who do not have a pre-existing escrow account are already paying their property taxes and any other traditionally escrowed charges 106 Section 1026.35(a)(2) defines APOR as an APR that is derived from average interest rates, points, and other loan pricing terms currently offered to consumers by a representative sample of creditors for mortgage transactions that have low-risk pricing characteristics. The Bureau publishes APORs for a broad range of types of transactions in a table updated at least weekly as well as the methodology the Bureau uses to derive these rates. 107 Section 1026.35(a)(1) defines HPML to mean ‘‘a closed-end consumer credit transaction secured by the consumer’s principal dwelling with an APR that exceeds the APOR for a comparable transaction as of the date the interest rate is set’’ by at least 1.5, 2.5, or 3.5 percentage points depending on the lien priority and the size of the loan relative to the maximum principal obligation eligible for purchase by Freddie Mac. 108 See PACE Report, supra note 12, at 12. 109 See Adam H. Langley, Lincoln Inst. Of Land Pol’y, Improving the Property Tax by Expanding Options for Monthly Payments, at 2 (Jan. 2018), https://www.lincolninst.edu/sites/default/files/ pubfiles/langley-wp18al1_0.pdf (stating that, in 2015, 44 percent of U.S. homeowners paid their property taxes as a part of their monthly mortgage payment). PO 00000 Frm 00012 Fmt 4701 Sfmt 4702 on their own and likely do not need or perhaps even want an escrow account. Because the PACE charges are billed with the property taxes, the Bureau believes that it is unlikely that such borrowers will mistakenly neglect to pay them. Additionally, escrow accounts for PACE transactions would be governed by rules in Regulation X.110 The rules include a variety of detailed requirements governing, for example, escrow account analyses, escrow account statements, and the treatment of surpluses, shortages, and deficiencies in escrow accounts.111 The Bureau believes the additional cost and burden to comply with these requirements in this context would not be warranted given the lack of consumer benefit.112 Further, Federal law requires certain escrow account disclosures, including escrow account statements required under Regulation X 113 and escrowrelated elements of the TILA–RESPA integrated disclosure forms required under Regulation Z,114 that could be confusing in the context of PACE transactions. A defining feature of PACE is that the loans are paid back through the property tax system. The escrow account disclosures were developed to address more traditional escrow accounts; they would not effectively communicate that an escrow account for a PACE transaction would collect the principal and interest payments as part of the property tax payment. These disclosures would not be required if the Bureau finalizes this proposal— Regulation X does not require escrow account statements if there will be no escrow account,115 and the TILA– RESPA integrated disclosure forms would not be required to disclose escrow-related information for PACE transactions.116 Additionally, the escrow account disclosures may create uncertainty about whether the PACE transaction affects the consumer’s preexisting mortgage escrow account when applicable. The Bureau notes that some of the consumer protection concerns that 110 See generally Regulation X, 12 CFR 1024.17. 111 Id. 112 Commenters to the 2008 HPML escrow rule estimated that the cost could range between one million and $16 million for a large creditor. See 73 FR 44521, 44558 (July 30, 2008). 113 See 12 CFR 1024.17(g)–(j). 114 See 12 CFR 1026.37, .38. 115 See generally 12 CFR 1024.17. 116 As discussed in the section-by-section analyses of §§ 1026.37(p) and 1026.38(u) below, the Bureau is proposing to eliminate certain escrowrelated fields from the TILA–RESPA integrated disclosure forms, and the remaining escrow-related fields can generally be left blank on the TILA– RESPA integrated disclosure forms if there is no escrow account associated with the transaction. E:\FR\FM\11MYP2.SGM 11MYP2 Federal Register / Vol. 88, No. 91 / Thursday, May 11, 2023 / Proposed Rules ddrumheller on DSK120RN23PROD with PROPOSALS2 prompted the Board to adopt the initial HPML escrows rule do not apply in the same way to the PACE market. The Board first implemented the HPML escrow requirement in Regulation Z in 2008, before the requirement was codified in TILA, relying on its authority to prohibit deceptive or unfair acts or practices.117 The Board’s HPML rule was originally intended to protect consumers who receive relatively high interest rates. The Board was concerned that market pressures discouraged creditors from offering escrow accounts to borrowers getting subprime loans, increasing the risk that these consumers would base borrowing decisions on an unrealistically low assessment of their mortgage-related obligations. In contrast, PACE borrowers for whom the HPML escrow requirement would apply will already be paying property taxes as a function of homeownership, and the Bureau understands that PACE transactions do not generally require any mortgage-related insurance. To the extent consumers do lack information about their overall payment obligations, and to the extent this could lead to them receiving unaffordable PACE loans, the Bureau believes such concerns are better addressed through other TILA provisions, including the TILA–RESPA integrated disclosures and ATR requirements that are tailored to PACE as discussed in the section-by-section analyses below.118 One ANPR comment letter from consumer groups advocated for applying the HPML escrow requirement for PACE consumers without an existing mortgage escrow, to help spread out payments. The Bureau recognizes that having the option to break up property tax payments into smaller amounts could be helpful to taxpayers generally and particularly to taxpayers with PACE accounts who do not already have a preexisting mortgage with an escrow account.119 The Bureau believes it would be beneficial if local taxing authorities facilitated the spreading-out of payments for PACE borrowers 120 but does not believe that requiring an escrow account for PACE HPMLs would be the best way to accomplish this. The Bureau is proposing this exemption pursuant to TILA sections 117 73 FR 44521 (July 30, 2008). The requirement was later codified in TILA section 129D, 15 U.S.C. 1639d. 118 See section-by-section analyses of proposed §§ 1026.37, 1026.38, 1026.43, infra. 119 Langley, Improving the Property Tax by Expanding Options for Monthly Payments, supra note 109, at 7. 120 See generally id. (encouraging local governments to expand options for consumers to pay property taxes on a monthly basis). VerDate Sep<11>2014 17:44 May 10, 2023 Jkt 259001 105(a) and 105(f). For the reasons discussed in this section-by-section analysis, the Bureau believes that exempting PACE transactions from the requirements of TILA section 125D is proper to carry out the purposes of TILA. As described above, the Bureau believes that the requirements of TILA section 125D would significantly complicate, hinder, and make more expensive the credit process for PACE transactions. The Bureau thus has preliminarily determined that the goal of consumer protection would not be undermined by this exemption. TILA–RESPA Integrated Disclosure Requirements Implemented Under Sections 1026.37 and 1026.38 The CFPA directed the Bureau to integrate the mortgage loan disclosures required under TILA and RESPA sections 4 and 5, and to publish model disclosure forms to facilitate compliance.121 The Bureau issued regulatory requirements and model forms to satisfy these statutory obligations in 2013 (2013 TILA–RESPA Rule).122 The requirements and forms generally apply to closed-end consumer credit transactions secured by real property or a cooperative unit, other than a reverse mortgage subject to § 1026.33.123 The integrated disclosures consist of two forms: a Loan Estimate and a Closing Disclosure. The Loan Estimate provides the consumer with good faith estimates of credit costs and transaction terms. It is designed to provide disclosures that are helpful to consumers in understanding the key features, costs, and risks of the mortgage for which they are applying.124 In general, the Loan Estimate must be provided to consumers within three business days after they submit a loan application 125 and not later than the seventh business day before consummation.126 The Closing Disclosure is a final disclosure reflecting 121 CFPA sections 1098 & 1100A, codified at 12 U.S.C. 2603(a) & 15 U.S.C. 1604(b), respectively. 122 See 78 FR 80225 (Dec. 31, 2013); 80 FR 43911 (July 24, 2015). The TILA–RESPA integrated disclosure requirements have been amended several times. See https://www.consumerfinance.gov/rulespolicy/final-rules/2013-integrated-mortgagedisclosure-rule-under-real-estate-settlementprocedures-act-regulation-x-and-truth-lending-actregulation-z/. 123 See § 1026.19(e)(1) and (f)(1). 124 See 78 FR 79730, 80225 (Dec. 31, 2013). 125 See § 1026.2(a)(3)(ii) (defining ‘‘application’’ for these purposes as one that ‘‘consists of the submission of the consumer’s name, the consumer’s income, the consumer’s social security number to obtain a credit report, the property address, an estimate of the value of the property, and the mortgage loan amount sought’’). 126 Section 1026.19(e)(1)(iii)(A)–(B). PO 00000 Frm 00013 Fmt 4701 Sfmt 4702 30399 the actual terms of the transaction. In general, the Closing Disclosure must be provided to the consumer three business days before consummation of the transaction.127 As the Bureau explained in the 2013 TILA–RESPA Rule, the TILA–RESPA integrated disclosure forms use clear language and design to make it easier for consumers to locate key information, such as interest rate, periodic payments, and loan costs.128 The forms also provide information to help consumers decide whether they can afford the loan and to compare the cost of different loan offers, including the cost of the loans over time.129 These benefits are important for PACE borrowers just as they are for other mortgage borrowers. The Bureau believes that certain elements of the current TILA–RESPA integrated disclosures may benefit from adaptation so that the forms more effectively disclose information about PACE transactions in view of their unique nature. The Bureau proposes the modifications to the Loan Estimate and Closing Disclosure described below. Where this proposal would not provide a PACE-specific version of a particular provision, the existing requirements in §§ 1026.37 and 1026.38 would apply. As with other mortgage transactions, elements of the forms that are not applicable for PACE transactions may generally be left blank.130 The Bureau requests comment on the proposed amendments and on any further amendments that may improve consumer understanding for PACE transactions. The Bureau is proposing model forms in appendix H–24(H) (Loan Estimate) and appendix H–25(K) (Closing Disclosure) reflecting the proposed PACE-specific implementation of the TILA–RESPA integrated disclosure requirements. The Bureau is not proposing amendments to the timing requirements for the Loan Estimate and Closing Disclosure for PACE transactions. The Bureau explained in the 2013 TILA– RESPA Rule that the seven-business-day waiting period between provision of the Loan Estimate and consummation is intended to effectuate the purposes of both TILA and RESPA by enabling the informed use of credit and ensuring effective advance disclosure of settlement charges.131 The Bureau 127 Section 128 78 1026.19(f)(1)(ii)(A). FR 79730, 80225 (Dec. 31, 2013). 129 Id. 130 See comments 37–1 and 38–1. FR 79730, 79802–03 (Dec. 31, 2013); see also id. at 79806–07 (reasoning in context of considering amendments to bona fide personal financial emergencies that, at least with respect to 131 78 E:\FR\FM\11MYP2.SGM Continued 11MYP2 ddrumheller on DSK120RN23PROD with PROPOSALS2 30400 Federal Register / Vol. 88, No. 91 / Thursday, May 11, 2023 / Proposed Rules explained that the three-business-dayperiod following provision of the Closing Disclosure greatly enhances consumer awareness and understanding of the costs associated with the mortgage transaction.132 As with the substantive disclosures, the timing requirements are important to PACE borrowers, particularly given concerns that the origination process for some PACE borrowers may not provide enough time to understand the obligation and shop for other financing options.133 The Bureau is proposing the implementation of the disclosure requirements described in the sectionby-section analyses of proposed §§ 1026.37(p) and 1026.38(u) pursuant to its authority under TILA section 105(a) and 105(f), and RESPA section 19(a). For the reasons discussed in the respective section-by-section analyses, the Bureau believes, in its initial analysis, that the proposed implementation would be necessary and proper to carry out the purposes of TILA and RESPA. The proposed provisions that would implement the disclosure requirements under TILA section 105(a), including adjustments or exceptions discussed in the applicable section-bysection analyses, are intended to assure a meaningful disclosure of credit terms, avoid the uninformed use of credit, or facilitate compliance with TILA. In general, the proposed changes are intended to make the Loan Estimate and Closing Disclosure more effective and understandable for PACE borrowers, and to facilitate compliance given the unique nature of PACE transactions. The Bureau believes that the proposed provisions that would implement the disclosure requirements under RESPA section 19(a), including interpretations discussed in the applicable section-bysection analysis, would further the purposes of RESPA and be consistent with the Bureau’s authority under RESPA section 19(a). For the reasons discussed in the respective section-by-section analyses, the Bureau is proposing various exemptions in §§ 1026.37(p) and 1026.38(u) pursuant to its authority under TILA section 105(a) and 105(f). With respect to TILA section 105(a), the Bureau believes, in its initial analysis, that the proposed exemptions would be relatively large mortgage loans, the seven-businessday-waiting-period would provide consumers a meaningful opportunity to shop for a loan, compare available financing options, and negotiate favorable terms, and that the seven-business-day-waiting period ‘‘is the minimum amount of time’’ in which consumers could meaningfully do so). 132 78 FR 79730, 79847 (Dec. 31, 2013). 133 See part II.A.4, supra. VerDate Sep<11>2014 17:44 May 10, 2023 Jkt 259001 necessary and proper to carry out TILA’s purposes, including by assuring the meaningful disclosure of credit terms and avoiding the uninformed use of credit. Additionally, with respect to TILA section 105(f), the Bureau’s preliminary determination, after considering the factors in TILA section 105(f)(2), is that the disclosures proposed to be exempted would not provide meaningful benefit to consumers in the form of useful information or protection. In the Bureau’s preliminary analysis, the exempted disclosure requirements would significantly complicate, hinder, or make more expensive credit for PACE transactions, and the exemptions would not undermine the goal of consumer protection. Where the Bureau believes that doing so would help assure the meaningful disclosure of credit terms and avoid the uninformed use of credit, the proposal would replace the exempted disclosures with disclosures that serve similar purposes to the existing disclosures, but that would better fit the context of PACE transactions. Section 1026.37 Content of Disclosures for Certain Mortgage Transactions (Loan Estimate) 37(p) PACE Transactions Section 1026.37 implements the TILA–RESPA integrated disclosure requirements by setting forth the requirements for the Loan Estimate. Proposed § 1026.37(p)(1)–(7) would set forth modifications to the Loan Estimate requirements for ‘‘PACE transactions,’’ as defined under proposed § 1026.43(b)(15), to account for the unique nature of PACE. 37(p)(1) Itemization TILA section 128(a)(6), (a)(16), (b)(2)(C), and (b)(4) are currently implemented in part by § 1026.37(c)(1) through (5), which generally requires creditors to disclose a table itemizing each separate periodic payment or range of payments, among other information, under the heading ‘‘Projected Payments.’’ As part of the projected payments table, the creditor is required to state the total periodic payment under § 1026.37(c)(2)(iv), as well as the constituent parts of the total periodic payment under § 1026.37(c)(2)(i) through (iii). Relevant here, § 1026.37(c)(2)(iii) generally requires a field for the disclosure of the amount payable into an escrow account to pay for some or all mortgage-related obligations, as applicable, labeled ‘‘Escrow,’’ together with a statement that the amount disclosed can increase over PO 00000 Frm 00014 Fmt 4701 Sfmt 4702 time. Proposed § 1026.37(p)(1) would exempt PACE transactions from the escrow account payment disclosure requirements implemented under § 1026.37(c)(2)(iii). As discussed in the section-by-section analysis of proposed § 1026.35(b)(2)(i)(E), the Bureau is unaware of any PACE transactions that carry their own escrow accounts. Thus, the escrow account payment field under § 1026.37(c)(2)(iii) would generally be left blank if it were included on the Loan Estimate associated with any PACE transaction.134 This blank entry could cause confusion for PACE borrowers who pay their property taxes into pre-existing escrow accounts associated with non-PACE mortgage loans, since PACE transactions are typically part of the property tax payment. It also could create doubt for the consumer about whether the PACE transaction will be repaid through the existing escrow account. The Bureau believes the proposed exemption would mitigate this risk. 37(p)(2) Taxes, Insurance, and Assessments TILA sections 128(a)(16) and 128(b)(4)(A) are currently implemented in part by § 1026.37(c)(4)(ii). Section 1026.37(c)(4) requires creditors to include in the projected payments table 135 information about taxes, insurance, and assessments, with the label ‘‘Taxes, Insurance & Assessments.’’ Section 1026.37(c)(4)(ii) generally requires disclosure of the sum of mortgage-related obligations, including property taxes, insurance premiums, and other charges.136 Section 1026.37(c)(4)(iii) through (vi) requires various statements about this disclosure. Under proposed § 1026.37(p)(2)(i) and 134 See existing comment 37–1, which provides that a portion of the Loan Estimate that is inapplicable may generally be left blank. (Existing comment 38–1 provides similarly for the Closing Disclosure.) 135 As noted in the section-by-section analysis of proposed § 1026.37(p)(1), § 1026.37(c) generally requires creditors to disclose a table itemizing each separate periodic payment or range of payments, among other information, under the heading ‘‘Projected Payments.’’ 136 Section 1026.37(c)(4)(ii) requires disclosure of ‘‘[t]he sum of the charges identified in § 1026.43(b)(8), other than amounts identified in § 1026.4(b)(5), expressed as a monthly amount, even if no escrow account for the payment of some or any of such charges will be established.’’ Section 1026.43(b)(8) defines mortgage-related obligations as ‘‘property taxes; premiums and similar charges identified in § 1026.4(b)(5), (7), (8), and (10) that are required by the creditor; fees and special assessments imposed by a condominium, cooperative, or homeowners association; ground rent; and leasehold payments.’’ See also the sectionby-section analysis of proposed § 1026.37(p)(8)(i) for discussion of the applicable unit-period for PACE transactions. E:\FR\FM\11MYP2.SGM 11MYP2 Federal Register / Vol. 88, No. 91 / Thursday, May 11, 2023 / Proposed Rules ddrumheller on DSK120RN23PROD with PROPOSALS2 (ii), the Bureau would retain most of these requirements for PACE transactions, with changes to the disclosures currently required under § 1026.37(c)(4)(iv), (v), and (vi) for PACE transactions. Currently, § 1026.37(c)(4)(iv) requires a statement of whether the sum of mortgage-related obligations disclosed pursuant to § 1026.37(c)(4)(ii) includes payments for property taxes, certain insurance premiums, or other charges.137 Section 1026.37(c)(4)(iv) currently does not require a more specific statement regarding the PACE payment, separate from other property tax obligations. The Bureau is proposing § 1026.37(p)(2)(i) to provide such specificity. Proposed § 1026.37(p)(2)(i) would require a statement of whether the amount disclosed pursuant to § 1026.37(c)(4)(ii) includes payments for the PACE transaction and, separately, whether it includes payments for the non-PACE portions of the property tax payment. The statement about the PACE loan payment would be labeled ‘‘PACE Payment,’’ and the statement about the other property taxes would be labeled ‘‘Property Taxes (not including PACE loan).’’ Besides having a more specific statement regarding the PACE payment separate from the other property taxes, the other components regarding certain insurance premiums or other charges would continue to be disclosed under proposed § 1026.37(p)(2)(i) similar to how they are disclosed under current § 1026.37(c)(4)(iv). The Bureau believes these proposed changes would help consumers understand the unique nature of PACE and reinforce that the 137 Section 1026.37(c)(4)(iv) refers to ‘‘payments for property taxes, amounts identified in § 1026.4(b)(8), and other amounts described in’’ § 1026.37(c)(4)(ii). Section 1026.4(b)(8), in turn, refers to ‘‘[p]remiums or other charges for insurance against loss of or damage to property, or against liability arising out of ownership or use of property, written in connection with a credit transaction.’’ Additionally, the Bureau notes that a creditor issuing a simultaneous loan that is a PACE transaction would generally be required to include the simultaneous PACE loan in calculating the sum of taxes, assessments, and insurance described in § 1026.37(c)(4)(ii), since the simultaneous PACE loan would increase the consumer’s property tax payment. This is consistent with existing comment 19(e)(1)(i)–1, which cross-references existing § 1026.17(c)(2)(i) and generally provides that creditors must make TILA–RESPA integrated disclosures based on the best information reasonably available to the creditor at the time the disclosure is provided to the consumer. As discussed in the section-by-section analysis of § 1026.43(c)(2)(iv), the Bureau is also proposing to clarify that a creditor originating a PACE transaction knows or has reason to know of simultaneous loans that are PACE transactions if the transactions are included in any existing database or registry of PACE transactions that includes the geographic area in which the property is located and to which the creditor has access. VerDate Sep<11>2014 17:44 May 10, 2023 Jkt 259001 PACE transaction will increase the consumer’s property tax payment. Section 1026.37(c)(4)(iv) also currently requires creditors to state whether the constituent parts of the taxes, insurance, or assessments will be paid by the creditor using escrow account funds. Proposed § 1026.37(p)(2)(i) would eliminate this requirement for PACE transactions. Omitting this information would avoid potential consumer confusion for similar reasons as explained in the section-by-section analysis of proposed § 1026.37(p)(1). The Bureau is also proposing amendments to the requirements in § 1026.37(c)(4)(v) and (vi). Currently, § 1026.37(c)(4)(v) requires a statement that the consumer must pay separately any amounts described in § 1026.37(c)(4)(ii) that are not paid by the creditor using escrow account funds; and § 1026.37(c)(4)(vi) requires a reference to escrow account information, required under § 1026.37(g)(3), located elsewhere on the Loan Estimate. Proposed § 1026.37(p)(2)(ii) would replace these disclosures with the following for PACE transactions: (1) a statement that the PACE transaction, described in plain language as a ‘‘PACE loan,’’ will be part of the property tax payment; and (2) a statement directing the consumer, if the consumer has a pre-existing mortgage with an escrow account, to contact the consumer’s mortgage servicer for what the consumer will owe and when. The Bureau believes the proposed disclosures would promote consumer understanding of PACE transactions and their effect on any pre-existing mortgage loans, and that omitting the two existing disclosures would not impair consumer understanding of the transaction. 37(p)(3) Contact Information TILA section 128(a)(1) is currently implemented in part by § 1026.37(k), which requires disclosure of certain contact information, under the heading ‘‘Additional Information About this Loan.’’ 138 In general, a creditor must disclose: (1) the name and NMLSR ID,139 license number, or other unique identifier issued by the applicable jurisdiction or regulating body for the creditor, labeled ‘‘Lender,’’ and mortgage broker, labeled ‘‘Mortgage Broker,’’ if any; (2) similar information for the individual loan officer, labeled ‘‘Loan Officer,’’ of the creditor and the 138 Section 1026.37(k) also integrates the disclosure of certain information required under appendix C to Regulation X. 139 Under § 1026.37(k)(1), the NMLS ID refers to the Nationwide Mortgage Licensing System and Registry identification number. PO 00000 Frm 00015 Fmt 4701 Sfmt 4702 30401 mortgage broker, if any, who is the primary contact for the consumer; and (3) the email address and telephone number of the loan officer. Section 1026.37(k)(1) through (3) further provides that, in the event the creditor, mortgage broker, or loan officer has not been assigned an NMLSR ID, the license number or other unique identifier issued by the applicable jurisdiction or regulating body with which the creditor or mortgage broker is licensed and/or registered shall be disclosed, with the abbreviation for the State of the applicable jurisdiction or regulating body. Proposed § 1026.37(p)(3) would additionally require similar disclosures for PACE companies if such information is not disclosed under the requirements described above. Specifically, proposed § 1026.37(p)(3) would require disclosure of the PACE company’s name, NMLSR ID (labeled ‘‘NMLS ID/License ID’’), email address, and telephone number of the PACE company (labeled ‘‘PACE Company’’). Similar to § 1026.37(k)(1) through (3)’s existing requirements with respect to creditors, mortgage brokers, and loan officers, proposed § 1026.37(p)(3) would provide that, in the event that the PACE company has not been assigned an NMLSR ID, the creditor must disclose on the Loan Estimate the license number or other unique identifier issued by the applicable jurisdiction or regulating body with which the PACE company is licensed and/or registered, along with the abbreviation for the State of the applicable jurisdiction or regulatory body stated before the word ‘‘License’’ in the label, if any. These disclosures would not be required if the PACE company’s contact information is otherwise disclosed pursuant to § 1026.37(k)(1) through (3). Proposed comment 37(p)(3)–1 would clarify that, for example, if the PACE company is a mortgage broker as defined in § 1026.36(a)(2), then the PACE company is disclosed as a mortgage broker and the field for PACE company may be left blank. As explained in the 2013 TILA– RESPA Rule, disclosing the name and NMLSR ID number, if any, for the creditor, mortgage broker, and loan officers employed by such entities provides consumers with the information they need to conduct the due diligence necessary to ensure that these parties are appropriately licensed.140 Having this information may also help consumers assess the risks associated with services and service providers associated with the 140 78 E:\FR\FM\11MYP2.SGM FR 79730, 79975–76 (Dec. 31, 2013). 11MYP2 30402 Federal Register / Vol. 88, No. 91 / Thursday, May 11, 2023 / Proposed Rules transaction, which in turn serves the purposes of TILA, RESPA, and the CFPA and Dodd-Frank Act.141 The Bureau believes that similar considerations apply to the disclosure of the PACE company. Proposed § 1026.37(p)(3) would reference proposed § 1026.43(b)(14) for the definition of ‘‘PACE company.’’ As explained in the section-by-section analysis of proposed § 1026.43(b)(14), ‘‘PACE company’’ means a person, other than a natural person or a government unit, that administers the program through which a consumer applies for or obtains PACE financing. The Bureau seeks comment on proposed § 1026.37(p)(3) generally, and on whether to require the contact information for the PACE company under the ‘‘PACE Company’’ heading in all cases, instead of under the ‘‘Mortgage Broker’’ heading when applicable. ddrumheller on DSK120RN23PROD with PROPOSALS2 37(p)(4) Assumption TILA section 128(a)(13) is currently implemented in part by § 1026.37(m)(2), which requires the creditor to disclose a statement of whether a subsequent purchaser of the property may be permitted to assume the remaining loan obligation on its original terms, labeled ‘‘Assumption.’’ This existing disclosure requirement could be misleading for PACE transactions. In general, PACE payment obligations can transfer with the sale of the property, such that the subsequent property owner would be required to pay the remaining obligation as a function of property ownership. However, the new homeowners generally do not technically assume the loans. Proposed § 1026.37(p)(4) would instead require a statement reflecting a PACE-specific risk that stakeholders have indicated sometimes occurs when consumers try to transfer the PACE obligation by selling the property. The proposed statement would state that, if the consumer sells the property, the buyer or the buyer’s mortgage lender may require the consumer to pay off the PACE transaction as a condition of the sale. For clarity, proposed § 1026.37(p)(4) requires the creditor to label this disclosure ‘‘Selling the Property’’ and use of the term ‘‘PACE loan’’ in the disclosure. The Bureau believes the proposed disclosure would further the purposes of TILA by providing useful information about key risks of PACE loans, thus avoiding the uninformed use of credit. 141 See id. VerDate Sep<11>2014 17:44 May 10, 2023 Jkt 259001 37(p)(5) Late Payment TILA section 128(a)(10) is currently implemented in part by § 1026.37(m)(4), which requires the creditor to disclose a statement detailing any charge that may be imposed for a late payment, stated as a dollar amount or percentage charge of the late payment amount, and the number of days that a payment must be late to trigger the late payment fee, labeled ‘‘Late Payment.’’ Unlike nonPACE mortgage loans, however, late payment charges for PACE transactions are typically determined by taxing authorities as part of the overall property tax payment. It may be challenging to disclose all late charges that may be associated with a property tax delinquency succinctly and effectively on the Loan Estimate, either under existing § 1026.37(m)(4) or otherwise. The Bureau understands that some States impose several types of late charges, some of which can change as the delinquency persists or depend on factors that are unknown at the time of the disclosure. To avoid potential confusion for consumers and ensure the Loan Estimate includes useful information about the charges a PACE borrower might accrue in delinquency, the Bureau proposes to implement TILA section 128(a)(10) for PACE transactions by requiring the disclosure in proposed § 1026.37(p)(5) rather than the existing disclosure in § 1026.37(m)(4). Proposed § 1026.37(p)(5) would require creditors, to include one or more statements relating to late charges, as applicable. First, proposed § 1026.37(p)(5)(i) would require a statement detailing any charge specific to the PACE transaction that may be imposed for a late payment, stated as a dollar amount or percentage charge of the late payment amount, and the number of days that a payment must be late to trigger the late payment fee, labeled ‘‘Late Payment.’’ Proposed comment 37(p)(5)–1 would clarify that a charge is specific to the PACE transaction if the property tax collector does not impose the same charges for general property tax delinquencies. Although the Bureau is not aware of PACE transactions that impose such PACE-specific late charges, if any PACE transactions do provide for it, disclosure of late payment information would be incomplete without it. If a PACE transaction does not provide for it, the disclosure would not be required. Second, proposed § 1026.37(p)(5)(ii) would require, for any charge that is not specific to the transaction, either (1) a statement notifying the consumer that, if the consumer’s property tax payment is late, they may be subject to penalties PO 00000 Frm 00016 Fmt 4701 Sfmt 4702 and late fees established by their property tax collector, as well as a statement directing the consumer to contact the tax collector for more information; or (2) a statement describing any charges that may result from property tax delinquency that are not specific to the PACE transaction, which may include dollar amounts or percentage charges and the number of days a payment must be late to trigger the fee. Proposed § 1026.37(p)(5)(ii) would provide flexibility for the creditor while ensuring that the Loan Estimate contains useful information about charges that may result from a property tax delinquency. The Bureau solicits comment on whether it should require creditors to disclose specific late-payment information and, if so, what information to require. 37(p)(6) Servicing RESPA section 6(a) is currently implemented by § 1026.37(m)(6), which requires the creditor to disclose a statement of whether the creditor intends to service the loan or transfer the loan to another servicer, using the label ‘‘Servicing.’’ PACE transactions are not subject to transfer of servicing rights as far as the Bureau is aware. Thus, the Bureau is proposing to implement RESPA section 6(a) for PACE transactions by requiring a servicingrelated disclosure that would be more valuable for PACE borrowers. Proposed § 1026.37(p)(6) would require the PACE creditor to provide a statement that the consumer will pay the PACE transaction, using the term ‘‘PACE loan,’’ as part of the consumer’s property tax payment. Proposed § 1026.37(p)(6) would also require a statement directing the consumer, if the consumer has a mortgage escrow account that includes the consumer’s property tax payment, to contact the consumer’s mortgage servicer for what the consumer will owe and when. Proposed § 1026.37(p)(6) would preserve the label ‘‘Servicing’’ for the disclosure. The Bureau believes that proposed § 1026.37(p)(6) would promote the informed use of credit. 37(p)(7) Exceptions 37(p)(7)(i) Unit-Period Because PACE transaction payments are repaid with the property taxes once or twice a year, the applicable unitperiod would typically be annual or semi-annual. The proposed model form for PACE under proposed appendix H– 24(H) would use ‘‘annual’’ in the tables disclosing loan terms and projected payments. Proposed § 1026.37(p)(7)(i) E:\FR\FM\11MYP2.SGM 11MYP2 Federal Register / Vol. 88, No. 91 / Thursday, May 11, 2023 / Proposed Rules would provide that, wherever the proposed form uses ‘‘annual’’ to describe the frequency of any payments or the applicable unit-period, the creditor shall use the appropriate term to reflect the transaction’s terms, such as semi-annual payments. Proposed § 1026.37(p)(7)(i) would be similar to existing § 1026.37(o)(5), which permits unit-period changes wherever the Loan Estimate or § 1026.37 uses ‘‘monthly’’ to describe the frequency of any payments or uses ‘‘month’’ to describe the applicable unit-period.142 37(p)(7)(ii) PACE Nomenclature The Bureau understands that PACE companies may market PACE loans to consumers using brand names that do not include the term ‘‘Property Assessed Clean Energy’’ or the acronym ‘‘PACE.’’ To improve the Loan Estimate’s utility and understandability, proposed § 1026.37(p)(7)(ii) would clarify that, wherever § 1026.37 requires disclosure of the term ‘‘PACE’’ or the proposed model form in appendix H–24(H) uses the term ‘‘PACE,’’ the creditor may substitute the name of a specific PACE financing program that will be recognizable to the consumer. Proposed comment 37(p)(7)(ii)–1 would provide an example of how a creditor may substitute the name of a specific PACE financing program that is recognizable to the consumer as PACE on the form. Section 1026.38 Content of Disclosures for Certain Mortgage Transactions (Closing Disclosure) ddrumheller on DSK120RN23PROD with PROPOSALS2 38(u) PACE Transactions Section 1026.38 implements the TILA–RESPA integrated disclosure requirements by setting forth the requirements for the Closing Disclosure. Proposed § 1026.38(u)(1)–(9) would set forth modifications to the Closing Disclosure requirements under § 1026.38 for ‘‘PACE transactions,’’ as defined under proposed § 1026.43(b)(15), to account for the unique nature of PACE. 38(u)(1) Transaction Information TILA section 128(a)(1) is currently implemented in part by § 1026.38(a)(4), which requires disclosure of identifying information for the borrower, the seller, where applicable, and the lender,143 142 Comment 37(o)(5)–4 explains that, for purposes of § 1026.37, the term ‘‘unit-period’’ has the same meaning as in appendix J to Regulation Z. 143 For purposes of § 1026.38(a)(4)(iii), the lender is defined as ‘‘the name of the creditor making the disclosure.’’ In relevant part, the ‘‘creditor’’ is 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 VerDate Sep<11>2014 17:44 May 10, 2023 Jkt 259001 under the heading ‘‘Transaction Information.’’ 144 Proposed § 1026.38(u)(1) would additionally require the Closing Disclosure for a PACE transaction to include the name of any PACE company involved in the transaction, labeled ‘‘PACE Company.’’ It would refer to proposed § 1026.43(b)(14) for the definition of ‘‘PACE company’’ for these purposes: a person, other than a natural person or a government unit, that administers the program through which a consumer applies for or obtains PACE financing. As the Bureau explained in the 2013 TILA–RESPA Rule, disclosing the identifying information for the borrower, seller, and lender is intended to effectuate statutory purposes by promoting the informed use of credit.145 The Bureau believes disclosing the PACE company’s identifying information would do the same.146 38(u)(2) Projected Payments TILA section 128(a)(6), (a)(16), (b)(2)(C), and (b)(4) is currently implemented in part by § 1026.38(c). Under § 1026.38(c)(1), the Closing Disclosure must disclose the information in the projected payments table required on the Loan Estimate under § 1026.37(c)(1)–(4),147 with certain exceptions. These disclosures generally include the total periodic payment, as well as an itemization of the periodic payment’s constituent parts. Additionally, § 1026.38(c)(2) requires the projected payments table on the Closing Disclosure to include a statement referring the consumer to a detailed disclosure of escrow account information located elsewhere on the form. Proposed § 1026.38(u)(2) would retain the existing structure of the projected payments table but would (1) eliminate the field for escrow account information that is part of the periodic payment disclosure currently required under § 1026.37(c)(2)(iii); (2) require the (not including a down payment), and to whom the obligation is initially payable.’’ See § 1026.2(a)(17). As noted in the section-by-section analysis of proposed § 1026.2(a)(14), government sponsors are typically the creditors for PACE transactions. 144 Section 1026.38(a)(4) also integrates the disclosure of certain information required under appendix A to Regulation X. 145 78 FR 79730, 80002–03 (Dec. 31, 2013). 146 See part II.A.1 for discussion of the central role PACE companies often play in PACE transactions. 147 Section 1026.37(c)(1)–(3) requires information about the initial periodic payment or range of payments; and § 1026.37(c)(4) requires information about estimated taxes, insurance, and assessments. The Bureau is proposing changes to these disclosure requirements for PACE transactions as described in the section-by-section analysis of proposed § 1026.37(p)(1) and (2). PO 00000 Frm 00017 Fmt 4701 Sfmt 4702 30403 creditor to disclose whether the amount disclosed for estimated taxes, insurance, and assessments includes payments for the PACE transaction and, separately, whether it includes the non-PACE portions of the property tax payment, with corresponding labels for both; and (3) require a statement that the PACE transaction will be part of the property tax payment and a statement directing the consumer, if they have a mortgage with an escrow account, to contact their mortgage servicer for what they will owe and when. Additionally, proposed § 1026.38(u)(2) would require the creditor to omit the existing reference to detailed escrow account information located elsewhere on the form. With these proposed amendments, the projected payments table for the Closing Disclosure in a PACE transaction would mirror that on the Loan Estimate as amended under proposed § 1026.37(p)(1) and (2). The Bureau is proposing these changes for the same reasons as set forth in the section-bysection analyses of proposed § 1026.37(p)(1) and (2) above. 38(u)(3) Assumption TILA section 128(a)(13) is currently implemented in part by § 1026.38(l)(1), which requires the information described in § 1026.37(m)(2) to be provided on the Closing Disclosure under the subheading ‘‘Assumption.’’ Section 1026.37(m)(2) requires the creditor to disclose a statement of whether a subsequent purchaser of the property may be permitted to assume the remaining loan obligation on its original terms. As discussed in the section-by-section analysis of proposed § 1026.37(p)(4), the Bureau understands that this disclosure would not be as relevant for PACE transactions, since subsequent property owners typically would not assume PACE obligations. For the reasons discussed in the sectionby-section analysis of proposed § 1026.37(p)(4), proposed § 1026.38(u)(3) would thus implement TILA section 128(a)(13) for PACE transactions by requiring the creditor to use the subheading ‘‘Selling the Property’’ and to disclose the information required by § 1026.37(p)(4) in place of the information required under § 1026.38(l)(1). 38(u)(4) Late Payment TILA section 128(a)(10) is currently implemented in part by § 1026.38(l)(3), which requires the creditor to disclose on the Closing Disclosure the information described in § 1026.37(m)(4) under the subheading ‘‘Late Payment.’’ It requires a statement detailing any charge that may be E:\FR\FM\11MYP2.SGM 11MYP2 30404 Federal Register / Vol. 88, No. 91 / Thursday, May 11, 2023 / Proposed Rules ddrumheller on DSK120RN23PROD with PROPOSALS2 imposed for a late payment, stated as a dollar amount or percentage charge of the late payment amount, and the number of days that a payment must be late to trigger the late payment fee, labeled ‘‘Late Payment.’’ Proposed § 1026.38(u)(4) would make changes relating to the disclosure of late payment charges on the Closing Disclosure for PACE transactions to parallel the changes that would be made in proposed § 1026.37(p)(5) with respect to the Loan Estimate. The Bureau proposes these changes for the same reasons discussed in the section-bysection analysis of proposed § 1026.37(p)(5). 38(u)(5) Partial Payment Policy TILA section 129C(h) is currently implemented by § 1026.38(l)(5), which requires certain disclosures regarding the lender’s acceptance of partial payments under the subheading ‘‘Partial Payments.’’ Section 1026.38(l)(5)(i) through (iii) generally requires disclosure of whether the creditor accepts partial payments and, if so, whether the creditor may apply the partial payments or hold them in a separate account. Section 1026.38(l)(5)(iv) requires a statement that, if the loan is sold, the new lender may have a different policy. For PACE transactions, however, the current partial-payment disclosure may not accurately and effectively reflect partial-payment options for PACE transactions. In general, partial payment policies for PACE transactions are typically set by the taxing authority and not by the creditor. The tax collector may offer payment options not described accurately in the disclosure required under § 1026.38(l)(5), and any payment options would likely apply to the full property tax payment, not only to the PACE payment specifically. Further, if a PACE borrower pays their property taxes into an escrow account on a pre-existing mortgage loan, their PACE loans may be subject to a partial payment policy associated with the preexisting mortgage loan, which the disclosure of partial-payment policies associated with the creditor for the PACE transaction would not necessarily reflect. Proposed § 1026.38(u)(5) would avoid potential inaccuracies that might arise under existing requirements and is intended to provide the consumer with useful information as it relates to a PACE transaction. It would require that, in lieu of the information required by § 1026.38(l)(5), the creditor shall disclose a statement directing the consumer to contact the mortgage servicer about the partial payment VerDate Sep<11>2014 17:44 May 10, 2023 Jkt 259001 policy for the account if the consumer has a mortgage escrow account for property taxes, and to contact the tax collector about the tax collector’s partial payment policy if the consumer pays property taxes directly to the tax authority. 38(u)(6) Escrow Account TILA section 129D(h) and 129D(j) is currently implemented in part by § 1026.38(l)(7), which requires a statement of whether an escrow account will be established for the transaction, as well as detailed information about the effects of having or not having an escrow account, under the subheading ‘‘Escrow Account.’’ For similar reasons as discussed in the section-by-section analysis for proposed § 1026.37(p)(1) with respect to exempting escrowrelated information from the projected payments table on the Loan Estimate for PACE transactions, and because certain elements of the disclosure under § 1026.38(l)(7) could be inaccurate for some PACE borrowers, proposed § 1026.38(u)(6) would exempt creditors in PACE transactions from the requirement to disclose on the Closing Disclosure the information otherwise required under § 1026.38(l)(7). 38(u)(7) Liability After Foreclosure TILA section 129C(g)(2) and 129C(g)(3) is currently implemented in part by § 1026.38(p)(3), which requires the creditor to disclose certain information about the consumer’s potential liability after foreclosure. It requires, under the subheading ‘‘Liability after Foreclosure,’’ a brief statement of whether, and the conditions under which, the consumer may remain responsible for any deficiency after foreclosure under applicable State law, a brief statement that certain protections may be lost if the consumer refinances or incurs additional debt on the property, and a statement that the consumer should consult an attorney for additional information. In general, this disclosure provides useful information for consumers who may have State-law protections against deficiency. However, it may not be applicable in the same way, or at all, with respect to PACE transactions due to their unique nature. Thus, proposed § 1026.38(u)(7) would provide that the creditor shall not disclose the liabilityafter-foreclosure disclosure described in § 1026.38(p)(3).148 It would provide 148 As described in § 1026.37(m)(7), if the purpose of the credit transaction is to refinance an extension of credit as described in § 1026.37(a)(9)(ii), the Loan Estimate would be required to disclose information about the consumer’s liability after foreclosure. The PO 00000 Frm 00018 Fmt 4701 Sfmt 4702 that, if the consumer may be responsible for any deficiency after foreclosure or tax sale under applicable State law, the creditor shall instead disclose a brief statement that the consumer may have such responsibility, a description of any applicable protections provided under State anti-deficiency laws, and a statement that the consumer should consult an attorney for additional information. This information would be under the subheading ‘‘Liability after Foreclosure or Tax Sale.’’ The Bureau believes this information would be more useful for PACE borrowers than the existing disclosure required under § 1026.38(p)(3), thus helping to avoid the uninformed use of credit. 38(u)(8) Contact Information TILA section 128(a)(1) is currently implemented in part by § 1026.38(r), which generally requires certain information disclosed in a separate table, under the heading ‘‘Contact Information.’’ 149 For transactions without a seller, § 1026.38(r) requires specified contact and licensing information for each creditor, mortgage broker, and settlement agent participating in the transaction. Proposed § 1026.38(u)(8) would require the same contact and licensing information for the PACE company if not otherwise disclosed pursuant to § 1026.38(r). As discussed in the section-by-section analysis of proposed § 1026.37(p)(3) and proposed comment 37(p)(3)–1,150 the PACE company may be a mortgage broker, in which case its information would be required under the existing requirements in § 1026.38(r); proposed § 1026.38(u)(8) would not require the disclosure of the PACE company a second time. As explained in the section-by-section analysis of proposed § 1026.43(b)(14), given the important role that PACE companies play in PACE transactions, the Bureau believes that disclosing their contact information could be useful to consumers and would facilitate the informed use of credit. 38(u)(9) Exceptions 38(u)(9)(i) Unit-Period To permit creditors the flexibility to disclose the correct unit-period for each PACE transaction, proposed Bureau believes that this disclosure is unlikely to be required on a Loan Estimate for a PACE loan. Therefore the proposal does not currently address such language on the Loan Estimate. 149 Section 1026.38(r) also integrates the disclosure of certain information required under appendix A and appendix C to Regulation X. 150 Proposed comment 37(p)(3)–1 explains that a PACE company may be a mortgage broker as defined in § 1026.36(a)(2). E:\FR\FM\11MYP2.SGM 11MYP2 Federal Register / Vol. 88, No. 91 / Thursday, May 11, 2023 / Proposed Rules § 1026.38(u)(9)(i) would provide that, wherever proposed form H–25(K) of appendix H uses ‘‘annual’’ to describe the frequency of any payments or the applicable unit-period, the creditor shall use the appropriate term to reflect the transaction’s terms, such semi-annual payments. The Closing Disclosure changes in proposed § 1026.38(u)(9)(i) parallel the Loan Estimate changes in proposed § 1026.37(p)(7)(i), and the Bureau is proposing proposed § 1026.38(u)(9)(i) for the same reasons stated in the section-by-section analysis of proposed § 1026.37(p)(7)(i). Proposed § 1026.38(u)(9)(i) is also similar to existing § 1026.38(t)(5)(i), which permits changes wherever the Closing Disclosure or § 1026.38 uses ‘‘monthly’’ to describe the frequency of any payments or uses ‘‘month’’ to describe the applicable unit-period.’’ 151 38(u)(9)(ii) PACE Nomenclature The Bureau understands that PACE companies may market to consumers using brand names that do not include the term ‘‘Property Assessed Clean Energy’’ or the acronym ‘‘PACE.’’ To ensure that consumers understand Closing Disclosures provided for PACE transactions, proposed § 1026.38(u)(9)(ii) would clarify that, wherever § 1026.38 requires disclosure of the term ‘‘PACE’’ or the proposed model form in appendix H–25(K) uses the term ‘‘PACE,’’ the creditor may substitute the name of a specific PACE financing program that will be recognizable to the consumer. Proposed comment 38(u)(9)(ii)–1 would provide an example of how a creditor may substitute the name of a specific PACE financing program that is recognizable to the consumer as PACE on the form. 1026.41 Periodic Statement 41(e) Exemptions ddrumheller on DSK120RN23PROD with PROPOSALS2 41(e)(7) PACE Transactions TILA section 128(f) generally requires periodic statements for residential mortgage loans.152 Section 1026.41 implements this requirement by requiring creditors, servicers, or assignees, as applicable, to provide a statement for each billing cycle that contains information such as the amount due, payment breakdown, transaction activity, contact information, and delinquency 151 Comment 38(t)(5)–3 explains that, for purposes of § 1026.38, the term ‘‘unit-period’’ has the same meaning as in appendix J to Regulation Z. 152 15 U.S.C. 1638(f). VerDate Sep<11>2014 17:44 May 10, 2023 Jkt 259001 information.153 Proposed § 1026.41(e)(7) would exempt PACE transactions, as defined in proposed § 1026.43(b)(15), from the periodic statement requirement to reduce consumer confusion while avoiding undue burden for PACE creditors. Several unique characteristics of PACE financing support this proposed exemption. First, PACE payments and delinquency charges are typically integrated with broader property tax payments and delinquency charges. Consumers may be confused about whether fields in the periodic statement include details of the PACE financing, property taxes, or both, or why the figures do not align with those in their property tax statements. Second, the annual or semi-annual payment schedule for PACE financing means that information on the periodic statement about the next expected payment would come many months before the payment was due, given timing requirements for periodic statements under Regulation Z, which may limit its utility for consumers.154 Finally, requiring a periodic statement could impose a significant burden on the party providing the statement given that local taxing authorities would hold needed information such as whether and when payments were made or delinquency charges applied. Even with the proposed exemption, consumers would still receive information regarding payments and delinquency from their property tax collector and, if they have a mortgage with an escrow, from their mortgage servicer. Consumers could also obtain information about the PACE loan by requesting a payoff statement pursuant to § 1026.36(c)(3). The Bureau seeks comment on proposed § 1026.41(e)(7) and whether a periodic statement requirement would benefit PACE consumers. Specifically, the Bureau seeks comment on the types of disclosures related to PACE financing that consumers currently receive from PACE creditors, property tax collectors, and others. The Bureau also seeks comment on whether an annual or semiannual disclosure like the periodic statement would be useful for PACE consumers and, if so, what information it should contain. The Bureau also requests comment on whether there are any other mortgage servicing requirements in Regulation Z or X beyond the periodic statement requirement that the Bureau should 153 For purposes of § 1026.41, the term ‘‘servicer’’ includes the creditor, assignee, or servicer of the loan, as applicable. § 1026.41(a)(2). 154 See 12 CFR 1026.41(b). PO 00000 Frm 00019 Fmt 4701 Sfmt 4702 30405 address in the final rule. Some servicing requirements, such as the requirements to provide periodic statements and to provide payoff statements, apply not just to servicers but also to creditors and assignees.155 Both Regulation Z and Regulation X also impose certain servicing requirements that apply only to ‘‘servicers’’ as defined in Regulation X, 12 CFR 1024.2(b).156 Regulation X generally defines servicer as ‘‘a person responsible for the servicing of a federally related mortgage loan’’ and servicing as receiving any scheduled periodic payments from a borrower pursuant to the loan’s terms and making certain payments to the loan’s owner or other third parties.157 The definition of ‘‘person’’ in RESPA 158 has been interpreted not to apply to government entities.159 This proposed rule does not address any servicing requirements that apply only to ‘‘servicers’’ as defined in Regulation X because there does not appear to be a ‘‘servicer’’ in typical PACE transactions. Pursuant to the terms of PACE transactions that the Bureau has reviewed, the consumer’s local government taxing authority typically receives the borrower’s regular PACE payments as part of the consumer’s larger property tax payment. The Bureau proposes to use its authority under TILA sections 105(a) and (f) and Dodd-Frank Act section 1405(b) to exempt PACE financing from the periodic statement requirement. The Bureau preliminarily concludes that this exemption is necessary and proper under TILA section 105(a). Furthermore, the Bureau preliminarily concludes, for the reasons stated above, that disclosure of the information specified in TILA section 128(f)(1) would not provide a meaningful benefit to PACE consumers, considering the factors in TILA section 105(f). The Bureau preliminarily believes that this conclusion would be true regardless of the loan amount, borrower status (including related 155 See §§ 1026.41(a)(2); 1026.36(c)(3). e.g., 12 CFR 1024.41 (loss mitigation); 1026.36(c)(1) and (2) (payment processing and pyramiding of late fees). 157 12 CFR 1024.2(b) (emphasis added); see also 12 U.S.C. 2605(i)(2). 158 See 12 U.S.C. 2602(5). 159 See, e.g., New Jersey Title Ins. Co. v. Cecere, 2020 WL 7137873, at *10 (D.N.J. 2020); United States v. Davis, 2018 WL 6694826, at *4 (C.D. Ill. 2018); Rodriguez v. Bank of Am., 2017 WL 3086369, at *5 (D.N.J. 2017). Other entities involved in PACE transactions, such as the PACE company and home improvement contractor, would fall within RESPA’s definition of ‘‘person’’ but do not appear to meet the Regulation X definition of ‘‘servicer’’ in typical PACE transactions. For federally related mortgage loans, defined in RESPA section 3(1), 12 U.S.C. 2602(1), and Regulation X § 1024.2(b), RESPA covered persons are generally subject to RESPA’s provisions including the anti-kickback provisions in 12 U.S.C. 2607. 156 See, E:\FR\FM\11MYP2.SGM 11MYP2 30406 Federal Register / Vol. 88, No. 91 / Thursday, May 11, 2023 / Proposed Rules financial arrangements, financial sophistication, and the importance to the borrower of the loan), or whether the loan is secured by the consumer’s principal residence. Consequently, the proposed exemption appears to further the consumer protection objectives of the statute, and helps to avoid complicating, hindering, or making more expensive the credit process. The Bureau also believes that the proposed modification of the requirements in TILA section 128(f) to exempt PACE financing would improve consumer awareness and understanding and is in the interest of consumers and in the public interest, consistent with DoddFrank Act section 1405(b). ddrumheller on DSK120RN23PROD with PROPOSALS2 1026.43 Minimum Standards for Transactions Secured by a Dwelling Section 1026.43 implements the requirement in TILA section 129C(a) that creditors must make a reasonable, good faith determination of a consumer’s ability to repay a residential mortgage loan and defines the loans eligible to be ‘‘qualified mortgages,’’ which obtain certain presumptions of compliance pursuant to TILA section 129C(b). The Bureau is proposing a number of amendments to § 1026.43 and its commentary to account for the unique nature of PACE. Specifically, this proposal would (1) define ‘‘PACE company’’ and ‘‘PACE transaction’’ for purposes of § 1026.43; (2) provide an additional factor a creditor must consider when making a repayment ability determination for PACE transactions extended to consumers who pay their property taxes through an escrow account; (3) provide that a PACE transaction is not a QM as defined in § 1026.43; and (4) extend the requirements of § 1026.43 and the liability provisions of section 130 of TILA 160 to any PACE company that is substantially involved in making the credit decision. This proposal would also amend the commentary to this section to explain that a creditor originating a PACE transaction knows or has reason to know of any simultaneous loans that are PACE transactions if the transactions are included in a relevant database or registry of PACE transactions. The Bureau further proposes to amend the commentary to make clear that pre-existing PACE transactions are considered a property tax for purposes of considering mortgage-related obligations under § 1026.43(b)(8) and to clarify the verification requirements for existing PACE transactions. The CFPB seeks 160 15 U.S.C. 1640. VerDate Sep<11>2014 17:44 May 10, 2023 Jkt 259001 comment on these proposed amendments. Background on the Existing Ability-toRepay Requirements for Mortgages The Dodd-Frank Act amended TILA to establish, among other things, ATR requirements in connection with the origination of most residential mortgage loans.161 As amended, TILA prohibits a creditor from making a residential mortgage loan unless the creditor makes a reasonable and good faith determination based on verified and documented information that, at the time the loan is consummated, the consumer has a reasonable ability to repay the loan according to its terms, and all applicable taxes, insurance (including mortgage guarantee insurance), and assessments.162 TILA identifies the factors a creditor must consider in making a reasonable and good faith assessment of a consumer’s ability to repay. These factors are the consumer’s credit history, current and expected income, current obligations, debt-to-income (DTI) ratio or residual income after paying nonmortgage debt and mortgage-related obligations, employment status, and other financial resources other than equity in the dwelling or real property that secures repayment of the loan.163 In January 2013, the Bureau issued a final rule amending Regulation Z to implement TILA’s ATR requirements (January 2013 Final Rule).164 This proposal refers to the January 2013 Final Rule and later amendments to it collectively as the ATR/QM Rule. The ATR/QM Rule implements the statutory criteria listed above in the eight underwriting factors a creditor must consider in making a repayment ability determination set out in § 1026.43(c)(2).165 These factors are (1) the consumer’s current or reasonably expected income or assets (other than the value of the dwelling and attached real property that secures the loan) that the consumer will rely on to repay the loan; (2) the consumer’s current employment status (if a creditor relies 161 Dodd-Frank Act sections 1411–12, 1414, 124 Stat. 2142–48, 2149; 15 U.S.C. 1639c. 162 15 U.S.C. 1639c(a)(1). TILA section 103 defines ‘‘residential mortgage loan’’ to mean, with some exceptions including open-end credit plans, ‘‘any consumer credit transaction that is secured by a mortgage, deed of trust, or other equivalent consensual security interest on a dwelling or on residential real property that includes a dwelling.’’ 15 U.S.C. 1602(dd)(5). TILA section 129C also exempts certain residential mortgage loans from the ATR requirements. See, e.g., 15 U.S.C. 1639c(a)(8) (exempting reverse mortgages and temporary or bridge loans with a term of 12 months or less). 163 15 U.S.C. 1639c(a)(3). 164 78 FR 6408 (Jan. 30, 2013). 165 See id. at 6463. PO 00000 Frm 00020 Fmt 4701 Sfmt 4702 on employment income when assessing the consumer’s ability to repay); (3) the monthly mortgage payment for the loan that the creditor is underwriting; (4) the monthly payment on any simultaneous loans secured by the same dwelling; (5) monthly mortgage-related obligations; (6) the consumer’s current debts, alimony, and child-support obligations; (7) the consumer’s monthly DTI ratio or residual income; and (8) the consumer’s credit history.166 The ATR/QM Rule generally requires a creditor to verify the information it relies on when determining a consumer’s repayment ability using reasonably reliable third-party records.167 For example, to verify the consumer’s income and assets, a creditor may use a tax-return transcript issued by the Internal Revenue Service or a variety of other records, such as filed tax returns, IRS Form W–2s, payroll statements, financial institution records, or other third-party documents.168 The ATR/QM Rule also defines categories of loans, called QMs, that are presumed to comply with the ATR requirement.169 Under the ATR/QM Rule, a creditor that makes a QM loan is deemed to have complied with ATR requirements presumptively or conclusively, which generally depends on whether the loan is ‘‘higher priced.’’ 170 The ATR/QM Rule defines several categories of QM loans. As 166 12 CFR 1026.43(c)(2). CFR 1026.43(c)(3)–(4). 168 12 CFR 1026.43(c)(4). TILA section 129C(a)(4) provides that, in order to safeguard against fraudulent reporting, any consideration of a consumer’s income history must include the verification of income using either (1) IRS transcripts of tax returns; or (2) an alternative method that quickly and effectively verifies income documentation by a third-party, subject to rules prescribed by the Bureau. In the January 2013 Final Rule, the Bureau implemented TILA section 129C(a)(4)(B) by adjusting the requirement to (1) require the creditor to use reasonably reliable thirdparty records, consistent with TILA section 129C(a)(4), rather than the ‘‘quickly and effectively’’ standard of TILA section 129C(a)(4)(B); and (2) provide examples of reasonably reliable records that a creditor can use to efficiently verify income, as well as assets. See 78 FR 6408, 6474 (Jan. 30, 2013). 169 15 U.S.C. 1639c(b)(1). 170 The ATR/QM Rule generally defines a ‘‘higher-priced’’ loan to mean a first-lien mortgage with an APR that exceeded APOR for a comparable transaction as of the date the interest rate was set by 1.5 or more percentage points; or a subordinatelien mortgage with an APR that exceeded APOR for a comparable transaction as of the date the interest rate was set by 3.5 or more percentage points. 12 CFR 1026.43(b)(4). A creditor that makes a QM loan that is not ‘‘higher priced’’ is entitled to a conclusive presumption that it has complied with the ATR/QM Rule—i.e., the creditor receives a safe harbor from liability. 12 CFR 1026.43(e)(1)(i). A creditor that makes a loan that meets the standards for a QM loan but is ‘‘higher priced’’ is entitled to a rebuttable presumption that it has complied with the ATR/QM Rule. 12 CFR 1026.43(e)(1)(ii). 167 12 E:\FR\FM\11MYP2.SGM 11MYP2 Federal Register / Vol. 88, No. 91 / Thursday, May 11, 2023 / Proposed Rules relevant here, those categories include General QM, Small Creditor QM, Seasoned QM, and Balloon-Payment QM loans.171 QM Definitions ddrumheller on DSK120RN23PROD with PROPOSALS2 One category of QM loans defined by the ATR/QM Rule consists of ‘‘General QM loans.’’ 172 The January 2013 Final Rule provided that a loan was a General QM loan if: • The loan did not have negativeamortization, interest-only, or balloonpayment features, a term that exceeds 30 years, or points and fees that exceed specified limits; 173 • The creditor underwrote the loan based on a fully amortizing schedule using the maximum rate permitted during the first five years; 174 • The creditor considered and verified the consumer’s income and debt obligations in accordance with appendix Q; 175 and • The consumer’s DTI ratio was no more than 43 percent, determined in accordance with appendix Q.176 The Bureau amended the General QM definition on December 10, 2020 (General QM Final Rule).177 The General QM Final Rule amended Regulation Z to remove the General QM loan definition’s DTI limit (and 171 12 CFR 1026.43(c), (e), (f). TILA section 129C(b)(3)(B)(ii) directs HUD, the Department of Veterans Affairs (VA), the Department of Agriculture (USDA), and the Rural Housing Service (RHS) to prescribe rules defining the types of loans they insure, guarantee, or administer, as the case may be, that are QMs. Section 1026.43(e)(4) provides that, notwithstanding paragraph § 1026.43.43(e)(2), a QM is a covered transaction that is defined as a QM by HUD under 24 CFR 201.7 and 24 CFR 203.19, VA under 38 CFR 36.4300 and 38 CFR 36.4500, or USDA under 7 CFR 3555.109. In addition, section 101 of the EGRRCPA amended TILA to provide protection from liability for insured depository institutions and insured credit unions with assets below $10 billion with respect to certain ATR requirements regarding residential mortgage loans. The Bureau is not aware of any PACE creditors that would qualify for protection under these provisions, and these provisions are not addressed in this proposed rule. 172 Another temporary category of QMs defined by the ATR/QM Rule, Temporary GSE QMs, expired on October 1, 2022. 173 12 CFR 1026.43(e)(2)(i)–(iii). 174 12 CFR 1026.43(e)(2)(iv). 175 12 CFR 1026.43(e)(2)(v). 176 12 CFR 1026.43(e)(2)(vi). Appendix Q contained standards for calculating and verifying debt and income for purposes of determining whether a mortgage satisfied the 43 percent DTI limit for General QM loans. The standards in appendix Q were adapted from guidelines maintained by the Federal Housing Administration (FHA) of HUD when the January 2013 Final Rule was issued. 78 FR 6408, 6527–28 (Jan. 30, 2013) (noting that appendix Q incorporates, with certain modifications, the definitions and standards in HUD Handbook 4155.1, Mortgage Credit Analysis for Mortgage Insurance on One-to-Four-Unit Mortgage Loans). 177 85 FR 86308 (Dec. 29, 2020). VerDate Sep<11>2014 17:44 May 10, 2023 Jkt 259001 appendix Q) and replace it with limits based on the loan’s pricing. For nonPACE mortgages, loan pricing in general is strongly correlated with early delinquency rates, which the General QM Final Rule used as a proxy for repayment ability.178 The Bureau concluded that a comparison of a loan’s APR to the APOR for a comparable transaction is a more holistic and flexible indicator of a consumer’s ability to repay than DTI alone.179 The Bureau further concluded that the bright-line pricing thresholds established in the General QM Final Rule strike an appropriate balance between ensuring consumers’ ability to repay and ensuring access to responsible, affordable mortgage credit.180 Under the amended rule, a loan meets the General QM loan definition only if the APR exceeds the APOR for a comparable transaction by less than 2.25 percentage points, with higher thresholds for loans with smaller loan amounts, for certain manufactured housing loans, and for subordinate-lien transactions.181 In May 2013, the Bureau amended the ATR/QM Rule to add, among other things, a new QM category for covered transactions that are originated by creditors that meet certain size criteria and that satisfy certain other requirements (the Small Creditor QM).182 Those requirements include many that apply to General QMs, with some exceptions. Specifically, Small Creditor QMs are not subject to the pricing threshold for QM status, and the threshold for determining whether Small Creditor QMs are higher-priced covered transactions, and thus qualify for the QM safe harbor or rebuttable presumption, is higher than the threshold for General QMs.183 In addition, Small Creditor QMs must be held in portfolio for three years (a 178 See part IX.A for a discussion of why these dynamics differ for PACE transactions. 179 85 FR 86308, 86317 (Dec. 29, 2020). 180 Id. 181 Id. at 86367. 182 78 FR 35430 (June 12, 2013). The Bureau made several amendments to the Small Creditor QM provisions in 2015. 80 FR 59944 (Oct. 2, 2015). 183 QMs are generally considered to be higher priced if they have an APR that exceeds the applicable APOR by at least 1.5 percentage points for first-lien loans and at least 3.5 percentage points for subordinate-lien loans. In contrast, Small Creditor QMs are only considered higher priced if the APR exceeds APOR by at least 3.5 percentage points for either a first- or subordinate-lien loan. 12 CFR 1026.43(b)(4). The same is true for another QM definition that permits certain creditors operating in rural or underserved areas to originate QMs with a balloon payment provided that the loans meet certain other criteria (Balloon Payment QM loans). QMs that are higher priced enjoy only a rebuttable presumption of compliance with the ATR requirements, whereas QMs that are not higher priced enjoy a safe harbor. PO 00000 Frm 00021 Fmt 4701 Sfmt 4702 30407 requirement that does not apply to General QMs).184 In December 2020, the Bureau created a new category of QMs (Seasoned QMs) for first-lien, fixed-rate covered transactions that have met certain performance requirements, are held in portfolio by the originating creditor or first purchaser for a 36-month period, comply with general restrictions on product features and points and fees, and meet certain underwriting requirements.185 To qualify, a transaction generally must have no more than two delinquencies of 30 or more days and no delinquencies of 60 or more days at the end of the seasoning period of 36 months beginning on the date on which the first periodic payment is due.186 The Bureau found that if combined with certain other factors, successful loan performance over a number of years indicates sufficient certainty to presume that loans were originated in compliance with the ATR/ QM Rule.187 TILA section 129C(b)(2)(E)(iv)(I) granted the Bureau the discretion to create a special provision allowing origination of balloon-payment QMs, which it implemented in the January 2013 Final Rule.188 As directed by Congress, the Bureau considered the issues facing small creditors in rural and underserved areas and determined that it was appropriate to exercise its discretion under TILA to reduce burdens on certain small creditors that operate predominantly in rural or underserved areas. Accordingly, the Bureau established a special provision allowing these creditors to originate balloon-payment QMs, even though balloon-payment mortgages are otherwise precluded from being considered QMs.189 43(b) Definitions Section 1026.43(b) sets forth certain definitions for purposes § 1026.43. The Bureau is proposing to amend the commentary to § 1026.43(b)(8), regarding the existing definition of mortgage-related obligations, to clarify the treatment of payments for preexisting PACE transactions. The Bureau is also proposing two new definitions in § 1026.43(b)(14) and (b)(15). Under the proposal, § 1026.43(b)(14) would define 184 12 CFR 1026.43(e)(5)(ii). FR 86402 (Dec. 29, 2020). 186 12 CFR 1026.43(e)(7)(ii). 187 85 FR 86402, 86415 (Dec. 29, 2020). 188 78 FR 6408, 6538 (Jan. 30, 2013). 189 Id. The Bureau further amended the Regulation Z requirements for balloon-payment QMs in response to the HELP Rural Communities Act in October 2015. 81 FR 16074 (Mar. 25, 2016); see Public Law 114–94, 129 Stat. 1312 (2015). 185 85 E:\FR\FM\11MYP2.SGM 11MYP2 30408 Federal Register / Vol. 88, No. 91 / Thursday, May 11, 2023 / Proposed Rules PACE company, and § 1026.43(b)(15) would define PACE transaction.190 43(b)(8) Mortgage-Related Obligations Section 1026.43(b)(8) defines ‘‘mortgage-related obligations’’ to include property taxes, among other things. In turn, § 1026.43(c)(2)(v) requires a creditor to consider the consumer’s monthly payment for mortgage-related obligations in making the repayment ability determination required under § 1026.43(c)(1). The Bureau proposes to amend comment 43(b)(8)–2 to explicitly state that payments for pre-existing PACE transactions are considered property taxes for purposes of § 1026.43(b)(8). The intent of this proposed amendment is to ensure that it is clear that a creditor must consider payments for pre-existing PACE transactions as mortgage-related obligations. The proposed amendment to comment 43(b)(8)–2 is consistent with the existing rule but adds an explicit reference to PACE transactions for clarity. Comment 43(b)(8)–2 already provides that all obligations that are related to the ownership or use of real property and paid to a taxing authority, whether on a monthly, quarterly, annual, or other basis, are property taxes for purposes of § 1026.43(b)(8). PACE transactions are related to the ownership or use of real property and are paid to a taxing authority. In addition, the existing comment provides as an example that taxes, assessments, and surcharges imposed by independent districts established or allowed by the government with the authority to impose levies on properties within the district to fund a special purpose qualify as property taxes for purposes of § 1026.43(b)(8). The Bureau seeks comment on this proposed amendment. ddrumheller on DSK120RN23PROD with PROPOSALS2 43(b)(14) PACE Company To provide clarity and for ease of reference, the Bureau proposes to add a definition of ‘‘PACE company’’ in § 1026.43(b)(14). As discussed in part II.A above, most local governments that engage in PACE financing rely on private companies to administer PACE programs. PACE companies are generally responsible for operating the applicable programs, including marketing PACE financing to consumers, administering originations, 190 If the Bureau finalizes the new definitions in proposed § 1026.43(b)(14) and (b)(15), the final rule would add the new definitions into § 1026.43(b) where they belong alphabetically in that paragraph and would renumber existing definitions as needed and make conforming technical adjustments to cross-references to those definitions to reflect the renumbering changes. VerDate Sep<11>2014 17:44 May 10, 2023 Jkt 259001 making decisions about whether to extend the loan, and enlisting home improvement contractors that will implement the projects to facilitate the originations. PACE companies thus play an extensive role in PACE transactions, and as discussed in the section-bysection analysis of § 1026.43(i) below, the Bureau proposes to apply the requirements of § 1026.43 to any PACE company that is substantially involved in making the credit decision.191 Proposed § 1026.43(b)(14) would provide that PACE company means a person, other than a natural person or a government unit, that administers the program through which a consumer applies for or obtains a PACE transaction. Proposed comment 43(b)(14)–1 would provide indicia of whether a person is administering a PACE financing program. The Bureau intends this proposed provision and associated commentary to target the private companies involved in running the PACE programs as described above—the Bureau understands that it would not apply to home improvement contractors, who may be natural persons and who generally do not administer the PACE program. The CFPB seeks comment on this proposed definition and, in particular, on whether it accurately identifies the intended entities and whether the use of this term accounts for the unique nature of PACE financing. 43(b)(15) PACE Transaction Section 307 of the EGRRCPA amended TILA to define the term ‘‘Property Assessed Clean Energy financing’’ for purposes of TILA section 129C(b)(3)(C) as financing to cover the costs of home improvements that results in a tax assessment on the real property of the consumer.192 The Bureau proposes to add a definition for the term ‘‘PACE transaction’’ to Regulation Z that is based on the EGRRCPA section 307 definition. Specifically, proposed § 1026.43(b)(15) would provide that a PACE transaction means financing to cover the costs of home improvements that results in a tax assessment on the real property of the consumer. The Bureau seeks comment on this proposed definition. 43(c) Repayment Ability Section 307 of the EGRRCPA directed the Bureau to prescribe regulations that carry out the purposes of TILA’s ATR 191 The Bureau also proposes to apply section 130 of TILA, 15 U.S.C. 1640, to covered PACE companies that fail to comply with § 1026.43. See section-by-section analysis of proposed § 1026.43(i)(3). 192 See 15 U.S.C. 1639C(b)(3)(C)(i). PO 00000 Frm 00022 Fmt 4701 Sfmt 4702 provisions for residential mortgage loans with respect to PACE transactions. The Bureau has preliminarily concluded that the existing ATR framework set out in § 1026.43(c) effectively carries out the purposes of TILA’s ATR provisions and is generally appropriate for PACE transactions, with adjustments to the commentary to § 1026.43(c) and the addition of the provisions set out in § 1026.43(i) described below. As described above, the existing ATR requirement in § 1026.43(c)(1) requires a creditor to make a reasonable and good faith determination of a consumer’s ability to repay at or before consummation of a covered mortgage loan. Section 1026.43(c)(2) provides eight factors that a creditor must consider in making the repayment ability determination, while § 1026.43(c)(3) and (c)(4) generally requires a creditor to verify the information that the creditor relies on in determining a consumer’s repayment ability using reasonably reliable thirdparty records. These verification requirements are important to carrying out the purpose of TILA’s ATR provisions.193 TILA section 129C(a)(4) is intended to safeguard against fraudulent reporting and inaccurate underwriting, as the statute specifically notes that a creditor must verify a consumer’s income history ‘‘[i]n order to safeguard against fraudulent reporting.’’ These concerns appear to be heightened in the PACE market given the consumer protection issues observed by advocates and others, such that weakening the verification requirement in this context would be inappropriate. The Bureau believes the current ATR provisions, which provide minimum requirements for creditors making ability-to-repay determinations but do not dictate particular underwriting models, are similarly appropriate for PACE transactions, subject to certain proposed adjustments specific to PACE transactions discussed below. Applying existing § 1026.43(c) to PACE transactions will allow PACE creditors to account for the particular features of the PACE transactions that they originate when assessing a consumer’s ability to repay. The Bureau’s ATR framework is designed to be flexible, to allow creditors to develop 193 See 78 FR 6408, 6475 (Jan 30. 2013) (‘‘One of the purposes of TILA section 129C is to assure that consumers are offered and receive covered transactions on terms that reasonably reflect their ability to repay the loan. See TILA section 129B(a)(2). The Bureau believes that a creditor consulting reasonably reliable records is an effective means of verifying a consumer’s income and helps ensure that consumers are offered and receive loans on terms that reasonably reflect their repayment ability.’’). E:\FR\FM\11MYP2.SGM 11MYP2 Federal Register / Vol. 88, No. 91 / Thursday, May 11, 2023 / Proposed Rules and apply their own underwriting standards, and to permit creditors to consider the facts and circumstances of each individual extension of credit. The ATR provisions of Regulation Z also do not provide comprehensive underwriting standards to which creditors must adhere.194 For example, the rule and commentary do not specify how much income is needed to support a particular level of debt or how credit history should be weighed against other factors. So long as creditors consider the factors set forth in § 1026.43(c)(2) according to the requirements of § 1026.43(c), creditors are permitted to develop their own underwriting standards and make changes to those standards over time in response to empirical information and changing economic and other conditions.195 As such, the Bureau preliminarily believes that the existing ATR framework provides PACE creditors sufficient operational flexibility while still requiring compliance with the general requirement to make a reasonable and good faith determination at or before consummation that the consumer will have a reasonable ability to repay the loan according to its terms. For these reasons, the Bureau proposes to apply existing § 1026.43(c) to PACE transactions, with adjustments to the commentary to § 1026.43(c) and the addition of the provisions set out in § 1026.43(i) described below. The Bureau seeks comment on these proposed changes. In particular, the Bureau seeks comment on whether § 1026.43(c) should be amended to permit or require a creditor to consider the effect of potential savings resulting from the home improvement project financed in the PACE transaction (such as lowered utility payments). 43(c)(2) Basis for Determination ddrumheller on DSK120RN23PROD with PROPOSALS2 43(c)(2)(iv) Section 1026.43(c)(2) sets forth factors creditors must consider when making the ATR determination required under § 1026.43(c)(1), and the accompanying commentary provides guidance regarding these factors. Section 1026.43(c)(2)(iv) provides that one factor a creditor must consider is the consumer’s payment obligation on any simultaneous loan that the creditor knows or has reason to know will be made at or before consummation of the covered transaction. The Bureau proposes to add new comment 43(c)(2)(iv)–4 to provide additional guidance to creditors originating PACE 194 See 195 See comment 43(c)(1)–1. id.; see also comment 43(c)(2)–1. VerDate Sep<11>2014 17:44 May 10, 2023 Jkt 259001 transactions. Proposed comment 43(c)(2)(iv)–4 would provide that a creditor originating a PACE transaction knows or has reason to know of any simultaneous loans that are PACE transactions if the transactions are included in any existing database or registry of PACE transactions that includes the geographic area in which the property is located and to which the creditor has access. Proposed comment 43(c)(2)(iv)–4 is intended to help address concerns about the prevalence of ‘‘loan splitting’’ and ‘‘loan stacking’’ in the PACE industry that were raised in ANPR comments from consumer groups and other stakeholders. As described in the comments, loan splitting refers to the practice of a contractor dividing a loan for one consumer into more than one transaction to make each transaction appear more affordable, while loan stacking refers to contractors returning to a PACE borrower to offer additional PACE financing (often through different creditors). The Bureau’s statistical analysis indicates that a little more than 13 percent of PACE borrowers between 2014 and 2020 received multiple PACE transactions, with many of these transactions originated simultaneously or within a few months of each other, which could be indicative of loan splitting or stacking.196 About onefourth of PACE borrowers with multiple PACE transactions consummated multiple transactions in the same month, and about three-quarters of PACE borrowers with multiple PACE loans consummated more than one transaction within the same 6-month period.197 In some cases, the creditor originating the second or successive PACE transaction might not be aware of previous transactions, due to delays in recording. Given these concerns and the increased possibility of a PACE borrower having previously entered a PACE transaction, the Bureau preliminarily concludes that it is practical and appropriate for a PACE creditor to search any existing database or registry of PACE transactions that includes the geographic area in which the property is located and to which the creditor has access. A PACE industry association has recommended that market participants create a PACErelated lien registry for PACE companies to review when underwriting consumers for PACE transactions.198 In addition, 196 See PACE Report, supra note 12, at 12, 24. id. at 24. 198 PACENation, Residential Property Assessed Clean Energy (R–PACE) State and Local Consumer Protection Policy Principles, at 3 (Oct. 21, 2021), 197 See PO 00000 Frm 00023 Fmt 4701 Sfmt 4702 30409 the Bureau understands that at least one active PACE State has contemplated establishing a real-time registry or database system for tracking PACE assessments.199 The Bureau believes that if a database of PACE transactions that covers the geographic area in which the property is located exists, proposed comment 43(c)(2)(iv)–4 would lead PACE creditors to discover more simultaneous loans, which could reduce the extent of loan splitting and loan stacking. The Bureau is not proposing to apply this provision to creditors originating non-PACE mortgages, because the origination of a PACE loan and a non-PACE mortgage in short succession does not appear to raise the same concerns regarding loan splitting or loan stacking. Additionally, it is relatively rare for a new mortgage borrower to have a pre-existing PACE transaction on the same property, since PACE transactions are less common than non-PACE mortgages and a property sale is unlikely to be completed unless any existing PACE loan has already been paid off. The Bureau seeks comment on this proposal. 43(c)(3) Verification Using Third-Party Records In general, a creditor must verify the information that the creditor relies on in determining a consumer’s repayment ability under § 1026.43(c)(2) using reasonably reliable third-party records. The Bureau proposes to amend comment 43(c)(3)–5 to clarify how this requirement applies to consumers with existing PACE transactions.200 Current comment 43(c)(3)–5 provides that, ‘‘[w]ith respect to the verification of mortgage-related obligations that are property taxes required to be considered under § 1026.43(c)(2)(v), a record is reasonably reliable if the information in the record was provided by a governmental organization, such as a taxing authority or local government.’’ Additionally, the comment provides that the creditor complies with § 1026.43(c)(2)(v) by relying on property taxes referenced in the title report if the source of the property tax information was a local taxing authority. The Bureau proposes to amend comment 43(c)(3)–5 to clarify that a https://www.pacenation.org/wp-content/uploads/ 2021/11/PACENation-R-PACE-ConsumerProtection-Policy-Principles-ADOPTED-October21.2021.pdf. 199 See Cal. Fin. Code sec. 22693. 200 As discussed above, the Bureau is proposing to clarify that payments for pre-existing PACE transactions are considered a property tax and therefore mortgage-related obligations under § 1026.43(b)(8). See discussion of comment 43(b)(8)–2 in section-by-section analysis of proposed § 1026.43(b)(8) supra. E:\FR\FM\11MYP2.SGM 11MYP2 30410 Federal Register / Vol. 88, No. 91 / Thursday, May 11, 2023 / Proposed Rules creditor that knows or has reason to know that a consumer has an existing PACE transaction does not comply with § 1026.43(c)(2)(v) by relying on information provided by a governmental organization, either directly or indirectly, if the information provided does not reflect the PACE transaction. A PACE creditor might know or have reason to know of a PACE transaction that is about to be originated and that, therefore, will not appear in property tax records or property tax information in a title report. For example, a PACE creditor might learn of the existing PACE transaction by searching a relevant database of PACE transactions, or a consumer might inform the creditor of the PACE transaction in application materials. In those circumstances, the proposed amendment provides that a creditor would not comply with the requirement to verify mortgage-related obligations using reasonably reliable third-party records by verifying the consumer’s property taxes solely using property tax records or property tax information in a title report that do not include the existing PACE transaction. The CFPB seeks comment on this proposed amendment. 43(i) PACE Transactions ddrumheller on DSK120RN23PROD with PROPOSALS2 43(i)(1) Many consumers who obtain PACE transactions have pre-existing mortgages that require the payment of property taxes through an escrow account. Consumers with such pre-existing mortgages will typically also make their PACE transaction payments through their existing escrow account. Under certain circumstances, the addition of payments for a PACE transaction can result in a sharp increase in the consumer’s escrow payments. This increase is relevant to the consumer’s ability to repay the PACE transaction. The CFPB preliminarily concludes that, for consumers who pay their property taxes through an escrow account, a creditor’s reasonable and good faith determination of a consumer’s ability to repay a PACE transaction according to its terms must include the creditor’s consideration of the effect of incorporating a PACE transaction into a consumer’s escrow payments. For the reasons discussed below, the Bureau proposes to add new § 1026.43(i)(1) to require that a creditor making the repayment ability determination under § 1026.43(c)(1) and (2) also consider any monthly payments the consumer will have to pay into the consumer’s escrow account as a result of the PACE transaction that are in excess of the VerDate Sep<11>2014 17:44 May 10, 2023 Jkt 259001 monthly payment amount considered under § 1026.43(c)(2)(iii). One unique aspect of PACE transactions is that, unlike traditional mortgages, consumers may pay them through an escrow account on another mortgage loan. PACE transactions are also distinct from non-PACE mortgage loans in several other respects, including with regard to the timing of when the first PACE payment is due and their annual or semi-annual repayment schedule. These distinct features of PACE transactions can result in significant payment spikes for consumers. Consumers who are required to make their PACE payments through their existing escrow account have faced particularly long delays before payments have come due on their PACE transaction.201 These consumers only begin repaying their PACE transaction once their mortgage servicer conducts an escrow account analysis and adjusts their monthly payment to reflect the addition of the PACE transaction to their property tax bill. A servicer must conduct an escrow account analysis every 12 months but may, and in some cases must, do so more frequently. The Bureau understands that the timing of this analysis—and whether the servicer knows of the PACE transaction at the time of the first analysis following consummation—can have a significant impact on the amount of the consumer’s initial escrow payments once adjusted to incorporate the PACE transaction.202 For example, assume a PACE transaction was consummated in June 2021, and the first PACE payment was due November 1, 2021. If the servicer had not learned of the PACE transaction before receiving a tax bill for the November 1, 2021 payment, the PACE transaction would not have been promptly incorporated into the consumer’s escrow account. Assuming no funds were set aside to pre-pay the consumer’s escrow account, in this example the servicer’s next escrow account analysis might newly account for (1) the initial payment due November 1, 2021 for which no escrow funds were previously collected, (2) the upcoming PACE payment that would be due November 1, 2022, and (3) any potential adjustments to the escrow 201 Regulation X provides that an escrow account is any account established or controlled by a servicer on behalf of a borrower to pay taxes, insurance premiums, or other charges with respect to a federally related mortgage loan, including those charges that the servicer and borrower agreed to have the servicer collect and pay. 12 CFR 1024.17(b). 202 See generally 12 CFR 1024.17(c)(3) (discussing annual escrow account analyses). PO 00000 Frm 00024 Fmt 4701 Sfmt 4702 account cushion attributable to the PACE transaction.203 In this example, a consumer could experience a sharp and unexpected increase in their initial escrow payments beyond the amount that would have been owed had the PACE transaction been incorporated into escrow promptly. This payment spike would undercut a central benefit of escrow accounts to consumers in spreading out large obligations into more manageable, regular payments. Consumer group commenters to the ANPR stated that the delay in this adjustment of the escrow account means that the first year or two of a consumer’s increased escrow payments to account for the PACE transaction will likely be higher than in subsequent years due to significant shortages in the escrow account. These commenters expressed that if, for example, the servicer analyzes the escrow account just before property tax bills are issued, the servicer will advance the full property tax amount, including the amount owed on the PACE transaction, but the escrow account will then carry a deficiency (or negative balance due to the prior year’s PACE payment) going forward. They stated further that, at the next escrow account analysis, the servicer will calculate the new escrow payment by adding to the base payment an amount sufficient to repay the deficiency, an amount to cover the upcoming year’s PACE payment that was not accounted for in the prior year’s escrow analysis (an escrow shortage), and a reserve cushion of no greater than one-sixth (1⁄6) of the estimated total annual payments from the account.204 A State trade association indicated that in general, it is not uncommon for a PACE transaction to double a consumer’s monthly escrow payment because the PACE transaction amount could be as much or more than the existing property tax. This commenter stated that the escrow adjustment to bring the escrow account current after one year, provide for the next PACE payment, and fund a cushion can potentially triple the consumer’s monthly escrow payment amount for a 12-month period. The CFPB understands that at least some PACE consumers have had difficulty repaying their PACE transaction because of this substantial and unanticipated spike in their escrow 203 Under 12 CFR 1024.17(c)(1), servicer may charge a cushion of no greater than one-sixth (1⁄6) of the estimated total annual payments from the account. 204 A deficiency is the amount of a negative balance in an escrow account, while a shortage is an amount by which a current escrow account balance falls short of the target balance at the time of escrow analysis. 12 CFR 1024.17(b). E:\FR\FM\11MYP2.SGM 11MYP2 ddrumheller on DSK120RN23PROD with PROPOSALS2 Federal Register / Vol. 88, No. 91 / Thursday, May 11, 2023 / Proposed Rules payments. Some consumer group commenters to the ANPR asserted that the addition of a PACE transaction to the property tax bill has frequently driven PACE consumers’ escrow payments to unaffordable levels that result in many PACE consumers being unable to make their full mortgage payments and going into default and even foreclosure. These commenters cited as examples a homeowner in Stockton, California, who saw his escrow payment increase by almost $500 a month, and an older adult homeowner in Oakland, California, whose monthly fixed income was only about $1,000 and faced an increase in her escrow payment of over $900. The Bureau preliminarily concludes that a creditor can only make a reasonable and good faith determination of the consumer’s ability to repay the PACE transaction by considering the potential spike in the consumer’s escrow payments it may cause. As described above, commenters to the ANPR expressed that the payment spike that can result when a PACE transaction is added to a consumer’s property tax bill frequently increases their escrow payments to unaffordable levels, which could result in the consumer’s default and even tax sale or foreclosure. The CFPB thus preliminarily concludes that it is consistent with the purposes of the ATR requirements to require a PACE creditor to consider whether a consumer who will pay their PACE payments through an escrow account will be able to make their monthly escrow payment once the escrow payment amount is adjusted to account for any potential deficiency or shortage and an escrow cushion attributable to the PACE transaction. Although the initial increase in the escrow payment would not last for the entire remaining duration of the PACE transaction, it could last for a year or longer and thus have a direct bearing on the consumer’s ability to afford their PACE transaction during the timeframe in which this higher amount is owed. This short-term payment spike is also foreseeable by PACE creditors at consummation. The CFPB also preliminarily concludes that the heightened consumer uncertainty that may arise for PACE transactions paid through escrow accounts as compared to other types of covered transactions supports this proposal. The Bureau has heard anecdotally and from commenters to the ANPR that PACE consumers are often surprised by and unprepared for the large payment spike. A few consumer group commenters to the ANPR asserted that the information provided by PACE programs regarding the relationship VerDate Sep<11>2014 17:44 May 10, 2023 Jkt 259001 between PACE financing and escrow accounts is insufficient to prepare consumers for the payment shock—or equip them to prevent it—when there is a delay between consummation and when the servicer learns of the PACE transaction and adjusts the escrow payment.205 The Bureau is concerned that the consumer uncertainty that can arise from the lack of information regarding how escrow accounts work in the context of PACE transactions could be further compounded by the lack of notice to consumers regarding when the escrow payments incorporating the PACE transactions will begin. The uncertainty that PACE consumers with escrow accounts experience regarding how much their escrow payments will increase because of their PACE transaction and when those increases will occur may persist even with the proposed disclosures and other protections that would be afforded under the proposal. Accordingly, the CFPB expects that the uniquely unpredictable and complex nature of the initial PACE payment obligations could make it challenging for these consumers to accurately track the amount owed as a result of their PACE transaction and set aside an amount sufficient to cover the higher initial payments once the escrow account is adjusted. For these reasons, the Bureau proposes to add new § 1026.43(i)(1). Section 1026.43(i)(1) would require that, for PACE transactions extended to consumers who pay their property taxes through an escrow account, in making the repayment ability determination required under § 1026.43(c)(1) and (c)(2), a creditor must consider the factors identified in § 1026.43(c)(2)(i) through (viii) and also must consider any monthly payments that the creditor knows or has reason to know the consumer will have to pay into any escrow account as a result of the PACE transaction that are in excess of the monthly payment amount considered under § 1026.43(c)(2)(iii). The CFPB preliminarily concludes that proposed § 1026.43(i)(1) would provide an appropriately calibrated means to address concerns about a consumer’s repayment ability when incorporation of the PACE transaction into the escrow payments could result in a sharp payment increase. As described above, 205 As an example, these commenters stated that California’s financing estimate and disclosure includes the following advice: ‘‘If you pay your taxes through an impound account you should notify your mortgage lender, so that your monthly mortgage payment can be adjusted by your mortgage lender to cover your increased property tax bill.’’ Cal. Sts. & Hwys. Code sec. 5898.17. PO 00000 Frm 00025 Fmt 4701 Sfmt 4702 30411 the Bureau preliminarily concludes that it would not be reasonable for a creditor to make an ATR determination while ignoring a potentially significant and unexpected spike in the consumer’s escrow payments once adjusted to account for the PACE transaction. At the same time, this potential payment spike would not last for the duration of the PACE transaction. Creditors would be required to consider any monthly payments that are in excess of the monthly payment amount considered under § 1026.43(c)(2)(iii), but they would not need to assume these higher payments would be owed for the entire duration of the loan. Creditors would also not be required to calculate this amount as part of the consumer’s monthly payment amount for purposes of § 1026.43(c)(5) or to include the amount considered under proposed § 1026.43(i)(1) in their DTI or residual income calculations required under § 1026.43(c)(2)(vii) but could do so at their option as one possible means of complying with proposed § 1026.43(i)(1). The Bureau expects the proposal would provide an appropriate means for creditors to consider this limited duration, but potentially significant PACE-related obligation, faced by consumers who pay through an escrow account. Proposed § 1026.43(i)(1)(i) and (ii) would provide additional detail on what factors creditors must take into account when considering any monthly payments that the creditor knows or has reason to know the consumer will have to pay into the consumer’s escrow account as a result of the PACE transaction that are in excess of the monthly payment amount considered under § 1026.43(c)(2)(iii). Under the escrow requirements in Regulation X, servicers are permitted to charge an additional amount to maintain a cushion of no greater than one-sixth (1⁄6) of the estimated total annual payments from the escrow account,206 and the Bureau understands that servicers frequently charge the full allowable amount of this cushion. Accordingly, proposed § 1026.43(i)(1)(i) would provide that, in making the consideration required by § 1026.43(i)(1), creditors must take into account the cushion of one-sixth (1⁄6) of the estimated total annual payments attributable to the PACE transaction from the escrow account that the servicer may charge under 12 CFR 1024.17(c)(1), unless the creditor reasonably expects that no such cushion will be required or unless the creditor reasonably expects that a different 206 12 E:\FR\FM\11MYP2.SGM CFR 1024.17(c)(1). 11MYP2 ddrumheller on DSK120RN23PROD with PROPOSALS2 30412 Federal Register / Vol. 88, No. 91 / Thursday, May 11, 2023 / Proposed Rules cushion amount will be required, in which case the creditor must use that amount. The Bureau preliminarily concludes that it is appropriate to require consideration of this cushion for PACE transactions given the unique potential for consumer uncertainty regarding the timing and amount of the new, higher escrow payments once adjusted to include the PACE transaction. Proposed § 1026.43(i)(1)(ii) would address specifically the payment spike that can result from a delay in incorporating the PACE transaction into the consumer’s escrow payments. It would require that in considering the amount specified by § 1026.43(i)(1), if the timing for when the servicer is expected to learn of the PACE transaction is likely to result in a shortage or deficiency in the consumer’s escrow account, the creditor must take into account the expected effect of any such shortage or deficiency on the monthly payment that the consumer will be required to pay into the consumer’s escrow account. There may be a significant time lag between when a PACE transaction is consummated and when the first escrow payment reflecting the PACE transaction comes due. As commenters to the ANPR noted, this delay could result in consumers incurring an escrow deficiency and shortage that would lead to significantly higher escrow payments than otherwise would have been required had the PACE transaction been incorporated promptly into the consumer’s escrow payments. The Bureau understands that the timing of when the servicer is expected to learn of the PACE transaction can affect the existence and amount of such a deficiency or shortage. This, in turn, would affect the monthly payment that the consumer is required to pay into their escrow account and the amount that would be considered under proposed § 1026.43(i)(1). As described above, when the servicer is expected to learn of the PACE transaction will depend, in part, on whether the servicer is informed of the covered PACE transaction at or prior to consummation. For example, assume a PACE transaction is consummated in June, the first payment is due November 1 of the same year, and the consumer has an escrow account. The creditor does not notify the servicer of the PACE transaction at consummation and no funds are allocated to pre-pay the consumer’s escrow account for any payments related to the PACE transaction. If the creditor considers the consumer’s monthly payment on the PACE transaction under § 1026.43(c)(2)(iii) but fails to consider VerDate Sep<11>2014 17:44 May 10, 2023 Jkt 259001 that the consumer will be unable to pay the higher amount required for the initial escrow payments due to the onesixth (1⁄6) cushion and escrow shortage or deficiency, the creditor does not comply with § 1026.43(i)(1). On the other hand, if under the same circumstances the creditor notifies the servicer of the PACE transaction at consummation to ensure the transaction will be incorporated into the escrow account promptly and determines that, given the timing of the notification, there will not be an escrow shortage or deficiency, and also confirms the consumer will be able to make initial escrow payments even with the additional one-sixth (1⁄6) cushion, the creditor complies with § 1026.43(i)(1). For the purposes of proposed § 1026.43(i)(1)(ii), where a creditor provides prompt notification to the servicer of the PACE transaction, it appears that it would be reasonable for the creditor to assume that the time at which the servicer learns of the PACE transaction will likely not result in a shortage or deficiency in the consumer’s escrow account. The Bureau seeks comment on proposed new § 1026.43(i)(1) and specifically on whether it would provide additional clarity to include the above examples in commentary to § 1026.43(i)(1). Although the proposed rule would not require creditors to notify servicers of PACE transactions, the Bureau strongly encourages prompt notice to servicers of the PACE transaction and rapid adjustment of the escrow payments by servicers to minimize payment spikes for PACE consumers. As an alternative approach to addressing the potential delay in incorporating PACE payments into a consumer’s escrow account, the Bureau considered requiring all PACE creditors to notify the servicer at consummation that the consumer has entered into a PACE transaction. This requirement would eliminate one source of delay leading to payment shocks—the time between origination and the mortgage servicer learning of the PACE transaction. Such a requirement could reduce the likelihood that a payment spike would be significant enough to result in a consumer being unable to meet the payment obligations of the PACE transaction. The Bureau considered imposing this requirement pursuant to its authority under TILA section 129B(e)(1).207 This section authorizes the Bureau to prohibit or condition terms, acts, or practices relating to residential mortgage loans that the Bureau finds to be 207 15 PO 00000 U.S.C. 1639b(e)(1). Frm 00026 Fmt 4701 Sfmt 4702 abusive, unfair, deceptive, predatory, necessary or proper to ensure that responsible, affordable mortgage credit remains available to consumers in a manner consistent with the purposes of TILA sections 129B and 129C, necessary or proper to effectuate the purposes of TILA sections 129B and 129C, to prevent circumvention or evasion thereof, or to facilitate compliance with such sections, or are not in the interest of the borrower. The Bureau believes the act or practice of originating a PACE transaction for a consumer who has a pre-existing non-PACE mortgage and pays property taxes through an escrow account without notifying the servicer of the non-PACE mortgage may not be in the interest of the borrower because it could lead to a payment shock when the PACE transaction is incorporated into the borrower’s escrow account, as described above. The Bureau preliminarily concludes, however, that it is preferrable to address the payment shock risk associated with nonnotification under proposed § 1026.43(i)(1)(ii), which would grant PACE creditors greater flexibility to determine on a case-by-case basis how best to ensure that consumers have the ability to repay their PACE loans in light of escrow delays. The Bureau nevertheless seeks comment on this alternative approach and any advantages or disadvantages it has in comparison to proposed § 1026.43(i)(1)(ii).208 43(i)(2) EGRRCPA section 307 requires the Bureau to prescribe regulations that carry out the purposes of TILA section 129C(a) with respect to PACE transactions. For the reasons described below, the CFPB is proposing to apply the Regulation Z ATR framework to PACE transactions without providing for a QM presumption of compliance for PACE transactions. Specifically, proposed § 1026.43(i)(2) would provide that, notwithstanding § 1026.43(e)(2), (e)(5), (e)(7), or (f), a PACE transaction 208 Some commenters to the ANPR recommended requiring creditors to consider a consumer’s ability to repay the full annual or semi-annual PACE payment (rather than the monthly payment amount, as otherwise required by § 1026.43(c)(2)(iii)) based on a single month’s income. The Bureau declines to propose such amendments. The ATR requirements anticipate that covered transactions (and other obligations that must be considered) may feature non-monthly payments and require that these non-monthly payments be converted into monthly payment amounts. Comment 43(c)(5)(i); see, e.g., comment 43(c)(2)(v)–4. The Bureau thus does not believe that the non-monthly payment aspect of PACE transactions is unique and seeks to take an approach here that is consistent with how it has handled other non-monthly payments under the ATR rules. E:\FR\FM\11MYP2.SGM 11MYP2 ddrumheller on DSK120RN23PROD with PROPOSALS2 Federal Register / Vol. 88, No. 91 / Thursday, May 11, 2023 / Proposed Rules is not a QM as defined in § 1026.43. If finalized, this provision would exclude PACE transactions from eligibility for each of these QM categories in § 1026.43.209 For the reasons explained herein, the CFPB preliminarily concludes that it would be inappropriate to provide PACE transactions eligibility for a presumption of compliance with the ATR requirements, particularly given the inherent consumer risks presented by these transactions and the unique lack of creditor incentives to consider repayment ability in this new and evolving market. The purposes of the QM provisions of Regulation Z include ensuring that responsible, affordable mortgage credit remains available to consumers in a manner consistent with the purposes of TILA section 129C. The purpose of TILA section 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. QMs thus are intended only to be those mortgages for which it is reasonable to presume that the creditor made a reasonable determination of consumer repayment ability. The unique nature of PACE transactions, however, raises serious risks that undermine the Bureau’s confidence in the reasonableness of presuming creditor compliance with the ATR requirements. First, as described above, certain aspects of PACE financing create unique risks for consumers and can result in unaffordable payment spikes that can lead to delinquency, late fees, tax defaults, and foreclosure actions. PACE consumers who make their payments through an existing escrow account may face large and unpredictable payment spikes that make it difficult for them to repay their PACE obligation. For consumers who do not have an existing escrow account, the annual or semiannual payment cadence with payments due simultaneously with large property tax payments may render loans unaffordable. The super-priority lien status of PACE transactions also heightens the risk of negative outcomes for consumers. These characteristics suggest that it may be inappropriate to provide a presumption of compliance to PACE financing. TILA specifically excludes from the QM definition loans 209 The Bureau also appreciates that, as a consequence of this proposal, PACE transactions would not be permitted to include prepayment penalties. 15 U.S.C. 1639c(c); 12 CFR 1026.43(g). The Bureau understands that in general PACE transactions currently do not include these penalties. VerDate Sep<11>2014 17:44 May 10, 2023 Jkt 259001 with certain risky features and lending practices well known to present significant risks to consumers, including loans with negative amortization or interest-only features and (for the most part) balloon loans.210 The CFPB preliminarily concludes that certain aspects of PACE financing can result in unaffordable payments that present similar risks to consumers and therefore should not be granted QM status. Available data that show the broader effect that PACE transactions have on consumers’ finances further highlight affordability risks inherent in PACE financing. The Bureau’s PACE Report estimated the causal effect of a PACE transaction on consumer financial outcomes and found clear evidence that PACE transactions increase non-PACE mortgage delinquency rates.211 For consumers with a pre-existing nonPACE mortgage, getting a PACE transaction increased the probability of a 60-day delinquency on their nonPACE mortgage by 2.5 percentage points over a two-year period.212 For comparison, the average two-year nonPACE mortgage delinquency rate in the Bureau’s data was about 7.1 percent.213 The PACE Report finds that consumers in lower credit score tiers are most negatively affected by their PACE transaction, with consumers with subprime credit scores experiencing an increase in non-PACE mortgage delinquency almost two-and-a-half times the average effect, and more than 20 times the effect on consumers with super-prime credit scores.214 In addition, the PACE Report finds that a PACE loan increases the probability of both foreclosure and bankruptcy by about 0.5 percentage points over a two- year period.215 The CFPB also noted in its PACE Report that PACE transactions may impact other credit outcomes if consumers adjust their borrowing and spending behavior to prioritize their payments for mortgage and property taxes.216 The PACE Report finds that, for the 29 percent of PACE consumers without a pre-existing non-PACE mortgage, their average monthly credit card balance increased by over $800 over a two-year period following origination of the PACE transaction.217 The PACE Report concludes that consumers without a pre-existing nonPACE mortgage appear to respond to the cost of PACE transactions by increasingly relying on credit cards. Although not tied directly to the consumer’s performance on the PACE transaction, these results suggest that at least some consumers without a preexisting non-PACE mortgage have obtained PACE transactions that were unaffordable at the time of consummation. The CFPB preliminarily concludes that, even with the ATR requirements applied to PACE, affordability risks could remain due to PACE transactions’ inherent features that shield creditors from losses, as discussed below. In addition, the Bureau is concerned that creditors originating PACE transactions may possess a uniquely strong disincentive to adequately consider a consumer’s income or assets, debt obligations, alimony, child support, and monthly debt-to-income ratio or residual income, as required under the Bureau’s existing QM definitions, and under the Regulation Z 215 Id. at 33. Bureau stated in the PACE Report that it expected that credit card outcomes may be particularly relevant for PACE consumers without non-PACE mortgage loans. The PACE Report finds essentially no impact on credit card balances or delinquency rates for consumers with a pre-existing non-PACE mortgage in the two-year period following consummation of their PACE transaction. Id. at 41–42. In general, accumulating revolving debt following a new financial obligation may be probative of difficulty repaying the new obligation. Typically, the Bureau has not evaluated these outcomes in its rulemakings related to the QM categories due to both the availability of more direct measures of ability to repay in the non-PACE mortgage space and the greater data requirements for reliably attributing changes in revolving balances to the effect of a new financial obligation. The data would need to link non-mortgage outcomes to a mortgage application, follow such outcomes over time, and ideally have a similarly situated comparison group that does not receive the new mortgage loan, to capture how non-mortgage outcomes would have evolved absent the new loan. Although the data used in the PACE Report had all of these characteristics, the datasets used in the January 2013 Final Rule and General QM Final Rule and the Bureau’s 2018 ATR/QM Assessment, such as the HMDA data, generally lacked one or more of these necessary characteristics. 217 Id. at 41. 216 The 210 In the January 2013 Final Rule, the Bureau observed that the clear intent of Congress was to ensure that loans with QM status have safer features and terms than other loans. See, e.g., 78 FR 6407, 6426 (Jan. 30, 2013) (discussing ‘‘Congress’s clear intent to ensure that qualified mortgages are products with limited fees and more safe features’’); id. at 6524 (discussing ‘‘Congress’ apparent intent to provide incentives to creditors to make qualified mortgages, since they have less risky features and terms’’). 211 A large majority of PACE borrowers have a primary mortgage at the time of the PACE origination. For consumers with a mortgage, difficulty in paying the cost of a PACE loan will generally manifest in the data as a mortgage delinquency. Payments on PACE transactions are made with property tax payments, and many consumers pay their property taxes through their monthly mortgage payment. See PACE Report, supra note 12, at 3. 212 Id. at 26–27. As in the Bureau’s analysis of the General QM Final Rule, the PACE Report uses delinquencies of at least 60 days as the outcome of interest, to focus on sustained periods of delinquency that may indicate financial distress, rather than isolated incidents or late payments. 213 Id. at 27. 214 Id. at 37. PO 00000 Frm 00027 Fmt 4701 Sfmt 4702 30413 E:\FR\FM\11MYP2.SGM 11MYP2 ddrumheller on DSK120RN23PROD with PROPOSALS2 30414 Federal Register / Vol. 88, No. 91 / Thursday, May 11, 2023 / Proposed Rules ATR framework, because these creditors bear minimal risk of loss related to the transaction. As noted, under most PACE-enabling statutes, the liens securing PACE transactions take the priority of a property tax lien, which is superior to other liens on the property, such as mortgages, even if the other liens predated the PACE lien.218 In the event of foreclosure, any amount owed on the PACE transaction is paid by the foreclosure sale proceeds before any proceeds will flow to other debt. This, combined with relatively low average loan amounts, appears to significantly limit the economic risk faced by creditors originating PACE transactions. Further, as described in the PACE Report and in part IX.A below, mortgage servicers will often pay a property tax delinquency on behalf of a consumer regardless of whether the consumer had a pre-existing escrow account. This means for the more than seventy percent of PACE consumers with a pre-existing non-PACE mortgage, it is unlikely that the PACE transaction would ever cause a loss to the PACE creditor.219 In addition, the PACE transaction repayment obligation generally remains with the property when ownership transfers through foreclosure or otherwise. Thus, any balance that remains on the PACE transaction following a foreclosure sale will generally remain as a lien on the property for future homeowners to repay, further reducing the risk of loss to the creditor. These factors limit creditors’ economic incentives to determine repayment ability and raise risks of consumer harm that undermine the Bureau’s confidence in the reasonableness of presuming creditor compliance with the ATR requirements. Further, the PACE market is still relatively new and evolving. As discussed in part II.A, PACE has only existed for 15 years, and State PACE authorizing statues have been amended in a number of ways since the product originally emerged. Additionally, some major PACE companies have recently exited the industry. These factors, coupled with the other factors discussed above, make it particularly difficult to draw any inferences that would support providing PACE transactions a presumption of compliance with the ATR requirements. In addition to these concerns about PACE transactions receiving a QM presumption of compliance, the Bureau also preliminarily concludes that the criteria used to determine QM status 218 See, e.g., Cal. Sts. & Hwys. Code sec. 5898.30; Fla. Stat. Ann. Sec. 163.08(8). 219 PACE Report, supra note 12, at 18. VerDate Sep<11>2014 17:44 May 10, 2023 Jkt 259001 under the existing QM definitions in § 1026.43 would not be suitable for PACE transactions. In particular, the Bureau preliminarily concludes that the unique pricing model and risk structure associated with PACE transactions may make any price-based criterion— including the pricing thresholds set forth for the General QM category in § 1026.43(e)(2)(vi) and any PACEspecific thresholds the Bureau might develop—an inappropriate measure of a consumer’s repayment ability at consummation. In the General QM Final Rule, the Bureau noted that loan pricing for nonPACE mortgages reflects credit risk based on many factors, including DTI ratios and other factors that may also be relevant to determining ability to repay, such as credit scores, cash reserves, or residual income, and may be a more holistic indicator of ability to repay than DTI ratios alone.220 However, the pricing for PACE transactions has some notable differences from the non-PACE mortgage market.221 The available data on PACE financing demonstrates that the pricing for such transactions is tightly bunched, with about half of PACE transactions analyzed by the Bureau having APRs between 8.3 and 9 percent.222 The Bureau’s available data indicate that pricing is primarily correlated with State and property type, causing the Bureau to doubt that any pricing threshold could serve as an appropriate indicator of a consumer’s ability to repay.223 The PACE Report confirms that PACE transactions are not generally priced based on traditional measures of credit risk; it notes that APRs for PACE transactions are uncorrelated or very weakly correlated with traditional measures of risk such as loan balance, loan-to-value (LTV) ratio, or credit score.224 Rather, as discussed in part IX.A, the data on PACE pricing shows that it is consistent with the unique and substantial protection from loss enjoyed by parties involved with PACE transactions that is not common in the non-PACE mortgage market. Further, while the Bureau’s research indicates some differences in delinquency rates on non-PACE mortgages correlated to PACE rate spreads, it is not clear that the pricing thresholds for the General QM category 220 85 FR 86308, 86325, 86361 (Dec. 29, 2020). generally part II.A. 222 PACE Report, supra note 12, at 22. 223 For example, projects involving solar panels (comprising over a third of projects in California but less than 7 percent of projects in Florida) are the least expensive among project types, and projects in Florida had substantially lower APRs than projects in California. Id. at 22–23. 224 Id. 221 See PO 00000 Frm 00028 Fmt 4701 Sfmt 4702 would be predictive of early delinquency and could be used as a proxy for measuring whether a consumer had a reasonable ability to repay at the time the PACE transaction was consummated.225 According to the Bureau’s research, PACE transactions with rate spreads above 3.5 percent and between 2.25 and 3.49 percent increase delinquency rates on a consumer’s nonPACE mortgage by an estimated 2.8 percent and an estimated 1.4 percentage points, respectively, and that PACE transactions with rate spreads below 2.25 percent have almost zero effect on non-PACE mortgage delinquency.226 The CFPB preliminarily concludes that this data would not be sufficient to provide a basis for applying the current General QM pricing thresholds to PACE transactions even if a QM were not otherwise inappropriate for the reasons discussed above. As discussed in part IX.A below, the economic logic that normally supports pricing being based on risk is absent in the market for PACE transactions. As a result, even though the PACE Report finds that PACE transactions with low rate spreads had relatively better delinquency outcomes, it does not appear reasonable to presume that a creditor that offers a PACE transaction with a low APR has made a reasonable and good faith determination of a consumer’s ability to repay.227 The Bureau also preliminarily concludes that the QM categories in § 1026.43(e)(5), (e)(7), and (f) would not 225 Pursuant to the General QM Final Rule, a loan generally meets the General QM loan definition in § 1026.43(e)(2) only if the APR exceeds the APOR for a comparable transaction by less than 2.25, 3.5, or 6.5 percentage points, respectively, depending upon the loan amount, whether the loan is a first or subordinate lien, and whether the loan is secured by a manufactured home. Most PACE transactions would qualify for the highest pricing threshold for General QMs, 6.5 percent, which generally applies to transactions with loan amounts of less than $66,156 (indexed for inflation). 12 CFR 1026.43(e)(2)(vi)(A)–(F). 226 PACE Report, supra note 12, at 40. 227 The Bureau is also skeptical that defining a category of QMs for PACE transactions based on a specific DTI threshold would be suitable for PACE, given the risk factors described above. Moreover, the CFPB’s available evidence does not demonstrate a correlation between a PACE consumer’s DTI and non-PACE mortgage outcomes. The Bureau estimates that the effect of a PACE transaction on a consumer’s non-PACE mortgage is essentially the same for consumers with DTI ratios above and below 43 percent, a threshold commonly used in the mortgage market and, prior to the General QM Final Rule, a criterion for the General QM category. Id. at 48–49. In any event, even assuming that the data revealed a DTI threshold that was sufficiently predictive of early delinquency to serve as a proxy for whether a consumer had a reasonable ability to repay at the time of consummation, the Bureau doubts that a presumption of compliance would be appropriate given the unique characteristics of PACE transactions discussed above. E:\FR\FM\11MYP2.SGM 11MYP2 ddrumheller on DSK120RN23PROD with PROPOSALS2 Federal Register / Vol. 88, No. 91 / Thursday, May 11, 2023 / Proposed Rules be appropriate for PACE transactions for additional reasons beyond the inherent risk of these transactions. As discussed above, the Small Creditor QM category in § 1026.43(e)(5) extends QM status to covered transactions that are originated by creditors that meet certain size criteria and that satisfy certain other requirements. The Bureau created the Small Creditor QM category based on its determination that the characteristics of a small creditor—its small size, community-based focus, and commitment to relationship lending— and the incentives associated with portfolio lending together justify extending QM status to loans that meet the criteria in § 1026.43(e)(5), including that the creditor consider and verify the consumers DTI or residual income.228 The CFPB preliminarily concludes that this reasoning does not apply in the context of PACE transactions. PACE financing is primarily administered by several large PACE companies that administer programs on behalf of government creditors in each State where residential PACE is active. The PACE companies’ role in the transaction eliminates the community-based focus or relationship-lending features that in part justified treating certain small creditors differently for purposes of the Small Creditor QM. The Bureau thus has reason to question whether PACE companies have a more comprehensive understanding of the financial circumstances of their customers or of the economic and other circumstances of a community when they administer a program.229 Moreover, as discussed above, the incentives for creditors are different for PACE financing than they are for other loans, limiting the effect that holding loans in portfolio has on underwriting practices. Even if a loan is held in portfolio, creditors and PACE companies bear little risk associated with PACE financing, making it more likely these entities will be repaid even in the event of foreclosure or other borrower distress. Similarly, the reasoning for the Seasoned QM loan category set out in § 1026.43(e)(7) would not apply to PACE transactions. In 2020, the Bureau created the Seasoned QM category for loans that meet certain performance requirements, are held in portfolio by the originating creditor or first purchaser for a 36-month period, comply with general restrictions on 228 78 FR 35430, 35485 (June 12, 2013) (‘‘The Bureau believes that § 1026.43(e)(5) will preserve consumers’ access to credit and, because of the characteristics of small creditors and portfolio lending described above, the credit provided generally will be responsible and affordable.’’). 229 See 80 FR 59947 (Oct. 2, 2015). VerDate Sep<11>2014 17:44 May 10, 2023 Jkt 259001 product features and points and fees, and meet certain underwriting requirements. As discussed above, the effect that holding loans in portfolio has on underwriting practices is limited for PACE transactions, so the portfolio lending requirement would provide only a limited incentive to make affordable loans. Additionally, mortgage servicers will often pay a property tax delinquency on behalf of a consumer who has both a PACE mortgage and a non-PACE mortgage regardless of whether the borrower had a pre-existing escrow account. For these borrowers, the payment of their property taxes may have no connection to their actual ability to repay their PACE transaction, let alone to creditor compliance with the ATR requirements at consummation. Given this, it does not seem appropriate to draw any inference from a borrower’s successful payment history on a PACE transaction regarding the creditor’s ability-to-repay determination at consummation. Moreover, in the context of PACE financing, successful loan performance over a seasoning period of 36 months would not give sufficient certainty to presume that loans were originated in compliance with the ATR requirements at consummation. While a non-PACE mortgage would typically have 36 payments due in the seasoning period, thus demonstrating that the loan payments were affordable to the consumer on an ongoing basis, a PACE transaction would have no more than three or six payments because PACE transactions are paid annually or semiannually. Evidence of successful performance over only three or six payments would not be sufficiently probative of the creditor’s compliance with the ATR requirements at consummation for PACE transactions to create a presumption of compliance. Similar concerns apply to the Balloon-Payment QM category in § 1026.43(f). The ATR/QM Rule permits balloon-payment loans originated by small creditors that operate in rural or underserved areas to qualify for QM status, even though balloon-payment loans are generally not eligible for General QM status. In addition to the general reasons discussed above for not having a QM definition for PACE, the same specific concerns noted above with respect to the Small Creditor QM— namely, that the involvement of nationwide PACE companies limits the applicability of any special features of small creditors—are equally applicable to the Balloon-Payment QM criteria. Moreover, the Bureau is not currently aware of PACE financing with balloon payments. PO 00000 Frm 00029 Fmt 4701 Sfmt 4702 30415 The CFPB recognizes that applying the ATR requirements without providing QM status for any PACE transactions may affect the number of PACE loans made. As discussed in more detail in part IX.D, however, the Bureau expects that many affected consumers will retain access to other forms of mortgage and non-mortgage credit that could serve the purposes of PACEauthorizing statutes, such as energy efficiency improvements. Moreover, the CFPB believes any credit access impacts must be justified against the consumer protection risks of extending QM status to PACE transactions. As discussed, the many distinct features of the PACE market and PACE financing significantly undermine the case that it would be appropriate to afford PACE creditors and companies protection from civil liability under TILA section 130 for claims that they failed to comply with the proposed ATR requirements. For these reasons, the Bureau is proposing to apply the Regulation Z ATR framework to PACE transactions without providing for a QM presumption of compliance. The CFPB is issuing this proposal consistent with EGRRCPA section 307 and pursuant to its authority under TILA sections 129C(b)(3)(C)(ii), 129C(b)(3)(B)(i), and 105(a). EGRRCPA section 307 makes no mention of PACE loans qualifying for a presumption of compliance with the ATR requirements it directed the Bureau adopt for PACE financing. Rather, it provides in relevant part that the CFPB must prescribe regulations that (1) ‘‘carry out the purposes of subsection (a)’’—i.e., that no creditor shall make a residential mortgage loan unless the creditor makes a reasonable and good faith determination based on verified and documented information that the consumer has a reasonable ability to repay the loan—and (2) apply TILA section 130 with respect to ‘‘violations under subsection (a)’’ to such financing. Nowhere does EGRRCPA section 307 mention TILA section 129C(b) (the provisions governing QMs) or otherwise indicate that the Bureau’s adoption of ATR requirements specific to PACE loans should make further allowance for any presumption of compliance with those requirements. Instead, by requiring that the Bureau ‘‘account for the unique nature’’ of PACE financing, the Bureau preliminarily concludes that Congress understood that elements of the existing ATR regime for residential mortgage loans—including the QM provisions— may not be appropriate in the case of PACE financing. In any event, TILA 129C(b)(3)(A) directs the Bureau to prescribe E:\FR\FM\11MYP2.SGM 11MYP2 30416 Federal Register / Vol. 88, No. 91 / Thursday, May 11, 2023 / Proposed Rules ddrumheller on DSK120RN23PROD with PROPOSALS2 regulations to carry out the purposes of section 129C and TILA section 129C(b)(3)(B)(i) in turn authorizes the Bureau to prescribe regulations that revise, add to, or subtract from the criteria that define a QM 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 this section, necessary and appropriate to effectuate the purposes of this section and section 129B, to prevent circumvention or evasion thereof, or to facilitate compliance with such sections. TILA section 105(a) likewise provides that regulations implementing TILA may contain such additional requirements, classifications, differentiations, or other provisions, and may provide for such adjustments and exceptions for all or any class of transactions, as in the judgment of the Bureau are necessary or proper to effectuate the purposes of TILA, to prevent circumvention or evasion thereof, or to facilitate compliance therewith. Consistent with those authorities, after taking into account the purposes of the ATR and QM provisions and the unique nature of PACE financing, the Bureau preliminary concludes there is ample reason not to extend a presumption of compliance with the ATR requirements to PACE transactions. The Bureau seeks comment on its preliminary conclusion not to extend QM to PACE financing. 43(i)(3) EGRRCPA section 307 requires the Bureau to ‘‘prescribe regulations that carry out the purposes of [TILA’s ATR requirements] and apply [TILA] section 130 with respect to violations [of TILA’s ATR requirements] with respect to [PACE] financing, which shall account for the unique nature of [PACE] financing.’’ Section 1026.43 currently applies to the creditor of any transaction that is subject to § 1026.43’s ATR requirement. Proposed § 1026.43(i)(3) would also apply the requirements of § 1026.43 to any PACE company that is substantially involved in making the credit decision for a PACE transaction. A PACE company would be ‘‘substantially involved’’ in making the credit decision if it makes the credit decision, makes a recommendation as to whether to extend credit, or applies criteria used in making the credit decision. A PACE company would not be substantially involved in making the credit decision for purposes of proposed § 1026.43(i)(3) if it merely solicits applications, collects application information, or performs administrative VerDate Sep<11>2014 17:44 May 10, 2023 Jkt 259001 tasks. Proposed § 1026.43(i)(3) would also apply section 130 of TILA 230 to covered PACE companies that fail to comply with § 1026.43. These proposed amendments would implement EGRRCPA section 307 and would account for the unique and extensive role that PACE companies play in PACE financing by creating incentives for those companies to ensure that TILA’s ATR requirements are met for PACE transactions and enhancing consumers’ remedies in the event that the ATR requirements are not met. PACE companies play an extensive role in PACE financing programs. As noted in the section-by-section analysis of proposed § 1026.2(a), it is the Bureau’s understanding that PACE creditors are typically government entities. At present in the PACE industry, these government creditors generally contract with PACE companies to perform many of the dayto-day operations of PACE financing programs. This encompasses tasks such as marketing PACE financing to consumers, training home improvement contractors to sell PACE transactions 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. Some ANPR commenters indicated that it is also common for PACE companies to help raise the private capital needed to fund PACE financing programs through the acquisition and securitization of PACE bonds issued by PACE creditors. In exchange for their role, PACE companies typically receive part of the profit from PACE financing. Given the unique role that PACE companies play in PACE financing, the Bureau preliminarily concludes that application of § 1026.43 to PACE companies, in addition to creditors, is both appropriate and consistent with the Congressional mandate in EGRRCPA section 307 to implement regulations that carry out the purposes of TILA’s ATR provisions. The Bureau similarly believes that it is appropriate to implement section 307’s mandate to apply section 130 to PACE transactions by extending the applicability of section 130 of TILA for violations of the ATR requirements to PACE companies that are substantially involved in making credit decisions. As described above, PACE companies are the entities most likely to perform or oversee the credit decision making, including any ability-to-repay analysis, 230 15 PO 00000 U.S.C. 1640. Frm 00030 Fmt 4701 and to receive much of the profit from operation of PACE financing programs. Applying section 130 to PACE companies that are substantially involved in the credit decision making, therefore, would extend the economic incentive to comply to a party that bears substantial responsibility for the credit decision and that is likely to profit from the transaction. In addition, application of section 130 to covered PACE companies would enhance consumers’ ability to obtain remedies for violation of the ATR rules. TILA section 113(b) 231 provides that no civil or criminal penalties may be imposed under TILA upon any State or political subdivision thereof, or any agency of any State or political subdivision. PACE creditors are generally government entities that would be subject to section 113(b)’s protection, and therefore, without application of section 130 to PACE companies, PACE consumers would be limited in their ability to obtain remedies for violations of the ATR requirements. By specifically directing the Bureau to apply section 130’s liability provision as well as the ATR requirements to PACE, while ‘‘account[ing] for the unique nature’’ of PACE financing, Congress intended the Bureau to do more than simply apply the ATR requirements to PACE financing. To apply the ATR requirements but not change the liability framework would mean section 130’s penalty provisions would be less effective as to ATR violations, since the only creditor available in a consumer civil action is the state or local government entities who are not subject to civil penalties. The Bureau proposes to use its authority under EGRRCPA section 307 to apply the requirements of § 1026.43 to PACE companies and to apply section 130 of TILA to PACE companies for violations of § 1026.43. For the reasons described above, the Bureau believes that the unique nature of PACE financing supports its proposal to add § 1026.43(i)(3). The Bureau seeks comment on this proposed provision and how best to define when a PACE company should be subject to proposed § 1026.43(i)(3). For example, the Bureau invites feedback on whether ‘‘substantially involved in making the credit decision for a PACE transaction’’ is the best way to define the type of involvement a PACE company should have in the PACE transaction to be subject to proposed § 1026.43(i)(3). 231 15 Sfmt 4702 E:\FR\FM\11MYP2.SGM U.S.C. 1612(b). 11MYP2 Federal Register / Vol. 88, No. 91 / Thursday, May 11, 2023 / Proposed Rules Appendix H—Closed-End Forms and Clauses comment on this proposed effective date. The Bureau proposes to add forms H– 24(H) and H–25(K) to appendix H to Regulation Z. Forms H–24(H) and H– 25(K) would provide blank model forms for the Loan Estimate and Closing Disclosure illustrating the inclusion or exclusion of the information as required, prohibited, or applicable under §§ 1026.37 and 1026.38 for PACE transactions. The proposed forms are generally based on existing forms H– 24(G), Mortgage Loan Transaction Loan Estimate—Modification to Loan Estimate for Transaction Not Involving Seller, and H–25(J), Mortgage Loan Transaction Estimate—Modification to Closing Disclosure for Transaction Not Involving Seller. The Bureau plans to publish translations of Forms H–24(H) and H–25(K) if the Bureau finalizes the proposed additions to appendix H. The Bureau is also considering modifying proposed forms H–24(H) and H–25(K) in the final rule to provide additional pages for variations in the information required or permitted to be disclosed. For example, existing form H–24(G) contains four versions of page two to reflect the possible permutations of the disclosures under § 1026.37(i) and (j). The Bureau proposes forms H–24(H) and H–25(K) pursuant to the authority and for the reasons described above in the discussion of §§ 1026.37(p) and 1026.38(u), as well as pursuant to its authority to publish such integrated model disclosure forms under TILA section 105(b) and RESPA section 4(a). IX. CFPA Act Section 1022(b) Analysis ddrumheller on DSK120RN23PROD with PROPOSALS2 VIII. Effective Date The Bureau proposes that the final rule, if adopted, would take effect at least one year after publication in the Federal Register, but no earlier than the October 1 which follows by at least six months the date of promulgation.232 The final rule would apply to covered transactions for which creditors receive an application on or after this effective date. The Bureau tentatively determines that a one-year period between Federal Register publication of a final rule and the final rule’s effective date would give creditors enough time to bring their systems into compliance with the revised regulations. The Bureau requests 232 Under TILA section 105(d), Bureau regulations requiring any disclosure which differs from disclosures previously required by part A, part D, or part E, or by any Bureau regulation promulgated thereunder, shall have an effective date of that October 1 which follows by at least six months the date of promulgation, subject to certain exceptions. 15 U.S.C. 1604(d). To the extent TILA section 105(d) applies, the proposed effective date would be consistent with it. VerDate Sep<11>2014 17:44 May 10, 2023 Jkt 259001 A. Overview In developing this proposed rule, the Bureau has considered the proposed rule’s potential benefits, costs, and impacts in accordance with section 1022(b)(2)(A) of the CFPA.233 The Bureau requests comment on the preliminary analysis presented below and submissions of additional data that could inform the Bureau’s analysis of the benefits, costs, and impacts. In developing the proposed rule, the Bureau has consulted or offered to consult with the appropriate prudential regulators and other Federal agencies, including regarding the consistency of this proposed rule with any prudential, market, or systemic objectives administered by those agencies, in accordance with section 1022(b)(2)(B) of the CFPA.234 As discussed in part V.C above, the Bureau also has consulted with State and local governments and bond-issuing authorities, in accordance with EGRRCPA section 307.235 Provisions To Be Analyzed Although the proposal has several parts, for purposes of this 1022(b)(2)(A) analysis, the Bureau’s discussion groups the proposed provisions into two broad categories. The provisions in each category would likely have similar or related impacts on consumers and covered persons. The categories of provisions are: (1) the proposal to apply the ATR provisions of § 1026.43 to PACE transactions, with certain adjustments to account for the unique nature of PACE, including denying eligibility for any QM categories; and (2) the proposal to clarify that only involuntary tax liens and involuntary tax assessments are not credit for purposes of TILA, such that voluntary tax liens and voluntary tax assessments that otherwise meet the definition of credit, such as PACE transactions, are credit for purposes of TILA. Economic Framework Before discussing the potential benefits, costs, and impacts specific to this proposal, the Bureau provides an overview of its economic framework for analyzing the impact and importance of creditors and PACE companies considering a consumer’s ability to repay prior to an extension of credit. The Bureau has previously discussed the general economics of ATR 233 12 U.S.C. 5512(b)(2)(A). U.S.C. 5512(b)(2)(B). 235 15 U.S.C. 1639c(b)(3)(C)(iii)(II). 234 12 PO 00000 Frm 00031 Fmt 4701 Sfmt 4702 30417 determinations in the January 2013 Final Rule and elsewhere,236 and focuses here on economic forces specific to PACE. In normal lending markets, such as the non-PACE mortgage market, creditors generally have an intrinsic profit motive to set loan pricing based in part on ability to repay and in turn have an economic incentive to determine ability to repay. Indeed, in the January 2013 Final Rule, the Bureau noted that even prior to the then-new ATR requirements of Regulation Z, most mortgage lenders voluntarily collected income information as part of their normal business practices. Economic theory says that, to be profitable, a lender must apply high enough interest rates to its loans such that the average ex ante expected value of the loans in its portfolio is positive. The higher the likelihood of nonpayment, the higher the interest rate must be to make a profit.237 Lenders may price based on the average ability to repay in the population, or may price on individual risk after making an effort to determine ability to repay, but they cannot typically remain profitable in a competitive market if they set interest rates while ignoring ability to repay entirely.238 The market for PACE financing has some notable differences from the typical non-PACE mortgage market that dampen or eliminate the economic incentive to price based on ability to repay. Those who stand to receive revenues from PACE transactions are shielded from losses in ways that are not common in the mortgage market. First, for the more than 70 percent of PACE borrowers with a pre-existing 236 See, e.g., 78 FR 35430, 35492–97 (June 12, 2013). 237 This holds empirically as well. In the General QM Final Rule, the Bureau noted that loan pricing for non-PACE mortgages is correlated both with credit risk, as measured by credit score, and with early delinquency, as a proxy for affordability. See 85 FR 86308, 86317 (Dec. 29, 2020). 238 A lender that conducts an ability-to-repay analysis will have a more precise measurement of the risk of non-payment, and can thus profitably price loans to consumers with high ability to repay at a low interest rate, being reasonably assured of repayment, while pricing riskier loans at a higher rate to compensate for the higher risk of default. A lender that does not conduct an ability-to-repay analysis must price loans consistent with the average risk of default in the population in order to make a profit. This pooled risk rate will involve an interest rate higher than the low rates that could otherwise be profitably offered to low-risk consumers. Note that this logic applies even if loans are ultimately sold on the secondary market and securitized. A rational investor will not pay market rate for an asset-backed security where the component mortgages are priced at levels consistent with low risk if the lender cannot verify that the loans are actually low risk. E:\FR\FM\11MYP2.SGM 11MYP2 30418 Federal Register / Vol. 88, No. 91 / Thursday, May 11, 2023 / Proposed Rules ddrumheller on DSK120RN23PROD with PROPOSALS2 non-PACE mortgage,239 it is unlikely that the PACE transaction would ever cause a loss to the PACE company or its investors because mortgage servicers for the non-PACE mortgage will often pay a property tax delinquency on behalf of a borrower. Second, PACE companies generally will be made whole in the event of foreclosure, whether that foreclosure is initiated by the taxing authority or a non-PACE mortgage holder, because PACE transactions are structured as tax liens, and will typically take precedence over any nontax liens, such as those securing preexisting mortgage loans. Third, PACE companies may be made whole even if the foreclosure proceeds are insufficient. Because PACE transactions are technically structured as obligations attached to the real property, rather than the consumer, any remaining amounts that are not paid through foreclosure proceeds generally will not be extinguished and will instead remain on the property for subsequent owners to pay. The empirical evidence on PACE transactions is consistent with the unusual protection from loss that the structure of PACE transactions provides for the parties receiving revenue from the loans. The PACE Report shows that PACE companies largely did not collect income information from applicants when they were not required to by State law, consistent with the lack of an economic incentive to verify ability to repay.240 Moreover, the PACE Report finds that PACE transactions are not priced based on individual risk.241 The PACE Report notes that estimated APRs for PACE transactions are tightly bunched, with about half of estimated PACE APRs between 8.3 and 9 percent.242 The Report also notes the PACE APRs are at best weakly correlated with credit score, with an average difference of less than five basis points between loans made to consumers with deep subprime credit scores and consumers with super-prime credit scores.243 B. Data Limitations and Quantification of Benefits, Costs, and Impacts The discussion below relies on information that the Bureau has obtained from industry, other regulatory agencies, and publicly available sources, including reports published by the Bureau. These sources form the basis for the Bureau’s consideration of the likely 239 PACE Report, supra note 12, at 18. 240 Id. at Table 1. 241 Id. at 23. 242 Id. at Table 2. 243 Id. at 23. VerDate Sep<11>2014 17:44 May 10, 2023 Jkt 259001 impacts of the proposed rule. The Bureau provides estimates, to the extent possible, of the potential benefits and costs to consumers and covered persons of this proposal, given available data. Among other sources, this discussion relies on the Bureau’s PACE Report, as described in part IV above. The Report utilizes data on applications for PACE transactions initiated between July 2014 and June 2020, linked to de-identified credit record information through June 2022. As described above, the Report estimates the effect of PACE transactions on consumers by comparing approved PACE applicants who had an originated PACE transaction to those who were approved but did not have an originated transaction. The Report uses a difference-in-differences regression methodology, essentially comparing the changes in outcomes like mortgage delinquency for originated PACE borrowers before and after their PACE transactions were originated to the same changes for applicants who were approved but not originated. In this discussion of the benefits, costs, and impacts of the proposal, the Bureau focuses on results from what the Report refers to as its ‘‘Static Model’’ which considers outcomes over the period between zero to two years prior to the PACE transaction and the period between one to three years after. The Report also estimates the effect of the 2018 California PACE Reforms on PACE lending in that State, using Florida as a comparison group in a difference-indifferences methodology. The Bureau also relies on publicly available data on PACE from State agencies and PACE trade associations, as well as on public comments in response to the ANPR. The Bureau acknowledges several important limitations that prevent a full determination of benefits, costs, and impacts. The Bureau relies on the PACE Report for many parts of this discussion, but as discussed in the PACE Report itself, the data underlying the Report have limitations.244 The data used in the report are restricted primarily to consumers with a credit record, with respect to consumer impacts. Further, the comparison groups used in the difference-in-differences analysis are reasonable but imperfect. In addition, while the 2018 California PACE Reforms are informative to the Bureau’s consideration of the impacts of the proposed rule on consumers and covered persons, the proposed rule has different requirements from the State laws that made up the 2018 California 244 Id. PO 00000 at 52. Frm 00032 Fmt 4701 Sfmt 4702 PACE Reforms, such that the potential impacts may differ. In light of these data limitations, the analysis below provides quantitative estimates where possible and a qualitative discussion of the proposed rule’s benefits, costs, and impacts. General economic principles and the Bureau’s expertise, together with the available data, provide insight into these benefits, costs, and impacts. The Bureau requests additional data or studies that could help quantify the benefits and costs to consumers and covered persons of the proposed rule. C. Baseline for Analysis In evaluating the proposal’s benefits, costs, and impacts, the Bureau considers the impacts against a baseline in which the Bureau takes no action. This baseline includes existing regulations, State laws, and the current state of the market. In particular, the baseline assumes no change in the current State laws and regulations around PACE financing. Also, notwithstanding the proposed clarification that only involuntary tax liens and involuntary tax assessments are excluded from being credit under Regulation Z (such that the commentary would not exclude PACE transactions), the baseline assumes that the current practices of PACE industry stakeholders generally are not consistent with treating PACE financing as TILA credit. D. Potential Benefits and Costs to Consumers and Covered Persons This section discusses the benefits and costs to consumers and covered persons of the two main groups of provisions discussed above: the proposed ATR provisions, and the proposal to clarify that only involuntary tax liens and involuntary tax assessments are excluded from being treated as credit under TILA. Potential Benefits and Costs to Consumers and Covered Persons From the Proposed ATR Provisions The Bureau proposes amendments under § 1026.43, which generally requires an ability-to-repay analysis before originating a mortgage loan, to explicitly include PACE transactions, with several adjustments for the unique nature of PACE. The Bureau also proposes to provide that a PACE transaction is not a QM as defined in § 1026.43. Potential Benefits and Costs to Consumers of the Proposed ATR Provisions Under the proposed rule, consumers who are not found to have a reasonable E:\FR\FM\11MYP2.SGM 11MYP2 ddrumheller on DSK120RN23PROD with PROPOSALS2 Federal Register / Vol. 88, No. 91 / Thursday, May 11, 2023 / Proposed Rules ability to repay the loan would not be able to obtain a PACE loan. In general, the Bureau expects that consumers who would be denied PACE transactions due to the required ATR determination would otherwise struggle to repay the cost of the PACE transaction. These consumers generally would benefit from the proposal. The evidence in the PACE Report helps to partially quantify the potential benefits to consumers who cannot afford a PACE transaction. The difference-indifferences estimation in the Report finds that, for consumers with a preexisting non-PACE mortgage, entering into a PACE transaction increases the probability of becoming 60-days delinquent on the pre-existing mortgage by 2.5 percentage points in the two years following the first due date for a tax bill including the PACE transaction.245 For consumers without a pre-existing non-PACE mortgage, the Report finds that, following a PACE transaction, such consumers’ monthly credit card balances increase by over $800 per month.246 Additional evidence from the PACE Report indicates that requiring an ability-to-repay analysis could improve outcomes specifically for consumers who would otherwise struggle to repay the PACE transaction. The PACE Report finds that the effect of a PACE transaction on mortgage delinquency is higher for consumers with lower credit scores. The average effect of a 2.5 percentage point increase in the rate of non-PACE mortgage delinquency over a two-year period is composed of a 0.3 percentage point increase for consumers with super-prime credit scores (11.1 percent of all PACE borrowers), a 1.7 percentage point increase for consumers with prime credit scores (42 percent of borrowers), a 3.8 percentage point increase for consumers with near-prime credit scores (23.4 percent of borrowers), and a 6.2 percentage point increase for consumers with subprime credit scores (20.4 percent of borrowers).247 The consumers with subprime credit scores would be the most likely to be excluded by the ability-to-repay analysis that the proposal would require. Credit score tends to be correlated with income. Moreover, credit scores are based on credit history, and the proposed ATR requirements would require consideration of credit history. The evidence from the PACE Report also suggests that collecting income information from potential PACE borrowers can lead to better outcomes. The evidence is less direct on this point because PACE companies did not collect income information from a large majority of applicants during the period studied by the Report. For example, the Report indicates PACE companies collected income information from less than 24 percent of originated borrowers in California prior to April 2018, and a little more than 10 percent of originated borrowers in Florida during that time.248 Income information was primarily available in the data used in the Report for consumers in California after April 2018. After this point, the Report finds that essentially all originated borrowers in California had income information collected, likely because the 2018 California PACE Reforms required consideration of income by PACE companies as part of an analysis that considered consumers’ ability to pay the PACE loan. As a result, the PACE Report’s analysis of income is largely based on consumers whose PACE transactions were originated under requirements that resemble the proposed ATR requirements in some respects. The PACE Report finds that PACE transactions increase non-PACE mortgage delinquency less for consumers where the PACE company collected income information.249 The Report also finds that PACE transactions increased non-PACE mortgage delinquency rates more for consumers in California before the 2018 California PACE Reforms, compared to consumers in California after 2018, with the effect falling by almost two-thirds after the 2018 California PACE Reforms required consideration of income by PACE companies, from a 3.9 percentage point increase to a 1.5 percentage point increase.250 However, the Report also finds that the effect of PACE on mortgage delinquency decreased somewhat in Florida as well around 2018, which suggests the change could be in part the result of other nationwide trends, rather than solely the requirements of the 2018 California PACE Reforms.251 The PACE Report was inconclusive with respect to whether income or a calculation of DTI predicted negative effects of PACE on financial outcomes, because income information was not available for enough consumers to draw statistically reliable conclusions about subgroups of the population with income information.252 248 Id. at Table 1. at 45. 250 Id. at 46. 251 Id. at 46–47. 252 Id. at 47–48. 249 Id. 245 Id. 246 Id. 247 Id. at 41–42. at Figure 10. VerDate Sep<11>2014 17:44 May 10, 2023 Jkt 259001 PO 00000 Frm 00033 Fmt 4701 The facts documented by the PACE Report, described above, indicate that the proposed ATR provisions would likely protect some consumers who cannot afford a PACE transaction from entering into a PACE transaction and potentially suffering negative consequences as a result of that transaction. The Bureau does not have data available to precisely determine the number of consumers who would benefit, or the monetary value of those benefits, but the Bureau provides some rough estimates below. Consumers who become delinquent on their mortgages will, at a minimum, incur late fees on their payments. If a PACE transaction causes a longer delinquency, the consequences could include foreclosure or a tax sale. Consumers’ credit scores could also be affected, although the PACE Report finds only small impacts of PACE on credit scores—perhaps in part because PACE borrowers tended to already have relatively low credit scores prior to the PACE transaction. The Bureau quantifies the individual and aggregate monetary benefits of avoiding these consumer harms below to the extent possible. The Bureau uses the estimates from the PACE Report of the average effect of PACE on consumer outcomes to estimate these benefits but notes that these estimates may overstate aggregate benefits to the extent that existing laws in California already protect consumers in that State from some unaffordable PACE transactions. The PACE Report finds that the average monthly mortgage payment for consumers with PACE transactions originated between 2014 and 2020 was $1,877.253 Assuming a late fee of five percent, avoiding a PACE transaction would save the average PACE consumer who experiences a 60-day mortgage delinquency at least $188 over a twoyear period. The average benefit to such consumers would likely be higher, as many would likely have more than a single 60-day mortgage delinquency caused by the PACE transaction. Foreclosure is extremely costly, both to the consumer who experiences foreclosure and to society at large. In its 2021 RESPA Mortgage Servicing Rule, the Bureau conservatively assumed the cost of a foreclosure was $30,100 in 2021 dollars, consisting of both the upfront cost to the foreclosed consumer and the resulting decrease in property values for their neighbors, but no other pecuniary or non-pecuniary costs.254 The Bureau adopts the same assumption here with an adjustment for inflation, 253 Id. at 16. 86 FR 34889 (June 30, 2021). 254 See Sfmt 4702 30419 E:\FR\FM\11MYP2.SGM 11MYP2 30420 Federal Register / Vol. 88, No. 91 / Thursday, May 11, 2023 / Proposed Rules noting as it did in the 2021 rule that it is likely an underestimate of the average benefit to preventing foreclosure. Adjusting for inflation to 2023 dollars, the benefit of an avoided foreclosure is $33,169. The Bureau does not have data available to estimate the benefits to consumers of preventing a reduction in credit score but notes again that the PACE Report finds that PACE transactions only lower scores by an average of about one point,255 suggesting that such benefits would be negligible in magnitude. In 2019, the last full year of data studied in the PACE Report, the four PACE companies whose data were included in the Report originated about 2,000 PACE transactions per month, for a total of about 24,000 per year.256 For the 71.1 percent of such borrowers with a pre-existing non-PACE mortgage,257 a 2.5 percentage point increase in mortgage delinquency would mean about 600 consumers per year struggling to pay the cost of their PACE transaction and incurring at least a 60-day delinquency. Most loans that become delinquent do not end with a foreclosure sale.258 The PACE Report finds that PACE transactions increase the probability of a foreclosure by 0.5 percentage points over a two-year period.259 255 PACE Report, supra note 12, at 41. at Figure 16. 257 Id. at 18. 258 Because of generally favorable conditions in both the housing market and the non-PACE mortgage market in recent years, PACE borrowers may have been more able to avoid foreclosure by either selling or refinancing their homes, compared to the non-PACE mortgage borrowers studied in the Assessment Report using earlier data. Indeed, the PACE Report finds that PACE loans increased the probability of a consumer closing a mortgage (indicating some kind of prepayment), with no increase in new mortgages, suggesting a subset of PACE borrowers may have been induced to sell their homes. Although they would avoid the cost of foreclosure by doing so, moving is also expensive, with real estate agents’ fees alone representing typically 5 to 6 percent of the home’s value, in addition to other closing costs and the costs related to moving. 259 See PACE Report, supra note 12, at 33. The PACE Report notes that the credit record data used in the PACE Report are limited with respect to measuring foreclosures. Nonetheless, the size of this effect relative to the Report’s estimate of the effect of PACE transactions on 60-day delinquencies is consistent with prior CFPB research on the share of 60-day delinquencies that end in a foreclosure. The Bureau’s 2013 RESPA Servicing Rule Assessment Report found that, for a range of loans that became 90-days delinquent from 2005 to 2014, approximately 18 to 35 percent ended in a foreclosure sale within three years of the initial delinquency. Focusing on loans that become 60days delinquent, the same report found that, 18 months after an initial 60-day delinquency, between eight and 18 percent of loans had ended in foreclosure sale over the period 2001 to 2016. See CFPB, 2013 RESPA Servicing Rule Assessment ddrumheller on DSK120RN23PROD with PROPOSALS2 256 Id. VerDate Sep<11>2014 17:44 May 10, 2023 Jkt 259001 Assuming that 0.5 percent of consumers who engage in a PACE transaction would ultimately experience foreclosure as a result of the PACE transaction, the proposed rule could prevent about 120 foreclosures per year, for an aggregate annual benefit of about $4 million per year. If the proposed rule were to prevent a minimum of two months of late fees for each of the 600 consumers who would otherwise become 60-days delinquent as a result of a PACE transaction, that would result in additional aggregate benefits of at least $112,000 per year. As discussed above, the difference-indifferences analysis in the PACE Report also finds that credit card balances increased significantly for PACE borrowers who did not have a preexisting non-PACE mortgage, compared to the change in balances for PACE applicants who did not originate a loan and also did not have a pre-existing non-PACE mortgage.260 The additional credit card balances incurred by consumers without a pre-existing nonPACE mortgage could result in interest charges if they are not paid in full on time.261 If the proposed rule prevented the 29.9 percent of PACE consumers without a pre-existing non-PACE mortgage from revolving an additional $833 in average credit card balances for an average of one year, with an APR of 24 percent this could result in about $1.4 million in aggregate benefit annually. The proposed ATR requirements may also benefit consumers by increasing the likelihood that they understand the nature of PACE transactions, particularly in combination with the required TILA–RESPA integrated disclosures discussed below in the next section. Commenters responding to the ANPR, as well as stories in the media, have indicated that some PACE borrowers do not realize they are committing to a long-term financial obligation when they agree to a PACE transaction. This may occur, for example, due to deceptive conduct on the part of a home improvement contractor marketing the PACE transaction, or due to the complexity and unfamiliarity of the PACE transaction itself. Whatever the cause, it Report (Jan. 2019), https:// files.consumerfinance.gov/f/documents/cfpb_ mortgage-servicing-rule-assessment_report.pdf. 260 PACE Report, supra note 12, at 41. 261 Interest charges generally do not result if a balance is paid in full and on time, but it stands to reason that if balances increased in response to another financial obligation, the consumer does not have the resources available to pay the balance in full. The PACE Report does not distinguish between revolving balances and ‘‘transacting’’ balances that are paid in full. PO 00000 Frm 00034 Fmt 4701 Sfmt 4702 is more likely that a consumer who is asked to produce documentation of their income will realize that they are signing up for a loan that must be repaid over time. As such, the proposed rule may benefit consumers who would otherwise misunderstand the nature of a PACE transaction. Consumers who would not agree to a PACE transaction if they understood its nature as a financial obligation they would need to repay may be more likely to understand the nature of the transaction, and thus decline it. In addition, even consumers who would still agree to the transaction understanding its nature as a financial obligation would be more likely to prepare for the increase to their property tax bill caused by the PACE transaction. For consumers who would not, with full understanding, agree to a PACE transaction, the potential benefits of the proposed rule to each such consumer would depend on whether the consumer would still agree to the home improvement contract the PACE transaction was intended to fund. For consumers who would have been willing to proceed with the home improvement project without a PACE transaction, the Bureau assumes that at least some would seek to pay off the PACE transaction after the first payment becomes due.262 In this case, the benefit to the consumer would be saving the first year of interest on the PACE transaction, as well as up-front fees and any capitalized interest accrued prior to the first payment. The PACE Report finds that the average fee amount for PACE transactions made between 2014 through 2020 was $1,301, and the average capitalized interest was $1,412.263 The average interest rate was 7.6 percent.264 On the average original balance of $25,001,265 this would result in interest payments of $1,900 in the first year. Thus, each consumer would save about $4,600 in interest and fees if they avoided a PACE transaction rather than repaying it after the first payment becomes due. Further, if the consumer otherwise would not have agreed to the home improvement project (i.e., the consumer only agreed to the project based on a misunderstanding about the 262 If the consumer did not realize they had effectively agreed to a loan at origination, this would become clear when their next property tax bill became due. The PACE Report finds that on average a consumer’s total property taxes likely increased by almost 88 percent as a result of the PACE loan payment. PACE Report, supra note 12, at 13. 263 Capitalized interest is calculated using the APR, the fee amounts, and the term and interest rate of the PACE transactions provided in the PACE Report. See id. at Table 2. 264 Id. 265 Id. E:\FR\FM\11MYP2.SGM 11MYP2 Federal Register / Vol. 88, No. 91 / Thursday, May 11, 2023 / Proposed Rules financing), the benefit of preventing misunderstanding is greater still, depending on the value the consumer nonetheless receives from the project.266 The Bureau does not have data indicating how often consumers currently misunderstand the nature of a PACE transaction or what share of those consumers would have, in the counterfactual, opted not to agree to the PACE transaction or the related home improvement project had they understood the nature of the PACE transaction. The data used in the PACE Report do not capture when and whether PACE transactions were paid off. However, publicly available data for California indicate that a significant fraction of PACE transactions to date were paid off early in the term of the transaction. The California Alternative Energy and Advanced Transportation Financing Authority (CAEATFA) manages a loss reserve fund for California PACE programs and requires PACE companies to submit information on new PACE transactions semi- annually, and to report their overall portfolio size as of June 30th of each year.267 CAEATFA reports aggregate statistics from this collection publicly on its website.268 Using this information, the Bureau can calculate the number of PACE transactions paid off each year as the sum of the prior year’s total portfolio and the current year’s new transactions, less the current year’s total portfolio. This is shown in Table 1. According to the CAEATFA data, there were 17,401 PACE transactions outstanding in California as of June 30, 2014, and 202,901 new transactions originated after that through June 30, 2020. However, about 89,000 transactions were paid off during this time, based on the change in total outstanding portfolios, meaning that up to 40 percent of PACE transactions may have been paid off early. This likely overstates somewhat the share of transactions that were paid early, and it very likely overstates the share of consumers who misunderstood the 30421 nature of the transactions. PACE transactions can have terms as short as five years, such that some transactions may have simply reached maturity. However, the PACE Report shows that only about six percent of PACE transactions have terms of five years.269 PACE transactions may be paid off early for reasons other than misunderstanding the nature of the transaction, including if the consumer sells their home and is required by the buyer to pay off the PACE transaction.270 Still, given the frequency of early repayments and the substantial potential benefits to individual consumers of preventing a misunderstanding about the nature of PACE as a financial obligation, the aggregate benefits could be substantial. For instance, if just 10 percent of early repayments on PACE transactions (i.e., 4 percent of all PACE borrowers) were due to a misunderstanding that the proposal could address, the aggregate benefits would be over $4.4 million annually.271 TABLE 1 (a) Actual total outstanding portfolio through June 30th, prior year Year 2015 2016 2017 2018 2019 2020 (b) New financings July 1st– December 31st prior year (c) New financings January 1st– December 31st, current year (d) Actual total outstanding portfolio through June 30th, current year (e) Number paid off ((a) + (b) + (c)¥(d)) ....................................................... ....................................................... ....................................................... ....................................................... ....................................................... ....................................................... 17,401 34,308 83,904 119,082 146,403 146,525 7,022 23,206 34,036 25,764 9,982 5,541 11,515 32,743 25,850 15,482 6,967 4,793 34,308 83,904 119,082 146,403 146,525 131,200 1,630 6,353 24,708 13,925 16,827 25,659 Total ................................................ N/A 97,350 105,551 N/A 89,102 ddrumheller on DSK120RN23PROD with PROPOSALS2 Source: CAEATFA, https://www.treasurer.ca.gov/caeatfa/pace/activity.pdf. To the extent that some consumers continue to receive PACE transactions that they are not able to afford, the proposal would benefit those consumers by providing an avenue for obtaining relief under the civil liability provisions of TILA and Regulation Z. The Bureau does not have data indicating how often this would occur, although as noted below in its discussion of litigation costs to covered persons, the Bureau expects that in the long run this would be infrequent. If the rule is finalized as proposed, consumers would face the time costs of gathering the required documentation for an ability-to-repay analysis, such as finding and producing W–2s to document proof of income. The Bureau has previously noted in the context of 266 Generally, the economic loss to a consumer from being induced to purchase something they would not otherwise purchase is the difference between the price paid and the consumer’s willingness to pay for the good or service. If the consumer is not willing to make the purchase, by definition their willingness to pay is less than the price. In the context of a PACE transaction for an otherwise unwanted project, the consumer’s willingness to pay would be less than the price paid to the contractor, which in turn is less than the full original balance due to fees and capitalized interest. Potentially a consumer’s willingness to pay for a project could be zero, or even negative (i.e., the consumer would have to be paid to be willing to permit the project, had they understood). However, consumers may frequently have willingness to pay greater than zero for projects funded by PACE transactions, if only due to realized energy, water, or insurance savings. 267 See Cal. State Treasurer, Property Assessed Clean Energy (PACE) Loss Reserve Program, https:// www.treasurer.ca.gov/caeatfa/pace/activity.asp (last visited Apr. 6, 2023). 268 Id.; see also Cal. State Treasurer, PACE Loss Reserve Program Enrollment Activity, https:// www.treasurer.ca.gov/caeatfa/pace/activity.pdf (last visited Apr. 20, 2023). 269 See PACE Report, supra note 12, at Figure A1. 270 The Bureau does not have data indicating how often homeowners are required to pay off a PACE transaction when selling their home. However, as noted in part II.A.4, some mortgage lenders or investors prohibit making a new loan on a property with an outstanding PACE transaction. See supra note 16. 271 Similar to the discussion above regarding the benefits of avoiding unaffordable PACE transactions, this calculation may overstate the aggregate benefits to the extent that existing State law in California prevents consumers from misunderstanding the nature of PACE transactions in that State. Given that the number of PACE transactions paid off each year remained high after the implementation of the 2018 California PACE Reforms, and given that the Bureau is being conservative in assuming that only 10 percent of early repayments were due to misunderstandings, the Bureau preliminarily determines that this estimate is, on balance, likely an underestimate. VerDate Sep<11>2014 17:44 May 10, 2023 Jkt 259001 PO 00000 Frm 00035 Fmt 4701 Sfmt 4702 E:\FR\FM\11MYP2.SGM 11MYP2 30422 Federal Register / Vol. 88, No. 91 / Thursday, May 11, 2023 / Proposed Rules ddrumheller on DSK120RN23PROD with PROPOSALS2 non-PACE mortgages that the time required to produce pay stubs or tax records should not be a large burden on consumers. This may differ in the case of PACE transactions, as these transactions are typically marketed in conjunction with home improvement contracts, and consumers may not be prepared to produce income documentation at the point of sale for a home improvement. In any event, the proposal likely would not increase time costs in a meaningful way for PACE applicants in California, because these consumers already must produce documentation similar to what might be necessary for an ATR determination as part of a PACE application under the proposal. In addition, the PACE Report indicates that at least some PACE companies have collected income information from applicants even in Florida, so again there may be little change for some consumers in that State.272 Further, the Bureau understands that, even in California after the effective date of the 2018 California PACE Reforms, PACE companies do not always collect full income documentation if other eligibility standards are not met. For instance, State laws governing PACE often prohibit PACE transactions from being made to consumers with evidence of recent payment difficulty, such as a recent bankruptcy, mortgage delinquency, or property tax delinquency. The Bureau understands that PACE companies in California set up their eligibility determination process to check these criteria before requesting income documentation from the consumer. The evidence in PACE Report is consistent with this—the Report finds that income information was not available for a sizeable minority of applications in California after 2018 where the application did not result in an originated PACE transaction.273 The PACE Report shows that, in 2019, the last full year for which data are available, the PACE companies that participated in the voluntary data collection received about 45,500 applications from prospective borrowers in Florida.274 As discussed further below, the number of applications would likely fall significantly if the proposal is finalized, possibly by as 272 See PACE Report, supra note 12, at Table 1. As noted in part II.A.6, in 2021, the main trade association for PACE companies announced a set of consumer protection policy principles that includes considering ability to pay, although the Bureau does not know to what extent this translates to requiring documentation from consumers where it is not required by State law. 273 PACE Report, supra note 12, at Table 1. 274 Id. at 50. VerDate Sep<11>2014 17:44 May 10, 2023 Jkt 259001 much as half. In addition, the PACE Report indicates that about a third of PACE applications in Florida after April 2018 included income information.275 Moreover, about one quarter of PACE applications in California after April 2018 (i.e., when the 2018 California PACE Reforms took effect and began requiring such income information as part of the ability-to-pay analysis) did not,276 indicating that such consumers in California were rejected before being asked for income information. Together, this suggests that, on average, approximately 11,400 additional consumers might be asked to provide income documentation annually under this rule as proposed.277 The Bureau does not have data indicating the average amount of time it takes a PACE applicant to produce the documentation for an ATR determination as would be required under the proposed rule. Assuming the time to be one hour and using the median hourly wage in Florida of $18.63,278 the aggregate time cost to consumers would be about $212,000 annually. Consumers would also face costs under the proposed rule due to losing access to PACE financing. This would include consumers whose PACE applications are denied due to failing the proposed ATR determination, as well as consumers who do not apply for PACE as a consequence of the proposal.279 For consumers who cannot, in fact, afford the cost of a PACE transaction, being denied is likely a benefit on net. However, no ATR determination can perfectly predict ability to repay, and some consumers who could, in fact, afford and benefit from a PACE transaction may be denied as a result of the proposed rule, if finalized. To quantify the cost to consumers of having applications for PACE transactions denied, the Bureau would need to be able to calculate the number of consumers that could afford the cost 275 Id. at 10. at Table 1. 277 The calculation is the product of 45,500 current applications, 0.5 (the assumed reduction due to proposal), 0.67 (the share of Florida applications that do not currently collect income), and 0.75 (the share of the remaining applications that would collect income, based on the share in California that currently collect income), which equals 11,375. 278 See Bureau of Lab. Stats., May 2021 State Occupational Employment and Wage Estimates, Florida, https://www.bls.gov/oes/current/oes_fl.htm (last visited Mar. 6, 2023). 279 Consumers might not apply for PACE due to the effect of the proposal if home improvement contractors who otherwise might have marketed PACE withdraw from that market, or if they opt not to proceed with a PACE transaction as a consequence of the provisions of the proposed rule. 276 Id. PO 00000 Frm 00036 Fmt 4701 Sfmt 4702 of a PACE transaction but would be denied as a result of the proposed rule, and the cost to the average consumer of being denied. The Bureau can roughly quantify the number of consumers and discusses this below, but it does not have the data necessary to quantify the average cost, and thus its discussion is ultimately qualitative in nature. The experience of California under the ability-to-pay regime of the 2018 California PACE Reforms provides a possible benchmark as to how the proposed rule might affect PACE application approval rates. The PACE Report shows that approval rates dropped sharply in California following the effective date of the 2018 California PACE Reforms in April 2018, falling from around 55 percent to around 40 percent.280 However, the Report also finds that approval rates recovered over time, rising back to around 55 percent by the end of 2019. Using Florida as a comparison group, the Report finds that the 2018 California PACE Reforms lowered the approval rate for PACE applications in California by about seven percentage points, although this average includes both the initial drop and the later recovery.281 Although the provisions of the proposed rule differ from the requirements of the 2018 California PACE Reforms, it is likely that the rule would have limited additional effect on PACE transaction approval rates in California. Instead, the proposal, if finalized, would primarily reduce approval rates in Florida. As noted above, the PACE Report indicates that PACE companies in Florida received about 45,500 applications in Florida in 2019, the last full year of data available. Again assuming that the proposed rule would lead to about half as many applications, and assuming that approval rates fall by seven percentage points, that would mean at most about 1,600 consumers annually might have a beneficial PACE application denied. This is an overcount, as many of these consumers in fact would not be able to afford a PACE transaction, and, moreover, the PACE Report shows that approval rates recovered over time. Some of the expected reduction in PACE applications may represent a cost to consumers as well, to the extent this arises from PACE financing being less available in general to consumers who could afford and benefit from it. However, as discussed above, one benefit of the proposal would be that consumers would be less likely to misunderstand the nature of a PACE 280 PACE 281 Id. E:\FR\FM\11MYP2.SGM Report, supra note 12, at Figure 16. at Table 13. 11MYP2 ddrumheller on DSK120RN23PROD with PROPOSALS2 Federal Register / Vol. 88, No. 91 / Thursday, May 11, 2023 / Proposed Rules transaction, which would also reduce PACE applications. As also noted above, a substantial fraction of PACE transactions are paid off early in the term of those transactions, which may be related to such misunderstandings. Although the Bureau expects the volume of PACE transactions in Florida and other States would decline if the proposed rule were finalized, it does not have data that would indicate how much of this decline would be a cost to consumers who miss out on a transaction they would prefer to engage in, and how much is a benefit to consumers who had no interest in participating in a PACE transaction once they understood its true nature or would not have been able to afford the PACE transaction. The Bureau can characterize qualitatively the consumer costs of not receiving a PACE transaction. The immediate impact to a consumer who might otherwise have agreed to a PACE transaction but is either denied or is not offered a PACE transaction due to the proposed rule is that the consumer either must pay for the home improvement project in cash or with another financing product, or else the consumer must forgo the home improvement project. Paying in cash for a homeimprovement project is not likely to be costly to consumers who choose to do so. Although this involves a large, upfront expenditure, it is unlikely that consumers will frequently agree to pay cash for a home improvement project they cannot afford—they will generally forgo the project instead, the costs of which are discussed below, or find other means of financing. Moreover, even if a consumer’s budget might be strained in the short term by the expenditure, the consumer would then save on the—potentially substantial— cost of interest and fees on a loan. The impact on consumers, relative to the baseline, of using another credit product may be either a cost or a benefit depending on the cost of the other credit product. If the next best alternative has a lower APR than the relevant PACE transaction, consumers who may have received a PACE loan but did not due to the proposed rules relating to ATR could be better off than they would be without the proposed rule. Conversely, if the next best alternative for a consumer has a higher APR, those consumers would be worse off. The PACE Report shows that estimated APRs for PACE transactions averaged 8.5 percent.282 This is greater than typical rates for home equity lines of 282 Id. at Table 2. VerDate Sep<11>2014 17:44 May 10, 2023 Jkt 259001 credit, but less than typical rates for credit cards.283 The interest rate on PACE transactions may be more or less than the cost of an unsecured loan for the same home improvement project, which can vary widely depending on the consumer’s credit score. The PACE Report suggests that under the proposal, many consumers who would not receive a PACE transaction would be able to obtain credit through another source, potentially at a better APR than the PACE transaction. The Report shows that the vast majority of PACE borrowers had other credit available. The report shows that almost 99 percent of PACE borrowers have sufficient credit history to have a credit score, almost 90 percent of PACE borrowers had a credit card pre-PACE, and on average PACE borrowers had more than seven unique credit accounts of any type pre-PACE.284 More than half of PACE borrowers had prime or superprime credit scores at the time they entered into a PACE transaction.285 The Bureau notes, however, that this aspect of the PACE Report’s analysis was limited to consumers who had a credit report. The Report had to exclude roughly a quarter of the consumers in the data submitted to the Bureau because they could not be matched to a credit report with the credit reporting company that acted as the Bureau’s contractor. Some of these consumers may simply have had a mismatch in name or address with the credit reporting company’s database, but likely at least some of these consumers had no credit report and were credit invisible. The true share of PACE borrowers with substantial access to credit is likely smaller than what is noted above. If the consumer does not opt to proceed with the home improvement project, the cost is the loss of the benefits of that project. The nature of these costs would depend on the type of project and the reasons the consumer 283 Average credit card interest rates on accounts assessed interest were between 13 and 17 percent during the period studied by the PACE Report. See Fed. Rsrv. Econ. Data, Fed. Rsrv. Bank of St. Louis, Commercial Bank Interest Rate on Credit Card Plans, Accounts Assessed Interest (Apr. 8, 2023), https://fred.stlouisfed.org/series/TERMCBCCINTNS. Interest rates for personal loans averaged around 10 percent. See Fed. Rsrv. Econ. Data, Fed. Rsrv. Bank of St. Louis, Finance Rate on Personal Loans at Commercial Banks, 24 Month Loan (Apr. 8, 2023), https://fred.stlouisfed.org/series/TERMCBPER24NS. The median interest rate on home equity lines of credit was 5.34 percent in 2019 based on HMDA data. See CFPB, An Updated Review of the New and Revised Data Points in HMDA: Further Observations using the 2019 HMDA Data, (Aug. 2020), https://files.consumerfinance.gov/f/ documents/cfpb_data-points_updated-reviewhmda_report.pdf. 284 See PACE Report, supra note 12, at Table 6. 285 See id. at Figure 1. PO 00000 Frm 00037 Fmt 4701 Sfmt 4702 30423 was considering the project. For the types of home improvement projects that might be eligible for PACE financing, the benefit of the project is primarily the energy, water, or insurance savings the project would have delivered.286 Other projects may be used to replace critical home equipment such as an HVAC system, without which the consumer would face the cost of not having that equipment. The Bureau does not have data available to estimate the average energy, water, or insurance savings actually obtained by PACE borrowers, nor is the Bureau aware of any research to estimate realworld savings from PACE transactions. One study the Bureau is aware of estimates aggregate energy savings from customers of one PACE company, but this is based on engineering estimates of the savings from each project.287 The academic literature has found that engineering estimates can frequently overestimate real-world savings from energy efficiency programs.288 Public comments from consumer advocacy groups in response to the ANPR also cited instances where consumers received smaller energy savings than what was advertised to them. Potential Benefits and Costs to Covered Persons of the Proposed Ability-toRepay Provisions The proposed ATR provisions would primarily affect PACE companies. Although the Bureau understands that local government sponsors are generally the creditor, as defined in TILA, for PACE transactions, the Bureau expects that the required ATR determination, and in practice the liability for any failures to make that determination, would fall on the PACE companies that 286 Home values may also increase as a result of the home improvement projects, but generally this will be the consequence of capitalizing the value of future energy, water, or insurance savings already considered here. With respect to insurance savings, industry stakeholders and local government stakeholders in Florida have asserted to the Bureau that consumers may have difficulty obtaining homeowners’ insurance for homes in Florida with roofs above a certain age. If a consumer cannot obtain homeowners’ insurance on real property that secures a non-PACE mortgage, lenders may forceplace insurance, generally at higher premiums than consumer-purchased insurance. PACE transactions may be used for roof replacements in Florida, and consumers may save on insurance costs if they utilize a PACE transaction for this purpose. 287 Adam Rose & Dan Wei, Impacts of Property Assessed Clean Energy (PACE) program on the economy of California, 137 Energy Pol’y 111087 (2020). 288 See, e.g., Meredith Fowlie, Michael Greenstone & Catherine Wolfram, Do Energy Efficient Investments Deliver? Evidence from the Weatherization Assistance Program, 133 Q J of Econ. 3 (Aug. 2018). E:\FR\FM\11MYP2.SGM 11MYP2 30424 Federal Register / Vol. 88, No. 91 / Thursday, May 11, 2023 / Proposed Rules ddrumheller on DSK120RN23PROD with PROPOSALS2 run PACE programs.289 Although the PACE Report provides some information on potential impacts of the ATR provisions on PACE companies, many of the potential benefits and costs to PACE companies are outside the scope of the Report. The Bureau discusses these benefits and costs qualitatively here. PACE companies may benefit from legal clarity provided by the proposed ATR provisions. As described above in part II.A, some PACE companies have been targets of legal actions from consumers and regulators. Some PACE companies have exited the industry citing such actions as at least a partial cause.290 These legal actions were not necessarily related to PACE companies consideration of consumers’ ability to repay—many related to conduct by home improvement contractors who marketed the PACE transactions. However, as described above in reference to benefits to consumers, the act of collecting income documentation as part of the proposed ATR provisions may make it more likely that consumers correctly understand the nature of a PACE transaction, potentially preventing some legal actions. Again, the required TILA–RESPA integrated disclosures (discussed in more detail below) would also assist in this respect. The Bureau does not have data on the frequency of lawsuits facing PACE companies currently, nor does it have data on the claims in those lawsuits that would allow the Bureau to determine what share might be prevented by following the proposed ATR provisions. By providing a Federal ability-torepay standard, the proposal may also encourage greater consistency across States. For example, the Bureau 289 The Bureau is aware that there may be programs authorized or administered by government entities that are not commonly understood as PACE, but that nonetheless meet the definition of PACE financing established in EGRRCPA section 307 and implemented under the proposed 12 CFR 1026.43(b)(15). Data on such programs is dispersed, and so the Bureau does not have sufficient information to reliably estimate how many such programs exist or to assess their current practices in providing financing. The Bureau understands these programs to operate independently of one another, under differing laws and practices. Consequently, the Bureau is unable to quantify (1) the number of such programs that are not commonly understood as PACE, but would meet the definition of PACE financing; (2) how many of those programs are operated by covered entities; or (3) the effects the proposed rule would have on each such covered entity. Any such program’s additional costs under the proposed ATR provisions would depend on its current procedures. The Bureau requests comment on how the proposed rule may affect such programs. 290 See, e.g., Decl. of Shawn Stone, CEO of Renovate America, In Support of Chapter 11 Petitions and First Day Motions, Case No. 20–13172 (Bankr. D. Del. 2020). VerDate Sep<11>2014 17:44 May 10, 2023 Jkt 259001 understands that PACE companies currently adhere to different processes for determining consumer eligibility for PACE transactions in California, involving some collection and verification of income and other documentation, than in Florida, where eligibility determinations generally involve less documentation. If the proposed rule encourages more standardized processes across States, this could result in reduced operating cost for PACE companies, which may offset some of the costs described below. More broadly, the nationwide minimum standard provided by the proposed rule could make it easier for PACE companies to expand into additional States, leading to additional business. As noted above, the Bureau understands that many States have legislation authorizing PACE transactions,291 but currently PACE companies are primarily active in just two States. Local governments in States with legislation authorizing PACE transactions may have a variety of reasons for opting not to engage with a PACE company to start a PACE program. However, the Bureau finds it plausible that controversies and consumer protection concerns discussed in part II.A.4 above may in part hold some government entities back from engaging in PACE. To the extent this is the case, the proposed rule could address those concerns and provide opportunities for PACE companies to grow, or for new PACE companies to enter the market. To the extent this occurs, the benefits could be considerable. The PACE Report documents that PACE origination volumes grew rapidly in both California and Florida when PACE companies entered those States.292 However, rapid growth may not materialize to the same extent in other States if the rapid growth in California and Florida was premised on business practices that would be prohibited by the proposal. Although PACE companies would likely receive some of the benefits discussed above from the proposed ATR provisions, PACE companies would also likely experience significant costs under the proposal, including reduced lending volumes in Florida and Missouri, onetime adjustment costs, and ongoing costs for training and compliance. The PACE Report documents that, following the effective date of the 2018 California PACE Reforms, PACE applications and originations fell sharply in that State, with no corresponding decline in Florida around the same time.293 Using Florida as a control group, the Report finds that PACE applications in California declined by more than 3,400 per month due to the provisions of the 2018 California PACE Reforms, from an average of over 5,300 per month in that State prior to the reforms.294 The Report finds that the number of originated PACE transactions in California declined by about 1000 per month due to the 2018 California PACE Reforms, representing about a 63 percent decrease from a pre-reform average of about 1600 originations per month in California.295 The specific requirements of the 2018 California PACE Reforms differ from those of the proposal, even with respect to provisions having to do with the California ability-to-pay requirements and the proposal’s Federal ATR requirements, but the Bureau expects that PACE companies would see a similar decline in originated loans in other States if the proposal is finalized. Conversely, the Bureau does not expect that the ATR requirements in the proposal would cause an additional reduction in PACE transactions in California due to the mechanisms discussed above. In addition, the decline in PACE applications in California following the 2018 California PACE Reforms that is documented in the PACE Report may have been accentuated by adjustments to firm behavior. That is, it is possible that PACE companies refocused marketing and other efforts on Florida following the implementation of the 2018 California PACE Reforms. This type of shifting would not occur in response to a Federal regulation that applies nationwide, such as the proposed rule. PACE companies will also likely experience one-time adjustment costs to update their systems and processes to accept and consider income and other information related to the proposed ATR requirements. These costs may include software and development, training of both PACE company staff and home improvement contractor affiliates, and costs for legal and compliance review of the changes to ensure compliance with the regulations. The Bureau does not have data indicating the magnitude of these costs. However, the Bureau notes that some of these costs may be ameliorated by the existing requirements in California. The Bureau understands that all currently active PACE companies are engaged in PACE financing in California and thus 293 Id. 291 See part II.A.2, supra. 292 PACE Report, supra note 12, at Figure 16. PO 00000 Frm 00038 Fmt 4701 Sfmt 4702 294 Id. at Table 13. 295 Id. E:\FR\FM\11MYP2.SGM 11MYP2 ddrumheller on DSK120RN23PROD with PROPOSALS2 Federal Register / Vol. 88, No. 91 / Thursday, May 11, 2023 / Proposed Rules must already have systems in place to allow for collection of income information and other documentation needed for the ATR determination the proposal would require. The Bureau thus expects that costs related to software changes would be relatively small, and that costs for training would likely be less than if there were no existing ability-to-pay requirements for PACE in any jurisdiction. The Bureau acknowledges that legal and compliance review costs would likely apply in all States, as the specific proposed requirements differ from the requirements of California State law and regulation. PACE companies may also experience additional litigation costs due to alleged violations of the proposed ATR provisions. As noted earlier in this analysis, the Bureau is proposing to apply civil liability in TILA section 130 to PACE companies that are substantially involved in making the credit decision. As the Bureau stated in the January 2013 Final Rule, even creditors making good faith efforts when documenting, verifying, and underwriting a loan may still face some legal challenges from consumers expost. This will occur when a consumer proves unable to repay a loan and wrongly believes (or chooses to assert) that the creditor failed to properly assess the consumer’s ability to repay before making the loan. This will likely result in some litigation expense, although the Bureau believes that over time, that expense will likely diminish as experience with litigation yields a more precise understanding regarding what level of compliance is considered sufficient. After some experience, litigation expense will most likely result where compliance is insufficient or from limited novel sets of facts and circumstances where some ambiguity remains. Moreover, as Bureau also stated in the January 2013 Final Rule, the Bureau believes that even without the benefit of any presumption of compliance, the actual increase in costs from the litigation risk associated with ability-to-repay requirements would be quite modest. This is a function of the relatively small number of potential claims, the relatively small size of those claims, and the relatively low likelihood of claims being filed and successfully prosecuted. The Bureau notes that litigation likely would arise only when a consumer in fact was unable to repay the loan (i.e., was seriously delinquent or had defaulted), and even then only if the consumer elects to assert a claim and, in all likelihood, only if the consumer is able to secure a lawyer to VerDate Sep<11>2014 17:44 May 10, 2023 Jkt 259001 provide representation; the consumer can prevail only upon proving that the creditor lacked a reasonable and good faith belief in the consumer’s ability to repay at consummation or failed to consider the statutory factors in arriving at that belief. Beyond PACE companies, the proposed ATR provisions would impose some costs on local government entities and home improvement contractors.296 Some local government entities would also experience costs due to the proposed ATR provisions, if finalized. The Bureau understands that local government entities receive some revenues from originated PACE transactions, in the form of fees, or a small percentage of the PACE payments collected through consumers’ property tax bills. The Bureau does not have data indicating the average revenue that government entities receive from each PACE transaction. To the extent that the proposal reduces the volume of PACE transactions, the Bureau expects that it would also reduce revenue to such government entities, in proportion to the revenue they currently receive from such transactions. Similar to the discussion above related to PACE companies, the Bureau expects that government entities in California would be less affected by the proposed rule than government entities in other States. If, as discussed above, the proposal were to facilitate growth of PACE transactions in States that do not currently have active programs, local government entities in those State might benefit as a result. Home improvement contractors involved in PACE transactions would experience costs under the proposal due to the additional staff time required to collect the required information for the proposed ATR determination. As with time costs for consumers discussed above, the Bureau assumes these costs would primarily affect home improvement contractors in Florida and that the volume of applications in Florida would decrease from current levels if the proposal is finalized; see above for details. The PACE Report indicates that roofs and disaster hardening are the most common type of project for PACE transactions in Florida, and so the Bureau uses the median wage for roofers in Florida, $18.43 per 296 Local government entities and home improvement contractors currently involved in PACE transactions may or may not be covered persons depending on the specific facts and circumstances of their involvement in PACE financing; to the extent they are not covered persons the Bureau exercises its discretion to consider benefits, costs and impacts to these entities. PO 00000 Frm 00039 Fmt 4701 Sfmt 4702 30425 hour,297 to value the time costs to home improvement contractors. Under these assumptions, the total costs to home improvement contractors from additional staff time would total about $210,000 annually.298 Potential Benefits and Costs to Consumers and Covered Persons of Clarifying That PACE Financing Is Credit The proposal would revise the official commentary for Regulation Z to clarify that PACE transactions are credit for purposes of TILA.299 In practice, this would impose a number of new requirements on PACE companies and other covered persons. Some relevant provisions whose benefits and costs are discussed below include (1) a three-day right of recission; 300 (2) disclosure requirements, including provision of relevant TILA–RESPA integrated disclosure forms and a mandatory waiting period between provision of the disclosure and consummation; 301 (3) requirements related to loan originators; 302 and (4) certain requirements for PACE transactions that meet the definitions of a high-cost mortgage or a higher-priced mortgage loan.303 The Bureau is not addressing in depth certain other provisions.304 297 See Bureau of Lab. Stats., May 2021 State Occupational Employment and Wage Estimates, Florida, https://www.bls.gov/oes/current/oes_fl.htm (last visited Mar. 6, 2023). 298 In the January 2013 Final Rule, the Bureau noted that most non-PACE mortgage lenders already collected income information as part of the normal course of business, and so assumed no significant costs relative to the baseline. See 78 FR 6546 (Jan. 30, 2013). This likely would not be the case for PACE companies outside of California. The Bureau requests comment on the actual time costs of gathering this information and typical wages of staff employed to collect it. 299 See section-by-section analysis of proposed § 1026.2(a)(14), supra. 300 Consumers have the right to rescind within three business days of consummation, delivery of the notice informing the consumer of the right to rescind, or delivery of all material disclosures, whichever occurs last. If the notice or disclosures are not delivered, the right to rescind expires three years after consummation. See 12 CFR 1026.23(a)(3)(i). 301 See, e.g., 12 CFR 1026.37, 1026.38. 302 See, e.g., 12 CFR 1026.36(a)(1)(i), 1026.36(d)– (g). 303 12 CFR 1026.32, 1026.34. 304 For instance, PACE companies would also be required to comply with the prohibition on prepayment penalties under 12 CFR 1026.43(g), but the Bureau does not expect this would create significant costs or benefits for consumers or covered persons, as the Bureau understands that PACE loans being made currently do not include these penalties. PACE contracts would also be prohibited from requiring the use of mandatory arbitration under 12 CFR 1026.36(h), but the Bureau does not have information sufficient to determine the extent to which PACE contracts currently include mandatory arbitration clauses. To the E:\FR\FM\11MYP2.SGM Continued 11MYP2 ddrumheller on DSK120RN23PROD with PROPOSALS2 30426 Federal Register / Vol. 88, No. 91 / Thursday, May 11, 2023 / Proposed Rules The right of recission could benefit consumers and impose costs on covered persons to the extent that consumers decide a PACE transaction is not appropriate for them during the rescission period and exercise the right. As discussed above, many PACE borrowers pay off their PACE transactions early, which suggests that some of these consumers may decide they do not want a PACE transaction after origination, or may not have intended to take out the PACE transaction at all. A rescission period could give consumers more time to exercise such preferences. However, the Bureau does not have data indicating whether PACE borrowers typically realize such a preference during the three-day period following origination of a PACE transaction. In addition, PACE borrowers in California already have a three-day right to cancel under State law,305 and PACE companies may currently voluntarily provide a recission option outside of California. As a result, the Bureau expects the application of this provision of TILA to impose few benefits or costs on consumers and covered persons. The disclosure requirements would likely benefit consumers by increasing their understanding of the terms of the PACE transaction and mandating a waiting period between disclosure and consummation. As discussed above in the context of collecting income information, mandating disclosures and a waiting period for PACE transactions conforming with TILA–RESPA integrated disclosure requirements would make it more likely that consumers understand the terms of their proposed PACE transactions. The disclosure requirements would also likely increase understanding of the fundamental nature of PACE transactions as financial obligations that must be repaid over time. The potential benefits of avoiding consumer misunderstanding of the nature of a PACE transaction are discussed above. By providing detailed information about the terms and payment amounts expected in a PACE transaction, TILA– RESPA integrated disclosures may also assist consumers in preparing for their first PACE payment, which can be a significant shock to their finances regardless of whether the consumer pays their property taxes directly or extent mandatory arbitration clauses are currently in use, consumers and covered persons could incur benefits and costs as a result of this prohibition. 305 Consumers have the option to cancel within three business days after signing the agreement, receipt of the Financing Estimate and Disclosure, or receipt of the cancellation notice, whichever occurs last. See Cal. Sts. & Hwys. Code sec. 5898.16. VerDate Sep<11>2014 17:44 May 10, 2023 Jkt 259001 through a pre-existing mortgage escrow account. The PACE Report finds that the average PACE consumer’s property tax bill likely nearly doubles as a result of the PACE assessment.306 Particularly for consumers who do not pay property taxes through an escrow account, this can be a major expenditure shock. For consumers who do pay property taxes through an escrow account, the Report finds that mortgage payments increase substantially over the two years following the PACE transaction, indicating an expenditure shock as well.307 Some of the disclosures on the proposed modified TILA–RESPA integrated disclosure form for PACE transactions may prompt consumers with a pre-existing non-PACE mortgage to inform their mortgage servicer of the PACE transaction. This, in turn, could prompt the servicer to conduct an escrow analysis to account for the PACE payment sooner than it otherwise would have and thus create a smaller monthly payment increase for the consumer. PACE companies would experience one-time adjustment costs related to the TILA–RESPA integrated disclosure if the proposal is finalized. The Bureau understands that PACE companies generally provide some disclosures with similar information at the point of sale, but not in the format or with precisely the same information as the disclosure that would be required under the proposal. The Bureau expects that ongoing costs will be minimal relative to the baseline, since PACE companies already provide disclosures. To the extent that the proposed TILA–RESPA integrated disclosures for PACE require that PACE companies gather information that they do not currently collect, they may face additional costs of gathering that information if the proposal is finalized. The required seven-day waiting period between provision of the Loan Estimate and consummation may also impose costs on both PACE companies and the home improvement contractors who market PACE transactions. As discussed in part II.A.4 above, the Bureau understands that, currently, PACE transactions are frequently originated on the spot, on the same day as the home improvement contractor approaches the consumer about a potential project. PACE industry stakeholders have expressed to the Bureau that this speed of origination is necessary to compete with unsecured financing options. It is possible that the seven-day waiting period would lead to a further reduction in PACE transaction 306 PACE 307 Id. PO 00000 Report, supra note 12, at 13. at 18–20. Frm 00040 Fmt 4701 Sfmt 4702 volume due to reduced contractor participation if contractors prefer to offer only credit options that do not have such a waiting period. No States currently have a similar mandatory waiting period under State law as far as the Bureau is aware, so this aspect of the proposal would likely affect PACE lending volumes in all States. The Bureau does not have data to indicate how large this effect might be. TILA and Regulation Z include a variety of provisions that apply to loan originators. With current PACE industry practices, the Bureau understands that, if the proposal is finalized, these provisions would primarily apply to home improvement contractors. If home improvement contractors continue in their current roles and act as loan originators for PACE transactions, both the individual contractors and related companies would face compliance costs, including costs relating to applicable State or Federal licensing and registration requirements.308 The Bureau does not have data available to quantify the costs to home improvement contractors from complying with TILA as loan originators. It is possible that, if the proposal is finalized, home improvement contractors would opt not to bear the cost of complying with TILA provisions to the extent they apply and would instead exit the PACE market. The home improvement contractors themselves would incur costs in this case. The Bureau does not have data available to estimate these costs. The costs to home improvement contractors from exiting the PACE industry depend on what would happen to prospective home improvement contracts for which PACE financing would no longer be an option. If contractors are able to make the sale of the home improvement contract based on a cash payment or another financial product, they generally would not experience any cost.309 However, contractors could lose some sales due to the unavailability of a PACE transaction as a financing option. The Bureau does not have data that would indicate how frequently this would happen. It is also possible that, if the proposal enables PACE financing to expand into additional States, home improvement contractors in those States would benefit from additional business. Again, 308 12 CFR 1026.36(f). Bureau’s understanding is that home improvement contractors do not receive a commission from PACE companies for originating a PACE contract. To the extent that contractors do receive commissions, exiting the PACE market would cost them these commissions, although they might be replaced by commissions from an alternate financial product, if any. 309 The E:\FR\FM\11MYP2.SGM 11MYP2 ddrumheller on DSK120RN23PROD with PROPOSALS2 Federal Register / Vol. 88, No. 91 / Thursday, May 11, 2023 / Proposed Rules the Bureau does not have data that would indicate how many contractors might benefit if this were to occur, or how much they would benefit. Consumers may experience both costs and benefits due to the proposed application of TILA’s loan originator provisions to PACE, if finalized. The costs and benefits to consumers of not being offered a PACE transaction are discussed above in this analysis; that discussion also applies to cases where consumers are not offered a PACE transaction because the home improvement contractor has exited the PACE market. To the extent that home improvement contractors opt to remain in the PACE market or PACE transactions are marketed by PACE companies or local governments directly as a result of the proposal being finalized, consumers may benefit from such changes to the way PACE transactions are marketed. Many consumer protection issues identified in the comments responding to the ANPR are related to conduct by home improvement contractors. Either mandatory compliance with TILA’s loan originator provisions by home improvement contractors, or a shift to marketing PACE transactions directly by PACE companies or local governments could ameliorate some of these issues. Finally, under TILA, certain additional protections apply to highcost mortgages as defined by HOEPA. High-cost mortgages generally include those that: (1) have an APR 6.5 or 8.5 percentage points higher than the APOR for a comparable transaction, depending on whether it is a first- or subordinatelien mortgage; (2) have points and fees exceeding 5 percent of the total loan amount or the lesser of 8 percent of the total loan amount or $1,000 (adjusted annually for inflation), depending on the size of the transaction; or (3) include certain prepayment penalties.310 Few PACE transactions have appear to have APRs high enough to meet the first prong,311 and the Bureau understands that more recent PACE transactions generally do not include prepayment penalties, although certain early PACE contracts did include prepayment penalties. The PACE Report finds that about 35 percent of PACE transactions in the data the Report studies had upfront fees exceeding the relevant HOEPA points-and-fees threshold.312 However, this varied sharply by State, 310 See TILA section 103(bb)(1)(A); 12 CFR 1026.32(a)(1). 311 See PACE Report, supra note 12, at 15 (finding that 96 percent of PACE transactions made between 2014 and 2020 had estimated APR–APOR spreads below 6.5 percent). 312 Id. at Table 5. VerDate Sep<11>2014 17:44 May 10, 2023 Jkt 259001 with over half of all PACE transactions in California having fees exceeding the threshold, compared to just 8 percent of PACE transactions in Florida.313 Some of the requirements of HOEPA may be difficult for PACE companies to comply with. This could lead to PACE companies declining to make PACE transactions that would be high-cost mortgages. Given the variation in fees across States, it seems possible that PACE companies could make PACE transactions profitably with lower fees than they currently do. As a result, the Bureau expects that, if the proposal is finalized, PACE companies would reduce fees or interest rates on PACE transactions that would otherwise exceed HOEPA thresholds rather than declining to make a PACE transaction at all. This would impose costs on PACE companies and the affiliated local government entities in the form of lost revenue and will benefit PACE consumers by the same measure. PACE companies may also experience costs due to the requirements of Regulation Z with respect to higherpriced mortgage loans. Regulation Z generally requires creditors to obtain a written appraisal of the property to be mortgaged prior to consummating higher-priced mortgage loans if the amount of credit extended exceeds a certain threshold—currently $31,000 in 2023—and to provide the consumer with a written copy of the appraisal.314 The PACE Report indicates that about a quarter of PACE transactions originated between June 2014 and July 2020 had original principal amounts above that threshold, and moreover shows that most PACE transactions have APR– APOR spreads above the threshold for higher-priced mortgage loans.315 The Bureau understands that PACE companies typically do not obtain written appraisals for properties securing PACE transactions, relying instead on automated valuation models. Switching to written appraisals, or lowering loan amounts to be under the threshold, would impose costs on PACE companies. Consumers may also experience costs to the extent that the price of conducting an appraisal is passed on to them. The Bureau does not have data on the amount of these costs, and requests comment on this. E. Potential Specific Impacts of the Proposed Rule on Access to Credit As discussed above, the proposal, if finalized, may reduce access to PACE credit. Potential PACE borrowers who cannot qualify for a PACE transaction due to the proposed ATR analysis will not have access to PACE credit. As also noted above, the PACE Report finds that the implementation of the 2018 California PACE Reforms, which included a required ability-to-pay analysis, resulted in a substantial reduction in new PACE transactions.316 Some of the decrease in California was likely due to increased denials of PACE applications, and some was likely due to reduced marketing of PACE transactions, such as reduced participation by home improvement contractors. It seems likely that, if the rule is finalized as proposed, a similar reduction would occur in other States. However, it is not clear how much of the reduction in PACE transactions in California was due to credit supply factors, versus reduced demand for PACE transactions. As discussed above, a substantial fraction of PACE transactions are paid off early, suggesting that at least some consumers who engage in a PACE transaction currently may not desire to have a longterm financial obligation. Some provisions of the proposed rule could prompt some consumers to avoid the transaction, which would reduce the volume of PACE transactions, but this would be due to a reduction in demand for credit, not a change in access to credit. In addition, consumers who have a PACE application denied, or who are not offered an opportunity to apply for a PACE transaction, may be able to access other forms of credit, potentially at more favorable APRs. To the extent that the legal clarity provided by the proposal were to enable PACE financing to expand into additional States, this would increase access to PACE credit for consumers in those States. The Bureau quantifies the potential impacts of the proposal on access to credit in its discussion above in part IX.D where possible but seeks comment on this issue, particularly in the form of additional studies or data that might inform the potential impact of the proposal on access to credit. 313 Id. 314 See generally 12 CFR 1026.35(c); comment 35(c)(2)(ii)–3. 315 See PACE Report, supra note 12, at Table 2, Table 5. PO 00000 Frm 00041 Fmt 4701 Sfmt 4702 30427 316 Id. E:\FR\FM\11MYP2.SGM at 45. 11MYP2 30428 Federal Register / Vol. 88, No. 91 / Thursday, May 11, 2023 / Proposed Rules ddrumheller on DSK120RN23PROD with PROPOSALS2 F. Potential Specific Impacts on Consumers in Rural Areas and Depository Institutions With Less Than $10 Billion in Assets The proposed rule would not have a significant impact on consumers in rural areas. If anything, the proposed rule would impact consumers in rural areas less than consumers in non-rural areas. The PACE Report shows that consumers who take part in PACE transactions are less likely to live in rural areas than other consumers in their States. Moreover, the Report notes that California and Florida, the States with the most PACE lending to date, have the smallest and sixth-smallest rural population shares among all States, respectively. The Bureau understands that depository institutions of any size are not typically involved with PACE transactions, and thus the proposed rule would have no direct impact on such entities, regardless of asset size. X. Regulatory Flexibility Act Analysis The Regulatory Flexibility Act (RFA) generally requires an agency to conduct an initial regulatory flexibility analysis (IRFA) and a final regulatory flexibility analysis of any rule subject to noticeand-comment rulemaking requirements unless the agency certifies that the rule will not have a significant economic impact on a substantial number of small entities (SISNOSE).317 The Bureau is also subject to specific additional procedures under the RFA involving convening a panel to consult with small business representatives before proposing a rule for which an IRFA is required.318 As the below analysis shows, an IRFA is not required for this proposal because the proposal, if adopted, would not have a SISNOSE.319 Small entities, for purposes of the RFA, include both small businesses as defined by the Small Business Administration, and small government jurisdictions, defined as jurisdictions with a population of less than 50,000.320 For the reasons discussed below, the Bureau does not believe that the proposed rule will have a SISNOSE. While it is possible that the proposed rule would have a significant impact on some entities, based on the information available it appears that most of those entities are not ‘‘small’’ as defined by the RFA, and that any small entities that 317 5 U.S.C. 601 et seq. U.S.C. 609. 319 This analysis considers collectively the potential impacts of all aspects of the proposal on small entities, including both the affirmative proposed new requirements and the proposed revisions to the official commentary. 320 5 U.S.C. 601(3), 601(5). 318 5 VerDate Sep<11>2014 17:44 May 10, 2023 Jkt 259001 may be impacted, significantly or otherwise, are unlikely to constitute a substantial number of small entities. The Bureau understands that any economic impact from the proposed rule would primarily fall on PACE companies, as defined under proposed § 1026.43(b)(14). Most of these entities are private firms. A small number of local government entities administer their own PACE programs, and may be affected in similar ways as PACE companies. The proposed rule may also have a direct economic impact on the local government entities that authorize PACE programs within their jurisdictions and are parties to the financing agreements but do not otherwise administer the originations, and it may also have a direct economic impact on the home improvement contractors who market PACE to consumers. The Bureau is aware of five entities that currently are administering PACE programs as commonly understood, including four private firms and one local government entity. Based on the information available to the Bureau, none of these entities currently are small entities. The local government entity that directly originates PACE transactions has population greater than 50,000.321 For private firms, Small Business Administration (SBA) size standards differ by industry based on the 6-digit North American Industry Classification System (NAICS) industry code that represents the primary business of a firm.322 For private firms whose primary business is originating PACE transactions, the relevant SBA threshold is $47 million in annual receipts.323 The 321 Sonoma County operates its own PACE program, called Sonoma County Energy Independence Program. Sonoma County, California had population 485,887 in 2021, according to the Census Bureau. See U.S. Census Bureau, Annual Estimates of the Resident Population for Counties in California: April 1, 2020 to July 1, 2021, https:// www2.census.gov/programs-surveys/popest/tables/ 2020-2021/counties/totals/co-est2021-pop-06.xlsx. 322 The NAICS system is produced by a partnership between the Office of Management and Budget and partner agencies in Canada and Mexico, with the aim of providing a consistent framework for analyzing industry statistics. 323 The SBA generally defines receipts as ‘‘ ‘total income’ . . . plus ‘cost of goods sold’, as these terms are defined and reported on Internal Revenue Service (IRS) tax return forms.’’ The SBA provides that the classification should be based on a five-year average of receipts, with adjustments if a firm has been in business for less than five full fiscal years. See 13 CFR 121.104. PACE is a small and relatively new industry that began around 2008, and there is more than one 6-digit NAICS industry that could reasonably apply to PACE companies (the NAICS system is comprehensive, such that every firm should fit into exactly one 6-digit industry code). The 6-digit NAICS industry codes that private PACE companies could arguably belong to include PO 00000 Frm 00042 Fmt 4701 Sfmt 4702 Bureau’s understanding is that PACE companies’ annual receipts for purposes of the SBA criteria are based on the principal balance of the financing obligations they originate in a given year.324 This is consistent with how PACE companies tend to describe the volume of their business.325 Based on the evidence available to the Bureau, it does not appear likely that any of the currently active private PACE companies averaged less than $47 million in annual receipts over the past five years.326 Moreover, even if some PACE companies are small entities, PACE companies would not represent a substantial number of the small entities in any of the industries they could reasonably be classified in, which have between hundreds and thousands of small firms.327 Even if all currently codes 522292 (Real Estate Credit), code 522299 (International, Secondary Market, and All Other Nondepository Credit Intermediation), or code 523910 (Miscellaneous Intermediation). See U.S. Census Bureau, North American Industry Classification System 2022, https:// www.census.gov/naics/?58967?yearbck=2022. For all these industries the SBA size threshold is $47 million in annual receipts. 13 CFR 121.201. 324 This will somewhat undercount annual receipts, which would also include revenues the firms receive from the sale of PACE securities to the secondary market. 325 See, e.g., Ygrene Energy Fund Inc., RE: Advanced Notice of Proposed Rulemaking on Residential Property Assessed Clean Energy (RIN 3170–AA84) (May 7, 2019) (describing the change in the volume of PACE assessments following the 2017 California PACE statute legislation in terms of the change in number of assessments and dollar value of those assessments). 326 Although the data used in the Bureau’s PACE Report did not identify revenue separately by individual companies, publicly available data from CAEATFA indicates that the currently active PACE companies generally averaged over $50 million in new PACE transactions in California alone between 2018 and 2020. See Cal. Alt. Energy & Advanced Transp. Fin. Auth., PACE Loss Reserve Program Enrollment Activity (Mar. 2021) https:// www.treasurer.ca.gov/caeatfa/pace/activity.pdf. Moreover, the PACE Report shows that PACE lending in Florida exceeded that in California after 2018. Similarly, statistics from the PACE trade association indicate that the PACE industry made around $500 million in new PACE transactions in 2021. See PACE Nation, PACE Market Data (updated Dec. 31, 2021), https:// www.pacenation.org/pace-market-data/. Even if these revenues were not evenly distributed among the four companies, it seems unlikely that any one company had revenues less than $47 million averaged over five years. 327 The Bureau can determine the approximate number of small firms active in each industry through the 2017 Economic Census (the most recent version available at this writing), which gives counts of firms categorized by NAICS code and annual revenues. See U.S. Census Bureau, 2017 Economic Census, Finance and Insurance (NAICS Sector 52), Establishment and Firm Size Statistics, https://www.census.gov/data/tables/2017/econ/ economic-census/naics-sector-52.html. The revenue categories in the public Economic Census data do not line up perfectly with the SBA size thresholds, but even excluding categories that overlap the threshold, the 2017 Economic Census indicates that there were at least 2,372 small firms in the Real E:\FR\FM\11MYP2.SGM 11MYP2 Federal Register / Vol. 88, No. 91 / Thursday, May 11, 2023 / Proposed Rules ddrumheller on DSK120RN23PROD with PROPOSALS2 operating PACE companies were small, they would not represent a substantial number within any of the relevant 6digit NAICS industries. The Bureau also considered whether a substantial number of small government entities could experience a significant impact if this proposal were finalized. As noted above, the Bureau is only aware of one government entity that is currently acting as its own administrator to provide PACE financing as it is commonly understood, and it is not small under the RFA. However, other government entities authorize and oversee PACE programs, are parties to the financing agreements, and receive some revenues from the program.328 To the extent that the proposed rule could directly impact these other government entities, the Bureau must consider whether the proposed rule would create a significant economic impact on a substantial number of these entities. As discussed above, under the RFA, government entities are small if they have populations of less than 50,000. The 19 States plus the District of Columbia which the Bureau understands currently have legislation authorizing PACE contained 17,209 total small governments, consisting of 715 counties, 7,716 incorporated places and 8,778 minor civil divisions.329 Of these small governments, currently, only small governments in California, Florida, and Missouri would be directly impacted by the proposed rule in any meaningful way because they are the Estate Credit industry, at least 1,725 small firms in the International, Secondary Market, and All Other Nondepository Credit Intermediation industry, at least 1,573 small firms in the All Other Nondepository Credit Intermediation industry and at least 6,715 in the Miscellaneous Intermediation industry. 328 As discussed in part VII above, the Bureau understands that government entities are legally the ‘‘creditor’’ for purposes of the TILA requirements as implemented in Regulation Z. See 12 CFR 1026.2(a)(17). However, for programs administered by PACE companies, in general the Bureau does not expect significant economic impact on these government entities from these provisions, as the Bureau expects that the private PACE companies will continue to administer origination activity on behalf of the government entities, such that most of the economic burden will fall on the private entities. As discussed above, an exception to this would be small government entities running programs that are not commonly understood as PACE but meet the definition of PACE financing under proposed 12 CFR 1026.43(b)(15). Even in this case, the Bureau does not believe the rule would impose a significant economic impact, as such programs represent a small fraction of any given entity’s overall revenue. 329 The States used for this calculation are Arkansas, California, Colorado, Connecticut, Florida, Georgia, Illinois, Maine, Maryland, Minnesota, Missouri, Nebraska, New Jersey, New Mexico, New York, Ohio, Rhode Island, Vermont, and Wyoming. VerDate Sep<11>2014 17:44 May 10, 2023 Jkt 259001 30429 only States with active PACE programs.330 There are exactly 2,000 small government entities in those three States combined, consisting of 134 counties, 1,583 incorporated places, and 283 minor civil districts. Even if all government entities in the three States were significantly impacted by the rule (which is unlikely, as not all local governments in those States sponsor PACE programs), this would be only about 11.6 percent of small government entities in States with active PACE legislation, which the Bureau does not consider to be a substantial number. In addition, those small government entities that would be directly impacted by the proposed rule are unlikely to receive a significant proportion of their revenue from PACE financing, such that even eliminating this revenue stream would not cause a significant economic impact.331 The proposed rule may impact the home improvement contractors who market and help originate PACE financing. Here again it appears that the rule would not directly impact a substantial number of small entities, even assuming that any small home improvement contractor would experience a significant economic impact. In the most recent Economic Census there were more than 233,000 small entities in the relevant NAICS codes for home improvement contractors.332 By comparison, there are currently approximately 2,000 firms registered in California as PACE solicitors.333 Even if all of these entities are small and there were a similar number of small entities acting as PACE solicitors in Missouri and Florida, this would be less than three percent of all relevant small entities, and so not a substantial number.334 Accordingly, the Director hereby certifies that this proposal, if adopted, would not have a significant economic impact on a substantial number of small entities. Thus, neither an IRFA nor a small business review panel is required for this proposal. The Bureau requests comment on the analysis above and requests any relevant data. 330 See PACENation, PACE Programs, https:// www.pacenation.org/pace-programs/ (‘‘Residential PACE is currently offered in California, Florida, and Missouri.’’) (last visited Mar. 16, 2023). 331 The Bureau understands that local government entities are typically funded in large part by property taxes. Although the PACE Report finds that PACE assessments can nearly double property tax payments for individual homeowners, the Bureau understands that most of the revenue of those payments accrues to the investors in the resulting PACE bonds. Moreover, the vast majority of residential properties in any given jurisdiction do not have PACE assessments. As such, revenue related to PACE received by small government entities will typically be a small fraction of overall revenue. 332 Home improvement contractors that serve as solicitors for PACE fall under NAICS industry codes 236118, (‘‘Residential Remodelers’’), 238150 (‘‘Glass and glazing contractors’’), 238160 (‘‘Roofing contractors’’), 238170 (‘‘Siding Contractors’’), 238210 (‘‘Electrical contractors’’), and 238220 (‘‘Plumbing, heating, and air-conditioning contractors’’). See U.S. Census Bureau, North American Industry Classification System 2022, https://www.census.gov/naics/?58967?yearbck= 2022. The relevant SBA threshold for industry 236118 is $45 million per year in annual receipts; for the other industries the threshold is $19 million. 13 CFR 121.201. According to the 2017 Economic Census, these industries had at least 70,000, 4,600, 14,000, 6,000, 58,000, and 81,000 small entities, respectively. See U.S. Census Bureau, 2017 Economic Census, Construction (NAICS Sector 23), Establishment and Firm Size Statistics, https:// www.census.gov/data/tables/2017/econ/economiccensus/naics-sector-23.html. The Economic Census The Bureau preliminarily intends that, if any provision of the final rule, or any application of a provision, is stayed or determined to be invalid, the remaining provisions or applications are severable and shall continue in effect. PO 00000 Frm 00043 Fmt 4701 Sfmt 4702 XI. Paperwork Reduction Act The information collections contained within TILA and Regulation Z are approved under OMB Control Number 3170–0015. The current expiration date for this approval is May 31, 2023. The Bureau has determined that this proposed rule would not impose any new information collections or revise any existing recordkeeping, reporting, or disclosure requirements on covered entities or members of the public that would be collections of information requiring approval by the Office of Management and Budget under the Paperwork Reduction Act. XII. Severability data does not disaggregate firm counts by State at the 6-digit NAICS level. 333 See Cal. Dep’t of Fin. Prot. & Innovation, Enrolled PACE Solicitors Search (updated Feb. 27, 2023), https://dfpi.ca.gov/pace-programadministrators/pace-solicitor-search/?emrc= 63ee970c63d06 for California’s database of solicitors, however note that many companies are duplicated to the extent they are enrolled with multiple PACE companies. California law and regulation defines a ‘‘PACE solicitor’’ as a person authorized by a program administrator to solicit a property owner to enter into an assessment contract. Cal. Fin. Code sec. 22017(a); see also 10 Cal. Code Regs. sec. 1620.02(f). 334 Limiting consideration to contractors operating in States with PACE legislation is not appropriate in this case. Unlike local governments, contractors can and do operate across State lines, so contractors currently operating in non-PACE States could possibly be affected by the proposed rule if finalized. As a result, it makes sense to consider all home improvement contractors as part of the total for purposes of the ‘‘substantial number’’ calculation. In addition, the Economic Census does not provide industry-level data disaggregated by State in a way that would allow the Bureau to determine the number of firms by industry and annual revenue. E:\FR\FM\11MYP2.SGM 11MYP2 30430 Federal Register / Vol. 88, No. 91 / Thursday, May 11, 2023 / Proposed Rules List of Subjects in 12 CFR Part 1026 Consumer protection, Credit, Housing, Mortgage servicing, Mortgages, Truth-in-lending. Authority and Issuance For the reasons set forth in the preamble, the CFPB proposes to amend Regulation Z, 12 CFR part 1026, as set forth below: PART 1026—TRUTH IN LENDING ACT (REGULATION Z) 1. The authority citation for part 1026 continues to read as follows: ■ Authority: 12 U.S.C. 2601, 2603–2605, 2607, 2609, 2617, 3353, 5511, 5512, 5532, 5581; 15 U.S.C. 1601 et seq. Subpart E—Special Rules for Certain Home Mortgage Transactions 2. Amend § 1026.35 by adding paragraph (b)(2)(i)(E) to read as follows: ■ § 1026.35 Requirements for higher-priced mortgage loans. * * * * * (b) * * * (2) * * * (i) * * * (E) A PACE transaction, as defined in § 1026.43(b)(15). * * * * * ■ 3. Amend § 1026.37 by adding paragraph (p) to read as follows: § 1026.37 Content of disclosures for certain mortgage transactions (Loan Estimate). ddrumheller on DSK120RN23PROD with PROPOSALS2 * * * * * (p) PACE transactions. For PACE transactions as defined in § 1026.43(b)(15), the creditor must comply with the requirements of this section with the following modifications: (1) Escrow account. The creditor shall not disclose the information in paragraph (c)(2)(iii) of this section. (2) Taxes, insurance, and assessments. (i) In lieu of the information required by paragraph (c)(4)(iv), the creditor shall disclose a statement of whether the amount disclosed pursuant to paragraph (c)(4)(ii) of this section includes payments for the PACE transaction, labeled ‘‘PACE Payment’’; payments for other property taxes, labeled ‘‘Property Taxes (not including PACE loan)’’; amounts identified in § 1026.4(b)(8); and other amounts described in paragraph (c)(4)(ii) of this section, along with a description of any such other amounts; (ii) In lieu of the information required by paragraph (c)(4)(v) and (vi), a statement that the PACE transaction, VerDate Sep<11>2014 17:44 May 10, 2023 Jkt 259001 described as a ‘‘PACE loan,’’ will be part of the property tax payment and a statement directing the consumer, if the consumer has a pre-existing mortgage with an escrow account, to contact the consumer’s mortgage servicer for what the consumer will owe and when. (3) Contact information. If the PACE company as defined in 12 CFR 1026.43(b)(14) is not otherwise disclosed pursuant to paragraphs (k)(1) through (3) of this section, the creditor shall disclose the name, NMLSR ID (labeled ‘‘NMLS ID/License ID’’), email address, and telephone number of the PACE company (labeled ‘‘PACE Company’’). In the event the PACE company has not been assigned an NMLSR ID, the creditor shall disclose the license number or other unique identifier issued by the applicable jurisdiction or regulating body with which the PACE company is licensed and/or registered, with the abbreviation for the State of the applicable jurisdiction or regulatory body stated before the word ‘‘License’’ in the label, if any. (4) Assumption. In lieu of the statement required by paragraph (m)(2) of this section, a statement that, if the consumer sells the property, the buyer or the buyer’s mortgage lender may require the consumer to pay off the PACE transaction, using the term ‘‘PACE loan’’ as a condition of the sale, labeled ‘‘Selling the Property.’’ (5) Late Payment. In lieu of the statement required by paragraph (m)(4) of this section: (i) A statement detailing any charge specific to the transaction that may be imposed for a late payment, stated as a dollar amount or percentage charge of the late payment amount, and the number of days that a payment must be late to trigger the late payment fee, labeled ‘‘Late payment,’’ and (ii) For any charge that is not specific to the transaction: (A) A statement that, if the consumer’s property tax payment is late, the consumer may be subject to penalties and late fees established by the consumer’s property tax collector, and directing the consumer to contact the consumer’s property tax collector for more information, or (B) A statement describing any charges that may result from property tax delinquency that are not specific to the PACE transaction. The statement may include dollar amounts or percentage charges and the number of days that a payment must be late to trigger the late payment fee. (6) Servicing. In lieu of the statement required by paragraph (m)(6) of this section, a statement that the consumer PO 00000 Frm 00044 Fmt 4701 Sfmt 4702 will pay the PACE transaction, using the term ‘‘PACE loan,’’ as part of the consumer’s property tax payment, and a statement directing the consumer, if the consumer has a mortgage escrow account that includes the consumer’s property tax payments, to contact the consumer’s mortgage servicer for what the consumer will owe and when. (7) Exceptions—(i) Unit-period. Wherever form H–24(H) of appendix H uses ‘‘annual’’ to describe the frequency of any payments or the applicable unitperiod, the creditor shall use the appropriate term to reflect the transaction’s terms, such as semi-annual payments. (ii) PACE nomenclature. Wherever this section requires disclosure of the word ‘‘PACE’’ or form H–24(H) of appendix H to this part uses the term ‘‘PACE,’’ the creditor may substitute the name of a specific PACE financing program that will be recognizable to the consumer. ■ 4. Amend § 1026.38 by adding paragraph (u) to read as follows: § 1026.38 Content of disclosures for certain mortgage transactions (Closing Disclosure). * * * * * (u) PACE transactions. For PACE transactions as defined in § 1026.43(b)(15), the creditor must comply with the requirements of this section with the following modifications: (1) Transaction information. In addition to the other disclosures required under paragraph (a)(4) of this section under the heading ‘‘Transaction Information,’’ the creditor shall disclose the name of any PACE company involved in the transaction, labeled ‘‘PACE Company.’’ For purposes of this paragraph (u)(1), ‘‘PACE company’’ has the same meaning as in § 1026.43(b)(14). (2) Projected payments. The creditor shall disclose the information required by paragraph (c)(1) of this section as modified by § 1026.37(p)(1) through (2) and shall omit the information required by paragraph (c)(2). (3) Assumption. In lieu of the information required by paragraph (l)(1) of this section, the creditor shall use the subheading ‘‘Selling the Property’’ and disclose the information required by § 1026.37(p)(4). (4) Late payment. In lieu of the information required by paragraph (l)(3) of this section, under the subheading ‘‘Late Payment,’’ the creditor shall disclose the information required by § 1026.37(p)(5). (5) Partial payment policy. In lieu of the information required by paragraph (l)(5) of the section, under the E:\FR\FM\11MYP2.SGM 11MYP2 30431 Federal Register / Vol. 88, No. 91 / Thursday, May 11, 2023 / Proposed Rules ddrumheller on DSK120RN23PROD with PROPOSALS2 subheading ‘‘Partial Payments,’’ the creditor shall disclose a statement directing the consumer to contact the mortgage servicer about the partial payment policy for the account if the consumer has a mortgage escrow account for property taxes and to contact the tax collector about the tax collector’s partial payment policy if the consumer pays property taxes directly to the tax authority. (6) Escrow account. The creditor shall not disclose the information required by paragraph (l)(7) of this section. (7) Liability after foreclosure. The creditor shall not disclose the information required by paragraph (p)(3) of this section. If the consumer may be responsible for any deficiency after foreclosure or tax sale under applicable State law, the creditor shall instead disclose a brief statement that the consumer may have such responsibility, a description of any applicable protections provided under State antideficiency laws, and a statement that the consumer should consult an attorney for additional information, under the subheading ‘‘Liability after Foreclosure or Tax Sale.’’ (8) Contact information. If the PACE company is not otherwise disclosed pursuant to paragraph (r) of this section, the creditor shall disclose the information described in paragraph (r)(1)–(7) of this section for the PACE company, as defined in § 1026.43(b)(14) (under the subheading ‘‘PACE Company’’). (9) Exceptions—(i) Unit-period. Wherever form H–25(K) of appendix H uses ‘‘annual’’ to describe the frequency of any payments or the applicable unitperiod, the creditor shall use the appropriate term to reflect the transaction’s terms, such semi-annual payments. (ii) PACE nomenclature. Wherever this section requires disclosure of the word ‘‘PACE’’ or form H–25(K) of appendix H to this part uses the term ‘‘PACE,’’ the creditor may substitute the name of a specific PACE financing VerDate Sep<11>2014 17:44 May 10, 2023 Jkt 259001 program that will be recognizable to the consumer. ■ 5. Amend § 1026.41 by adding paragraph (e)(7) to read as follows: § 1026.41 Periodic statements for residential mortgage loans. * * * * * (e) * * * (7) PACE transactions. PACE transactions, as defined in § 1026.43(b)(15), are exempt from the requirements of this section. * * * * * ■ 6. Amend § 1026.43 by adding paragraphs (b)(14), (b)(15), and (i) to read as follows: § 1026.43 Minimum standards for transactions secured by a dwelling. * * * * * (b) * * * (14) PACE company means a person, other than a natural person or a government unit, that administers the program through which a consumer applies for or obtains a PACE transaction. (15) PACE transaction means financing to cover the costs of home improvements that results in a tax assessment on the real property of the consumer. * * * * * (i) PACE transactions. (1) For PACE transactions extended to consumers who pay their property taxes through an escrow account, in making the repayment ability determination required under paragraphs (c)(1) and (2) of this section, a creditor must consider the factors identified in paragraphs (c)(2)(i) through (viii) of this section and also must consider any monthly payments that the creditor knows or has reason to know the consumer will have to pay into any escrow account as a result of the PACE transaction that are in excess of the monthly payment amount considered under paragraph (c)(2)(iii) of this section, taking into account: (i) The cushion of one-sixth (1⁄6) of the estimated total annual payments attributable to the PACE transaction PO 00000 Frm 00045 Fmt 4701 Sfmt 4702 from the escrow account that the servicer may charge under 12 CFR 1024.17(c)(1), unless the creditor reasonably expects that no such cushion will be required or unless the creditor reasonably expects that a different cushion amount will be required, in which case the creditor must use that amount; and (ii) If the timing for when the servicer is expected to learn of the PACE transaction is likely to result in a shortage or deficiency in the consumer’s escrow account, the expected effect of any such shortage or deficiency on the monthly payment that the consumer will be required to pay into the consumer’s escrow account. (2) Notwithstanding paragraphs (e)(2), (e)(5), (e)(7), or (f) of this section, a PACE transaction is not a qualified mortgage as defined in this section. (3) For a PACE transaction, the requirements of this section apply to both the creditor and any PACE company that is substantially involved in making the credit decision. A PACE company is substantially involved in making the credit decision if it, as to a particular consumer, makes the credit decision, makes a recommendation as to whether to extend credit, or applies criteria used in making the credit decision. In the case of any failure by any such PACE company to comply with any requirement imposed under this section, section 130 of the Truth in Lending Act, 15 U.S.C. 1640, shall be applied with respect to any such failure by substituting ‘‘PACE company’’ for ‘‘creditor’’ each place such term appears in each such subsection. ■ 7. Appendix H to part 1026 is amended by adding the entries for Model Forms H–24(H) and H–25(K) to read as follows: Appendix H to Part 1026—Closed-End Model Forms and Clauses * * * * * H–24(H) Mortgage Loan Transaction Loan Estimate—Model Form for PACE Transactions BILLING CODE 4810–AM–P E:\FR\FM\11MYP2.SGM 11MYP2 VerDate Sep<11>2014 Federal Register / Vol. 88, No. 91 / Thursday, May 11, 2023 / Proposed Rules 17:44 May 10, 2023 Jkt 259001 PO 00000 Frm 00046 Fmt 4701 Sfmt 4725 E:\FR\FM\11MYP2.SGM 11MYP2 EP11MY23.000</GPH> ddrumheller on DSK120RN23PROD with PROPOSALS2 30432 VerDate Sep<11>2014 17:44 May 10, 2023 Jkt 259001 PO 00000 Frm 00047 Fmt 4701 Sfmt 4725 E:\FR\FM\11MYP2.SGM 11MYP2 30433 EP11MY23.001</GPH> ddrumheller on DSK120RN23PROD with PROPOSALS2 Federal Register / Vol. 88, No. 91 / Thursday, May 11, 2023 / Proposed Rules VerDate Sep<11>2014 Federal Register / Vol. 88, No. 91 / Thursday, May 11, 2023 / Proposed Rules 17:44 May 10, 2023 Jkt 259001 PO 00000 Frm 00048 Fmt 4701 Sfmt 4725 E:\FR\FM\11MYP2.SGM 11MYP2 EP11MY23.002</GPH> ddrumheller on DSK120RN23PROD with PROPOSALS2 30434 Federal Register / Vol. 88, No. 91 / Thursday, May 11, 2023 / Proposed Rules * * VerDate Sep<11>2014 * H–25(K) Mortgage Loan Transaction Closing Disclosure—Model Form for PACE Transactions * 17:44 May 10, 2023 Jkt 259001 PO 00000 Frm 00049 Fmt 4701 Sfmt 4725 E:\FR\FM\11MYP2.SGM 11MYP2 EP11MY23.003</GPH> ddrumheller on DSK120RN23PROD with PROPOSALS2 * 30435 VerDate Sep<11>2014 Federal Register / Vol. 88, No. 91 / Thursday, May 11, 2023 / Proposed Rules 17:44 May 10, 2023 Jkt 259001 PO 00000 Frm 00050 Fmt 4701 Sfmt 4725 E:\FR\FM\11MYP2.SGM 11MYP2 EP11MY23.004</GPH> ddrumheller on DSK120RN23PROD with PROPOSALS2 30436 VerDate Sep<11>2014 17:44 May 10, 2023 Jkt 259001 PO 00000 Frm 00051 Fmt 4701 Sfmt 4725 E:\FR\FM\11MYP2.SGM 11MYP2 30437 EP11MY23.005</GPH> ddrumheller on DSK120RN23PROD with PROPOSALS2 Federal Register / Vol. 88, No. 91 / Thursday, May 11, 2023 / Proposed Rules VerDate Sep<11>2014 Federal Register / Vol. 88, No. 91 / Thursday, May 11, 2023 / Proposed Rules 17:44 May 10, 2023 Jkt 259001 PO 00000 Frm 00052 Fmt 4701 Sfmt 4725 E:\FR\FM\11MYP2.SGM 11MYP2 EP11MY23.006</GPH> ddrumheller on DSK120RN23PROD with PROPOSALS2 30438 BILLING CODE 4810–AM–C * * * * * ■ 8. Amend Supplement I to Part 1026—Official Interpretations, as follows: ■ a. Under Section 1026.2—Definitions and Rules of Construction, in 2(a)(14) Credit, revise comment 2(a)(14)1.ii; ■ b. Under Section 1026.37—Content of disclosures for certain mortgage VerDate Sep<11>2014 17:44 May 10, 2023 Jkt 259001 transactions (Loan Estimate), add as a heading 37(p) PACE transactions and add the following comments: 37(p)(3) Contact information; 37(p)(5) Late payment; 37(p)(7) Form of disclosures— Exceptions; and 37(p)(7)(ii) PACE nomenclature; ■ c. Under Section 1026.38—Content of disclosures for certain mortgage PO 00000 Frm 00053 Fmt 4701 Sfmt 4702 30439 transactions (Closing Disclosure), add as headings 38(u) PACE transactions and (u)(9) Exceptions and add the following comment: 38(u)(9)(ii) PACE Nomenclature; ■ d. Under Section 1026.43—Minimum standards for transactions secured by a dwelling, E:\FR\FM\11MYP2.SGM 11MYP2 EP11MY23.007</GPH> ddrumheller on DSK120RN23PROD with PROPOSALS2 Federal Register / Vol. 88, No. 91 / Thursday, May 11, 2023 / Proposed Rules 30440 Federal Register / Vol. 88, No. 91 / Thursday, May 11, 2023 / Proposed Rules i. in 43(b)(8) Mortgage-related obligations, revise comment 43(b)(8)–2, ■ ii. add as a heading 43(b)(14) PACE company and add comment 43(b)(14)–1, ■ iii. in 43(c) Repayment ability, add comment 43(c)(2)(iv)–4, and revise comment 43(c)(3)–5; and ■ e. Under Appendix H—Closed-End Forms and Clauses, revise comment–30. The additions and revisions read as follows: ■ Supplement I to Part 1026—Official Interpretations * * * * * Section 1026.2—Definitions and Rules of Construction * * * * * * 2(a)(14) Credit. 1. Exclusions. The following situations are not considered credit for purposes of the regulation: i. * * * ii. Involuntary tax liens, involuntary tax assessments, court judgments, and court approvals of reaffirmation of debts in bankruptcy. However, third-party financing of such obligations (for example, a bank loan obtained to pay off an involuntary tax lien) is credit for purposes of the regulation. * * * * * Section 1026.37—Content of disclosures for certain mortgage transactions (Loan Estimate). ddrumheller on DSK120RN23PROD with PROPOSALS2 * * * * * 37(p) PACE transactions. 37(p)(3) Contact information. 1. Section 1026.37(p)(3) requires disclosure of information about the PACE company if the PACE company is not otherwise disclosed pursuant to § 1026.37(k)(1) through (3). For example, if a PACE company is a mortgage broker as defined in § 1026.36(a)(2), then the name of the PACE company is disclosed as a mortgage broker and the field for PACE company may be left blank. See comments 1026.37(k)–1 and–2 for more guidance. 37(p)(5) Late payment. 1. For purposes of § 1026.37(p)(5), a charge is specific to the PACE transaction if the property tax collector does not impose the same charges for general property tax delinquencies. 37(p)(7) Form of disclosures—Exceptions. 37(p)(7)(ii) PACE nomenclature. 1. Wherever § 1026.37 requires disclosure of the word ‘‘PACE’’ or form H–24(H) in appendix H uses the term ‘‘PACE,’’ § 1026.37(p)(7)(ii) permits a creditor to substitute an alternative name for the specific PACE financing program that will be recognizable to the consumer. For example, if the name XYZ Financing is used in marketing and branding a PACE transaction to the consumer, such that XYZ Financing will be recognizable to the consumer, the creditor may substitute the name XYZ Financing for PACE on the Loan Estimate. Section 1026.38—Content of disclosures for certain mortgage transactions (Closing Disclosure). * * * VerDate Sep<11>2014 * * 17:44 May 10, 2023 Jkt 259001 38(u)—PACE transactions 38(u)(9) Exceptions. 38(u)(9)(ii) PACE nomenclature. 1. Wherever § 1026.38 requires disclosure of the word ‘‘PACE’’ or form H–25(K) in appendix H uses the term ‘‘PACE,’’ § 1026.38(u)(9)(ii) permits a creditor to substitute an alternative name for the specific PACE financing program that will be recognizable to the consumer. For example, if the name XYZ Financing is used in marketing and branding a PACE transaction to the consumer, such that XYZ Financing will be recognizable to the consumer, the creditor may substitute the name XYZ Financing for PACE on the Closing Disclosure. * * * * Section 1026.43—Minimum standards for transactions secured by a dwelling * * * * * 43(b)(8) Mortgage-related obligations. * * * * * 2. Property taxes. Section 1026.43(b)(8) includes property taxes in the evaluation of mortgage-related obligations. Obligations that are related to the ownership or use of real property and paid to a taxing authority, whether on a monthly, quarterly, annual, or other basis, are property taxes for purposes of § 1026.43(b)(8). Section 1026.43(b)(8) includes obligations that are equivalent to property taxes, even if such obligations are not denominated as ‘‘taxes.’’ For example, governments may establish or allow independent districts with the authority to impose levies on properties within the district to fund a special purpose, such as a local development bond district, water district, or other public purpose. These levies may be referred to as taxes, assessments, surcharges, or by some other name. For purposes of § 1026.43(b)(8), these are property taxes and are included in the determination of mortgage-related obligations. Any payments for pre-existing PACE transactions are considered property taxes for purposes of § 1026.43(b)(8). * * * * * 43(b)(14) PACE company. 1. Indicia of whether a person administers a PACE financing program for purposes of § 1026.43(b)(14) include, for example, marketing PACE financing to consumers, developing or implementing policies and procedures for the origination process, being substantially involved in making a credit decision, or extending an offer to the consumer. * * * * * 43(c) Repayment ability. * * * * * 43(c)(2) Basis for determination. * * * * * Paragraph 43(c)(2)(iv). * * * * * 4. Knows or has reason to know—PACE transaction. In addition to the guidance provided under comment 43(c)(2)(iv)–2, a creditor originating a PACE transaction knows or has reason to know of any simultaneous loans that are PACE transactions if the transactions are included in any existing database or registry of PACE PO 00000 Frm 00054 Fmt 4701 Sfmt 9990 transactions that includes the geographic area in which the property is located and to which the creditor has access. * * * * * 43(c)(3) Verification using third-party records. * * * * * 5. Verification of mortgage-related obligations. Creditors must make the repayment ability determination required under § 1026.43(c)(2) based on information verified from reasonably reliable records. For general guidance regarding verification see comments 43(c)(3)–1 and –2, which discuss verification using third-party records. With respect to the verification of mortgage-related obligations that are property taxes required to be considered under § 1026.43(c)(2)(v), a record is reasonably reliable if the information in the record was provided by a governmental organization, such as a taxing authority or local government. The creditor complies with § 1026.43(c)(2)(v) by relying on property taxes referenced in the title report if the source of the property tax information was a local taxing authority. A creditor that knows or has reason to know that a consumer has an existing PACE transaction does not comply with § 1026.43(c)(2)(v) by relying on information provided by a governmental organization, either directly or indirectly, if the information provided does not reflect the PACE transaction. With respect to other information in a record provided by an entity assessing charges, such as a homeowners association, the creditor complies with § 1026.43(c)(2)(v) if it relies on homeowners association billing statements provided by the seller. Records are also reasonably reliable if the information in the record was obtained from a valid and legally executed contract. For example, the creditor complies with § 1026.43(c)(2)(v) by relying on the amount of monthly ground rent referenced in the ground rent agreement currently in effect and applicable to the subject property. Records, other than those discussed above, may be reasonably reliable for purposes of § 1026.43(c)(2)(v) if the source provided the information objectively. * * * * * Appendix H—Closed-End Forms and Clauses * * * * * 30. Standard Loan Estimate and Closing Disclosure forms. Forms H–24(A) through (H), H–25(A) through (K), and H–28(A) through (J) are model forms for the disclosures required under §§ 1026.37 and 1026.38. However, pursuant to §§ 1026.37(o)(3) and 1026.38(t)(3), for federally related mortgage loans forms H– 24(A) through (H) and H–25(A) through (K) are standard forms required to be used for the disclosures required under §§ 1026.37 and 1026.38, respectively. * * * * * Rohit Chopra, Director, Consumer Financial Protection Bureau. [FR Doc. 2023–09468 Filed 5–10–23; 8:45 am] BILLING CODE 4810–AM–P E:\FR\FM\11MYP2.SGM 11MYP2

Agencies

CONSUMER FINANCIAL PROTECTION BUREAU

[Federal Register Volume 88, Number 91 (Thursday, May 11, 2023)]
[Proposed Rules]
[Pages 30388-30440]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-09468]



[[Page 30387]]

Vol. 88

Thursday,

No. 91

May 11, 2023

Part II





Consumer Financial Protection Bureau





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12 CFR Part 1026





Residential Property Assessed Clean Energy Financing (Regulation Z); 
Proposed Rule

Federal Register / Vol. 88 , No. 91 / Thursday, May 11, 2023 / 
Proposed Rules

[[Page 30388]]


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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: Proposed rule; request for public comment.

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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 notice of proposed rulemaking, the Bureau 
proposes to implement EGRRCPA section 307 and to amend Regulation Z to 
address how TILA applies to PACE transactions to account for the unique 
nature of PACE.

DATES: Comments must be received on or before July 26, 2023.

ADDRESSES: You may submit comments, identified by Docket No. CFPB-2023-
0029 or RIN 3170-AA84, by any of the following methods:
     Federal eRulemaking Portal: https://www.regulations.gov. 
Follow the instructions for submitting comments.
     Email: [email protected]. Include Docket No. CFPB-
2023-0029 or RIN 3170-AA84 in the subject line of the message.
     Mail/Hand Delivery/Courier: Comment Intake--PACE, c/o 
Legal Division Docket Manager, Consumer Financial Protection Bureau, 
1700 G Street NW, Washington, DC 20552.
    Instructions: The CFPB encourages the early submission of comments. 
All submissions should include the agency name and docket number or 
Regulatory Information Number (RIN) for this rulemaking. Because paper 
mail in the Washington, DC area and at the CFPB is subject to delay, 
commenters are encouraged to submit comments electronically. In 
general, all comments received will be posted without change to https://www.regulations.gov.
    All submissions, including attachments and other supporting 
materials, will become part of the public record and subject to public 
disclosure. Proprietary information or sensitive personal information, 
such as account numbers or Social Security numbers, or names of other 
individuals, should not be included. Submissions will not be edited to 
remove any identifying or contact information.

FOR FURTHER INFORMATION CONTACT: Luke Diamond, Daniel Tingley, 
Counsels; Kristin McPartland, Amanda Quester, Alexa Reimelt, or Joel 
Singerman, Senior Counsels, Office of Regulations, at 202-435-7700. If 
you require this document in an alternative electronic format, please 
contact [email protected].

SUPPLEMENTARY INFORMATION: 

I. Summary of the Proposed Rule

    Section 307 of the Economic Growth, Regulatory Relief, and Consumer 
Protection Act (EGRRCPA) directs the Bureau to prescribe ability-to-
repay (ATR) 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 notice of proposed rulemaking, the 
Bureau proposes to implement EGRRCPA section 307 and to amend 
Regulation Z to address the application of TILA to ``PACE 
transactions'' as defined in proposed Sec.  1026.43(b)(15).
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    \1\ 15 U.S.C. 1639c(b)(3)(C).
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    The proposed rule would:
     Clarify an existing exclusion to Regulation Z's definition 
of credit that relates to tax liens and tax assessments. Specifically, 
the CFPB is proposing to clarify that the commentary's exclusion to 
``credit,'' as defined in Sec.  1026.2(a)(14), for tax liens and tax 
assessments applies only to involuntary tax liens and involuntary tax 
assessments.
     Make a number of adjustments to the requirements for Loan 
Estimates and Closing Disclosures under Sec. Sec.  1026.37 and 1026.38 
that would apply when those disclosures are provided for PACE 
transactions, including:
    [cir] Eliminating certain fields relating to escrow account 
information;
    [cir] Requiring the PACE transaction and other property tax payment 
obligations to be identified as separate components of estimated taxes, 
insurance, and assessments;
    [cir] Clarifying certain implications of the PACE transaction on 
the property taxes;
    [cir] Requiring disclosure of identifying information for the PACE 
company;
    [cir] Requiring various qualitative disclosures for PACE 
transactions that would replace disclosures on the current forms, 
including disclosures relating to assumption, late payment, servicing, 
partial payment policy, and the consumer's liability after foreclosure; 
and
    [cir] Clarifying how unit-periods would be disclosed for PACE 
transactions.
     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.
     Exempt PACE transactions from the requirement to establish 
escrow accounts for certain higher-priced mortgage loans, under 
proposed Sec.  1026.35(b)(2)(i)(E).
     Exempt PACE transactions from the requirement to provide 
periodic statements, under proposed Sec.  1026.41(e)(7).
     Apply Regulation Z's ATR requirements in Sec.  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.
     Provide that a PACE transaction is not a qualified 
mortgage (QM) as defined in Sec.  1026.43.
     Extend the ATR requirements and the liability provisions 
of TILA section 130 to any ``PACE company,'' as defined in proposed 
Sec.  1026.43(b)(14), that is substantially involved in making the 
credit decision for a PACE transaction.
     Provide clarification regarding how PACE and non-PACE 
mortgage creditors should consider pre-existing PACE transactions when 
originating new mortgage loans.
    The Bureau proposes that the final rule, if adopted, would take 
effect at least one year after publication of the final rule in the 
Federal Register, but no earlier than the October 1 which follows by at 
least six months Federal Register publication. The Bureau requests 
comment on all aspects of the proposed rule and on whether there are 
any other provisions of TILA or Regulation Z that the Bureau should 
address with respect to PACE transactions.

II. Background

A. PACE Market Overview

1. How does PACE financing work?
    PACE financing is a mechanism that enables property owners to 
finance certain upgrades to real property

[[Page 30389]]

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 (PACE loans) 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 along with the consumer's other 
property tax payment obligations. The assessments are typically 
collected through the same process as real property taxes.\4\ Local 
governments typically fund PACE transactions through bond issuance, 
with these bonds in turn collateralized and sold as securitized 
obligations.
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    \2\ Some States authorize PACE financing for residential and 
commercial property. In this proposal, 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. 
163.08; Fla. Stat. 197.3632(8)(a); Mo. Stat. 67.2815(5).
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    PACE assessments 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 superior 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 assessment 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.
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    \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. 163.08(8) 
(``The recorded agreement shall provide constructive notice that the 
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 PACE States 
provide for subordinated-lien status for PACE financing. See, e.g., 
Minn. Stat. 216C.437(4); Me. Stat. tit. 35A 10156(3), (4); 24 V.S.A. 
3255(b).
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    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 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. Typically, 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 often earn various fees related to the transactions.\6\
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    \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://www.energyprograms.org/wp-content/uploads/2017/03/R-PACE-Primer-March-2017.pdf.
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    PACE companies often rely heavily upon home improvement contractors 
both to sell PACE loans to consumers and to facilitate the origination 
of those loans. Home improvement contractors frequently market PACE 
financing directly to consumers in the course of selling their home 
improvement contracts, often door-to-door. They often serve as the 
primary point of contact with consumers during the origination process, 
typically collecting any 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.
2. Origin and Growth of PACE Programs
    In 2008, California passed Assembly Bill no. 811 to enable the 
first PACE programs. The Bureau 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\
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    \7\ See infra note 329. 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.developohio.com/post/detail/lucas-county-pace-program-benefits-homeowners-234705. 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).
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    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, reaching peak production 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, with an average investment of $769 
million per year during those years.\10\ Overall, as of December 31, 
2021, the PACE financing industry had financed 323,000 home upgrades, 
totaling over $7.7 billion.\11\
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    \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 2021.
    \11\ See id.
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3. Common Financing Terms
    According to data analyzed in a report that the Bureau is releasing 
concurrently with this proposal (``PACE Report''), the term of PACE 
loans that were originated between July 2014 and June 2020 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\ Fees vary by program, but 
the CFPB has reviewed agreements that include fees for application, 
origination, tax administration, lien recordation, title, escrow, bond 
counsel, processing, title, underwriting, and fund disbursement. The 
Bureau is not aware of any PACE obligations that are open-end or have a 
negative-amortization feature.
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    \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 IV.
    \13\ Id.
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4. Consumer Protection Concerns
    Consumer advocates have expressed concerns that the PACE market 
lacks adequate consumer protections. They have indicated that the 
highly secure super-priority lien associated with PACE transactions 
creates incentives for PACE companies and home improvement contractors 
to originate loans quickly, often on the spot, without regard to 
affordability or consumer understanding. They have reported allegations 
of deceptive sales tactics, aggressive sales practices, and fraud.
    Consumer advocates have criticized other aspects of PACE financing 
as well,

[[Page 30390]]

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 financing can result in unexpected 
and unaffordable tax payment spikes that can lead to delinquency, late 
fees, tax defaults, and foreclosure actions.\14\ Some local officials 
have echoed many of these concerns in discussions with CFPB staff.
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    \14\ See, e.g., Nat'l Consumer Law 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 Street Journal (Jan. 10, 2017), https://www.wsj.com/articles/americas-fastest-growing-loan-category-has-eerie-echoes-of-subprime-crisis-1484060984.
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    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.\15\ 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.
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    \15\ 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, https://www.law.berkeley.edu/wp-content/uploads/2021/02/ELC_PACE_DARK_SIDE_RPT_2_2021.pdf.
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    Additionally, consumer advocates have 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. They have also 
highlighted that, although a PACE assessment 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.\16\ 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 assessment to complete a 
home sale.
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    \16\ See Freddie Mac, Purchase and ``no cash-out'' refinance 
Mortgage requirements (Mar. 31, 2022), https://guide.freddiemac.com/app/guide/section/4606.4. 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. & Urban 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 that PACE 
financing introduces risk to the mortgage market, as PACE liens take 
priority over pre-existing mortgage liens.\17\
---------------------------------------------------------------------------

    \17\ See, e.g., Fed. Hous. Fin. Agency (FHFA), FHFA Statement on 
Certain Energy Retrofit Loan Programs (July 6, 2010), https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Statement-on-Certain-Energy-Retrofit-Loan-Programs.aspx; FHFA Notice and Request for 
Input on PACE Financing, 85 FR 2736 (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 50 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. Six of the 
complaints involve older Americans, 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 385 complaints 
between 2019 and 2021.\18\
---------------------------------------------------------------------------

    \18\ 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. 2022) 
https://dfpi.ca.gov/wp-content/uploads/sites/337/2022/08/2021-CFL-Aggregated-Annual-Report.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.\19\ The complaint, filed in State court, 
alleged that Renovate America misrepresented the PACE program or failed 
to make adequate disclosures about key aspects of the program, 
including its government affiliation, tax deductibility, 
transferability of assessments to subsequent property owners, financing 
costs, and Renovate's contractor verification policy.\20\ Subsequently, 
in June 2021, the California State PACE regulator moved to revoke 
Renovate's Administrator license, required to operate a PACE company in 
the State, after finding that one of its solicitors repeatedly 
defrauded homeowners in San Diego County.\21\ Renovate ultimately 
consented to the revocation.\22\
---------------------------------------------------------------------------

    \19\ 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).
    \20\ Id.
    \21\ 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/2021/06/04/dfpi-moves-to-revoke-pace-administrators-license-after-finding-its-solicitor-defrauded-homeowners/.
    \22\ 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.\23\ 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.\24\ 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.\25\
---------------------------------------------------------------------------

    \23\ 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.
    \24\ Id.
    \25\ Id.
---------------------------------------------------------------------------

5. 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

[[Page 30391]]

infrastructure measures.\26\ 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 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.\27\ Additionally, California law 
requires, among other protections, financial disclosures prior to 
consummation; \28\ a three-day right to cancel, which is extended to 
five days for older adults; \29\ mandatory confirmation-of-terms calls; 
\30\ and restrictions on contractor compensation.\31\ California law 
also 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.\32\ There is 
also a maximum permissible loan-to-value ratio for PACE financing under 
California law.\33\ California law exempts government agencies from 
some of these requirements.\34\
---------------------------------------------------------------------------

    \26\ See, e.g., Cal. Sts. & Hwys. Code secs. 5898.12, 5899, 
5899.3.
    \27\ Cal. Fin. Code sec. 22686-87.
    \28\ Cal. Sts. & High. Code sec. 5898.17.
    \29\ Cal. Sts. & High. Code sec. 5898.16-17.
    \30\ Cal. Sts. & High. Code sec. 5913.
    \31\ Cal. Sts. & High. Code sec. 5923.
    \32\ Cal. Fin. Code sec. 22684(a), (d)-(e).
    \33\ Cal. Fin. Code sec. 22684(h).
    \34\ 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).\35\ In 2019, 
the DFPI began licensing PACE administrators and subsequently 
promulgated rules implementing some of California's statutory PACE 
provisions, which became effective in 2021.\36\ DFPI also has certain 
examination, investigation, and enforcement authorities over PACE 
administrators, solicitors, and solicitor agents.\37\
---------------------------------------------------------------------------

    \35\ Cal. AB 1284 (2017-2018), Cal. SB 1087 (2017-2018).
    \36\ 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.
    \37\ 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. sec. 22017(a)-(b).
---------------------------------------------------------------------------

    PACE administrators must be licensed by the DFPI under the 
California Financing Law. They must also establish and maintain 
processes for the enrollment of PACE solicitors and solicitor agents, 
including training and background checks.\38\ PACE administrators are 
required to annually share certain operational data with DFPI.\39\ DFPI 
compiles the data in annual reports on PACE lending in California, 
which provide aggregated information on PACE loans, PACE administrators 
and solicitors, and consumer complaints.\40\
---------------------------------------------------------------------------

    \38\ Cal. Fin. Code secs. 22680-82.
    \39\ Cal. Fin. Code sec. 22692.
    \40\ 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.\41\ The 
authorizing legislation 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.\42\ It 
also includes a maximum loan-to-value ratio and requires a short 
general disclosure about PACE assessments.\43\ 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.\44\
---------------------------------------------------------------------------

    \41\ See Fla. HB 7179 (2010), codified at Fla. Stat. 163.08 et 
seq.
    \42\ Fla. Stat. sec. 163.08(9).
    \43\ Fla. Stat. sec. 163.08(12), (14).
    \44\ Fla. Stat. sec. 163.08(13).
---------------------------------------------------------------------------

Missouri
    Missouri authorized PACE programs in 2010 to finance projects 
involving energy efficiency improvements and renewable energy 
improvements.\45\ 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 of the assessment contract, 
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 assessment.\46\ It also 
requires verbal confirmation of certain provisions of the assessment 
contract, imposes specific financial requirements to execute an 
assessment requirement, and provides for a three-day right to 
cancel.\47\ 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 assessment 
contracts.\48\ The new requirements became effective January 1, 
2022.\49\
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    \45\ Mo. HB 1692 (2010), codified at Mo. Rev. Stat. 67.2800(8) 
(defining projects eligible for financing).
    \46\ Mo. HB 697, codified at Mo. Rev. Stat. 67.2818(4).
    \47\ Mo. HB 697, codified at Mo. Rev. Stat. 67.2817(2) 
(financial requirements to execute an assessment contract); 
67.2817(4) (right to cancel); 67.2817(6) (verbal confirmation).
    \48\ Mo. HB 697, codified at Mo. Rev. Stat. 67.2817(2), 
67.2818(2)-(3).
    \49\ Mo. HB 697, codified at Mo. Rev. Stat. 67.2840.
---------------------------------------------------------------------------

6. 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.\50\ 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.\51\ They include provisions 
relating to ability-to-pay, financing disclosures, a right to cancel, 
and foreclosure-avoidance protections, among others.
---------------------------------------------------------------------------

    \50\ 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/.
    \51\ Id.
---------------------------------------------------------------------------

B. EGRRCPA

    The Economic Growth, Regulatory Relief, and Consumer Protection Act 
of

[[Page 30392]]

2018 (EGRRCPA) was signed into law on May 24, 2018.\52\ 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.'' Specifically, it provides in relevant part that the 
CFPB must 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, 
and requires that the regulations account for the unique nature of PACE 
financing.\53\ TILA section 129C(a) contains TILA's ATR provisions for 
residential mortgage loans and TILA section 130 contains TILA's civil 
liability provisions. Thus, section 307 requires the Bureau to apply 
TILA's ATR provisions to PACE financing, and to apply TILA's civil 
liability provisions for violations of those ATR provisions, all in a 
way that accounts for the unique nature of PACE financing. This 
proposal discusses the proposed implementation of the ATR and civil 
liability requirements further in the section-by-section analysis of 
proposed Sec.  1026.43.
---------------------------------------------------------------------------

    \52\ Public Law 115-174, 132 Stat. 1296 (2018).
    \53\ 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 Bureau to ``collect such 
information and data that the Bureau determines is necessary'' in 
prescribing the regulations and requiring the Bureau to ``consult 
with State and local governments and bond-issuing authorities.''
---------------------------------------------------------------------------

III. Advance Notice of Proposed Rulemaking

    On March 4, 2019, the CFPB issued an Advance Notice of Proposed 
Rulemaking (ANPR) to solicit information relating to residential PACE 
financing.\54\ The purpose of the ANPR was to gather information to 
better understand the PACE financing market and other information to 
inform a proposed rulemaking under EGRRCPA section 307.
---------------------------------------------------------------------------

    \54\ Advance Notice of Proposed Rulemaking on Residential 
Property Assessed Clean Energy Financing, 84 FR 8479 (Mar. 8, 2019).
---------------------------------------------------------------------------

    The ANPR sought five categories of information related to PACE 
financing: (1) written materials associated with PACE transactions; (2) 
descriptions of current standards and practices in the PACE financing 
origination process; (3) information relating to civil liability under 
TILA for violations of the ATR requirements in connection with PACE 
financing, as well as rescission and borrower delinquency and default; 
(4) information about what features of PACE financing make it unique 
and how the CFPB should address those unique features in this 
rulemaking; and (5) views concerning the potential implications of 
regulating PACE financing under TILA.
    In response to the ANPR, the CFPB received over 115 comments, which 
were submitted by a diverse group 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 ANPR comments is included below, and 
additional information from the ANPR comments is referenced throughout 
this proposal.
    Regarding the need for PACE regulation, consumer groups and 
mortgage industry stakeholders generally agreed that PACE transactions 
require Federal regulation, advocating for strong ATR rules, in 
particular. Some also supported further application of TILA to PACE 
financing, including disclosure requirements, rescission rights, loan 
originator compensation requirements, and protections for high-cost 
PACE transactions. These commenters indicated that PACE financing is 
consumer credit, and should be regulated similar to a traditional 
mortgage because it is voluntary financing that is secured by the 
consumer's home and because delinquency can lead to penalties, 
additional interest, and foreclosure. Some argued for more stringent 
regulations than currently apply to traditional mortgages due to what 
they asserted was the dangerous nature of PACE financing, citing 
problematic lending incentives, alleged abuses by home improvement 
contractors, and alleged targeting of PACE to vulnerable populations.
    On the other hand, PACE industry participants generally opposed the 
imposition of additional or stringent regulations. Many argued that 
PACE financing is safe for consumers, citing the involvement of State 
and local governments, the relatively small size of the debt 
obligation, existing State and local requirements, low delinquency 
rates, and other features of PACE financing. Some expressed concern 
that overly broad rules could infringe on the fundamental taxing 
authority of State and local governments, undermine PACE's public 
purpose of reducing barriers to green energy financing, decrease access 
to private capital, and potentially lead to the termination of PACE 
programs. Some were also worried that regulations would erode PACE's 
point-of-sale nature, causing consumers and contractors to turn to more 
dangerous unsecured credit products and decrease new applications. Many 
argued that PACE financing is not consumer credit subject to TILA, and 
that the CFPB lacks authority to impose TILA's requirements beyond its 
ATR rules.
    In regard to application of TILA's ATR requirements to PACE 
financing, there were again differing opinions among commenters. 
Consumer groups and mortgage industry stakeholders generally agreed 
that TILA's existing ATR requirements should be applied, but some 
suggested adjusting them to account for factors such as the cadence of 
property tax payments, which tend to be due on an annual or semi-annual 
basis, and the potential for payment shocks related to PACE financing's 
impact on the consumer's existing mortgage escrow account. Some called 
for verification of consumers' financial information, and for the ATR 
rules to account for pre-existing and simultaneous PACE financing to 
prevent loan stacking or loan splitting. In contrast, some PACE 
industry participants opposed application of TILA's existing ATR 
requirements, stating that it would be unnecessary and too burdensome, 
and would lead to decreased consumer participation in PACE programs. 
Some also argued that mandatory income verification for all consumers 
would interfere with the point-of-sale nature of PACE financing, and 
that a modeled income requirement would be sufficient. Some recommended 
an emergency exception to any ATR requirement. Still others recommended 
that the CFPB structure any ATR rules to avoid conflict with existing 
California regulations.
    A few commenters provided their opinions on whether certain PACE 
transactions should be entitled to a presumption of compliance with the 
CFPB's ATR requirements similar to QM status. One PACE company 
suggested that a reasonable safe harbor is necessary to ensure that 
private capital continues to invest in PACE financing. However, some 
consumer groups opposed offering a presumption of compliance, stating 
that PACE is structurally unsafe and a source of abuse for some 
populations. A mortgage trade association recommended that, if the CFPB 
decides to permit such a presumption, subordination of the PACE lien 
should be required.
    Regarding the application of TILA section 130 to PACE financing, 
some consumer groups suggested that PACE companies should be held 
liable under TILA section 130 because they are responsible for 
operating the PACE

[[Page 30393]]

programs. Some PACE industry participants expressed concern that, if 
government entities become subject to civil liability, they might stop 
operating PACE programs. Finally, one PACE company recommended capping 
civil liability at the amount of the assessment, to prevent TILA's 
statutory damages from exceeding the principal amount of the average 
PACE transaction.

IV. Data Collection

    EGRRCPA section 307 authorizes the CFPB to ``collect such 
information and data that the Bureau determines is necessary'' to 
support the PACE rulemaking required by the section.\55\ 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 2014 and June 2020, 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.
---------------------------------------------------------------------------

    \55\ 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.\56\ 
The PACE company data encompassed about 370,000 PACE transaction 
applications submitted in California and Florida from 2014 to 2020 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.\57\
---------------------------------------------------------------------------

    \56\ The Bureau received data from FortiFi Financial, Home Run 
Financing, Renew Financial, and Ygrene Energy Fund.
    \57\ 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 utilized 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'' (PACE 
Report) is being published concurrently with this NPRM.\58\
---------------------------------------------------------------------------

    \58\ 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.\59\ 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 majority-non-white census tracts.\60\ The PACE Report also 
assesses the impact of the 2018 California PACE Reforms, discussed in 
part II.A.5. The analysis finds that these laws improved consumer 
outcomes while substantially reducing the volume of PACE lending.\61\
---------------------------------------------------------------------------

    \59\ Id. at 4.
    \60\ Id. at 38-39, Figure 11.
    \61\ Id. at 4-5.
---------------------------------------------------------------------------

V. Outreach

    To learn about the industry and the unique nature of PACE 
financing, the Bureau 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 on the ANPR, panel appearances by CFPB staff, and 
written correspondence.
    The CFPB's outreach relating to PACE financing is summarized at a 
high level below.\62\ The outreach has supplemented information on PACE 
financing that the CFPB has gleaned from independent research; the 
detailed comments responding to the ANPR, discussed in part III; the 
data collection described in part IV; and information from publicly 
available sources such as news reports, research and analysis, and 
litigation documents.
---------------------------------------------------------------------------

    \62\ The CFPB also engaged in extensive outreach with numerous 
stakeholders to design and complete the Bureau data collection on 
PACE financing that is discussed in part IV.
---------------------------------------------------------------------------

A. 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 has continued the engagement since EGRRCPA section 307 was 
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. Similar to the 
perspectives they shared in ANPR comments, discussed in part III, 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.

B. Private PACE Industry Stakeholders

    Since 2015, the CFPB has engaged on dozens of occasions with 
various private PACE industry stakeholders, including private PACE 
companies, a national trade organization, 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 financing providers, assessment 
administrators, and a national trade organization 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 developed, 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

[[Page 30394]]

requirements in particular States. Some of these stakeholders have also 
shared their perspectives on EGRRCPA section 307 and considerations the 
CFPB should bear in mind in this rulemaking.

C. State and Local Governments and Bond-Issuing Authorities

    As part of the CFPB's PACE rulemaking, EGRRCPA section 307 requires 
that the CFPB ``consult with State and local governments and bond-
issuing authorities.'' \63\ Consistent with this requirement, 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 for the rulemaking. Entities with which the CFPB 
has consulted over the years include 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 engagements with 
bond-issuing authorities occurred on a number of occasions, including 
discussions over the phone and in-person, and through written 
correspondence. The CFPB also conferred on a number of occasions with 
membership organizations representing municipalities.
---------------------------------------------------------------------------

    \63\ 15 U.S.C. 1639c(b)(3)(C)(iii)(II).
---------------------------------------------------------------------------

    In the course of developing the NPRM, 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 proposal, including, for example, whether the CFPB 
should use the same ATR 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 QM definitions to PACE financing, how to 
apply TILA's general civil liability provisions to violations of the 
ATR requirements for PACE financing, and the implications of this 
rulemaking for PACE financing bonds. Each call was targeted to specific 
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. In addition to feedback provided during the 
calls, some participants provided input after the calls.
    Public entities involved in the operation of PACE financing and 
third parties operating on their behalf have expressed divergent views 
on PACE financing. For example, some individuals from local tax 
collectors' offices and other government units have 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 have shared consumer 
protection recommendations and background information about how the 
PACE financing industry operates in particular jurisdictions. Several 
localities with active PACE financing programs have expressed consumer 
protection concerns and informed the CFPB that they would welcome 
application of TILA's ATR 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.
    Other local governments (and third parties they work with) have 
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 
\64\) 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 
creating jobs. Local government representatives in certain 
jurisdictions have expressed enthusiasm about aspects of PACE financing 
such as increased solar panel installations, and have 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 ATR 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.
---------------------------------------------------------------------------

    \64\ The Bureau understands that a number of government 
sponsors, some of which participated in the Bureau'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#:~:text=Los%20Angeles%20County%20has%20ended,risk%20of%20losin
g%20their%20homes.
---------------------------------------------------------------------------

D. Other Stakeholders

    The CFPB 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 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 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 standard mortgage or apply TILA more generally 
to PACE.
    The CFPB has also met with representatives from environmental and 
energy groups. These representatives shared general views on, for 
example, the role of PACE financing in the marketplace, industry 
trends, and potential risks to consumers.
    As discussed in part IX, the CFPB has also consulted with Federal 
government entities.

VI. Legal Authority

    The Bureau is proposing to amend 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

[[Page 30395]]

Act (Dodd-Frank Act),\65\ EGRRCPA section 307, TILA, and Real Estate 
Settlement Procedures Act of 1974 (RESPA).\66\
---------------------------------------------------------------------------

    \65\ Public Law 111-203, 124 Stat. 1376 (2010).
    \66\ 12 U.S.C. 2601 et seq.
---------------------------------------------------------------------------

A. Dodd-Frank Act

    CFPA section 1022(b)(1). Section 1022(b)(1) of the CFPA authorizes 
the Bureau to prescribe rules ``as may be necessary or appropriate to 
enable the Bureau to administer and carry out the purposes and 
objectives of the Federal consumer financial laws, and to prevent 
evasions thereof.'' \67\ Among other statutes, TILA, RESPA, and the 
CFPA are Federal consumer financial laws.\68\ Accordingly, the Bureau 
proposes 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.
---------------------------------------------------------------------------

    \67\ 12 U.S.C. 5512(b)(1).
    \68\ 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).
---------------------------------------------------------------------------

    Dodd-Frank Act section 1405(b). 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 Bureau may exempt from or modify 
disclosure requirements, in whole or in part, for any class of 
residential mortgage loans if the Bureau determines that such exemption 
or modification is in the interest of consumers and in the public 
interest.\69\ 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.\70\ 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 proposed rule, the Bureau 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 Bureau proposes 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 Bureau believes the proposal is in the interest of consumers 
and in the public interest, consistent with Dodd-Frank Act section 
1405(b).
---------------------------------------------------------------------------

    \69\ Public Law 111-203, 124 Stat. 1376, 2142 (2010) (codified 
at 15 U.S.C. 1601 note).
    \70\ Public Law 111-203, 124 Stat. 1376, 2138 (2010) (codified 
at 15 U.S.C. 1602(cc)(5)).
---------------------------------------------------------------------------

B. TILA

    TILA section 105(a). TILA section 105(a) directs the Bureau 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 Bureau judges are necessary or proper to 
effectuate the purposes of TILA, to prevent circumvention or evasion 
thereof, or to facilitate compliance therewith.\71\ 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.\72\ 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.\73\
---------------------------------------------------------------------------

    \71\ 15 U.S.C. 1604(a).
    \72\ 15 U.S.C. 1601(a).
    \73\ 15 U.S.C. 1639b(a)(2).
---------------------------------------------------------------------------

    TILA section 105(b). 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.\74\ 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 Bureau provided additional 
discussion of this integrated disclosure mandate in the 2013 TILA-RESPA 
Rule.\75\
---------------------------------------------------------------------------

    \74\ Public Law 111-203, 124 Stat. 1376, 2108 (2010) (codified 
at 15 U.S.C. 1604(b)).
    \75\ 78 FR 79730, 79753-54 (Dec. 31, 2013).
---------------------------------------------------------------------------

    TILA section 105(f). Section 105(f) of TILA, 15 U.S.C. 1604(f), 
authorizes the Bureau to exempt from all or part of TILA any class of 
transactions if the Bureau 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), (B)(i). TILA section 129C(b)(3)(A) 
directs the Bureau to prescribe regulations to carry out the purposes 
of the subsection.\76\ In addition, TILA section 129C(b)(3)(B)(i) 
authorizes the Bureau to prescribe regulations that revise, add to, or 
subtract from the criteria that define a QM 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.\77\
---------------------------------------------------------------------------

    \76\ 15 U.S.C. 1639c(b)(3)(A).
    \77\ 15 U.S.C. 1639c(b)(3)(B)(i).
---------------------------------------------------------------------------

    TILA section 129C(b)(3)(C)(ii). In section 307 of the EGRRCPA, 
codified in TILA section 129C(b)(3)(C), Congress directed the Bureau 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.'' \78\
---------------------------------------------------------------------------

    \78\ 15 U.S.C. 1639c(b)(3)(C)(ii).
---------------------------------------------------------------------------

C. RESPA

    RESPA section 4(a). 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.\79\ 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 Bureau provided additional 
discussion of this integrated disclosure mandate in the 2013 TILA-RESPA 
Rule.\80\
---------------------------------------------------------------------------

    \79\ Public Law 111-203, 124 Stat. 1376, 2103 (2010) (codified 
at 12 U.S.C. 2603(a)).
    \80\ 78 FR 79730, 79753-54 (Dec. 31, 2013).
---------------------------------------------------------------------------

    RESPA section 19(a). Section 19(a) of RESPA authorizes the Bureau 
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.\81\ 
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

[[Page 30396]]

home buyers and sellers of settlement costs.\82\ 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.\83\ 
In developing proposed rules under RESPA section 19(a), the Bureau 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.
---------------------------------------------------------------------------

    \81\ 12 U.S.C. 2617(a).
    \82\ 12 U.S.C. 2601(b).
    \83\ 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.
---------------------------------------------------------------------------

VII. 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.'' 
Currently, comment 2(a)(14)-1.ii states, in part, that ``tax liens'' 
and ``tax assessments'' are not considered credit for purposes of the 
regulation. The Bureau proposes to amend comment 2(a)(14)-1.ii to add 
the word ``involuntary'' to clarify which tax liens and tax assessments 
are not considered credit. Amended as proposed, comment 2(a)(14)-1.ii 
would provide 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.\84\ The proposed amendment would resolve ambiguity in the 
existing comment and bring the exclusion in line with the definition of 
credit in TILA and congressional intent with respect to TILA coverage.
---------------------------------------------------------------------------

    \84\ The proposed rule would also make 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.
---------------------------------------------------------------------------

    For a number of years, stakeholders have expressed disagreement in 
litigation, ANPR comments, and other communications about whether 
comment 2(a)(14)-1.ii excludes PACE transactions from TILA coverage. 
The ambiguity derives largely from the text of the comment in light of 
the structure of PACE transactions. The comment excludes tax 
assessments and tax liens, and PACE transactions have attributes of 
both involuntary special property tax assessments that are not subject 
to TILA and voluntary mortgage transactions that are. As described in 
part II.A, PACE transactions have been treated as assessments under 
State law, are collected through local property tax systems, and are 
secured by liens treated similarly to property tax liens; but PACE 
transactions arise through voluntary contractual agreement, similar to 
other credit transactions that are subject to TILA.
    In general, PACE industry stakeholders have argued that PACE 
transactions are not TILA credit, in part because the text of the 
comment states that tax liens and tax assessments are not credit 
without explicitly distinguishing between voluntary and involuntary 
obligations; and consumer advocates and mortgage industry stakeholders 
have argued that PACE transactions are TILA credit because, unlike 
other tax liens and assessments, PACE transactions are voluntary for 
consumers. One Federal district court has directly addressed the 
question, ruling that PACE financing is not credit for purposes of TILA 
in part due to the text of comment 2(a)(14)-1.ii.\85\
---------------------------------------------------------------------------

    \85\ See In re HERO Loan Litig., 017 WL 3038250 (C.D. Cal. 
2017); see also Burke v. Renew Fin. Grp., Inc., 2021 WL 5177776 
(C.D. Cal. 2021) (ruling that PACE transactions are not consumer 
credit under TILA). The In re HERO and Burke courts suggested that 
PACE assessments are not ``consumer credit transactions'' for 
purposes of TILA. 2017 WL 3038250, at *2-*3; 2021 WL 5177776, at *3. 
TILA defines ``consumer credit transactions'' to mean that a credit 
transaction is ``one in which the party to whom credit is offered or 
extended is a natural person, and the money, property, or services 
which are the subject of the transaction are primarily for personal, 
family, or household purposes.'' 15 U.S.C. 1602(i). Consistent with 
this, Regulation Z defines ``consumer credit'' to mean ``credit 
offered or extended to a consumer primarily for personal, family, or 
household purposes.'' 12 CFR 1026.2(a)(12). Residential PACE 
transactions satisfy these definitions. Notwithstanding the rulings 
in Burke and In re HERO, such Residential PACE transactions satisfy 
these definitions. Notwithstanding the rulings in Burke and In re 
HERO, such transactions are ``offered or extended'' to consumers, 
who as natural persons are the targets of marketing and sales 
efforts, are offered the loans and decide whether to sign up, and 
are signatories to the financing agreements, which are for money to 
fund home improvement services that are primarily for personal, 
family, or household purposes.
---------------------------------------------------------------------------

    The Bureau proposes to amend the commentary to clarify that PACE 
transactions are credit under TILA and Regulation Z. Amended as 
proposed, comment 2(a)(14)-1.ii would state 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'' to comment 2(a)(14)-1.ii, the Bureau would clarify that 
the comment does not exclude tax liens and tax assessments that arise 
from voluntary contractual agreements, such as PACE transactions. Thus, 
under the proposed amendments, tax liens and tax assessments that are 
voluntary would be credit if they meet the definition of credit under 
TILA and Regulation Z and are not otherwise excluded.\86\
---------------------------------------------------------------------------

    \86\ Under the proposed amendments, tax liens and tax 
assessments that are not voluntary for the consumer would continue 
to be excluded.
---------------------------------------------------------------------------

    The proposed amendment would bring the exclusion in comment 
2(a)(14)-1.ii in line with the definition of credit in TILA and 
Regulation Z. TILA defines ``credit'' to mean the ``right granted by 
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.'' \87\ 
In general, PACE transactions appear to easily fit these definitions--
the agreements provide for consumers to receive funding for home 
improvement projects and repay those funds over time in 
installments.\88\
---------------------------------------------------------------------------

    \87\ 15 U.S.C. 1602(f); 12 CFR 1026.2(a)(14). Regulation Z 
further 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 (not 
including a down payment), and to whom the obligation is initially 
payable, either on the face of the note or contract, or by agreement 
when there is no note or contract.'' 12 CFR 1026.2(a)(17).
    \88\ Treating PACE transactions as TILA credit is consistent 
with the FTC's assertion of claims against a PACE company under the 
Bureau'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.4 (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.
---------------------------------------------------------------------------

    The proposed amendments to comment 2(a)(14)-1.ii would also be in 
line with congressional intent. 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.'' 
\89\ To that end, relevant legislative history indicates that TILA was 
intended to require ``all creditors to disclose credit information in a 
uniform manner'' so that ``the American

[[Page 30397]]

consumer will be given the information he needs to compare the cost of 
credit and to make the best informed decision on the use of credit.'' 
\90\ Clarifying that voluntary tax liens and tax assessments can be 
credit, such that PACE transactions are subject to TILA's uniform 
disclosure requirements, would squarely align with these goals. 
Consumers have a number of financing options for home improvement 
projects, such as home equity lines of credit, personal loans, and 
credit cards. Just like these other financing options, PACE 
transactions carry certain costs, terms, and conditions that consumers 
must be aware of in order to make informed credit decisions. Requiring 
TILA disclosures for PACE transactions allows consumers to shop among 
different options and across creditors.
---------------------------------------------------------------------------

    \89\ TILA section 102(a), 15 U.S.C. 1601(a).
    \90\ H.R. Rep. No. 1040, 90th Cong. (1967).
---------------------------------------------------------------------------

    Notably, it appears that the current text of comment 2(a)(14)-1.ii 
was not intended to exclude voluntary transactions such as PACE. The 
Board of Governors of the Federal Reserve System (Board) first issued 
the comment in 1981 as part of a broader rulemaking issuing commentary 
to Regulation Z.\91\ In preamble preceding that issuance and in several 
public information letters that were forerunners to the 1981 rule, it 
is clear that the Board was addressing whether certain types of 
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.'' \92\ 
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.'' \93\ Other letters contained similar 
analysis,\94\ and the Board reiterated this reasoning in preamble 
predating the commentary in which it explained its rationale for the 
comment, again focusing on the involuntary nature of the obligations as 
the reason they were not credit.\95\ The Board explained:
---------------------------------------------------------------------------

    \91\ See 46 FR 50288, 50292 (Oct. 9, 1981).
    \92\ Fed. Rsrv. Bd., Public Information Letter No. 166 (1969).
    \93\ Id.
    \94\ See Fed. Rsrv. Bd., Public Information Letter No. 153 
(1969) (similar with regard to sewer assessment installment 
payments); 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.'').
    \95\ 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.\96\
---------------------------------------------------------------------------

    \96\ Id.

    Moreover, in this preamble and in the commentary to Regulation Z 
that it adopted later that year, 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.'' \97\ 
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.
---------------------------------------------------------------------------

    \97\ 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 
Bureau, which republished the 1981 Board interpretation as an 
official Bureau interpretation in comment 2(a)(14)-1.ii with no 
substantive changes.
---------------------------------------------------------------------------

    PACE industry stakeholders have asserted a number of additional 
reasons PACE transactions should not be treated as TILA credit, 
including that PACE financing serves important public policy purposes 
as mandated by State law, and that PACE transactions are special 
assessments that are repaid through the property tax system and are 
secured by liens enforced similar to property tax liens under State 
law. The Bureau is not aware of any indication that Congress intended 
for TILA to exclude voluntary transactions like PACE financing on 
account of their being processed through property tax systems or 
because they are intended to further certain public policy purposes.
    The Bureau recognizes that clarifying the exclusion in comment 
2(a)(14)-1.ii as limited to involuntary tax assessments and involuntary 
tax liens would ensure that TILA applies generally to PACE 
transactions. As a result, it would ensure that certain participants in 
PACE transactions would be subject to TILA requirements. For example, 
various disclosure and other requirements would apply to the entity 
that is the ``creditor'' as defined in Sec.  1026.2(a)(17), which the 
Bureau understands is typically the government sponsor in a PACE 
transaction.\98\ Other requirements would 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.\99\ In the 
Bureau's view, PACE transactions share relevant characteristics with 
other credit transactions, as described above. If they were not subject 
to TILA and Regulation Z, consumers would be at risk, and it would run 
counter to the purposes for enacting TILA expressed by Congress. The 
Bureau understands, however, that certain existing requirements in 
Regulation Z might warrant adjustment to better accommodate the unique 
structure of PACE transactions. The Bureau is proposing amendments to 
that end, as described in the relevant section-by-section analyses in 
this proposal.
---------------------------------------------------------------------------

    \98\ Implementing TILA section 103(g), Sec.  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 Bureau's understanding, 
consistent with ANPR comments and other research, is that these 
characteristics apply to government sponsors of PACE transactions in 
the PACE programs that have been active.
    \99\ 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 proposed Sec.  1026.41 for discussion of servicing provisions in 
Regulation Z.
---------------------------------------------------------------------------

    The Bureau seeks comment on the proposed amendments to comment 
2(a)(14)-1.ii. The Bureau also seeks comment on whether any TILA 
provisions not addressed in this proposal warrant amendment for PACE 
transactions.

1026.32 Requirements for High-Cost Mortgages and 1026.34 Prohibited 
Acts or Practices in Connection With High-Cost Mortgages

    The Home Ownership and Equity Protection Act (HOEPA) was enacted in 
1994 as an amendment to TILA to address abusive practices in 
refinancing and home-equity mortgage loans with high interest rates or 
high fees.\100\ Loans that meet HOEPA's high-cost coverage tests are 
subject to special disclosure requirements and restrictions on loan 
terms, and borrowers in high-cost

[[Page 30398]]

mortgages have enhanced remedies for violations of the law.\101\ The 
provisions of HOEPA are implemented in Regulation Z in Sec. Sec.  
1026.32 and 1026.34.\102\
---------------------------------------------------------------------------

    \100\ Public Law 103-325, 108 Stat. 2160.
    \101\ See 15 U.S.C. 1602(bb), 1639.
    \102\ 12 CFR part 1026.
---------------------------------------------------------------------------

    The Bureau is not proposing any changes to Sec.  1026.32 or Sec.  
1026.34 in this proposed rule. Thus, if the proposed rule is finalized 
as proposed, the high-cost loan requirements implemented in Sec. Sec.  
1026.32 and 1026.34 would apply to PACE transactions that meet the 
definition of high-cost mortgage in Sec.  1026.32(a)(1) in the same way 
that they apply to other high-cost mortgages.\103\ The Bureau requests 
comment on whether any clarification is required through rulemaking or 
otherwise with respect to how HOEPA's provisions as implemented in 
Regulation Z apply to PACE transactions that may qualify as high-cost 
mortgages. In particular, the Bureau requests comment on the interest 
rates and late fees that consumers may have to pay in connection with 
their PACE transactions both before and after default, and whether, for 
example, late fees that apply to all property taxes should be treated 
differently from contractually-imposed late fees for purposes of 
HOEPA's limitations on late fees \104\ as implemented in Sec.  
1026.34(a)(8).
---------------------------------------------------------------------------

    \103\ A mortgage is generally a high-cost mortgage if (1) the 
spread between the APR and the average prime offer rate (APOR) is 
greater than 6.5 percentage points for a first-lien transaction or 
8.5 percentage points for a subordinate-lien transaction, (2) points 
and fees exceed 5 percent of the total loan amount (for loans under 
$20,000) or the lesser of 8 percent or $1,000 (for loans over 
$20,000), or (3) the creditor can charge prepayment penalties more 
than 36 months after consummation or in an amount exceeding 2 
percent of the amount prepaid. 12 CFR 1026.32(a)(1). As discussed in 
the PACE Report, the Bureau estimates that a small percentage of 
PACE transactions would exceed the APR-APOR spread trigger, while 
over one-third of existing PACE transactions have points and fees 
that would exceed the HOEPA points and fees coverage trigger. PACE 
Report, supra note 12, at 15.
    \104\ 15 U.S.C. 1639(k).
---------------------------------------------------------------------------

1026.35 Requirements for Higher-Priced Mortgage Loans

35(b) Escrow Accounts
35(b)(2) Exemptions
35(b)(2)(i)
35(b)(2)(i)(E)
    TILA section 129D generally requires creditors to establish escrow 
accounts for certain higher-priced mortgage loans (HPMLs).\105\ 
Regulation Z implements this requirement in Sec.  1026.35(a) and (b), 
defining an HPML as a closed-end consumer credit transaction secured by 
the consumer's principal dwelling with an APR exceeding the average 
prime offer rate (APOR) \106\ for a comparable transaction by a certain 
number of percentage points.\107\ With certain exemptions, Regulation Z 
Sec.  1026.35(b) prohibits creditors from extending HPMLs secured by 
first liens on consumers' principal dwellings unless an escrow account 
is established before consummation for payment of property taxes, among 
other charges (HPML escrow requirement). The Bureau is unaware of any 
PACE transactions that require consumers to escrow property tax 
payments or other charges, whether or not the PACE transaction could be 
characterized as an HPML. The Bureau believes that requiring escrow 
accounts for PACE transactions that would be subject to the HPML escrow 
requirement would provide little or no benefit to consumers while 
imposing substantial burden on industry. The Bureau proposes to add 
Sec.  1026.35(b)(2)(i)(E) to exempt PACE transactions from the HPML 
escrow requirement.
---------------------------------------------------------------------------

    \105\ 15 U.S.C. 1639d.
    \106\ Section 1026.35(a)(2) defines APOR as an APR that is 
derived from average interest rates, points, and other loan pricing 
terms currently offered to consumers by a representative sample of 
creditors for mortgage transactions that have low-risk pricing 
characteristics. The Bureau publishes APORs for a broad range of 
types of transactions in a table updated at least weekly as well as 
the methodology the Bureau uses to derive these rates.
    \107\ Section 1026.35(a)(1) defines HPML to mean ``a closed-end 
consumer credit transaction secured by the consumer's principal 
dwelling with an APR that exceeds the APOR for a comparable 
transaction as of the date the interest rate is set'' by at least 
1.5, 2.5, or 3.5 percentage points depending on the lien priority 
and the size of the loan relative to the maximum principal 
obligation eligible for purchase by Freddie Mac.
---------------------------------------------------------------------------

    The Bureau believes that a mandatory escrow requirement would 
provide little or no benefit to PACE borrowers. According to the 
Bureau's PACE data, nearly three-fourths of PACE borrowers had a 
mortgage at the time their PACE transactions were funded.\108\ As a 
result, a large proportion of PACE borrowers already may have escrow 
accounts through their pre-existing mortgage loan.\109\ For PACE 
borrowers for whom this is true, PACE payments are already incorporated 
into the mortgage escrow accounts as part of the property tax payment. 
Those borrowers who do not have a pre-existing escrow account are 
already paying their property taxes and any other traditionally 
escrowed charges on their own and likely do not need or perhaps even 
want an escrow account. Because the PACE charges are billed with the 
property taxes, the Bureau believes that it is unlikely that such 
borrowers will mistakenly neglect to pay them.
---------------------------------------------------------------------------

    \108\ See PACE Report, supra note 12, at 12.
    \109\ See Adam H. Langley, Lincoln Inst. Of Land Pol'y, 
Improving the Property Tax by Expanding Options for Monthly 
Payments, at 2 (Jan. 2018), https://www.lincolninst.edu/sites/default/files/pubfiles/langley-wp18al1_0.pdf (stating that, in 2015, 
44 percent of U.S. homeowners paid their property taxes as a part of 
their monthly mortgage payment).
---------------------------------------------------------------------------

    Additionally, escrow accounts for PACE transactions would be 
governed by rules in Regulation X.\110\ The rules include a variety of 
detailed requirements governing, for example, escrow account analyses, 
escrow account statements, and the treatment of surpluses, shortages, 
and deficiencies in escrow accounts.\111\ The Bureau believes the 
additional cost and burden to comply with these requirements in this 
context would not be warranted given the lack of consumer benefit.\112\
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    \110\ See generally Regulation X, 12 CFR 1024.17.
    \111\ Id.
    \112\ Commenters to the 2008 HPML escrow rule estimated that the 
cost could range between one million and $16 million for a large 
creditor. See 73 FR 44521, 44558 (July 30, 2008).
---------------------------------------------------------------------------

    Further, Federal law requires certain escrow account disclosures, 
including escrow account statements required under Regulation X \113\ 
and escrow-related elements of the TILA-RESPA integrated disclosure 
forms required under Regulation Z,\114\ that could be confusing in the 
context of PACE transactions. A defining feature of PACE is that the 
loans are paid back through the property tax system. The escrow account 
disclosures were developed to address more traditional escrow accounts; 
they would not effectively communicate that an escrow account for a 
PACE transaction would collect the principal and interest payments as 
part of the property tax payment. These disclosures would not be 
required if the Bureau finalizes this proposal--Regulation X does not 
require escrow account statements if there will be no escrow 
account,\115\ and the TILA-RESPA integrated disclosure forms would not 
be required to disclose escrow-related information for PACE 
transactions.\116\ Additionally, the escrow account disclosures may 
create uncertainty about whether the PACE transaction affects the 
consumer's pre-existing mortgage escrow account when applicable.
---------------------------------------------------------------------------

    \113\ See 12 CFR 1024.17(g)-(j).
    \114\ See 12 CFR 1026.37, .38.
    \115\ See generally 12 CFR 1024.17.
    \116\ As discussed in the section-by-section analyses of 
Sec. Sec.  1026.37(p) and 1026.38(u) below, the Bureau is proposing 
to eliminate certain escrow-related fields from the TILA-RESPA 
integrated disclosure forms, and the remaining escrow-related fields 
can generally be left blank on the TILA-RESPA integrated disclosure 
forms if there is no escrow account associated with the transaction.
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    The Bureau notes that some of the consumer protection concerns that

[[Page 30399]]

prompted the Board to adopt the initial HPML escrows rule do not apply 
in the same way to the PACE market. The Board first implemented the 
HPML escrow requirement in Regulation Z in 2008, before the requirement 
was codified in TILA, relying on its authority to prohibit deceptive or 
unfair acts or practices.\117\ The Board's HPML rule was originally 
intended to protect consumers who receive relatively high interest 
rates. The Board was concerned that market pressures discouraged 
creditors from offering escrow accounts to borrowers getting subprime 
loans, increasing the risk that these consumers would base borrowing 
decisions on an unrealistically low assessment of their mortgage-
related obligations. In contrast, PACE borrowers for whom the HPML 
escrow requirement would apply will already be paying property taxes as 
a function of homeownership, and the Bureau understands that PACE 
transactions do not generally require any mortgage-related insurance. 
To the extent consumers do lack information about their overall payment 
obligations, and to the extent this could lead to them receiving 
unaffordable PACE loans, the Bureau believes such concerns are better 
addressed through other TILA provisions, including the TILA-RESPA 
integrated disclosures and ATR requirements that are tailored to PACE 
as discussed in the section-by-section analyses below.\118\
---------------------------------------------------------------------------

    \117\ 73 FR 44521 (July 30, 2008). The requirement was later 
codified in TILA section 129D, 15 U.S.C. 1639d.
    \118\ See section-by-section analyses of proposed Sec. Sec.  
1026.37, 1026.38, 1026.43, infra.
---------------------------------------------------------------------------

    One ANPR comment letter from consumer groups advocated for applying 
the HPML escrow requirement for PACE consumers without an existing 
mortgage escrow, to help spread out payments. The Bureau recognizes 
that having the option to break up property tax payments into smaller 
amounts could be helpful to taxpayers generally and particularly to 
taxpayers with PACE accounts who do not already have a pre-existing 
mortgage with an escrow account.\119\ The Bureau believes it would be 
beneficial if local taxing authorities facilitated the spreading-out of 
payments for PACE borrowers \120\ but does not believe that requiring 
an escrow account for PACE HPMLs would be the best way to accomplish 
this.
---------------------------------------------------------------------------

    \119\ Langley, Improving the Property Tax by Expanding Options 
for Monthly Payments, supra note 109, at 7.
    \120\ See generally id. (encouraging local governments to expand 
options for consumers to pay property taxes on a monthly basis).
---------------------------------------------------------------------------

    The Bureau is proposing this exemption pursuant to TILA sections 
105(a) and 105(f). For the reasons discussed in this section-by-section 
analysis, the Bureau believes that exempting PACE transactions from the 
requirements of TILA section 125D is proper to carry out the purposes 
of TILA. As described above, the Bureau believes that the requirements 
of TILA section 125D would significantly complicate, hinder, and make 
more expensive the credit process for PACE transactions. The Bureau 
thus has preliminarily determined that the goal of consumer protection 
would not be undermined by this exemption.

TILA-RESPA Integrated Disclosure Requirements Implemented Under 
Sections 1026.37 and 1026.38

    The CFPA directed the Bureau to integrate the mortgage loan 
disclosures required under TILA and RESPA sections 4 and 5, and to 
publish model disclosure forms to facilitate compliance.\121\ The 
Bureau issued regulatory requirements and model forms to satisfy these 
statutory obligations in 2013 (2013 TILA-RESPA Rule).\122\ The 
requirements and forms generally apply to closed-end consumer credit 
transactions secured by real property or a cooperative unit, other than 
a reverse mortgage subject to Sec.  1026.33.\123\
---------------------------------------------------------------------------

    \121\ CFPA sections 1098 & 1100A, codified at 12 U.S.C. 2603(a) 
& 15 U.S.C. 1604(b), respectively.
    \122\ See 78 FR 80225 (Dec. 31, 2013); 80 FR 43911 (July 24, 
2015). The TILA-RESPA integrated disclosure requirements have been 
amended several times. See https://www.consumerfinance.gov/rules-policy/final-rules/2013-integrated-mortgage-disclosure-rule-under-real-estate-settlement-procedures-act-regulation-x-and-truth-lending-act-regulation-z/.
    \123\ See Sec.  1026.19(e)(1) and (f)(1).
---------------------------------------------------------------------------

    The integrated disclosures consist of two forms: a Loan Estimate 
and a Closing Disclosure. The Loan Estimate provides the consumer with 
good faith estimates of credit costs and transaction terms. It is 
designed to provide disclosures that are helpful to consumers in 
understanding the key features, costs, and risks of the mortgage for 
which they are applying.\124\ In general, the Loan Estimate must be 
provided to consumers within three business days after they submit a 
loan application \125\ and not later than the seventh business day 
before consummation.\126\ The Closing Disclosure is a final disclosure 
reflecting the actual terms of the transaction. In general, the Closing 
Disclosure must be provided to the consumer three business days before 
consummation of the transaction.\127\
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    \124\ See 78 FR 79730, 80225 (Dec. 31, 2013).
    \125\ See Sec.  1026.2(a)(3)(ii) (defining ``application'' for 
these purposes as one that ``consists of the submission of the 
consumer's name, the consumer's income, the consumer's social 
security number to obtain a credit report, the property address, an 
estimate of the value of the property, and the mortgage loan amount 
sought'').
    \126\ Section 1026.19(e)(1)(iii)(A)-(B).
    \127\ Section 1026.19(f)(1)(ii)(A).
---------------------------------------------------------------------------

    As the Bureau explained in the 2013 TILA-RESPA Rule, the TILA-RESPA 
integrated disclosure forms use clear language and design to make it 
easier for consumers to locate key information, such as interest rate, 
periodic payments, and loan costs.\128\ The forms also provide 
information to help consumers decide whether they can afford the loan 
and to compare the cost of different loan offers, including the cost of 
the loans over time.\129\ These benefits are important for PACE 
borrowers just as they are for other mortgage borrowers.
---------------------------------------------------------------------------

    \128\ 78 FR 79730, 80225 (Dec. 31, 2013).
    \129\ Id.
---------------------------------------------------------------------------

    The Bureau believes that certain elements of the current TILA-RESPA 
integrated disclosures may benefit from adaptation so that the forms 
more effectively disclose information about PACE transactions in view 
of their unique nature. The Bureau proposes the modifications to the 
Loan Estimate and Closing Disclosure described below. Where this 
proposal would not provide a PACE-specific version of a particular 
provision, the existing requirements in Sec. Sec.  1026.37 and 1026.38 
would apply. As with other mortgage transactions, elements of the forms 
that are not applicable for PACE transactions may generally be left 
blank.\130\ The Bureau requests comment on the proposed amendments and 
on any further amendments that may improve consumer understanding for 
PACE transactions. The Bureau is proposing model forms in appendix H-
24(H) (Loan Estimate) and appendix H-25(K) (Closing Disclosure) 
reflecting the proposed PACE-specific implementation of the TILA-RESPA 
integrated disclosure requirements.
---------------------------------------------------------------------------

    \130\ See comments 37-1 and 38-1.
---------------------------------------------------------------------------

    The Bureau is not proposing amendments to the timing requirements 
for the Loan Estimate and Closing Disclosure for PACE transactions. The 
Bureau explained in the 2013 TILA-RESPA Rule that the seven-business-
day waiting period between provision of the Loan Estimate and 
consummation is intended to effectuate the purposes of both TILA and 
RESPA by enabling the informed use of credit and ensuring effective 
advance disclosure of settlement charges.\131\ The Bureau

[[Page 30400]]

explained that the three-business-day-period following provision of the 
Closing Disclosure greatly enhances consumer awareness and 
understanding of the costs associated with the mortgage 
transaction.\132\ As with the substantive disclosures, the timing 
requirements are important to PACE borrowers, particularly given 
concerns that the origination process for some PACE borrowers may not 
provide enough time to understand the obligation and shop for other 
financing options.\133\
---------------------------------------------------------------------------

    \131\ 78 FR 79730, 79802-03 (Dec. 31, 2013); see also id. at 
79806-07 (reasoning in context of considering amendments to bona 
fide personal financial emergencies that, at least with respect to 
relatively large mortgage loans, the seven-business-day-waiting-
period would provide consumers a meaningful opportunity to shop for 
a loan, compare available financing options, and negotiate favorable 
terms, and that the seven-business-day-waiting period ``is the 
minimum amount of time'' in which consumers could meaningfully do 
so).
    \132\ 78 FR 79730, 79847 (Dec. 31, 2013).
    \133\ See part II.A.4, supra.
---------------------------------------------------------------------------

    The Bureau is proposing the implementation of the disclosure 
requirements described in the section-by-section analyses of proposed 
Sec. Sec.  1026.37(p) and 1026.38(u) pursuant to its authority under 
TILA section 105(a) and 105(f), and RESPA section 19(a). For the 
reasons discussed in the respective section-by-section analyses, the 
Bureau believes, in its initial analysis, that the proposed 
implementation would be necessary and proper to carry out the purposes 
of TILA and RESPA. The proposed provisions that would implement the 
disclosure requirements under TILA section 105(a), including 
adjustments or exceptions discussed in the applicable section-by-
section analyses, are intended to assure a meaningful disclosure of 
credit terms, avoid the uninformed use of credit, or facilitate 
compliance with TILA. In general, the proposed changes are intended to 
make the Loan Estimate and Closing Disclosure more effective and 
understandable for PACE borrowers, and to facilitate compliance given 
the unique nature of PACE transactions. The Bureau believes that the 
proposed provisions that would implement the disclosure requirements 
under RESPA section 19(a), including interpretations discussed in the 
applicable section-by-section analysis, would further the purposes of 
RESPA and be consistent with the Bureau's authority under RESPA section 
19(a).
    For the reasons discussed in the respective section-by-section 
analyses, the Bureau is proposing various exemptions in Sec. Sec.  
1026.37(p) and 1026.38(u) pursuant to its authority under TILA section 
105(a) and 105(f). With respect to TILA section 105(a), the Bureau 
believes, in its initial analysis, that the proposed exemptions would 
be necessary and proper to carry out TILA's purposes, including by 
assuring the meaningful disclosure of credit terms and avoiding the 
uninformed use of credit. Additionally, with respect to TILA section 
105(f), the Bureau's preliminary determination, after considering the 
factors in TILA section 105(f)(2), is that the disclosures proposed to 
be exempted would not provide meaningful benefit to consumers in the 
form of useful information or protection. In the Bureau's preliminary 
analysis, the exempted disclosure requirements would significantly 
complicate, hinder, or make more expensive credit for PACE 
transactions, and the exemptions would not undermine the goal of 
consumer protection. Where the Bureau believes that doing so would help 
assure the meaningful disclosure of credit terms and avoid the 
uninformed use of credit, the proposal would replace the exempted 
disclosures with disclosures that serve similar purposes to the 
existing disclosures, but that would better fit the context of PACE 
transactions.

Section 1026.37 Content of Disclosures for Certain Mortgage 
Transactions (Loan Estimate)

37(p) PACE Transactions
    Section 1026.37 implements the TILA-RESPA integrated disclosure 
requirements by setting forth the requirements for the Loan Estimate. 
Proposed Sec.  1026.37(p)(1)-(7) would set forth modifications to the 
Loan Estimate requirements for ``PACE transactions,'' as defined under 
proposed Sec.  1026.43(b)(15), to account for the unique nature of 
PACE.
37(p)(1) Itemization
    TILA section 128(a)(6), (a)(16), (b)(2)(C), and (b)(4) are 
currently implemented in part by Sec.  1026.37(c)(1) through (5), which 
generally requires creditors to disclose a table itemizing each 
separate periodic payment or range of payments, among other 
information, under the heading ``Projected Payments.'' As part of the 
projected payments table, the creditor is required to state the total 
periodic payment under Sec.  1026.37(c)(2)(iv), as well as the 
constituent parts of the total periodic payment under Sec.  
1026.37(c)(2)(i) through (iii). Relevant here, Sec.  1026.37(c)(2)(iii) 
generally requires a field for the disclosure of the amount payable 
into an escrow account to pay for some or all mortgage-related 
obligations, as applicable, labeled ``Escrow,'' together with a 
statement that the amount disclosed can increase over time. Proposed 
Sec.  1026.37(p)(1) would exempt PACE transactions from the escrow 
account payment disclosure requirements implemented under Sec.  
1026.37(c)(2)(iii).
    As discussed in the section-by-section analysis of proposed Sec.  
1026.35(b)(2)(i)(E), the Bureau is unaware of any PACE transactions 
that carry their own escrow accounts. Thus, the escrow account payment 
field under Sec.  1026.37(c)(2)(iii) would generally be left blank if 
it were included on the Loan Estimate associated with any PACE 
transaction.\134\ This blank entry could cause confusion for PACE 
borrowers who pay their property taxes into pre-existing escrow 
accounts associated with non-PACE mortgage loans, since PACE 
transactions are typically part of the property tax payment. It also 
could create doubt for the consumer about whether the PACE transaction 
will be repaid through the existing escrow account. The Bureau believes 
the proposed exemption would mitigate this risk.
---------------------------------------------------------------------------

    \134\ See existing comment 37-1, which provides that a portion 
of the Loan Estimate that is inapplicable may generally be left 
blank. (Existing comment 38-1 provides similarly for the Closing 
Disclosure.)
---------------------------------------------------------------------------

37(p)(2) Taxes, Insurance, and Assessments
    TILA sections 128(a)(16) and 128(b)(4)(A) are currently implemented 
in part by Sec.  1026.37(c)(4)(ii). Section 1026.37(c)(4) requires 
creditors to include in the projected payments table \135\ information 
about taxes, insurance, and assessments, with the label ``Taxes, 
Insurance & Assessments.'' Section 1026.37(c)(4)(ii) generally requires 
disclosure of the sum of mortgage-related obligations, including 
property taxes, insurance premiums, and other charges.\136\ Section 
1026.37(c)(4)(iii) through (vi) requires various statements about this 
disclosure. Under proposed Sec.  1026.37(p)(2)(i) and

[[Page 30401]]

(ii), the Bureau would retain most of these requirements for PACE 
transactions, with changes to the disclosures currently required under 
Sec.  1026.37(c)(4)(iv), (v), and (vi) for PACE transactions.
---------------------------------------------------------------------------

    \135\ As noted in the section-by-section analysis of proposed 
Sec.  1026.37(p)(1), Sec.  1026.37(c) generally requires creditors 
to disclose a table itemizing each separate periodic payment or 
range of payments, among other information, under the heading 
``Projected Payments.''
    \136\ Section 1026.37(c)(4)(ii) requires disclosure of ``[t]he 
sum of the charges identified in Sec.  1026.43(b)(8), other than 
amounts identified in Sec.  1026.4(b)(5), expressed as a monthly 
amount, even if no escrow account for the payment of some or any of 
such charges will be established.'' Section 1026.43(b)(8) defines 
mortgage-related obligations as ``property taxes; premiums and 
similar charges identified in Sec.  1026.4(b)(5), (7), (8), and (10) 
that are required by the creditor; fees and special assessments 
imposed by a condominium, cooperative, or homeowners association; 
ground rent; and leasehold payments.'' See also the section-by-
section analysis of proposed Sec.  1026.37(p)(8)(i) for discussion 
of the applicable unit-period for PACE transactions.
---------------------------------------------------------------------------

    Currently, Sec.  1026.37(c)(4)(iv) requires a statement of whether 
the sum of mortgage-related obligations disclosed pursuant to Sec.  
1026.37(c)(4)(ii) includes payments for property taxes, certain 
insurance premiums, or other charges.\137\ Section 1026.37(c)(4)(iv) 
currently does not require a more specific statement regarding the PACE 
payment, separate from other property tax obligations. The Bureau is 
proposing Sec.  1026.37(p)(2)(i) to provide such specificity. Proposed 
Sec.  1026.37(p)(2)(i) would require a statement of whether the amount 
disclosed pursuant to Sec.  1026.37(c)(4)(ii) includes payments for the 
PACE transaction and, separately, whether it includes payments for the 
non-PACE portions of the property tax payment. The statement about the 
PACE loan payment would be labeled ``PACE Payment,'' and the statement 
about the other property taxes would be labeled ``Property Taxes (not 
including PACE loan).'' Besides having a more specific statement 
regarding the PACE payment separate from the other property taxes, the 
other components regarding certain insurance premiums or other charges 
would continue to be disclosed under proposed Sec.  1026.37(p)(2)(i) 
similar to how they are disclosed under current Sec.  
1026.37(c)(4)(iv). The Bureau believes these proposed changes would 
help consumers understand the unique nature of PACE and reinforce that 
the PACE transaction will increase the consumer's property tax payment.
---------------------------------------------------------------------------

    \137\ Section 1026.37(c)(4)(iv) refers to ``payments for 
property taxes, amounts identified in Sec.  1026.4(b)(8), and other 
amounts described in'' Sec.  1026.37(c)(4)(ii). Section 
1026.4(b)(8), in turn, refers to ``[p]remiums or other charges for 
insurance against loss of or damage to property, or against 
liability arising out of ownership or use of property, written in 
connection with a credit transaction.'' Additionally, the Bureau 
notes that a creditor issuing a simultaneous loan that is a PACE 
transaction would generally be required to include the simultaneous 
PACE loan in calculating the sum of taxes, assessments, and 
insurance described in Sec.  1026.37(c)(4)(ii), since the 
simultaneous PACE loan would increase the consumer's property tax 
payment. This is consistent with existing comment 19(e)(1)(i)-1, 
which cross-references existing Sec.  1026.17(c)(2)(i) and generally 
provides that creditors must make TILA-RESPA integrated disclosures 
based on the best information reasonably available to the creditor 
at the time the disclosure is provided to the consumer. As discussed 
in the section-by-section analysis of Sec.  1026.43(c)(2)(iv), the 
Bureau is also proposing to clarify that a creditor originating a 
PACE transaction knows or has reason to know of simultaneous loans 
that are PACE transactions if the transactions are included in any 
existing database or registry of PACE transactions that includes the 
geographic area in which the property is located and to which the 
creditor has access.
---------------------------------------------------------------------------

    Section 1026.37(c)(4)(iv) also currently requires creditors to 
state whether the constituent parts of the taxes, insurance, or 
assessments will be paid by the creditor using escrow account funds. 
Proposed Sec.  1026.37(p)(2)(i) would eliminate this requirement for 
PACE transactions. Omitting this information would avoid potential 
consumer confusion for similar reasons as explained in the section-by-
section analysis of proposed Sec.  1026.37(p)(1).
    The Bureau is also proposing amendments to the requirements in 
Sec.  1026.37(c)(4)(v) and (vi). Currently, Sec.  1026.37(c)(4)(v) 
requires a statement that the consumer must pay separately any amounts 
described in Sec.  1026.37(c)(4)(ii) that are not paid by the creditor 
using escrow account funds; and Sec.  1026.37(c)(4)(vi) requires a 
reference to escrow account information, required under Sec.  
1026.37(g)(3), located elsewhere on the Loan Estimate. Proposed Sec.  
1026.37(p)(2)(ii) would replace these disclosures with the following 
for PACE transactions: (1) a statement that the PACE transaction, 
described in plain language as a ``PACE loan,'' will be part of the 
property tax payment; and (2) a statement directing the consumer, if 
the consumer has a pre-existing mortgage with an escrow account, to 
contact the consumer's mortgage servicer for what the consumer will owe 
and when. The Bureau believes the proposed disclosures would promote 
consumer understanding of PACE transactions and their effect on any 
pre-existing mortgage loans, and that omitting the two existing 
disclosures would not impair consumer understanding of the transaction.
37(p)(3) Contact Information
    TILA section 128(a)(1) is currently implemented in part by Sec.  
1026.37(k), which requires disclosure of certain contact information, 
under the heading ``Additional Information About this Loan.'' \138\ In 
general, a creditor must disclose: (1) the name and NMLSR ID,\139\ 
license number, or other unique identifier issued by the applicable 
jurisdiction or regulating body for the creditor, labeled ``Lender,'' 
and mortgage broker, labeled ``Mortgage Broker,'' if any; (2) similar 
information for the individual loan officer, labeled ``Loan Officer,'' 
of the creditor and the mortgage broker, if any, who is the primary 
contact for the consumer; and (3) the email address and telephone 
number of the loan officer. Section 1026.37(k)(1) through (3) further 
provides that, in the event the creditor, mortgage broker, or loan 
officer has not been assigned an NMLSR ID, the license number or other 
unique identifier issued by the applicable jurisdiction or regulating 
body with which the creditor or mortgage broker is licensed and/or 
registered shall be disclosed, with the abbreviation for the State of 
the applicable jurisdiction or regulating body.
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    \138\ Section 1026.37(k) also integrates the disclosure of 
certain information required under appendix C to Regulation X.
    \139\ Under Sec.  1026.37(k)(1), the NMLS ID refers to the 
Nationwide Mortgage Licensing System and Registry identification 
number.
---------------------------------------------------------------------------

    Proposed Sec.  1026.37(p)(3) would additionally require similar 
disclosures for PACE companies if such information is not disclosed 
under the requirements described above. Specifically, proposed Sec.  
1026.37(p)(3) would require disclosure of the PACE company's name, 
NMLSR ID (labeled ``NMLS ID/License ID''), email address, and telephone 
number of the PACE company (labeled ``PACE Company''). Similar to Sec.  
1026.37(k)(1) through (3)'s existing requirements with respect to 
creditors, mortgage brokers, and loan officers, proposed Sec.  
1026.37(p)(3) would provide that, in the event that the PACE company 
has not been assigned an NMLSR ID, the creditor must disclose on the 
Loan Estimate the license number or other unique identifier issued by 
the applicable jurisdiction or regulating body with which the PACE 
company is licensed and/or registered, along with the abbreviation for 
the State of the applicable jurisdiction or regulatory body stated 
before the word ``License'' in the label, if any. These disclosures 
would not be required if the PACE company's contact information is 
otherwise disclosed pursuant to Sec.  1026.37(k)(1) through (3). 
Proposed comment 37(p)(3)-1 would clarify that, for example, if the 
PACE company is a mortgage broker as defined in Sec.  1026.36(a)(2), 
then the PACE company is disclosed as a mortgage broker and the field 
for PACE company may be left blank.
    As explained in the 2013 TILA-RESPA Rule, disclosing the name and 
NMLSR ID number, if any, for the creditor, mortgage broker, and loan 
officers employed by such entities provides consumers with the 
information they need to conduct the due diligence necessary to ensure 
that these parties are appropriately licensed.\140\ Having this 
information may also help consumers assess the risks associated with 
services and service providers associated with the

[[Page 30402]]

transaction, which in turn serves the purposes of TILA, RESPA, and the 
CFPA and Dodd-Frank Act.\141\ The Bureau believes that similar 
considerations apply to the disclosure of the PACE company.
---------------------------------------------------------------------------

    \140\ 78 FR 79730, 79975-76 (Dec. 31, 2013).
    \141\ See id.
---------------------------------------------------------------------------

    Proposed Sec.  1026.37(p)(3) would reference proposed Sec.  
1026.43(b)(14) for the definition of ``PACE company.'' As explained in 
the section-by-section analysis of proposed Sec.  1026.43(b)(14), 
``PACE company'' means a person, other than a natural person or a 
government unit, that administers the program through which a consumer 
applies for or obtains PACE financing.
    The Bureau seeks comment on proposed Sec.  1026.37(p)(3) generally, 
and on whether to require the contact information for the PACE company 
under the ``PACE Company'' heading in all cases, instead of under the 
``Mortgage Broker'' heading when applicable.
37(p)(4) Assumption
    TILA section 128(a)(13) is currently implemented in part by Sec.  
1026.37(m)(2), which requires the creditor to disclose a statement of 
whether a subsequent purchaser of the property may be permitted to 
assume the remaining loan obligation on its original terms, labeled 
``Assumption.'' This existing disclosure requirement could be 
misleading for PACE transactions. In general, PACE payment obligations 
can transfer with the sale of the property, such that the subsequent 
property owner would be required to pay the remaining obligation as a 
function of property ownership. However, the new homeowners generally 
do not technically assume the loans.
    Proposed Sec.  1026.37(p)(4) would instead require a statement 
reflecting a PACE-specific risk that stakeholders have indicated 
sometimes occurs when consumers try to transfer the PACE obligation by 
selling the property. The proposed statement would state that, if the 
consumer sells the property, the buyer or the buyer's mortgage lender 
may require the consumer to pay off the PACE transaction as a condition 
of the sale. For clarity, proposed Sec.  1026.37(p)(4) requires the 
creditor to label this disclosure ``Selling the Property'' and use of 
the term ``PACE loan'' in the disclosure. The Bureau believes the 
proposed disclosure would further the purposes of TILA by providing 
useful information about key risks of PACE loans, thus avoiding the 
uninformed use of credit.
37(p)(5) Late Payment
    TILA section 128(a)(10) is currently implemented in part by Sec.  
1026.37(m)(4), which requires the creditor to disclose a statement 
detailing any charge that may be imposed for a late payment, stated as 
a dollar amount or percentage charge of the late payment amount, and 
the number of days that a payment must be late to trigger the late 
payment fee, labeled ``Late Payment.'' Unlike non-PACE mortgage loans, 
however, late payment charges for PACE transactions are typically 
determined by taxing authorities as part of the overall property tax 
payment. It may be challenging to disclose all late charges that may be 
associated with a property tax delinquency succinctly and effectively 
on the Loan Estimate, either under existing Sec.  1026.37(m)(4) or 
otherwise. The Bureau understands that some States impose several types 
of late charges, some of which can change as the delinquency persists 
or depend on factors that are unknown at the time of the disclosure.
    To avoid potential confusion for consumers and ensure the Loan 
Estimate includes useful information about the charges a PACE borrower 
might accrue in delinquency, the Bureau proposes to implement TILA 
section 128(a)(10) for PACE transactions by requiring the disclosure in 
proposed Sec.  1026.37(p)(5) rather than the existing disclosure in 
Sec.  1026.37(m)(4). Proposed Sec.  1026.37(p)(5) would require 
creditors, to include one or more statements relating to late charges, 
as applicable. First, proposed Sec.  1026.37(p)(5)(i) would require a 
statement detailing any charge specific to the PACE transaction that 
may be imposed for a late payment, stated as a dollar amount or 
percentage charge of the late payment amount, and the number of days 
that a payment must be late to trigger the late payment fee, labeled 
``Late Payment.'' Proposed comment 37(p)(5)-1 would clarify that a 
charge is specific to the PACE transaction if the property tax 
collector does not impose the same charges for general property tax 
delinquencies. Although the Bureau is not aware of PACE transactions 
that impose such PACE-specific late charges, if any PACE transactions 
do provide for it, disclosure of late payment information would be 
incomplete without it. If a PACE transaction does not provide for it, 
the disclosure would not be required.
    Second, proposed Sec.  1026.37(p)(5)(ii) would require, for any 
charge that is not specific to the transaction, either (1) a statement 
notifying the consumer that, if the consumer's property tax payment is 
late, they may be subject to penalties and late fees established by 
their property tax collector, as well as a statement directing the 
consumer to contact the tax collector for more information; or (2) a 
statement describing any charges that may result from property tax 
delinquency that are not specific to the PACE transaction, which may 
include dollar amounts or percentage charges and the number of days a 
payment must be late to trigger the fee. Proposed Sec.  
1026.37(p)(5)(ii) would provide flexibility for the creditor while 
ensuring that the Loan Estimate contains useful information about 
charges that may result from a property tax delinquency.
    The Bureau solicits comment on whether it should require creditors 
to disclose specific late-payment information and, if so, what 
information to require.
37(p)(6) Servicing
    RESPA section 6(a) is currently implemented by Sec.  1026.37(m)(6), 
which requires the creditor to disclose a statement of whether the 
creditor intends to service the loan or transfer the loan to another 
servicer, using the label ``Servicing.'' PACE transactions are not 
subject to transfer of servicing rights as far as the Bureau is aware. 
Thus, the Bureau is proposing to implement RESPA section 6(a) for PACE 
transactions by requiring a servicing-related disclosure that would be 
more valuable for PACE borrowers.
    Proposed Sec.  1026.37(p)(6) would require the PACE creditor to 
provide a statement that the consumer will pay the PACE transaction, 
using the term ``PACE loan,'' as part of the consumer's property tax 
payment. Proposed Sec.  1026.37(p)(6) would also require a statement 
directing the consumer, if the consumer has a mortgage escrow account 
that includes the consumer's property tax payment, to contact the 
consumer's mortgage servicer for what the consumer will owe and when. 
Proposed Sec.  1026.37(p)(6) would preserve the label ``Servicing'' for 
the disclosure. The Bureau believes that proposed Sec.  1026.37(p)(6) 
would promote the informed use of credit.
37(p)(7) Exceptions
37(p)(7)(i) Unit-Period
    Because PACE transaction payments are repaid with the property 
taxes once or twice a year, the applicable unit-period would typically 
be annual or semi-annual. The proposed model form for PACE under 
proposed appendix H-24(H) would use ``annual'' in the tables disclosing 
loan terms and projected payments. Proposed Sec.  1026.37(p)(7)(i)

[[Page 30403]]

would provide that, wherever the proposed form uses ``annual'' to 
describe the frequency of any payments or the applicable unit-period, 
the creditor shall use the appropriate term to reflect the 
transaction's terms, such as semi-annual payments. Proposed Sec.  
1026.37(p)(7)(i) would be similar to existing Sec.  1026.37(o)(5), 
which permits unit-period changes wherever the Loan Estimate or Sec.  
1026.37 uses ``monthly'' to describe the frequency of any payments or 
uses ``month'' to describe the applicable unit-period.\142\
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    \142\ Comment 37(o)(5)-4 explains that, for purposes of Sec.  
1026.37, the term ``unit-period'' has the same meaning as in 
appendix J to Regulation Z.
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37(p)(7)(ii) PACE Nomenclature
    The Bureau understands that PACE companies may market PACE loans to 
consumers using brand names that do not include the term ``Property 
Assessed Clean Energy'' or the acronym ``PACE.'' To improve the Loan 
Estimate's utility and understandability, proposed Sec.  
1026.37(p)(7)(ii) would clarify that, wherever Sec.  1026.37 requires 
disclosure of the term ``PACE'' or the proposed model form in appendix 
H-24(H) uses the term ``PACE,'' the creditor may substitute the name of 
a specific PACE financing program that will be recognizable to the 
consumer. Proposed comment 37(p)(7)(ii)-1 would provide an example of 
how a creditor may substitute the name of a specific PACE financing 
program that is recognizable to the consumer as PACE on the form.

Section 1026.38 Content of Disclosures for Certain Mortgage 
Transactions (Closing Disclosure)

38(u) PACE Transactions
    Section 1026.38 implements the TILA-RESPA integrated disclosure 
requirements by setting forth the requirements for the Closing 
Disclosure. Proposed Sec.  1026.38(u)(1)-(9) would set forth 
modifications to the Closing Disclosure requirements under Sec.  
1026.38 for ``PACE transactions,'' as defined under proposed Sec.  
1026.43(b)(15), to account for the unique nature of PACE.
38(u)(1) Transaction Information
    TILA section 128(a)(1) is currently implemented in part by Sec.  
1026.38(a)(4), which requires disclosure of identifying information for 
the borrower, the seller, where applicable, and the lender,\143\ under 
the heading ``Transaction Information.'' \144\ Proposed Sec.  
1026.38(u)(1) would additionally require the Closing Disclosure for a 
PACE transaction to include the name of any PACE company involved in 
the transaction, labeled ``PACE Company.'' It would refer to proposed 
Sec.  1026.43(b)(14) for the definition of ``PACE company'' for these 
purposes: a person, other than a natural person or a government unit, 
that administers the program through which a consumer applies for or 
obtains PACE financing.
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    \143\ For purposes of Sec.  1026.38(a)(4)(iii), the lender is 
defined as ``the name of the creditor making the disclosure.'' In 
relevant part, the ``creditor'' is 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 (not including a 
down payment), and to whom the obligation is initially payable.'' 
See Sec.  1026.2(a)(17). As noted in the section-by-section analysis 
of proposed Sec.  1026.2(a)(14), government sponsors are typically 
the creditors for PACE transactions.
    \144\ Section 1026.38(a)(4) also integrates the disclosure of 
certain information required under appendix A to Regulation X.
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    As the Bureau explained in the 2013 TILA-RESPA Rule, disclosing the 
identifying information for the borrower, seller, and lender is 
intended to effectuate statutory purposes by promoting the informed use 
of credit.\145\ The Bureau believes disclosing the PACE company's 
identifying information would do the same.\146\
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    \145\ 78 FR 79730, 80002-03 (Dec. 31, 2013).
    \146\ See part II.A.1 for discussion of the central role PACE 
companies often play in PACE transactions.
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38(u)(2) Projected Payments
    TILA section 128(a)(6), (a)(16), (b)(2)(C), and (b)(4) is currently 
implemented in part by Sec.  1026.38(c). Under Sec.  1026.38(c)(1), the 
Closing Disclosure must disclose the information in the projected 
payments table required on the Loan Estimate under Sec.  1026.37(c)(1)-
(4),\147\ with certain exceptions. These disclosures generally include 
the total periodic payment, as well as an itemization of the periodic 
payment's constituent parts. Additionally, Sec.  1026.38(c)(2) requires 
the projected payments table on the Closing Disclosure to include a 
statement referring the consumer to a detailed disclosure of escrow 
account information located elsewhere on the form.
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    \147\ Section 1026.37(c)(1)-(3) requires information about the 
initial periodic payment or range of payments; and Sec.  
1026.37(c)(4) requires information about estimated taxes, insurance, 
and assessments. The Bureau is proposing changes to these disclosure 
requirements for PACE transactions as described in the section-by-
section analysis of proposed Sec.  1026.37(p)(1) and (2).
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    Proposed Sec.  1026.38(u)(2) would retain the existing structure of 
the projected payments table but would (1) eliminate the field for 
escrow account information that is part of the periodic payment 
disclosure currently required under Sec.  1026.37(c)(2)(iii); (2) 
require the creditor to disclose whether the amount disclosed for 
estimated taxes, insurance, and assessments includes payments for the 
PACE transaction and, separately, whether it includes the non-PACE 
portions of the property tax payment, with corresponding labels for 
both; and (3) require a statement that the PACE transaction will be 
part of the property tax payment and a statement directing the 
consumer, if they have a mortgage with an escrow account, to contact 
their mortgage servicer for what they will owe and when. Additionally, 
proposed Sec.  1026.38(u)(2) would require the creditor to omit the 
existing reference to detailed escrow account information located 
elsewhere on the form. With these proposed amendments, the projected 
payments table for the Closing Disclosure in a PACE transaction would 
mirror that on the Loan Estimate as amended under proposed Sec.  
1026.37(p)(1) and (2). The Bureau is proposing these changes for the 
same reasons as set forth in the section-by-section analyses of 
proposed Sec.  1026.37(p)(1) and (2) above.
38(u)(3) Assumption
    TILA section 128(a)(13) is currently implemented in part by Sec.  
1026.38(l)(1), which requires the information described in Sec.  
1026.37(m)(2) to be provided on the Closing Disclosure under the 
subheading ``Assumption.'' Section 1026.37(m)(2) requires the creditor 
to disclose a statement of whether a subsequent purchaser of the 
property may be permitted to assume the remaining loan obligation on 
its original terms. As discussed in the section-by-section analysis of 
proposed Sec.  1026.37(p)(4), the Bureau understands that this 
disclosure would not be as relevant for PACE transactions, since 
subsequent property owners typically would not assume PACE obligations. 
For the reasons discussed in the section-by-section analysis of 
proposed Sec.  1026.37(p)(4), proposed Sec.  1026.38(u)(3) would thus 
implement TILA section 128(a)(13) for PACE transactions by requiring 
the creditor to use the subheading ``Selling the Property'' and to 
disclose the information required by Sec.  1026.37(p)(4) in place of 
the information required under Sec.  1026.38(l)(1).
38(u)(4) Late Payment
    TILA section 128(a)(10) is currently implemented in part by Sec.  
1026.38(l)(3), which requires the creditor to disclose on the Closing 
Disclosure the information described in Sec.  1026.37(m)(4) under the 
subheading ``Late Payment.'' It requires a statement detailing any 
charge that may be

[[Page 30404]]

imposed for a late payment, stated as a dollar amount or percentage 
charge of the late payment amount, and the number of days that a 
payment must be late to trigger the late payment fee, labeled ``Late 
Payment.'' Proposed Sec.  1026.38(u)(4) would make changes relating to 
the disclosure of late payment charges on the Closing Disclosure for 
PACE transactions to parallel the changes that would be made in 
proposed Sec.  1026.37(p)(5) with respect to the Loan Estimate. The 
Bureau proposes these changes for the same reasons discussed in the 
section-by-section analysis of proposed Sec.  1026.37(p)(5).
38(u)(5) Partial Payment Policy
    TILA section 129C(h) is currently implemented by Sec.  
1026.38(l)(5), which requires certain disclosures regarding the 
lender's acceptance of partial payments under the subheading ``Partial 
Payments.'' Section 1026.38(l)(5)(i) through (iii) generally requires 
disclosure of whether the creditor accepts partial payments and, if so, 
whether the creditor may apply the partial payments or hold them in a 
separate account. Section 1026.38(l)(5)(iv) requires a statement that, 
if the loan is sold, the new lender may have a different policy.
    For PACE transactions, however, the current partial-payment 
disclosure may not accurately and effectively reflect partial-payment 
options for PACE transactions. In general, partial payment policies for 
PACE transactions are typically set by the taxing authority and not by 
the creditor. The tax collector may offer payment options not described 
accurately in the disclosure required under Sec.  1026.38(l)(5), and 
any payment options would likely apply to the full property tax 
payment, not only to the PACE payment specifically. Further, if a PACE 
borrower pays their property taxes into an escrow account on a pre-
existing mortgage loan, their PACE loans may be subject to a partial 
payment policy associated with the pre-existing mortgage loan, which 
the disclosure of partial-payment policies associated with the creditor 
for the PACE transaction would not necessarily reflect.
    Proposed Sec.  1026.38(u)(5) would avoid potential inaccuracies 
that might arise under existing requirements and is intended to provide 
the consumer with useful information as it relates to a PACE 
transaction. It would require that, in lieu of the information required 
by Sec.  1026.38(l)(5), the creditor shall disclose a statement 
directing the consumer to contact the mortgage servicer about the 
partial payment policy for the account if the consumer has a mortgage 
escrow account for property taxes, and to contact the tax collector 
about the tax collector's partial payment policy if the consumer pays 
property taxes directly to the tax authority.
38(u)(6) Escrow Account
    TILA section 129D(h) and 129D(j) is currently implemented in part 
by Sec.  1026.38(l)(7), which requires a statement of whether an escrow 
account will be established for the transaction, as well as detailed 
information about the effects of having or not having an escrow 
account, under the subheading ``Escrow Account.'' For similar reasons 
as discussed in the section-by-section analysis for proposed Sec.  
1026.37(p)(1) with respect to exempting escrow-related information from 
the projected payments table on the Loan Estimate for PACE 
transactions, and because certain elements of the disclosure under 
Sec.  1026.38(l)(7) could be inaccurate for some PACE borrowers, 
proposed Sec.  1026.38(u)(6) would exempt creditors in PACE 
transactions from the requirement to disclose on the Closing Disclosure 
the information otherwise required under Sec.  1026.38(l)(7).
38(u)(7) Liability After Foreclosure
    TILA section 129C(g)(2) and 129C(g)(3) is currently implemented in 
part by Sec.  1026.38(p)(3), which requires the creditor to disclose 
certain information about the consumer's potential liability after 
foreclosure. It requires, under the subheading ``Liability after 
Foreclosure,'' a brief statement of whether, and the conditions under 
which, the consumer may remain responsible for any deficiency after 
foreclosure under applicable State law, a brief statement that certain 
protections may be lost if the consumer refinances or incurs additional 
debt on the property, and a statement that the consumer should consult 
an attorney for additional information.
    In general, this disclosure provides useful information for 
consumers who may have State-law protections against deficiency. 
However, it may not be applicable in the same way, or at all, with 
respect to PACE transactions due to their unique nature. Thus, proposed 
Sec.  1026.38(u)(7) would provide that the creditor shall not disclose 
the liability-after-foreclosure disclosure described in Sec.  
1026.38(p)(3).\148\ It would provide that, if the consumer may be 
responsible for any deficiency after foreclosure or tax sale under 
applicable State law, the creditor shall instead disclose a brief 
statement that the consumer may have such responsibility, a description 
of any applicable protections provided under State anti-deficiency 
laws, and a statement that the consumer should consult an attorney for 
additional information. This information would be under the subheading 
``Liability after Foreclosure or Tax Sale.'' The Bureau believes this 
information would be more useful for PACE borrowers than the existing 
disclosure required under Sec.  1026.38(p)(3), thus helping to avoid 
the uninformed use of credit.
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    \148\ As described in Sec.  1026.37(m)(7), if the purpose of the 
credit transaction is to refinance an extension of credit as 
described in Sec.  1026.37(a)(9)(ii), the Loan Estimate would be 
required to disclose information about the consumer's liability 
after foreclosure. The Bureau believes that this disclosure is 
unlikely to be required on a Loan Estimate for a PACE loan. 
Therefore the proposal does not currently address such language on 
the Loan Estimate.
---------------------------------------------------------------------------

38(u)(8) Contact Information
    TILA section 128(a)(1) is currently implemented in part by Sec.  
1026.38(r), which generally requires certain information disclosed in a 
separate table, under the heading ``Contact Information.'' \149\ For 
transactions without a seller, Sec.  1026.38(r) requires specified 
contact and licensing information for each creditor, mortgage broker, 
and settlement agent participating in the transaction. Proposed Sec.  
1026.38(u)(8) would require the same contact and licensing information 
for the PACE company if not otherwise disclosed pursuant to Sec.  
1026.38(r). As discussed in the section-by-section analysis of proposed 
Sec.  1026.37(p)(3) and proposed comment 37(p)(3)-1,\150\ the PACE 
company may be a mortgage broker, in which case its information would 
be required under the existing requirements in Sec.  1026.38(r); 
proposed Sec.  1026.38(u)(8) would not require the disclosure of the 
PACE company a second time. As explained in the section-by-section 
analysis of proposed Sec.  1026.43(b)(14), given the important role 
that PACE companies play in PACE transactions, the Bureau believes that 
disclosing their contact information could be useful to consumers and 
would facilitate the informed use of credit.
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    \149\ Section 1026.38(r) also integrates the disclosure of 
certain information required under appendix A and appendix C to 
Regulation X.
    \150\ Proposed comment 37(p)(3)-1 explains that a PACE company 
may be a mortgage broker as defined in Sec.  1026.36(a)(2).
---------------------------------------------------------------------------

38(u)(9) Exceptions
38(u)(9)(i) Unit-Period
    To permit creditors the flexibility to disclose the correct unit-
period for each PACE transaction, proposed

[[Page 30405]]

Sec.  1026.38(u)(9)(i) would provide that, wherever proposed form H-
25(K) of appendix H uses ``annual'' to describe the frequency of any 
payments or the applicable unit-period, the creditor shall use the 
appropriate term to reflect the transaction's terms, such semi-annual 
payments. The Closing Disclosure changes in proposed Sec.  
1026.38(u)(9)(i) parallel the Loan Estimate changes in proposed Sec.  
1026.37(p)(7)(i), and the Bureau is proposing proposed Sec.  
1026.38(u)(9)(i) for the same reasons stated in the section-by-section 
analysis of proposed Sec.  1026.37(p)(7)(i). Proposed Sec.  
1026.38(u)(9)(i) is also similar to existing Sec.  1026.38(t)(5)(i), 
which permits changes wherever the Closing Disclosure or Sec.  1026.38 
uses ``monthly'' to describe the frequency of any payments or uses 
``month'' to describe the applicable unit-period.'' \151\
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    \151\ Comment 38(t)(5)-3 explains that, for purposes of Sec.  
1026.38, the term ``unit-period'' has the same meaning as in 
appendix J to Regulation Z.
---------------------------------------------------------------------------

38(u)(9)(ii) PACE Nomenclature
    The Bureau understands that PACE companies may market to consumers 
using brand names that do not include the term ``Property Assessed 
Clean Energy'' or the acronym ``PACE.'' To ensure that consumers 
understand Closing Disclosures provided for PACE transactions, proposed 
Sec.  1026.38(u)(9)(ii) would clarify that, wherever Sec.  1026.38 
requires disclosure of the term ``PACE'' or the proposed model form in 
appendix H-25(K) uses the term ``PACE,'' the creditor may substitute 
the name of a specific PACE financing program that will be recognizable 
to the consumer. Proposed comment 38(u)(9)(ii)-1 would provide an 
example of how a creditor may substitute the name of a specific PACE 
financing program that is recognizable to the consumer as PACE on the 
form.

1026.41 Periodic Statement

41(e) Exemptions
41(e)(7) PACE Transactions
    TILA section 128(f) generally requires periodic statements for 
residential mortgage loans.\152\ Section 1026.41 implements this 
requirement by requiring creditors, servicers, or assignees, as 
applicable, to provide a statement for each billing cycle that contains 
information such as the amount due, payment breakdown, transaction 
activity, contact information, and delinquency information.\153\ 
Proposed Sec.  1026.41(e)(7) would exempt PACE transactions, as defined 
in proposed Sec.  1026.43(b)(15), from the periodic statement 
requirement to reduce consumer confusion while avoiding undue burden 
for PACE creditors.
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    \152\ 15 U.S.C. 1638(f).
    \153\ For purposes of Sec.  1026.41, the term ``servicer'' 
includes the creditor, assignee, or servicer of the loan, as 
applicable. Sec.  1026.41(a)(2).
---------------------------------------------------------------------------

    Several unique characteristics of PACE financing support this 
proposed exemption. First, PACE payments and delinquency charges are 
typically integrated with broader property tax payments and delinquency 
charges. Consumers may be confused about whether fields in the periodic 
statement include details of the PACE financing, property taxes, or 
both, or why the figures do not align with those in their property tax 
statements. Second, the annual or semi-annual payment schedule for PACE 
financing means that information on the periodic statement about the 
next expected payment would come many months before the payment was 
due, given timing requirements for periodic statements under Regulation 
Z, which may limit its utility for consumers.\154\ Finally, requiring a 
periodic statement could impose a significant burden on the party 
providing the statement given that local taxing authorities would hold 
needed information such as whether and when payments were made or 
delinquency charges applied.
---------------------------------------------------------------------------

    \154\ See 12 CFR 1026.41(b).
---------------------------------------------------------------------------

    Even with the proposed exemption, consumers would still receive 
information regarding payments and delinquency from their property tax 
collector and, if they have a mortgage with an escrow, from their 
mortgage servicer. Consumers could also obtain information about the 
PACE loan by requesting a payoff statement pursuant to Sec.  
1026.36(c)(3).
    The Bureau seeks comment on proposed Sec.  1026.41(e)(7) and 
whether a periodic statement requirement would benefit PACE consumers. 
Specifically, the Bureau seeks comment on the types of disclosures 
related to PACE financing that consumers currently receive from PACE 
creditors, property tax collectors, and others. The Bureau also seeks 
comment on whether an annual or semi-annual disclosure like the 
periodic statement would be useful for PACE consumers and, if so, what 
information it should contain.
    The Bureau also requests comment on whether there are any other 
mortgage servicing requirements in Regulation Z or X beyond the 
periodic statement requirement that the Bureau should address in the 
final rule. Some servicing requirements, such as the requirements to 
provide periodic statements and to provide payoff statements, apply not 
just to servicers but also to creditors and assignees.\155\ Both 
Regulation Z and Regulation X also impose certain servicing 
requirements that apply only to ``servicers'' as defined in Regulation 
X, 12 CFR 1024.2(b).\156\ Regulation X generally defines servicer as 
``a person responsible for the servicing of a federally related 
mortgage loan'' and servicing as receiving any scheduled periodic 
payments from a borrower pursuant to the loan's terms and making 
certain payments to the loan's owner or other third parties.\157\ The 
definition of ``person'' in RESPA \158\ has been interpreted not to 
apply to government entities.\159\ This proposed rule does not address 
any servicing requirements that apply only to ``servicers'' as defined 
in Regulation X because there does not appear to be a ``servicer'' in 
typical PACE transactions. Pursuant to the terms of PACE transactions 
that the Bureau has reviewed, the consumer's local government taxing 
authority typically receives the borrower's regular PACE payments as 
part of the consumer's larger property tax payment.
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    \155\ See Sec. Sec.  1026.41(a)(2); 1026.36(c)(3).
    \156\ See, e.g., 12 CFR 1024.41 (loss mitigation); 1026.36(c)(1) 
and (2) (payment processing and pyramiding of late fees).
    \157\ 12 CFR 1024.2(b) (emphasis added); see also 12 U.S.C. 
2605(i)(2).
    \158\ See 12 U.S.C. 2602(5).
    \159\ See, e.g., New Jersey Title Ins. Co. v. Cecere, 2020 WL 
7137873, at *10 (D.N.J. 2020); United States v. Davis, 2018 WL 
6694826, at *4 (C.D. Ill. 2018); Rodriguez v. Bank of Am., 2017 WL 
3086369, at *5 (D.N.J. 2017). Other entities involved in PACE 
transactions, such as the PACE company and home improvement 
contractor, would fall within RESPA's definition of ``person'' but 
do not appear to meet the Regulation X definition of ``servicer'' in 
typical PACE transactions. For federally related mortgage loans, 
defined in RESPA section 3(1), 12 U.S.C. 2602(1), and Regulation X 
Sec.  1024.2(b), RESPA covered persons are generally subject to 
RESPA's provisions including the anti-kickback provisions in 12 
U.S.C. 2607.
---------------------------------------------------------------------------

    The Bureau proposes to use its authority under TILA sections 105(a) 
and (f) and Dodd-Frank Act section 1405(b) to exempt PACE financing 
from the periodic statement requirement. The Bureau preliminarily 
concludes that this exemption is necessary and proper under TILA 
section 105(a). Furthermore, the Bureau preliminarily concludes, for 
the reasons stated above, that disclosure of the information specified 
in TILA section 128(f)(1) would not provide a meaningful benefit to 
PACE consumers, considering the factors in TILA section 105(f). The 
Bureau preliminarily believes that this conclusion would be true 
regardless of the loan amount, borrower status (including related

[[Page 30406]]

financial arrangements, financial sophistication, and the importance to 
the borrower of the loan), or whether the loan is secured by the 
consumer's principal residence. Consequently, the proposed exemption 
appears to further the consumer protection objectives of the statute, 
and helps to avoid complicating, hindering, or making more expensive 
the credit process. The Bureau also believes that the proposed 
modification of the requirements in TILA section 128(f) to exempt PACE 
financing would improve consumer awareness and understanding and is in 
the interest of consumers and in the public interest, consistent with 
Dodd-Frank Act section 1405(b).

1026.43 Minimum Standards for Transactions Secured by a Dwelling

    Section 1026.43 implements the requirement in TILA section 129C(a) 
that creditors must make a reasonable, good faith determination of a 
consumer's ability to repay a residential mortgage loan and defines the 
loans eligible to be ``qualified mortgages,'' which obtain certain 
presumptions of compliance pursuant to TILA section 129C(b). The Bureau 
is proposing a number of amendments to Sec.  1026.43 and its commentary 
to account for the unique nature of PACE. Specifically, this proposal 
would (1) define ``PACE company'' and ``PACE transaction'' for purposes 
of Sec.  1026.43; (2) provide an additional factor a creditor must 
consider when making a repayment ability determination for PACE 
transactions extended to consumers who pay their property taxes through 
an escrow account; (3) provide that a PACE transaction is not a QM as 
defined in Sec.  1026.43; and (4) extend the requirements of Sec.  
1026.43 and the liability provisions of section 130 of TILA \160\ to 
any PACE company that is substantially involved in making the credit 
decision. This proposal would also amend the commentary to this section 
to explain that a creditor originating a PACE transaction knows or has 
reason to know of any simultaneous loans that are PACE transactions if 
the transactions are included in a relevant database or registry of 
PACE transactions. The Bureau further proposes to amend the commentary 
to make clear that pre-existing PACE transactions are considered a 
property tax for purposes of considering mortgage-related obligations 
under Sec.  1026.43(b)(8) and to clarify the verification requirements 
for existing PACE transactions. The CFPB seeks comment on these 
proposed amendments.
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    \160\ 15 U.S.C. 1640.
---------------------------------------------------------------------------

Background on the Existing Ability-to-Repay Requirements for Mortgages
    The Dodd-Frank Act amended TILA to establish, among other things, 
ATR requirements in connection with the origination of most residential 
mortgage loans.\161\ As amended, TILA prohibits a creditor from making 
a residential mortgage loan unless the creditor makes a reasonable and 
good faith determination based on verified and documented information 
that, at the time the loan is consummated, the consumer has a 
reasonable ability to repay the loan according to its terms, and all 
applicable taxes, insurance (including mortgage guarantee insurance), 
and assessments.\162\
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    \161\ Dodd-Frank Act sections 1411-12, 1414, 124 Stat. 2142-48, 
2149; 15 U.S.C. 1639c.
    \162\ 15 U.S.C. 1639c(a)(1). TILA section 103 defines 
``residential mortgage loan'' to mean, with some exceptions 
including open-end credit plans, ``any consumer credit transaction 
that is secured by a mortgage, deed of trust, or other equivalent 
consensual security interest on a dwelling or on residential real 
property that includes a dwelling.'' 15 U.S.C. 1602(dd)(5). TILA 
section 129C also exempts certain residential mortgage loans from 
the ATR requirements. See, e.g., 15 U.S.C. 1639c(a)(8) (exempting 
reverse mortgages and temporary or bridge loans with a term of 12 
months or less).
---------------------------------------------------------------------------

    TILA identifies the factors a creditor must consider in making a 
reasonable and good faith assessment of a consumer's ability to repay. 
These factors are the consumer's credit history, current and expected 
income, current obligations, debt-to-income (DTI) ratio or residual 
income after paying non-mortgage debt and mortgage-related obligations, 
employment status, and other financial resources other than equity in 
the dwelling or real property that secures repayment of the loan.\163\
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    \163\ 15 U.S.C. 1639c(a)(3).
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    In January 2013, the Bureau issued a final rule amending Regulation 
Z to implement TILA's ATR requirements (January 2013 Final Rule).\164\ 
This proposal refers to the January 2013 Final Rule and later 
amendments to it collectively as the ATR/QM Rule. The ATR/QM Rule 
implements the statutory criteria listed above in the eight 
underwriting factors a creditor must consider in making a repayment 
ability determination set out in Sec.  1026.43(c)(2).\165\ These 
factors are (1) the consumer's current or reasonably expected income or 
assets (other than the value of the dwelling and attached real property 
that secures the loan) that the consumer will rely on to repay the 
loan; (2) the consumer's current employment status (if a creditor 
relies on employment income when assessing the consumer's ability to 
repay); (3) the monthly mortgage payment for the loan that the creditor 
is underwriting; (4) the monthly payment on any simultaneous loans 
secured by the same dwelling; (5) monthly mortgage-related obligations; 
(6) the consumer's current debts, alimony, and child-support 
obligations; (7) the consumer's monthly DTI ratio or residual income; 
and (8) the consumer's credit history.\166\
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    \164\ 78 FR 6408 (Jan. 30, 2013).
    \165\ See id. at 6463.
    \166\ 12 CFR 1026.43(c)(2).
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    The ATR/QM Rule generally requires a creditor to verify the 
information it relies on when determining a consumer's repayment 
ability using reasonably reliable third-party records.\167\ For 
example, to verify the consumer's income and assets, a creditor may use 
a tax-return transcript issued by the Internal Revenue Service or a 
variety of other records, such as filed tax returns, IRS Form W-2s, 
payroll statements, financial institution records, or other third-party 
documents.\168\
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    \167\ 12 CFR 1026.43(c)(3)-(4).
    \168\ 12 CFR 1026.43(c)(4). TILA section 129C(a)(4) provides 
that, in order to safeguard against fraudulent reporting, any 
consideration of a consumer's income history must include the 
verification of income using either (1) IRS transcripts of tax 
returns; or (2) an alternative method that quickly and effectively 
verifies income documentation by a third-party, subject to rules 
prescribed by the Bureau. In the January 2013 Final Rule, the Bureau 
implemented TILA section 129C(a)(4)(B) by adjusting the requirement 
to (1) require the creditor to use reasonably reliable third-party 
records, consistent with TILA section 129C(a)(4), rather than the 
``quickly and effectively'' standard of TILA section 129C(a)(4)(B); 
and (2) provide examples of reasonably reliable records that a 
creditor can use to efficiently verify income, as well as assets. 
See 78 FR 6408, 6474 (Jan. 30, 2013).
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    The ATR/QM Rule also defines categories of loans, called QMs, that 
are presumed to comply with the ATR requirement.\169\ Under the ATR/QM 
Rule, a creditor that makes a QM loan is deemed to have complied with 
ATR requirements presumptively or conclusively, which generally depends 
on whether the loan is ``higher priced.'' \170\ The ATR/QM Rule defines 
several categories of QM loans. As

[[Page 30407]]

relevant here, those categories include General QM, Small Creditor QM, 
Seasoned QM, and Balloon-Payment QM loans.\171\
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    \169\ 15 U.S.C. 1639c(b)(1).
    \170\ The ATR/QM Rule generally defines a ``higher-priced'' loan 
to mean a first-lien mortgage with an APR that exceeded APOR for a 
comparable transaction as of the date the interest rate was set by 
1.5 or more percentage points; or a subordinate-lien mortgage with 
an APR that exceeded APOR for a comparable transaction as of the 
date the interest rate was set by 3.5 or more percentage points. 12 
CFR 1026.43(b)(4). A creditor that makes a QM loan that is not 
``higher priced'' is entitled to a conclusive presumption that it 
has complied with the ATR/QM Rule--i.e., the creditor receives a 
safe harbor from liability. 12 CFR 1026.43(e)(1)(i). A creditor that 
makes a loan that meets the standards for a QM loan but is ``higher 
priced'' is entitled to a rebuttable presumption that it has 
complied with the ATR/QM Rule. 12 CFR 1026.43(e)(1)(ii).
    \171\ 12 CFR 1026.43(c), (e), (f). TILA section 
129C(b)(3)(B)(ii) directs HUD, the Department of Veterans Affairs 
(VA), the Department of Agriculture (USDA), and the Rural Housing 
Service (RHS) to prescribe rules defining the types of loans they 
insure, guarantee, or administer, as the case may be, that are QMs. 
Section 1026.43(e)(4) provides that, notwithstanding paragraph Sec.  
1026.43.43(e)(2), a QM is a covered transaction that is defined as a 
QM by HUD under 24 CFR 201.7 and 24 CFR 203.19, VA under 38 CFR 
36.4300 and 38 CFR 36.4500, or USDA under 7 CFR 3555.109. In 
addition, section 101 of the EGRRCPA amended TILA to provide 
protection from liability for insured depository institutions and 
insured credit unions with assets below $10 billion with respect to 
certain ATR requirements regarding residential mortgage loans. The 
Bureau is not aware of any PACE creditors that would qualify for 
protection under these provisions, and these provisions are not 
addressed in this proposed rule.
---------------------------------------------------------------------------

QM Definitions
    One category of QM loans defined by the ATR/QM Rule consists of 
``General QM loans.'' \172\ The January 2013 Final Rule provided that a 
loan was a General QM loan if:
---------------------------------------------------------------------------

    \172\ Another temporary category of QMs defined by the ATR/QM 
Rule, Temporary GSE QMs, expired on October 1, 2022.
---------------------------------------------------------------------------

     The loan did not have negative-amortization, interest-
only, or balloon-payment features, a term that exceeds 30 years, or 
points and fees that exceed specified limits; \173\
---------------------------------------------------------------------------

    \173\ 12 CFR 1026.43(e)(2)(i)-(iii).
---------------------------------------------------------------------------

     The creditor underwrote the loan based on a fully 
amortizing schedule using the maximum rate permitted during the first 
five years; \174\
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    \174\ 12 CFR 1026.43(e)(2)(iv).
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     The creditor considered and verified the consumer's income 
and debt obligations in accordance with appendix Q; \175\ and
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    \175\ 12 CFR 1026.43(e)(2)(v).
---------------------------------------------------------------------------

     The consumer's DTI ratio was no more than 43 percent, 
determined in accordance with appendix Q.\176\
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    \176\ 12 CFR 1026.43(e)(2)(vi). Appendix Q contained standards 
for calculating and verifying debt and income for purposes of 
determining whether a mortgage satisfied the 43 percent DTI limit 
for General QM loans. The standards in appendix Q were adapted from 
guidelines maintained by the Federal Housing Administration (FHA) of 
HUD when the January 2013 Final Rule was issued. 78 FR 6408, 6527-28 
(Jan. 30, 2013) (noting that appendix Q incorporates, with certain 
modifications, the definitions and standards in HUD Handbook 4155.1, 
Mortgage Credit Analysis for Mortgage Insurance on One-to-Four-Unit 
Mortgage Loans).
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    The Bureau amended the General QM definition on December 10, 2020 
(General QM Final Rule).\177\ The General QM Final Rule amended 
Regulation Z to remove the General QM loan definition's DTI limit (and 
appendix Q) and replace it with limits based on the loan's pricing. For 
non-PACE mortgages, loan pricing in general is strongly correlated with 
early delinquency rates, which the General QM Final Rule used as a 
proxy for repayment ability.\178\ The Bureau concluded that a 
comparison of a loan's APR to the APOR for a comparable transaction is 
a more holistic and flexible indicator of a consumer's ability to repay 
than DTI alone.\179\ The Bureau further concluded that the bright-line 
pricing thresholds established in the General QM Final Rule strike an 
appropriate balance between ensuring consumers' ability to repay and 
ensuring access to responsible, affordable mortgage credit.\180\ Under 
the amended rule, a loan meets the General QM loan definition only if 
the APR exceeds the APOR for a comparable transaction by less than 2.25 
percentage points, with higher thresholds for loans with smaller loan 
amounts, for certain manufactured housing loans, and for subordinate-
lien transactions.\181\
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    \177\ 85 FR 86308 (Dec. 29, 2020).
    \178\ See part IX.A for a discussion of why these dynamics 
differ for PACE transactions.
    \179\ 85 FR 86308, 86317 (Dec. 29, 2020).
    \180\ Id.
    \181\ Id. at 86367.
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    In May 2013, the Bureau amended the ATR/QM Rule to add, among other 
things, a new QM category for covered transactions that are originated 
by creditors that meet certain size criteria and that satisfy certain 
other requirements (the Small Creditor QM).\182\ Those requirements 
include many that apply to General QMs, with some exceptions. 
Specifically, Small Creditor QMs are not subject to the pricing 
threshold for QM status, and the threshold for determining whether 
Small Creditor QMs are higher-priced covered transactions, and thus 
qualify for the QM safe harbor or rebuttable presumption, is higher 
than the threshold for General QMs.\183\ In addition, Small Creditor 
QMs must be held in portfolio for three years (a requirement that does 
not apply to General QMs).\184\
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    \182\ 78 FR 35430 (June 12, 2013). The Bureau made several 
amendments to the Small Creditor QM provisions in 2015. 80 FR 59944 
(Oct. 2, 2015).
    \183\ QMs are generally considered to be higher priced if they 
have an APR that exceeds the applicable APOR by at least 1.5 
percentage points for first-lien loans and at least 3.5 percentage 
points for subordinate-lien loans. In contrast, Small Creditor QMs 
are only considered higher priced if the APR exceeds APOR by at 
least 3.5 percentage points for either a first- or subordinate-lien 
loan. 12 CFR 1026.43(b)(4). The same is true for another QM 
definition that permits certain creditors operating in rural or 
underserved areas to originate QMs with a balloon payment provided 
that the loans meet certain other criteria (Balloon Payment QM 
loans). QMs that are higher priced enjoy only a rebuttable 
presumption of compliance with the ATR requirements, whereas QMs 
that are not higher priced enjoy a safe harbor.
    \184\ 12 CFR 1026.43(e)(5)(ii).
---------------------------------------------------------------------------

    In December 2020, the Bureau created a new category of QMs 
(Seasoned QMs) for first-lien, fixed-rate covered transactions that 
have met certain performance requirements, are held in portfolio by the 
originating creditor or first purchaser for a 36-month period, comply 
with general restrictions on product features and points and fees, and 
meet certain underwriting requirements.\185\ To qualify, a transaction 
generally must have no more than two delinquencies of 30 or more days 
and no delinquencies of 60 or more days at the end of the seasoning 
period of 36 months beginning on the date on which the first periodic 
payment is due.\186\ The Bureau found that if combined with certain 
other factors, successful loan performance over a number of years 
indicates sufficient certainty to presume that loans were originated in 
compliance with the ATR/QM Rule.\187\
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    \185\ 85 FR 86402 (Dec. 29, 2020).
    \186\ 12 CFR 1026.43(e)(7)(ii).
    \187\ 85 FR 86402, 86415 (Dec. 29, 2020).
---------------------------------------------------------------------------

    TILA section 129C(b)(2)(E)(iv)(I) granted the Bureau the discretion 
to create a special provision allowing origination of balloon-payment 
QMs, which it implemented in the January 2013 Final Rule.\188\ As 
directed by Congress, the Bureau considered the issues facing small 
creditors in rural and underserved areas and determined that it was 
appropriate to exercise its discretion under TILA to reduce burdens on 
certain small creditors that operate predominantly in rural or 
underserved areas. Accordingly, the Bureau established a special 
provision allowing these creditors to originate balloon-payment QMs, 
even though balloon-payment mortgages are otherwise precluded from 
being considered QMs.\189\
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    \188\ 78 FR 6408, 6538 (Jan. 30, 2013).
    \189\ Id. The Bureau further amended the Regulation Z 
requirements for balloon-payment QMs in response to the HELP Rural 
Communities Act in October 2015. 81 FR 16074 (Mar. 25, 2016); see 
Public Law 114-94, 129 Stat. 1312 (2015).
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43(b) Definitions
    Section 1026.43(b) sets forth certain definitions for purposes 
Sec.  1026.43. The Bureau is proposing to amend the commentary to Sec.  
1026.43(b)(8), regarding the existing definition of mortgage-related 
obligations, to clarify the treatment of payments for pre-existing PACE 
transactions. The Bureau is also proposing two new definitions in Sec.  
1026.43(b)(14) and (b)(15). Under the proposal, Sec.  1026.43(b)(14) 
would define

[[Page 30408]]

PACE company, and Sec.  1026.43(b)(15) would define PACE 
transaction.\190\
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    \190\ If the Bureau finalizes the new definitions in proposed 
Sec.  1026.43(b)(14) and (b)(15), the final rule would add the new 
definitions into Sec.  1026.43(b) where they belong alphabetically 
in that paragraph and would renumber existing definitions as needed 
and make conforming technical adjustments to cross-references to 
those definitions to reflect the renumbering changes.
---------------------------------------------------------------------------

43(b)(8) Mortgage-Related Obligations
    Section 1026.43(b)(8) defines ``mortgage-related obligations'' to 
include property taxes, among other things. In turn, Sec.  
1026.43(c)(2)(v) requires a creditor to consider the consumer's monthly 
payment for mortgage-related obligations in making the repayment 
ability determination required under Sec.  1026.43(c)(1). The Bureau 
proposes to amend comment 43(b)(8)-2 to explicitly state that payments 
for pre-existing PACE transactions are considered property taxes for 
purposes of Sec.  1026.43(b)(8). The intent of this proposed amendment 
is to ensure that it is clear that a creditor must consider payments 
for pre-existing PACE transactions as mortgage-related obligations.
    The proposed amendment to comment 43(b)(8)-2 is consistent with the 
existing rule but adds an explicit reference to PACE transactions for 
clarity. Comment 43(b)(8)-2 already provides that all obligations that 
are related to the ownership or use of real property and paid to a 
taxing authority, whether on a monthly, quarterly, annual, or other 
basis, are property taxes for purposes of Sec.  1026.43(b)(8). PACE 
transactions are related to the ownership or use of real property and 
are paid to a taxing authority. In addition, the existing comment 
provides as an example that taxes, assessments, and surcharges imposed 
by independent districts established or allowed by the government with 
the authority to impose levies on properties within the district to 
fund a special purpose qualify as property taxes for purposes of Sec.  
1026.43(b)(8). The Bureau seeks comment on this proposed amendment.
43(b)(14) PACE Company
    To provide clarity and for ease of reference, the Bureau proposes 
to add a definition of ``PACE company'' in Sec.  1026.43(b)(14).
    As discussed in part II.A above, most local governments that engage 
in PACE financing rely on private companies to administer PACE 
programs. PACE companies are generally responsible for operating the 
applicable programs, including marketing PACE financing to consumers, 
administering originations, making decisions about whether to extend 
the loan, and enlisting home improvement contractors that will 
implement the projects to facilitate the originations. PACE companies 
thus play an extensive role in PACE transactions, and as discussed in 
the section-by-section analysis of Sec.  1026.43(i) below, the Bureau 
proposes to apply the requirements of Sec.  1026.43 to any PACE company 
that is substantially involved in making the credit decision.\191\
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    \191\ The Bureau also proposes to apply section 130 of TILA, 15 
U.S.C. 1640, to covered PACE companies that fail to comply with 
Sec.  1026.43. See section-by-section analysis of proposed Sec.  
1026.43(i)(3).
---------------------------------------------------------------------------

    Proposed Sec.  1026.43(b)(14) would provide that PACE company means 
a person, other than a natural person or a government unit, that 
administers the program through which a consumer applies for or obtains 
a PACE transaction. Proposed comment 43(b)(14)-1 would provide indicia 
of whether a person is administering a PACE financing program. The 
Bureau intends this proposed provision and associated commentary to 
target the private companies involved in running the PACE programs as 
described above--the Bureau understands that it would not apply to home 
improvement contractors, who may be natural persons and who generally 
do not administer the PACE program. The CFPB seeks comment on this 
proposed definition and, in particular, on whether it accurately 
identifies the intended entities and whether the use of this term 
accounts for the unique nature of PACE financing.
43(b)(15) PACE Transaction
    Section 307 of the EGRRCPA amended TILA to define the term 
``Property Assessed Clean Energy financing'' for purposes of TILA 
section 129C(b)(3)(C) as financing to cover the costs of home 
improvements that results in a tax assessment on the real property of 
the consumer.\192\ The Bureau proposes to add a definition for the term 
``PACE transaction'' to Regulation Z that is based on the EGRRCPA 
section 307 definition. Specifically, proposed Sec.  1026.43(b)(15) 
would provide that a PACE transaction means financing to cover the 
costs of home improvements that results in a tax assessment on the real 
property of the consumer. The Bureau seeks comment on this proposed 
definition.
---------------------------------------------------------------------------

    \192\ See 15 U.S.C. 1639C(b)(3)(C)(i).
---------------------------------------------------------------------------

43(c) Repayment Ability
    Section 307 of the EGRRCPA directed the Bureau to prescribe 
regulations that carry out the purposes of TILA's ATR provisions for 
residential mortgage loans with respect to PACE transactions. The 
Bureau has preliminarily concluded that the existing ATR framework set 
out in Sec.  1026.43(c) effectively carries out the purposes of TILA's 
ATR provisions and is generally appropriate for PACE transactions, with 
adjustments to the commentary to Sec.  1026.43(c) and the addition of 
the provisions set out in Sec.  1026.43(i) described below.
    As described above, the existing ATR requirement in Sec.  
1026.43(c)(1) requires a creditor to make a reasonable and good faith 
determination of a consumer's ability to repay at or before 
consummation of a covered mortgage loan. Section 1026.43(c)(2) provides 
eight factors that a creditor must consider in making the repayment 
ability determination, while Sec.  1026.43(c)(3) and (c)(4) generally 
requires a creditor to verify the information that the creditor relies 
on in determining a consumer's repayment ability using reasonably 
reliable third-party records. These verification requirements are 
important to carrying out the purpose of TILA's ATR provisions.\193\ 
TILA section 129C(a)(4) is intended to safeguard against fraudulent 
reporting and inaccurate underwriting, as the statute specifically 
notes that a creditor must verify a consumer's income history ``[i]n 
order to safeguard against fraudulent reporting.'' These concerns 
appear to be heightened in the PACE market given the consumer 
protection issues observed by advocates and others, such that weakening 
the verification requirement in this context would be inappropriate. 
The Bureau believes the current ATR provisions, which provide minimum 
requirements for creditors making ability-to-repay determinations but 
do not dictate particular underwriting models, are similarly 
appropriate for PACE transactions, subject to certain proposed 
adjustments specific to PACE transactions discussed below.
---------------------------------------------------------------------------

    \193\ See 78 FR 6408, 6475 (Jan 30. 2013) (``One of the purposes 
of TILA section 129C is to assure that consumers are offered and 
receive covered transactions on terms that reasonably reflect their 
ability to repay the loan. See TILA section 129B(a)(2). The Bureau 
believes that a creditor consulting reasonably reliable records is 
an effective means of verifying a consumer's income and helps ensure 
that consumers are offered and receive loans on terms that 
reasonably reflect their repayment ability.'').
---------------------------------------------------------------------------

    Applying existing Sec.  1026.43(c) to PACE transactions will allow 
PACE creditors to account for the particular features of the PACE 
transactions that they originate when assessing a consumer's ability to 
repay. The Bureau's ATR framework is designed to be flexible, to allow 
creditors to develop

[[Page 30409]]

and apply their own underwriting standards, and to permit creditors to 
consider the facts and circumstances of each individual extension of 
credit. The ATR provisions of Regulation Z also do not provide 
comprehensive underwriting standards to which creditors must 
adhere.\194\ For example, the rule and commentary do not specify how 
much income is needed to support a particular level of debt or how 
credit history should be weighed against other factors. So long as 
creditors consider the factors set forth in Sec.  1026.43(c)(2) 
according to the requirements of Sec.  1026.43(c), creditors are 
permitted to develop their own underwriting standards and make changes 
to those standards over time in response to empirical information and 
changing economic and other conditions.\195\ As such, the Bureau 
preliminarily believes that the existing ATR framework provides PACE 
creditors sufficient operational flexibility while still requiring 
compliance with the general requirement to make a reasonable and good 
faith determination at or before consummation that the consumer will 
have a reasonable ability to repay the loan according to its terms.
---------------------------------------------------------------------------

    \194\ See comment 43(c)(1)-1.
    \195\ See id.; see also comment 43(c)(2)-1.
---------------------------------------------------------------------------

    For these reasons, the Bureau proposes to apply existing Sec.  
1026.43(c) to PACE transactions, with adjustments to the commentary to 
Sec.  1026.43(c) and the addition of the provisions set out in Sec.  
1026.43(i) described below. The Bureau seeks comment on these proposed 
changes. In particular, the Bureau seeks comment on whether Sec.  
1026.43(c) should be amended to permit or require a creditor to 
consider the effect of potential savings resulting from the home 
improvement project financed in the PACE transaction (such as lowered 
utility payments).
43(c)(2) Basis for Determination
43(c)(2)(iv)
    Section 1026.43(c)(2) sets forth factors creditors must consider 
when making the ATR determination required under Sec.  1026.43(c)(1), 
and the accompanying commentary provides guidance regarding these 
factors. Section 1026.43(c)(2)(iv) provides that one factor a creditor 
must consider is the consumer's payment obligation on any simultaneous 
loan that the creditor knows or has reason to know will be made at or 
before consummation of the covered transaction. The Bureau proposes to 
add new comment 43(c)(2)(iv)-4 to provide additional guidance to 
creditors originating PACE transactions. Proposed comment 43(c)(2)(iv)-
4 would provide that a creditor originating a PACE transaction knows or 
has reason to know of any simultaneous loans that are PACE transactions 
if the transactions are included in any existing database or registry 
of PACE transactions that includes the geographic area in which the 
property is located and to which the creditor has access.
    Proposed comment 43(c)(2)(iv)-4 is intended to help address 
concerns about the prevalence of ``loan splitting'' and ``loan 
stacking'' in the PACE industry that were raised in ANPR comments from 
consumer groups and other stakeholders. As described in the comments, 
loan splitting refers to the practice of a contractor dividing a loan 
for one consumer into more than one transaction to make each 
transaction appear more affordable, while loan stacking refers to 
contractors returning to a PACE borrower to offer additional PACE 
financing (often through different creditors). The Bureau's statistical 
analysis indicates that a little more than 13 percent of PACE borrowers 
between 2014 and 2020 received multiple PACE transactions, with many of 
these transactions originated simultaneously or within a few months of 
each other, which could be indicative of loan splitting or 
stacking.\196\ About one-fourth of PACE borrowers with multiple PACE 
transactions consummated multiple transactions in the same month, and 
about three-quarters of PACE borrowers with multiple PACE loans 
consummated more than one transaction within the same 6-month 
period.\197\ In some cases, the creditor originating the second or 
successive PACE transaction might not be aware of previous 
transactions, due to delays in recording.
---------------------------------------------------------------------------

    \196\ See PACE Report, supra note 12, at 12, 24.
    \197\ See id. at 24.
---------------------------------------------------------------------------

    Given these concerns and the increased possibility of a PACE 
borrower having previously entered a PACE transaction, the Bureau 
preliminarily concludes that it is practical and appropriate for a PACE 
creditor to search any existing database or registry of PACE 
transactions that includes the geographic area in which the property is 
located and to which the creditor has access. A PACE industry 
association has recommended that market participants create a PACE-
related lien registry for PACE companies to review when underwriting 
consumers for PACE transactions.\198\ In addition, the Bureau 
understands that at least one active PACE State has contemplated 
establishing a real-time registry or database system for tracking PACE 
assessments.\199\ The Bureau believes that if a database of PACE 
transactions that covers the geographic area in which the property is 
located exists, proposed comment 43(c)(2)(iv)-4 would lead PACE 
creditors to discover more simultaneous loans, which could reduce the 
extent of loan splitting and loan stacking. The Bureau is not proposing 
to apply this provision to creditors originating non-PACE mortgages, 
because the origination of a PACE loan and a non-PACE mortgage in short 
succession does not appear to raise the same concerns regarding loan 
splitting or loan stacking. Additionally, it is relatively rare for a 
new mortgage borrower to have a pre-existing PACE transaction on the 
same property, since PACE transactions are less common than non-PACE 
mortgages and a property sale is unlikely to be completed unless any 
existing PACE loan has already been paid off. The Bureau seeks comment 
on this proposal.
---------------------------------------------------------------------------

    \198\ PACENation, Residential Property Assessed Clean Energy (R-
PACE) State and Local Consumer Protection Policy Principles, at 3 
(Oct. 21, 2021), https://www.pacenation.org/wp-content/uploads/2021/11/PACENation-R-PACE-Consumer-Protection-Policy-Principles-ADOPTED-October-21.2021.pdf.
    \199\ See Cal. Fin. Code sec. 22693.
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43(c)(3) Verification Using Third-Party Records
    In general, a creditor must verify the information that the 
creditor relies on in determining a consumer's repayment ability under 
Sec.  1026.43(c)(2) using reasonably reliable third-party records. The 
Bureau proposes to amend comment 43(c)(3)-5 to clarify how this 
requirement applies to consumers with existing PACE transactions.\200\ 
Current comment 43(c)(3)-5 provides that, ``[w]ith respect to the 
verification of mortgage-related obligations that are property taxes 
required to be considered under Sec.  1026.43(c)(2)(v), a record is 
reasonably reliable if the information in the record was provided by a 
governmental organization, such as a taxing authority or local 
government.'' Additionally, the comment provides that the creditor 
complies with Sec.  1026.43(c)(2)(v) by relying on property taxes 
referenced in the title report if the source of the property tax 
information was a local taxing authority.
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    \200\ As discussed above, the Bureau is proposing to clarify 
that payments for pre-existing PACE transactions are considered a 
property tax and therefore mortgage-related obligations under Sec.  
1026.43(b)(8). See discussion of comment 43(b)(8)-2 in section-by-
section analysis of proposed Sec.  1026.43(b)(8) supra.
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    The Bureau proposes to amend comment 43(c)(3)-5 to clarify that a

[[Page 30410]]

creditor that knows or has reason to know that a consumer has an 
existing PACE transaction does not comply with Sec.  1026.43(c)(2)(v) 
by relying on information provided by a governmental organization, 
either directly or indirectly, if the information provided does not 
reflect the PACE transaction. A PACE creditor might know or have reason 
to know of a PACE transaction that is about to be originated and that, 
therefore, will not appear in property tax records or property tax 
information in a title report. For example, a PACE creditor might learn 
of the existing PACE transaction by searching a relevant database of 
PACE transactions, or a consumer might inform the creditor of the PACE 
transaction in application materials. In those circumstances, the 
proposed amendment provides that a creditor would not comply with the 
requirement to verify mortgage-related obligations using reasonably 
reliable third-party records by verifying the consumer's property taxes 
solely using property tax records or property tax information in a 
title report that do not include the existing PACE transaction. The 
CFPB seeks comment on this proposed amendment.
43(i) PACE Transactions
43(i)(1)
    Many consumers who obtain PACE transactions have pre-existing 
mortgages that require the payment of property taxes through an escrow 
account. Consumers with such pre-existing mortgages will typically also 
make their PACE transaction payments through their existing escrow 
account. Under certain circumstances, the addition of payments for a 
PACE transaction can result in a sharp increase in the consumer's 
escrow payments. This increase is relevant to the consumer's ability to 
repay the PACE transaction. The CFPB preliminarily concludes that, for 
consumers who pay their property taxes through an escrow account, a 
creditor's reasonable and good faith determination of a consumer's 
ability to repay a PACE transaction according to its terms must include 
the creditor's consideration of the effect of incorporating a PACE 
transaction into a consumer's escrow payments. For the reasons 
discussed below, the Bureau proposes to add new Sec.  1026.43(i)(1) to 
require that a creditor making the repayment ability determination 
under Sec.  1026.43(c)(1) and (2) also consider any monthly payments 
the consumer will have to pay into the consumer's escrow account as a 
result of the PACE transaction that are in excess of the monthly 
payment amount considered under Sec.  1026.43(c)(2)(iii).
    One unique aspect of PACE transactions is that, unlike traditional 
mortgages, consumers may pay them through an escrow account on another 
mortgage loan. PACE transactions are also distinct from non-PACE 
mortgage loans in several other respects, including with regard to the 
timing of when the first PACE payment is due and their annual or semi-
annual repayment schedule. These distinct features of PACE transactions 
can result in significant payment spikes for consumers. Consumers who 
are required to make their PACE payments through their existing escrow 
account have faced particularly long delays before payments have come 
due on their PACE transaction.\201\ These consumers only begin repaying 
their PACE transaction once their mortgage servicer conducts an escrow 
account analysis and adjusts their monthly payment to reflect the 
addition of the PACE transaction to their property tax bill. A servicer 
must conduct an escrow account analysis every 12 months but may, and in 
some cases must, do so more frequently. The Bureau understands that the 
timing of this analysis--and whether the servicer knows of the PACE 
transaction at the time of the first analysis following consummation--
can have a significant impact on the amount of the consumer's initial 
escrow payments once adjusted to incorporate the PACE transaction.\202\
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    \201\ Regulation X provides that an escrow account is any 
account established or controlled by a servicer on behalf of a 
borrower to pay taxes, insurance premiums, or other charges with 
respect to a federally related mortgage loan, including those 
charges that the servicer and borrower agreed to have the servicer 
collect and pay. 12 CFR 1024.17(b).
    \202\ See generally 12 CFR 1024.17(c)(3) (discussing annual 
escrow account analyses).
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    For example, assume a PACE transaction was consummated in June 
2021, and the first PACE payment was due November 1, 2021. If the 
servicer had not learned of the PACE transaction before receiving a tax 
bill for the November 1, 2021 payment, the PACE transaction would not 
have been promptly incorporated into the consumer's escrow account. 
Assuming no funds were set aside to pre-pay the consumer's escrow 
account, in this example the servicer's next escrow account analysis 
might newly account for (1) the initial payment due November 1, 2021 
for which no escrow funds were previously collected, (2) the upcoming 
PACE payment that would be due November 1, 2022, and (3) any potential 
adjustments to the escrow account cushion attributable to the PACE 
transaction.\203\ In this example, a consumer could experience a sharp 
and unexpected increase in their initial escrow payments beyond the 
amount that would have been owed had the PACE transaction been 
incorporated into escrow promptly. This payment spike would undercut a 
central benefit of escrow accounts to consumers in spreading out large 
obligations into more manageable, regular payments.
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    \203\ Under 12 CFR 1024.17(c)(1), servicer may charge a cushion 
of no greater than one-sixth (\1/6\) of the estimated total annual 
payments from the account.
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    Consumer group commenters to the ANPR stated that the delay in this 
adjustment of the escrow account means that the first year or two of a 
consumer's increased escrow payments to account for the PACE 
transaction will likely be higher than in subsequent years due to 
significant shortages in the escrow account. These commenters expressed 
that if, for example, the servicer analyzes the escrow account just 
before property tax bills are issued, the servicer will advance the 
full property tax amount, including the amount owed on the PACE 
transaction, but the escrow account will then carry a deficiency (or 
negative balance due to the prior year's PACE payment) going forward. 
They stated further that, at the next escrow account analysis, the 
servicer will calculate the new escrow payment by adding to the base 
payment an amount sufficient to repay the deficiency, an amount to 
cover the upcoming year's PACE payment that was not accounted for in 
the prior year's escrow analysis (an escrow shortage), and a reserve 
cushion of no greater than one-sixth (\1/6\) of the estimated total 
annual payments from the account.\204\ A State trade association 
indicated that in general, it is not uncommon for a PACE transaction to 
double a consumer's monthly escrow payment because the PACE transaction 
amount could be as much or more than the existing property tax. This 
commenter stated that the escrow adjustment to bring the escrow account 
current after one year, provide for the next PACE payment, and fund a 
cushion can potentially triple the consumer's monthly escrow payment 
amount for a 12-month period.
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    \204\ A deficiency is the amount of a negative balance in an 
escrow account, while a shortage is an amount by which a current 
escrow account balance falls short of the target balance at the time 
of escrow analysis. 12 CFR 1024.17(b).
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    The CFPB understands that at least some PACE consumers have had 
difficulty repaying their PACE transaction because of this substantial 
and unanticipated spike in their escrow

[[Page 30411]]

payments. Some consumer group commenters to the ANPR asserted that the 
addition of a PACE transaction to the property tax bill has frequently 
driven PACE consumers' escrow payments to unaffordable levels that 
result in many PACE consumers being unable to make their full mortgage 
payments and going into default and even foreclosure. These commenters 
cited as examples a homeowner in Stockton, California, who saw his 
escrow payment increase by almost $500 a month, and an older adult 
homeowner in Oakland, California, whose monthly fixed income was only 
about $1,000 and faced an increase in her escrow payment of over $900.
    The Bureau preliminarily concludes that a creditor can only make a 
reasonable and good faith determination of the consumer's ability to 
repay the PACE transaction by considering the potential spike in the 
consumer's escrow payments it may cause. As described above, commenters 
to the ANPR expressed that the payment spike that can result when a 
PACE transaction is added to a consumer's property tax bill frequently 
increases their escrow payments to unaffordable levels, which could 
result in the consumer's default and even tax sale or foreclosure. The 
CFPB thus preliminarily concludes that it is consistent with the 
purposes of the ATR requirements to require a PACE creditor to consider 
whether a consumer who will pay their PACE payments through an escrow 
account will be able to make their monthly escrow payment once the 
escrow payment amount is adjusted to account for any potential 
deficiency or shortage and an escrow cushion attributable to the PACE 
transaction. Although the initial increase in the escrow payment would 
not last for the entire remaining duration of the PACE transaction, it 
could last for a year or longer and thus have a direct bearing on the 
consumer's ability to afford their PACE transaction during the 
timeframe in which this higher amount is owed. This short-term payment 
spike is also foreseeable by PACE creditors at consummation.
    The CFPB also preliminarily concludes that the heightened consumer 
uncertainty that may arise for PACE transactions paid through escrow 
accounts as compared to other types of covered transactions supports 
this proposal. The Bureau has heard anecdotally and from commenters to 
the ANPR that PACE consumers are often surprised by and unprepared for 
the large payment spike. A few consumer group commenters to the ANPR 
asserted that the information provided by PACE programs regarding the 
relationship between PACE financing and escrow accounts is insufficient 
to prepare consumers for the payment shock--or equip them to prevent 
it--when there is a delay between consummation and when the servicer 
learns of the PACE transaction and adjusts the escrow payment.\205\ The 
Bureau is concerned that the consumer uncertainty that can arise from 
the lack of information regarding how escrow accounts work in the 
context of PACE transactions could be further compounded by the lack of 
notice to consumers regarding when the escrow payments incorporating 
the PACE transactions will begin. The uncertainty that PACE consumers 
with escrow accounts experience regarding how much their escrow 
payments will increase because of their PACE transaction and when those 
increases will occur may persist even with the proposed disclosures and 
other protections that would be afforded under the proposal. 
Accordingly, the CFPB expects that the uniquely unpredictable and 
complex nature of the initial PACE payment obligations could make it 
challenging for these consumers to accurately track the amount owed as 
a result of their PACE transaction and set aside an amount sufficient 
to cover the higher initial payments once the escrow account is 
adjusted.
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    \205\ As an example, these commenters stated that California's 
financing estimate and disclosure includes the following advice: 
``If you pay your taxes through an impound account you should notify 
your mortgage lender, so that your monthly mortgage payment can be 
adjusted by your mortgage lender to cover your increased property 
tax bill.'' Cal. Sts. & Hwys. Code sec. 5898.17.
---------------------------------------------------------------------------

    For these reasons, the Bureau proposes to add new Sec.  
1026.43(i)(1). Section 1026.43(i)(1) would require that, for PACE 
transactions extended to consumers who pay their property taxes through 
an escrow account, in making the repayment ability determination 
required under Sec.  1026.43(c)(1) and (c)(2), a creditor must consider 
the factors identified in Sec.  1026.43(c)(2)(i) through (viii) and 
also must consider any monthly payments that the creditor knows or has 
reason to know the consumer will have to pay into any escrow account as 
a result of the PACE transaction that are in excess of the monthly 
payment amount considered under Sec.  1026.43(c)(2)(iii). The CFPB 
preliminarily concludes that proposed Sec.  1026.43(i)(1) would provide 
an appropriately calibrated means to address concerns about a 
consumer's repayment ability when incorporation of the PACE transaction 
into the escrow payments could result in a sharp payment increase. As 
described above, the Bureau preliminarily concludes that it would not 
be reasonable for a creditor to make an ATR determination while 
ignoring a potentially significant and unexpected spike in the 
consumer's escrow payments once adjusted to account for the PACE 
transaction. At the same time, this potential payment spike would not 
last for the duration of the PACE transaction. Creditors would be 
required to consider any monthly payments that are in excess of the 
monthly payment amount considered under Sec.  1026.43(c)(2)(iii), but 
they would not need to assume these higher payments would be owed for 
the entire duration of the loan. Creditors would also not be required 
to calculate this amount as part of the consumer's monthly payment 
amount for purposes of Sec.  1026.43(c)(5) or to include the amount 
considered under proposed Sec.  1026.43(i)(1) in their DTI or residual 
income calculations required under Sec.  1026.43(c)(2)(vii) but could 
do so at their option as one possible means of complying with proposed 
Sec.  1026.43(i)(1). The Bureau expects the proposal would provide an 
appropriate means for creditors to consider this limited duration, but 
potentially significant PACE-related obligation, faced by consumers who 
pay through an escrow account.
    Proposed Sec.  1026.43(i)(1)(i) and (ii) would provide additional 
detail on what factors creditors must take into account when 
considering any monthly payments that the creditor knows or has reason 
to know the consumer will have to pay into the consumer's escrow 
account as a result of the PACE transaction that are in excess of the 
monthly payment amount considered under Sec.  1026.43(c)(2)(iii). Under 
the escrow requirements in Regulation X, servicers are permitted to 
charge an additional amount to maintain a cushion of no greater than 
one-sixth (\1/6\) of the estimated total annual payments from the 
escrow account,\206\ and the Bureau understands that servicers 
frequently charge the full allowable amount of this cushion. 
Accordingly, proposed Sec.  1026.43(i)(1)(i) would provide that, in 
making the consideration required by Sec.  1026.43(i)(1), creditors 
must take into account the cushion of one-sixth (\1/6\) of the 
estimated total annual payments attributable to the PACE transaction 
from the escrow account that the servicer may charge under 12 CFR 
1024.17(c)(1), unless the creditor reasonably expects that no such 
cushion will be required or unless the creditor reasonably expects that 
a different

[[Page 30412]]

cushion amount will be required, in which case the creditor must use 
that amount. The Bureau preliminarily concludes that it is appropriate 
to require consideration of this cushion for PACE transactions given 
the unique potential for consumer uncertainty regarding the timing and 
amount of the new, higher escrow payments once adjusted to include the 
PACE transaction.
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    \206\ 12 CFR 1024.17(c)(1).
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    Proposed Sec.  1026.43(i)(1)(ii) would address specifically the 
payment spike that can result from a delay in incorporating the PACE 
transaction into the consumer's escrow payments. It would require that 
in considering the amount specified by Sec.  1026.43(i)(1), if the 
timing for when the servicer is expected to learn of the PACE 
transaction is likely to result in a shortage or deficiency in the 
consumer's escrow account, the creditor must take into account the 
expected effect of any such shortage or deficiency on the monthly 
payment that the consumer will be required to pay into the consumer's 
escrow account. There may be a significant time lag between when a PACE 
transaction is consummated and when the first escrow payment reflecting 
the PACE transaction comes due. As commenters to the ANPR noted, this 
delay could result in consumers incurring an escrow deficiency and 
shortage that would lead to significantly higher escrow payments than 
otherwise would have been required had the PACE transaction been 
incorporated promptly into the consumer's escrow payments. The Bureau 
understands that the timing of when the servicer is expected to learn 
of the PACE transaction can affect the existence and amount of such a 
deficiency or shortage. This, in turn, would affect the monthly payment 
that the consumer is required to pay into their escrow account and the 
amount that would be considered under proposed Sec.  1026.43(i)(1).
    As described above, when the servicer is expected to learn of the 
PACE transaction will depend, in part, on whether the servicer is 
informed of the covered PACE transaction at or prior to consummation. 
For example, assume a PACE transaction is consummated in June, the 
first payment is due November 1 of the same year, and the consumer has 
an escrow account. The creditor does not notify the servicer of the 
PACE transaction at consummation and no funds are allocated to pre-pay 
the consumer's escrow account for any payments related to the PACE 
transaction. If the creditor considers the consumer's monthly payment 
on the PACE transaction under Sec.  1026.43(c)(2)(iii) but fails to 
consider that the consumer will be unable to pay the higher amount 
required for the initial escrow payments due to the one-sixth (\1/6\) 
cushion and escrow shortage or deficiency, the creditor does not comply 
with Sec.  1026.43(i)(1). On the other hand, if under the same 
circumstances the creditor notifies the servicer of the PACE 
transaction at consummation to ensure the transaction will be 
incorporated into the escrow account promptly and determines that, 
given the timing of the notification, there will not be an escrow 
shortage or deficiency, and also confirms the consumer will be able to 
make initial escrow payments even with the additional one-sixth (\1/6\) 
cushion, the creditor complies with Sec.  1026.43(i)(1). For the 
purposes of proposed Sec.  1026.43(i)(1)(ii), where a creditor provides 
prompt notification to the servicer of the PACE transaction, it appears 
that it would be reasonable for the creditor to assume that the time at 
which the servicer learns of the PACE transaction will likely not 
result in a shortage or deficiency in the consumer's escrow account. 
The Bureau seeks comment on proposed new Sec.  1026.43(i)(1) and 
specifically on whether it would provide additional clarity to include 
the above examples in commentary to Sec.  1026.43(i)(1).
    Although the proposed rule would not require creditors to notify 
servicers of PACE transactions, the Bureau strongly encourages prompt 
notice to servicers of the PACE transaction and rapid adjustment of the 
escrow payments by servicers to minimize payment spikes for PACE 
consumers. As an alternative approach to addressing the potential delay 
in incorporating PACE payments into a consumer's escrow account, the 
Bureau considered requiring all PACE creditors to notify the servicer 
at consummation that the consumer has entered into a PACE transaction. 
This requirement would eliminate one source of delay leading to payment 
shocks--the time between origination and the mortgage servicer learning 
of the PACE transaction. Such a requirement could reduce the likelihood 
that a payment spike would be significant enough to result in a 
consumer being unable to meet the payment obligations of the PACE 
transaction.
    The Bureau considered imposing this requirement pursuant to its 
authority under TILA section 129B(e)(1).\207\ This section authorizes 
the Bureau to prohibit or condition terms, acts, or practices relating 
to residential mortgage loans that the Bureau finds to be abusive, 
unfair, deceptive, predatory, necessary or proper to ensure that 
responsible, affordable mortgage credit remains available to consumers 
in a manner consistent with the purposes of TILA sections 129B and 
129C, necessary or proper to effectuate the purposes of TILA sections 
129B and 129C, to prevent circumvention or evasion thereof, or to 
facilitate compliance with such sections, or are not in the interest of 
the borrower. The Bureau believes the act or practice of originating a 
PACE transaction for a consumer who has a pre-existing non-PACE 
mortgage and pays property taxes through an escrow account without 
notifying the servicer of the non-PACE mortgage may not be in the 
interest of the borrower because it could lead to a payment shock when 
the PACE transaction is incorporated into the borrower's escrow 
account, as described above. The Bureau preliminarily concludes, 
however, that it is preferrable to address the payment shock risk 
associated with non-notification under proposed Sec.  
1026.43(i)(1)(ii), which would grant PACE creditors greater flexibility 
to determine on a case-by-case basis how best to ensure that consumers 
have the ability to repay their PACE loans in light of escrow delays. 
The Bureau nevertheless seeks comment on this alternative approach and 
any advantages or disadvantages it has in comparison to proposed Sec.  
1026.43(i)(1)(ii).\208\
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    \207\ 15 U.S.C. 1639b(e)(1).
    \208\ Some commenters to the ANPR recommended requiring 
creditors to consider a consumer's ability to repay the full annual 
or semi-annual PACE payment (rather than the monthly payment amount, 
as otherwise required by Sec.  1026.43(c)(2)(iii)) based on a single 
month's income. The Bureau declines to propose such amendments. The 
ATR requirements anticipate that covered transactions (and other 
obligations that must be considered) may feature non-monthly 
payments and require that these non-monthly payments be converted 
into monthly payment amounts. Comment 43(c)(5)(i); see, e.g., 
comment 43(c)(2)(v)-4. The Bureau thus does not believe that the 
non-monthly payment aspect of PACE transactions is unique and seeks 
to take an approach here that is consistent with how it has handled 
other non-monthly payments under the ATR rules.
---------------------------------------------------------------------------

43(i)(2)
    EGRRCPA section 307 requires the Bureau to prescribe regulations 
that carry out the purposes of TILA section 129C(a) with respect to 
PACE transactions. For the reasons described below, the CFPB is 
proposing to apply the Regulation Z ATR framework to PACE transactions 
without providing for a QM presumption of compliance for PACE 
transactions. Specifically, proposed Sec.  1026.43(i)(2) would provide 
that, notwithstanding Sec.  1026.43(e)(2), (e)(5), (e)(7), or (f), a 
PACE transaction

[[Page 30413]]

is not a QM as defined in Sec.  1026.43. If finalized, this provision 
would exclude PACE transactions from eligibility for each of these QM 
categories in Sec.  1026.43.\209\ For the reasons explained herein, the 
CFPB preliminarily concludes that it would be inappropriate to provide 
PACE transactions eligibility for a presumption of compliance with the 
ATR requirements, particularly given the inherent consumer risks 
presented by these transactions and the unique lack of creditor 
incentives to consider repayment ability in this new and evolving 
market.
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    \209\ The Bureau also appreciates that, as a consequence of this 
proposal, PACE transactions would not be permitted to include 
prepayment penalties. 15 U.S.C. 1639c(c); 12 CFR 1026.43(g). The 
Bureau understands that in general PACE transactions currently do 
not include these penalties.
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    The purposes of the QM provisions of Regulation Z include ensuring 
that responsible, affordable mortgage credit remains available to 
consumers in a manner consistent with the purposes of TILA section 
129C. The purpose of TILA section 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. QMs thus are intended only to be 
those mortgages for which it is reasonable to presume that the creditor 
made a reasonable determination of consumer repayment ability. The 
unique nature of PACE transactions, however, raises serious risks that 
undermine the Bureau's confidence in the reasonableness of presuming 
creditor compliance with the ATR requirements.
    First, as described above, certain aspects of PACE financing create 
unique risks for consumers and can result in unaffordable payment 
spikes that can lead to delinquency, late fees, tax defaults, and 
foreclosure actions. PACE consumers who make their payments through an 
existing escrow account may face large and unpredictable payment spikes 
that make it difficult for them to repay their PACE obligation. For 
consumers who do not have an existing escrow account, the annual or 
semi-annual payment cadence with payments due simultaneously with large 
property tax payments may render loans unaffordable. The super-priority 
lien status of PACE transactions also heightens the risk of negative 
outcomes for consumers. These characteristics suggest that it may be 
inappropriate to provide a presumption of compliance to PACE financing. 
TILA specifically excludes from the QM definition loans with certain 
risky features and lending practices well known to present significant 
risks to consumers, including loans with negative amortization or 
interest-only features and (for the most part) balloon loans.\210\ The 
CFPB preliminarily concludes that certain aspects of PACE financing can 
result in unaffordable payments that present similar risks to consumers 
and therefore should not be granted QM status.
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    \210\ In the January 2013 Final Rule, the Bureau observed that 
the clear intent of Congress was to ensure that loans with QM status 
have safer features and terms than other loans. See, e.g., 78 FR 
6407, 6426 (Jan. 30, 2013) (discussing ``Congress's clear intent to 
ensure that qualified mortgages are products with limited fees and 
more safe features''); id. at 6524 (discussing ``Congress' apparent 
intent to provide incentives to creditors to make qualified 
mortgages, since they have less risky features and terms'').
---------------------------------------------------------------------------

    Available data that show the broader effect that PACE transactions 
have on consumers' finances further highlight affordability risks 
inherent in PACE financing. The Bureau's PACE Report estimated the 
causal effect of a PACE transaction on consumer financial outcomes and 
found clear evidence that PACE transactions increase non-PACE mortgage 
delinquency rates.\211\ For consumers with a pre-existing non-PACE 
mortgage, getting a PACE transaction increased the probability of a 60-
day delinquency on their non-PACE mortgage by 2.5 percentage points 
over a two-year period.\212\ For comparison, the average two-year non-
PACE mortgage delinquency rate in the Bureau's data was about 7.1 
percent.\213\ The PACE Report finds that consumers in lower credit 
score tiers are most negatively affected by their PACE transaction, 
with consumers with sub-prime credit scores experiencing an increase in 
non-PACE mortgage delinquency almost two-and-a-half times the average 
effect, and more than 20 times the effect on consumers with super-prime 
credit scores.\214\ In addition, the PACE Report finds that a PACE loan 
increases the probability of both foreclosure and bankruptcy by about 
0.5 percentage points over a two-year period.\215\ The CFPB also noted 
in its PACE Report that PACE transactions may impact other credit 
outcomes if consumers adjust their borrowing and spending behavior to 
prioritize their payments for mortgage and property taxes.\216\ The 
PACE Report finds that, for the 29 percent of PACE consumers without a 
pre-existing non-PACE mortgage, their average monthly credit card 
balance increased by over $800 over a two-year period following 
origination of the PACE transaction.\217\ The PACE Report concludes 
that consumers without a pre-existing non-PACE mortgage appear to 
respond to the cost of PACE transactions by increasingly relying on 
credit cards. Although not tied directly to the consumer's performance 
on the PACE transaction, these results suggest that at least some 
consumers without a pre-existing non-PACE mortgage have obtained PACE 
transactions that were unaffordable at the time of consummation. The 
CFPB preliminarily concludes that, even with the ATR requirements 
applied to PACE, affordability risks could remain due to PACE 
transactions' inherent features that shield creditors from losses, as 
discussed below.
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    \211\ A large majority of PACE borrowers have a primary mortgage 
at the time of the PACE origination. For consumers with a mortgage, 
difficulty in paying the cost of a PACE loan will generally manifest 
in the data as a mortgage delinquency. Payments on PACE transactions 
are made with property tax payments, and many consumers pay their 
property taxes through their monthly mortgage payment. See PACE 
Report, supra note 12, at 3.
    \212\ Id. at 26-27. As in the Bureau's analysis of the General 
QM Final Rule, the PACE Report uses delinquencies of at least 60 
days as the outcome of interest, to focus on sustained periods of 
delinquency that may indicate financial distress, rather than 
isolated incidents or late payments.
    \213\ Id. at 27.
    \214\ Id. at 37.
    \215\ Id. at 33.
    \216\ The Bureau stated in the PACE Report that it expected that 
credit card outcomes may be particularly relevant for PACE consumers 
without non-PACE mortgage loans. The PACE Report finds essentially 
no impact on credit card balances or delinquency rates for consumers 
with a pre-existing non-PACE mortgage in the two-year period 
following consummation of their PACE transaction. Id. at 41-42. In 
general, accumulating revolving debt following a new financial 
obligation may be probative of difficulty repaying the new 
obligation. Typically, the Bureau has not evaluated these outcomes 
in its rulemakings related to the QM categories due to both the 
availability of more direct measures of ability to repay in the non-
PACE mortgage space and the greater data requirements for reliably 
attributing changes in revolving balances to the effect of a new 
financial obligation. The data would need to link non-mortgage 
outcomes to a mortgage application, follow such outcomes over time, 
and ideally have a similarly situated comparison group that does not 
receive the new mortgage loan, to capture how non-mortgage outcomes 
would have evolved absent the new loan. Although the data used in 
the PACE Report had all of these characteristics, the datasets used 
in the January 2013 Final Rule and General QM Final Rule and the 
Bureau's 2018 ATR/QM Assessment, such as the HMDA data, generally 
lacked one or more of these necessary characteristics.
    \217\ Id. at 41.
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    In addition, the Bureau is concerned that creditors originating 
PACE transactions may possess a uniquely strong disincentive to 
adequately consider a consumer's income or assets, debt obligations, 
alimony, child support, and monthly debt-to-income ratio or residual 
income, as required under the Bureau's existing QM definitions, and 
under the Regulation Z

[[Page 30414]]

ATR framework, because these creditors bear minimal risk of loss 
related to the transaction. As noted, under most PACE-enabling 
statutes, the liens securing PACE transactions take the priority of a 
property tax lien, which is superior to other liens on the property, 
such as mortgages, even if the other liens predated the PACE lien.\218\ 
In the event of foreclosure, any amount owed on the PACE transaction is 
paid by the foreclosure sale proceeds before any proceeds will flow to 
other debt. This, combined with relatively low average loan amounts, 
appears to significantly limit the economic risk faced by creditors 
originating PACE transactions. Further, as described in the PACE Report 
and in part IX.A below, mortgage servicers will often pay a property 
tax delinquency on behalf of a consumer regardless of whether the 
consumer had a pre-existing escrow account. This means for the more 
than seventy percent of PACE consumers with a pre-existing non-PACE 
mortgage, it is unlikely that the PACE transaction would ever cause a 
loss to the PACE creditor.\219\ In addition, the PACE transaction 
repayment obligation generally remains with the property when ownership 
transfers through foreclosure or otherwise. Thus, any balance that 
remains on the PACE transaction following a foreclosure sale will 
generally remain as a lien on the property for future homeowners to 
repay, further reducing the risk of loss to the creditor. These factors 
limit creditors' economic incentives to determine repayment ability and 
raise risks of consumer harm that undermine the Bureau's confidence in 
the reasonableness of presuming creditor compliance with the ATR 
requirements.
---------------------------------------------------------------------------

    \218\ See, e.g., Cal. Sts. & Hwys. Code sec. 5898.30; Fla. Stat. 
Ann. Sec. 163.08(8).
    \219\ PACE Report, supra note 12, at 18.
---------------------------------------------------------------------------

    Further, the PACE market is still relatively new and evolving. As 
discussed in part II.A, PACE has only existed for 15 years, and State 
PACE authorizing statues have been amended in a number of ways since 
the product originally emerged. Additionally, some major PACE companies 
have recently exited the industry. These factors, coupled with the 
other factors discussed above, make it particularly difficult to draw 
any inferences that would support providing PACE transactions a 
presumption of compliance with the ATR requirements.
    In addition to these concerns about PACE transactions receiving a 
QM presumption of compliance, the Bureau also preliminarily concludes 
that the criteria used to determine QM status under the existing QM 
definitions in Sec.  1026.43 would not be suitable for PACE 
transactions. In particular, the Bureau preliminarily concludes that 
the unique pricing model and risk structure associated with PACE 
transactions may make any price-based criterion--including the pricing 
thresholds set forth for the General QM category in Sec.  
1026.43(e)(2)(vi) and any PACE-specific thresholds the Bureau might 
develop--an inappropriate measure of a consumer's repayment ability at 
consummation.
    In the General QM Final Rule, the Bureau noted that loan pricing 
for non-PACE mortgages reflects credit risk based on many factors, 
including DTI ratios and other factors that may also be relevant to 
determining ability to repay, such as credit scores, cash reserves, or 
residual income, and may be a more holistic indicator of ability to 
repay than DTI ratios alone.\220\ However, the pricing for PACE 
transactions has some notable differences from the non-PACE mortgage 
market.\221\ The available data on PACE financing demonstrates that the 
pricing for such transactions is tightly bunched, with about half of 
PACE transactions analyzed by the Bureau having APRs between 8.3 and 9 
percent.\222\ The Bureau's available data indicate that pricing is 
primarily correlated with State and property type, causing the Bureau 
to doubt that any pricing threshold could serve as an appropriate 
indicator of a consumer's ability to repay.\223\ The PACE Report 
confirms that PACE transactions are not generally priced based on 
traditional measures of credit risk; it notes that APRs for PACE 
transactions are uncorrelated or very weakly correlated with 
traditional measures of risk such as loan balance, loan-to-value (LTV) 
ratio, or credit score.\224\ Rather, as discussed in part IX.A, the 
data on PACE pricing shows that it is consistent with the unique and 
substantial protection from loss enjoyed by parties involved with PACE 
transactions that is not common in the non-PACE mortgage market.
---------------------------------------------------------------------------

    \220\ 85 FR 86308, 86325, 86361 (Dec. 29, 2020).
    \221\ See generally part II.A.
    \222\ PACE Report, supra note 12, at 22.
    \223\ For example, projects involving solar panels (comprising 
over a third of projects in California but less than 7 percent of 
projects in Florida) are the least expensive among project types, 
and projects in Florida had substantially lower APRs than projects 
in California. Id. at 22-23.
    \224\ Id.
---------------------------------------------------------------------------

    Further, while the Bureau's research indicates some differences in 
delinquency rates on non-PACE mortgages correlated to PACE rate 
spreads, it is not clear that the pricing thresholds for the General QM 
category would be predictive of early delinquency and could be used as 
a proxy for measuring whether a consumer had a reasonable ability to 
repay at the time the PACE transaction was consummated.\225\ According 
to the Bureau's research, PACE transactions with rate spreads above 3.5 
percent and between 2.25 and 3.49 percent increase delinquency rates on 
a consumer's non-PACE mortgage by an estimated 2.8 percent and an 
estimated 1.4 percentage points, respectively, and that PACE 
transactions with rate spreads below 2.25 percent have almost zero 
effect on non-PACE mortgage delinquency.\226\ The CFPB preliminarily 
concludes that this data would not be sufficient to provide a basis for 
applying the current General QM pricing thresholds to PACE transactions 
even if a QM were not otherwise inappropriate for the reasons discussed 
above. As discussed in part IX.A below, the economic logic that 
normally supports pricing being based on risk is absent in the market 
for PACE transactions. As a result, even though the PACE Report finds 
that PACE transactions with low rate spreads had relatively better 
delinquency outcomes, it does not appear reasonable to presume that a 
creditor that offers a PACE transaction with a low APR has made a 
reasonable and good faith determination of a consumer's ability to 
repay.\227\
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    \225\ Pursuant to the General QM Final Rule, a loan generally 
meets the General QM loan definition in Sec.  1026.43(e)(2) only if 
the APR exceeds the APOR for a comparable transaction by less than 
2.25, 3.5, or 6.5 percentage points, respectively, depending upon 
the loan amount, whether the loan is a first or subordinate lien, 
and whether the loan is secured by a manufactured home. Most PACE 
transactions would qualify for the highest pricing threshold for 
General QMs, 6.5 percent, which generally applies to transactions 
with loan amounts of less than $66,156 (indexed for inflation). 12 
CFR 1026.43(e)(2)(vi)(A)-(F).
    \226\ PACE Report, supra note 12, at 40.
    \227\ The Bureau is also skeptical that defining a category of 
QMs for PACE transactions based on a specific DTI threshold would be 
suitable for PACE, given the risk factors described above. Moreover, 
the CFPB's available evidence does not demonstrate a correlation 
between a PACE consumer's DTI and non-PACE mortgage outcomes. The 
Bureau estimates that the effect of a PACE transaction on a 
consumer's non-PACE mortgage is essentially the same for consumers 
with DTI ratios above and below 43 percent, a threshold commonly 
used in the mortgage market and, prior to the General QM Final Rule, 
a criterion for the General QM category. Id. at 48-49. In any event, 
even assuming that the data revealed a DTI threshold that was 
sufficiently predictive of early delinquency to serve as a proxy for 
whether a consumer had a reasonable ability to repay at the time of 
consummation, the Bureau doubts that a presumption of compliance 
would be appropriate given the unique characteristics of PACE 
transactions discussed above.
---------------------------------------------------------------------------

    The Bureau also preliminarily concludes that the QM categories in 
Sec.  1026.43(e)(5), (e)(7), and (f) would not

[[Page 30415]]

be appropriate for PACE transactions for additional reasons beyond the 
inherent risk of these transactions. As discussed above, the Small 
Creditor QM category in Sec.  1026.43(e)(5) extends QM status to 
covered transactions that are originated by creditors that meet certain 
size criteria and that satisfy certain other requirements. The Bureau 
created the Small Creditor QM category based on its determination that 
the characteristics of a small creditor--its small size, community-
based focus, and commitment to relationship lending--and the incentives 
associated with portfolio lending together justify extending QM status 
to loans that meet the criteria in Sec.  1026.43(e)(5), including that 
the creditor consider and verify the consumers DTI or residual 
income.\228\
---------------------------------------------------------------------------

    \228\ 78 FR 35430, 35485 (June 12, 2013) (``The Bureau believes 
that Sec.  1026.43(e)(5) will preserve consumers' access to credit 
and, because of the characteristics of small creditors and portfolio 
lending described above, the credit provided generally will be 
responsible and affordable.'').
---------------------------------------------------------------------------

    The CFPB preliminarily concludes that this reasoning does not apply 
in the context of PACE transactions. PACE financing is primarily 
administered by several large PACE companies that administer programs 
on behalf of government creditors in each State where residential PACE 
is active. The PACE companies' role in the transaction eliminates the 
community-based focus or relationship-lending features that in part 
justified treating certain small creditors differently for purposes of 
the Small Creditor QM. The Bureau thus has reason to question whether 
PACE companies have a more comprehensive understanding of the financial 
circumstances of their customers or of the economic and other 
circumstances of a community when they administer a program.\229\ 
Moreover, as discussed above, the incentives for creditors are 
different for PACE financing than they are for other loans, limiting 
the effect that holding loans in portfolio has on underwriting 
practices. Even if a loan is held in portfolio, creditors and PACE 
companies bear little risk associated with PACE financing, making it 
more likely these entities will be repaid even in the event of 
foreclosure or other borrower distress.
---------------------------------------------------------------------------

    \229\ See 80 FR 59947 (Oct. 2, 2015).
---------------------------------------------------------------------------

    Similarly, the reasoning for the Seasoned QM loan category set out 
in Sec.  1026.43(e)(7) would not apply to PACE transactions. In 2020, 
the Bureau created the Seasoned QM category for loans that meet certain 
performance requirements, are held in portfolio by the originating 
creditor or first purchaser for a 36-month period, comply with general 
restrictions on product features and points and fees, and meet certain 
underwriting requirements. As discussed above, the effect that holding 
loans in portfolio has on underwriting practices is limited for PACE 
transactions, so the portfolio lending requirement would provide only a 
limited incentive to make affordable loans. Additionally, mortgage 
servicers will often pay a property tax delinquency on behalf of a 
consumer who has both a PACE mortgage and a non-PACE mortgage 
regardless of whether the borrower had a pre-existing escrow account. 
For these borrowers, the payment of their property taxes may have no 
connection to their actual ability to repay their PACE transaction, let 
alone to creditor compliance with the ATR requirements at consummation. 
Given this, it does not seem appropriate to draw any inference from a 
borrower's successful payment history on a PACE transaction regarding 
the creditor's ability-to-repay determination at consummation.
    Moreover, in the context of PACE financing, successful loan 
performance over a seasoning period of 36 months would not give 
sufficient certainty to presume that loans were originated in 
compliance with the ATR requirements at consummation. While a non-PACE 
mortgage would typically have 36 payments due in the seasoning period, 
thus demonstrating that the loan payments were affordable to the 
consumer on an ongoing basis, a PACE transaction would have no more 
than three or six payments because PACE transactions are paid annually 
or semi-annually. Evidence of successful performance over only three or 
six payments would not be sufficiently probative of the creditor's 
compliance with the ATR requirements at consummation for PACE 
transactions to create a presumption of compliance.
    Similar concerns apply to the Balloon-Payment QM category in Sec.  
1026.43(f). The ATR/QM Rule permits balloon-payment loans originated by 
small creditors that operate in rural or underserved areas to qualify 
for QM status, even though balloon-payment loans are generally not 
eligible for General QM status. In addition to the general reasons 
discussed above for not having a QM definition for PACE, the same 
specific concerns noted above with respect to the Small Creditor QM--
namely, that the involvement of nationwide PACE companies limits the 
applicability of any special features of small creditors--are equally 
applicable to the Balloon-Payment QM criteria. Moreover, the Bureau is 
not currently aware of PACE financing with balloon payments.
    The CFPB recognizes that applying the ATR requirements without 
providing QM status for any PACE transactions may affect the number of 
PACE loans made. As discussed in more detail in part IX.D, however, the 
Bureau expects that many affected consumers will retain access to other 
forms of mortgage and non-mortgage credit that could serve the purposes 
of PACE-authorizing statutes, such as energy efficiency improvements. 
Moreover, the CFPB believes any credit access impacts must be justified 
against the consumer protection risks of extending QM status to PACE 
transactions. As discussed, the many distinct features of the PACE 
market and PACE financing significantly undermine the case that it 
would be appropriate to afford PACE creditors and companies protection 
from civil liability under TILA section 130 for claims that they failed 
to comply with the proposed ATR requirements.
    For these reasons, the Bureau is proposing to apply the Regulation 
Z ATR framework to PACE transactions without providing for a QM 
presumption of compliance. The CFPB is issuing this proposal consistent 
with EGRRCPA section 307 and pursuant to its authority under TILA 
sections 129C(b)(3)(C)(ii), 129C(b)(3)(B)(i), and 105(a). EGRRCPA 
section 307 makes no mention of PACE loans qualifying for a presumption 
of compliance with the ATR requirements it directed the Bureau adopt 
for PACE financing. Rather, it provides in relevant part that the CFPB 
must prescribe regulations that (1) ``carry out the purposes of 
subsection (a)''--i.e., that no creditor shall make a residential 
mortgage loan unless the creditor makes a reasonable and good faith 
determination based on verified and documented information that the 
consumer has a reasonable ability to repay the loan--and (2) apply TILA 
section 130 with respect to ``violations under subsection (a)'' to such 
financing. Nowhere does EGRRCPA section 307 mention TILA section 
129C(b) (the provisions governing QMs) or otherwise indicate that the 
Bureau's adoption of ATR requirements specific to PACE loans should 
make further allowance for any presumption of compliance with those 
requirements. Instead, by requiring that the Bureau ``account for the 
unique nature'' of PACE financing, the Bureau preliminarily concludes 
that Congress understood that elements of the existing ATR regime for 
residential mortgage loans--including the QM provisions--may not be 
appropriate in the case of PACE financing.
    In any event, TILA 129C(b)(3)(A) directs the Bureau to prescribe

[[Page 30416]]

regulations to carry out the purposes of section 129C and TILA section 
129C(b)(3)(B)(i) in turn authorizes the Bureau to prescribe regulations 
that revise, add to, or subtract from the criteria that define a QM 
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 this section, 
necessary and appropriate to effectuate the purposes of this section 
and section 129B, to prevent circumvention or evasion thereof, or to 
facilitate compliance with such sections. TILA section 105(a) likewise 
provides that regulations implementing TILA may contain such additional 
requirements, classifications, differentiations, or other provisions, 
and may provide for such adjustments and exceptions for all or any 
class of transactions, as in the judgment of the Bureau are necessary 
or proper to effectuate the purposes of TILA, to prevent circumvention 
or evasion thereof, or to facilitate compliance therewith. Consistent 
with those authorities, after taking into account the purposes of the 
ATR and QM provisions and the unique nature of PACE financing, the 
Bureau preliminary concludes there is ample reason not to extend a 
presumption of compliance with the ATR requirements to PACE 
transactions. The Bureau seeks comment on its preliminary conclusion 
not to extend QM to PACE financing.
43(i)(3)
    EGRRCPA section 307 requires the Bureau to ``prescribe regulations 
that carry out the purposes of [TILA's ATR requirements] and apply 
[TILA] section 130 with respect to violations [of TILA's ATR 
requirements] with respect to [PACE] financing, which shall account for 
the unique nature of [PACE] financing.'' Section 1026.43 currently 
applies to the creditor of any transaction that is subject to Sec.  
1026.43's ATR requirement. Proposed Sec.  1026.43(i)(3) would also 
apply the requirements of Sec.  1026.43 to any PACE company that is 
substantially involved in making the credit decision for a PACE 
transaction. A PACE company would be ``substantially involved'' in 
making the credit decision if it makes the credit decision, makes a 
recommendation as to whether to extend credit, or applies criteria used 
in making the credit decision. A PACE company would not be 
substantially involved in making the credit decision for purposes of 
proposed Sec.  1026.43(i)(3) if it merely solicits applications, 
collects application information, or performs administrative tasks. 
Proposed Sec.  1026.43(i)(3) would also apply section 130 of TILA \230\ 
to covered PACE companies that fail to comply with Sec.  1026.43. These 
proposed amendments would implement EGRRCPA section 307 and would 
account for the unique and extensive role that PACE companies play in 
PACE financing by creating incentives for those companies to ensure 
that TILA's ATR requirements are met for PACE transactions and 
enhancing consumers' remedies in the event that the ATR requirements 
are not met.
---------------------------------------------------------------------------

    \230\ 15 U.S.C. 1640.
---------------------------------------------------------------------------

    PACE companies play an extensive role in PACE financing programs. 
As noted in the section-by-section analysis of proposed Sec.  
1026.2(a), it is the Bureau's understanding that PACE creditors are 
typically government entities. At present in the PACE industry, these 
government creditors generally contract with PACE companies to perform 
many of the day-to-day operations of PACE financing programs. This 
encompasses tasks such as marketing PACE financing to consumers, 
training home improvement contractors to sell PACE transactions 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. Some ANPR commenters indicated that it is 
also common for PACE companies to help raise the private capital needed 
to fund PACE financing programs through the acquisition and 
securitization of PACE bonds issued by PACE creditors. In exchange for 
their role, PACE companies typically receive part of the profit from 
PACE financing.
    Given the unique role that PACE companies play in PACE financing, 
the Bureau preliminarily concludes that application of Sec.  1026.43 to 
PACE companies, in addition to creditors, is both appropriate and 
consistent with the Congressional mandate in EGRRCPA section 307 to 
implement regulations that carry out the purposes of TILA's ATR 
provisions.
    The Bureau similarly believes that it is appropriate to implement 
section 307's mandate to apply section 130 to PACE transactions by 
extending the applicability of section 130 of TILA for violations of 
the ATR requirements to PACE companies that are substantially involved 
in making credit decisions. As described above, PACE companies are the 
entities most likely to perform or oversee the credit decision making, 
including any ability-to-repay analysis, and to receive much of the 
profit from operation of PACE financing programs. Applying section 130 
to PACE companies that are substantially involved in the credit 
decision making, therefore, would extend the economic incentive to 
comply to a party that bears substantial responsibility for the credit 
decision and that is likely to profit from the transaction.
    In addition, application of section 130 to covered PACE companies 
would enhance consumers' ability to obtain remedies for violation of 
the ATR rules. TILA section 113(b) \231\ provides that no civil or 
criminal penalties may be imposed under TILA upon any State or 
political subdivision thereof, or any agency of any State or political 
subdivision. PACE creditors are generally government entities that 
would be subject to section 113(b)'s protection, and therefore, without 
application of section 130 to PACE companies, PACE consumers would be 
limited in their ability to obtain remedies for violations of the ATR 
requirements. By specifically directing the Bureau to apply section 
130's liability provision as well as the ATR requirements to PACE, 
while ``account[ing] for the unique nature'' of PACE financing, 
Congress intended the Bureau to do more than simply apply the ATR 
requirements to PACE financing. To apply the ATR requirements but not 
change the liability framework would mean section 130's penalty 
provisions would be less effective as to ATR violations, since the only 
creditor available in a consumer civil action is the state or local 
government entities who are not subject to civil penalties.
---------------------------------------------------------------------------

    \231\ 15 U.S.C. 1612(b).
---------------------------------------------------------------------------

    The Bureau proposes to use its authority under EGRRCPA section 307 
to apply the requirements of Sec.  1026.43 to PACE companies and to 
apply section 130 of TILA to PACE companies for violations of Sec.  
1026.43. For the reasons described above, the Bureau believes that the 
unique nature of PACE financing supports its proposal to add Sec.  
1026.43(i)(3). The Bureau seeks comment on this proposed provision and 
how best to define when a PACE company should be subject to proposed 
Sec.  1026.43(i)(3). For example, the Bureau invites feedback on 
whether ``substantially involved in making the credit decision for a 
PACE transaction'' is the best way to define the type of involvement a 
PACE company should have in the PACE transaction to be subject to 
proposed Sec.  1026.43(i)(3).

[[Page 30417]]

Appendix H--Closed-End Forms and Clauses

    The Bureau proposes to add forms H-24(H) and H-25(K) to appendix H 
to Regulation Z. Forms H-24(H) and H-25(K) would provide blank model 
forms for the Loan Estimate and Closing Disclosure illustrating the 
inclusion or exclusion of the information as required, prohibited, or 
applicable under Sec. Sec.  1026.37 and 1026.38 for PACE transactions. 
The proposed forms are generally based on existing forms H-24(G), 
Mortgage Loan Transaction Loan Estimate--Modification to Loan Estimate 
for Transaction Not Involving Seller, and H-25(J), Mortgage Loan 
Transaction Estimate--Modification to Closing Disclosure for 
Transaction Not Involving Seller. The Bureau plans to publish 
translations of Forms H-24(H) and H-25(K) if the Bureau finalizes the 
proposed additions to appendix H. The Bureau is also considering 
modifying proposed forms H-24(H) and H-25(K) in the final rule to 
provide additional pages for variations in the information required or 
permitted to be disclosed. For example, existing form H-24(G) contains 
four versions of page two to reflect the possible permutations of the 
disclosures under Sec.  1026.37(i) and (j). The Bureau proposes forms 
H-24(H) and H-25(K) pursuant to the authority and for the reasons 
described above in the discussion of Sec. Sec.  1026.37(p) and 
1026.38(u), as well as pursuant to its authority to publish such 
integrated model disclosure forms under TILA section 105(b) and RESPA 
section 4(a).

VIII. Effective Date

    The Bureau proposes that the final rule, if adopted, would take 
effect at least one year after publication in the Federal Register, but 
no earlier than the October 1 which follows by at least six months the 
date of promulgation.\232\ The final rule would apply to covered 
transactions for which creditors receive an application on or after 
this effective date. The Bureau tentatively determines that a one-year 
period between Federal Register publication of a final rule and the 
final rule's effective date would give creditors enough time to bring 
their systems into compliance with the revised regulations. The Bureau 
requests comment on this proposed effective date.
---------------------------------------------------------------------------

    \232\ Under TILA section 105(d), Bureau regulations requiring 
any disclosure which differs from disclosures previously required by 
part A, part D, or part E, or by any Bureau regulation promulgated 
thereunder, shall have an effective date of that October 1 which 
follows by at least six months the date of promulgation, subject to 
certain exceptions. 15 U.S.C. 1604(d). To the extent TILA section 
105(d) applies, the proposed effective date would be consistent with 
it.
---------------------------------------------------------------------------

IX. CFPA Act Section 1022(b) Analysis

A. Overview

    In developing this proposed rule, the Bureau has considered the 
proposed rule's potential benefits, costs, and impacts in accordance 
with section 1022(b)(2)(A) of the CFPA.\233\ The Bureau requests 
comment on the preliminary analysis presented below and submissions of 
additional data that could inform the Bureau's analysis of the 
benefits, costs, and impacts. In developing the proposed rule, the 
Bureau has consulted or offered to consult with the appropriate 
prudential regulators and other Federal agencies, including regarding 
the consistency of this proposed rule with any prudential, market, or 
systemic objectives administered by those agencies, in accordance with 
section 1022(b)(2)(B) of the CFPA.\234\ As discussed in part V.C above, 
the Bureau also has consulted with State and local governments and 
bond-issuing authorities, in accordance with EGRRCPA section 307.\235\
---------------------------------------------------------------------------

    \233\ 12 U.S.C. 5512(b)(2)(A).
    \234\ 12 U.S.C. 5512(b)(2)(B).
    \235\ 15 U.S.C. 1639c(b)(3)(C)(iii)(II).
---------------------------------------------------------------------------

Provisions To Be Analyzed
    Although the proposal has several parts, for purposes of this 
1022(b)(2)(A) analysis, the Bureau's discussion groups the proposed 
provisions into two broad categories. The provisions in each category 
would likely have similar or related impacts on consumers and covered 
persons. The categories of provisions are: (1) the proposal to apply 
the ATR provisions of Sec.  1026.43 to PACE transactions, with certain 
adjustments to account for the unique nature of PACE, including denying 
eligibility for any QM categories; and (2) the proposal to clarify that 
only involuntary tax liens and involuntary tax assessments are not 
credit for purposes of TILA, such that voluntary tax liens and 
voluntary tax assessments that otherwise meet the definition of credit, 
such as PACE transactions, are credit for purposes of TILA.
Economic Framework
    Before discussing the potential benefits, costs, and impacts 
specific to this proposal, the Bureau provides an overview of its 
economic framework for analyzing the impact and importance of creditors 
and PACE companies considering a consumer's ability to repay prior to 
an extension of credit. The Bureau has previously discussed the general 
economics of ATR determinations in the January 2013 Final Rule and 
elsewhere,\236\ and focuses here on economic forces specific to PACE.
---------------------------------------------------------------------------

    \236\ See, e.g., 78 FR 35430, 35492-97 (June 12, 2013).
---------------------------------------------------------------------------

    In normal lending markets, such as the non-PACE mortgage market, 
creditors generally have an intrinsic profit motive to set loan pricing 
based in part on ability to repay and in turn have an economic 
incentive to determine ability to repay. Indeed, in the January 2013 
Final Rule, the Bureau noted that even prior to the then-new ATR 
requirements of Regulation Z, most mortgage lenders voluntarily 
collected income information as part of their normal business 
practices. Economic theory says that, to be profitable, a lender must 
apply high enough interest rates to its loans such that the average ex 
ante expected value of the loans in its portfolio is positive. The 
higher the likelihood of nonpayment, the higher the interest rate must 
be to make a profit.\237\ Lenders may price based on the average 
ability to repay in the population, or may price on individual risk 
after making an effort to determine ability to repay, but they cannot 
typically remain profitable in a competitive market if they set 
interest rates while ignoring ability to repay entirely.\238\
---------------------------------------------------------------------------

    \237\ This holds empirically as well. In the General QM Final 
Rule, the Bureau noted that loan pricing for non-PACE mortgages is 
correlated both with credit risk, as measured by credit score, and 
with early delinquency, as a proxy for affordability. See 85 FR 
86308, 86317 (Dec. 29, 2020).
    \238\ A lender that conducts an ability-to-repay analysis will 
have a more precise measurement of the risk of non-payment, and can 
thus profitably price loans to consumers with high ability to repay 
at a low interest rate, being reasonably assured of repayment, while 
pricing riskier loans at a higher rate to compensate for the higher 
risk of default. A lender that does not conduct an ability-to-repay 
analysis must price loans consistent with the average risk of 
default in the population in order to make a profit. This pooled 
risk rate will involve an interest rate higher than the low rates 
that could otherwise be profitably offered to low-risk consumers. 
Note that this logic applies even if loans are ultimately sold on 
the secondary market and securitized. A rational investor will not 
pay market rate for an asset-backed security where the component 
mortgages are priced at levels consistent with low risk if the 
lender cannot verify that the loans are actually low risk.
---------------------------------------------------------------------------

    The market for PACE financing has some notable differences from the 
typical non-PACE mortgage market that dampen or eliminate the economic 
incentive to price based on ability to repay. Those who stand to 
receive revenues from PACE transactions are shielded from losses in 
ways that are not common in the mortgage market. First, for the more 
than 70 percent of PACE borrowers with a pre-existing

[[Page 30418]]

non-PACE mortgage,\239\ it is unlikely that the PACE transaction would 
ever cause a loss to the PACE company or its investors because mortgage 
servicers for the non-PACE mortgage will often pay a property tax 
delinquency on behalf of a borrower. Second, PACE companies generally 
will be made whole in the event of foreclosure, whether that 
foreclosure is initiated by the taxing authority or a non-PACE mortgage 
holder, because PACE transactions are structured as tax liens, and will 
typically take precedence over any non-tax liens, such as those 
securing pre-existing mortgage loans. Third, PACE companies may be made 
whole even if the foreclosure proceeds are insufficient. Because PACE 
transactions are technically structured as obligations attached to the 
real property, rather than the consumer, any remaining amounts that are 
not paid through foreclosure proceeds generally will not be 
extinguished and will instead remain on the property for subsequent 
owners to pay.
---------------------------------------------------------------------------

    \239\ PACE Report, supra note 12, at 18.
---------------------------------------------------------------------------

    The empirical evidence on PACE transactions is consistent with the 
unusual protection from loss that the structure of PACE transactions 
provides for the parties receiving revenue from the loans. The PACE 
Report shows that PACE companies largely did not collect income 
information from applicants when they were not required to by State 
law, consistent with the lack of an economic incentive to verify 
ability to repay.\240\ Moreover, the PACE Report finds that PACE 
transactions are not priced based on individual risk.\241\ The PACE 
Report notes that estimated APRs for PACE transactions are tightly 
bunched, with about half of estimated PACE APRs between 8.3 and 9 
percent.\242\ The Report also notes the PACE APRs are at best weakly 
correlated with credit score, with an average difference of less than 
five basis points between loans made to consumers with deep subprime 
credit scores and consumers with super-prime credit scores.\243\
---------------------------------------------------------------------------

    \240\ Id. at Table 1.
    \241\ Id. at 23.
    \242\ Id. at Table 2.
    \243\ Id. at 23.
---------------------------------------------------------------------------

B. Data Limitations and Quantification of Benefits, Costs, and Impacts

    The discussion below relies on information that the Bureau has 
obtained from industry, other regulatory agencies, and publicly 
available sources, including reports published by the Bureau. These 
sources form the basis for the Bureau's consideration of the likely 
impacts of the proposed rule. The Bureau provides estimates, to the 
extent possible, of the potential benefits and costs to consumers and 
covered persons of this proposal, given available data.
    Among other sources, this discussion relies on the Bureau's PACE 
Report, as described in part IV above. The Report utilizes data on 
applications for PACE transactions initiated between July 2014 and June 
2020, linked to de-identified credit record information through June 
2022. As described above, the Report estimates the effect of PACE 
transactions on consumers by comparing approved PACE applicants who had 
an originated PACE transaction to those who were approved but did not 
have an originated transaction. The Report uses a difference-in-
differences regression methodology, essentially comparing the changes 
in outcomes like mortgage delinquency for originated PACE borrowers 
before and after their PACE transactions were originated to the same 
changes for applicants who were approved but not originated. In this 
discussion of the benefits, costs, and impacts of the proposal, the 
Bureau focuses on results from what the Report refers to as its 
``Static Model'' which considers outcomes over the period between zero 
to two years prior to the PACE transaction and the period between one 
to three years after. The Report also estimates the effect of the 2018 
California PACE Reforms on PACE lending in that State, using Florida as 
a comparison group in a difference-in-differences methodology. The 
Bureau also relies on publicly available data on PACE from State 
agencies and PACE trade associations, as well as on public comments in 
response to the ANPR.
    The Bureau acknowledges several important limitations that prevent 
a full determination of benefits, costs, and impacts. The Bureau relies 
on the PACE Report for many parts of this discussion, but as discussed 
in the PACE Report itself, the data underlying the Report have 
limitations.\244\ The data used in the report are restricted primarily 
to consumers with a credit record, with respect to consumer impacts. 
Further, the comparison groups used in the difference-in-differences 
analysis are reasonable but imperfect. In addition, while the 2018 
California PACE Reforms are informative to the Bureau's consideration 
of the impacts of the proposed rule on consumers and covered persons, 
the proposed rule has different requirements from the State laws that 
made up the 2018 California PACE Reforms, such that the potential 
impacts may differ.
---------------------------------------------------------------------------

    \244\ Id. at 52.
---------------------------------------------------------------------------

    In light of these data limitations, the analysis below provides 
quantitative estimates where possible and a qualitative discussion of 
the proposed rule's benefits, costs, and impacts. General economic 
principles and the Bureau's expertise, together with the available 
data, provide insight into these benefits, costs, and impacts. The 
Bureau requests additional data or studies that could help quantify the 
benefits and costs to consumers and covered persons of the proposed 
rule.

C. Baseline for Analysis

    In evaluating the proposal's benefits, costs, and impacts, the 
Bureau considers the impacts against a baseline in which the Bureau 
takes no action. This baseline includes existing regulations, State 
laws, and the current state of the market. In particular, the baseline 
assumes no change in the current State laws and regulations around PACE 
financing. Also, notwithstanding the proposed clarification that only 
involuntary tax liens and involuntary tax assessments are excluded from 
being credit under Regulation Z (such that the commentary would not 
exclude PACE transactions), the baseline assumes that the current 
practices of PACE industry stakeholders generally are not consistent 
with treating PACE financing as TILA credit.

D. Potential Benefits and Costs to Consumers and Covered Persons

    This section discusses the benefits and costs to consumers and 
covered persons of the two main groups of provisions discussed above: 
the proposed ATR provisions, and the proposal to clarify that only 
involuntary tax liens and involuntary tax assessments are excluded from 
being treated as credit under TILA.
Potential Benefits and Costs to Consumers and Covered Persons From the 
Proposed ATR Provisions
    The Bureau proposes amendments under Sec.  1026.43, which generally 
requires an ability-to-repay analysis before originating a mortgage 
loan, to explicitly include PACE transactions, with several adjustments 
for the unique nature of PACE. The Bureau also proposes to provide that 
a PACE transaction is not a QM as defined in Sec.  1026.43.
Potential Benefits and Costs to Consumers of the Proposed ATR 
Provisions
    Under the proposed rule, consumers who are not found to have a 
reasonable

[[Page 30419]]

ability to repay the loan would not be able to obtain a PACE loan. In 
general, the Bureau expects that consumers who would be denied PACE 
transactions due to the required ATR determination would otherwise 
struggle to repay the cost of the PACE transaction. These consumers 
generally would benefit from the proposal.
    The evidence in the PACE Report helps to partially quantify the 
potential benefits to consumers who cannot afford a PACE transaction. 
The difference-in-differences estimation in the Report finds that, for 
consumers with a pre-existing non-PACE mortgage, entering into a PACE 
transaction increases the probability of becoming 60-days delinquent on 
the pre-existing mortgage by 2.5 percentage points in the two years 
following the first due date for a tax bill including the PACE 
transaction.\245\ For consumers without a pre-existing non-PACE 
mortgage, the Report finds that, following a PACE transaction, such 
consumers' monthly credit card balances increase by over $800 per 
month.\246\
---------------------------------------------------------------------------

    \245\ Id.
    \246\ Id. at 41-42.
---------------------------------------------------------------------------

    Additional evidence from the PACE Report indicates that requiring 
an ability-to-repay analysis could improve outcomes specifically for 
consumers who would otherwise struggle to repay the PACE transaction. 
The PACE Report finds that the effect of a PACE transaction on mortgage 
delinquency is higher for consumers with lower credit scores. The 
average effect of a 2.5 percentage point increase in the rate of non-
PACE mortgage delinquency over a two-year period is composed of a 0.3 
percentage point increase for consumers with super-prime credit scores 
(11.1 percent of all PACE borrowers), a 1.7 percentage point increase 
for consumers with prime credit scores (42 percent of borrowers), a 3.8 
percentage point increase for consumers with near-prime credit scores 
(23.4 percent of borrowers), and a 6.2 percentage point increase for 
consumers with subprime credit scores (20.4 percent of borrowers).\247\ 
The consumers with subprime credit scores would be the most likely to 
be excluded by the ability-to-repay analysis that the proposal would 
require. Credit score tends to be correlated with income. Moreover, 
credit scores are based on credit history, and the proposed ATR 
requirements would require consideration of credit history.
---------------------------------------------------------------------------

    \247\ Id. at Figure 10.
---------------------------------------------------------------------------

    The evidence from the PACE Report also suggests that collecting 
income information from potential PACE borrowers can lead to better 
outcomes. The evidence is less direct on this point because PACE 
companies did not collect income information from a large majority of 
applicants during the period studied by the Report. For example, the 
Report indicates PACE companies collected income information from less 
than 24 percent of originated borrowers in California prior to April 
2018, and a little more than 10 percent of originated borrowers in 
Florida during that time.\248\ Income information was primarily 
available in the data used in the Report for consumers in California 
after April 2018. After this point, the Report finds that essentially 
all originated borrowers in California had income information 
collected, likely because the 2018 California PACE Reforms required 
consideration of income by PACE companies as part of an analysis that 
considered consumers' ability to pay the PACE loan. As a result, the 
PACE Report's analysis of income is largely based on consumers whose 
PACE transactions were originated under requirements that resemble the 
proposed ATR requirements in some respects.
---------------------------------------------------------------------------

    \248\ Id. at Table 1.
---------------------------------------------------------------------------

    The PACE Report finds that PACE transactions increase non-PACE 
mortgage delinquency less for consumers where the PACE company 
collected income information.\249\ The Report also finds that PACE 
transactions increased non-PACE mortgage delinquency rates more for 
consumers in California before the 2018 California PACE Reforms, 
compared to consumers in California after 2018, with the effect falling 
by almost two-thirds after the 2018 California PACE Reforms required 
consideration of income by PACE companies, from a 3.9 percentage point 
increase to a 1.5 percentage point increase.\250\ However, the Report 
also finds that the effect of PACE on mortgage delinquency decreased 
somewhat in Florida as well around 2018, which suggests the change 
could be in part the result of other nationwide trends, rather than 
solely the requirements of the 2018 California PACE Reforms.\251\ The 
PACE Report was inconclusive with respect to whether income or a 
calculation of DTI predicted negative effects of PACE on financial 
outcomes, because income information was not available for enough 
consumers to draw statistically reliable conclusions about subgroups of 
the population with income information.\252\
---------------------------------------------------------------------------

    \249\ Id. at 45.
    \250\ Id. at 46.
    \251\ Id. at 46-47.
    \252\ Id. at 47-48.
---------------------------------------------------------------------------

    The facts documented by the PACE Report, described above, indicate 
that the proposed ATR provisions would likely protect some consumers 
who cannot afford a PACE transaction from entering into a PACE 
transaction and potentially suffering negative consequences as a result 
of that transaction. The Bureau does not have data available to 
precisely determine the number of consumers who would benefit, or the 
monetary value of those benefits, but the Bureau provides some rough 
estimates below.
    Consumers who become delinquent on their mortgages will, at a 
minimum, incur late fees on their payments. If a PACE transaction 
causes a longer delinquency, the consequences could include foreclosure 
or a tax sale. Consumers' credit scores could also be affected, 
although the PACE Report finds only small impacts of PACE on credit 
scores--perhaps in part because PACE borrowers tended to already have 
relatively low credit scores prior to the PACE transaction. The Bureau 
quantifies the individual and aggregate monetary benefits of avoiding 
these consumer harms below to the extent possible. The Bureau uses the 
estimates from the PACE Report of the average effect of PACE on 
consumer outcomes to estimate these benefits but notes that these 
estimates may overstate aggregate benefits to the extent that existing 
laws in California already protect consumers in that State from some 
unaffordable PACE transactions.
    The PACE Report finds that the average monthly mortgage payment for 
consumers with PACE transactions originated between 2014 and 2020 was 
$1,877.\253\ Assuming a late fee of five percent, avoiding a PACE 
transaction would save the average PACE consumer who experiences a 60-
day mortgage delinquency at least $188 over a two-year period. The 
average benefit to such consumers would likely be higher, as many would 
likely have more than a single 60-day mortgage delinquency caused by 
the PACE transaction.
---------------------------------------------------------------------------

    \253\ Id. at 16.
---------------------------------------------------------------------------

    Foreclosure is extremely costly, both to the consumer who 
experiences foreclosure and to society at large. In its 2021 RESPA 
Mortgage Servicing Rule, the Bureau conservatively assumed the cost of 
a foreclosure was $30,100 in 2021 dollars, consisting of both the up-
front cost to the foreclosed consumer and the resulting decrease in 
property values for their neighbors, but no other pecuniary or non-
pecuniary costs.\254\ The Bureau adopts the same assumption here with 
an adjustment for inflation,

[[Page 30420]]

noting as it did in the 2021 rule that it is likely an underestimate of 
the average benefit to preventing foreclosure. Adjusting for inflation 
to 2023 dollars, the benefit of an avoided foreclosure is $33,169.
---------------------------------------------------------------------------

    \254\ See 86 FR 34889 (June 30, 2021).
---------------------------------------------------------------------------

    The Bureau does not have data available to estimate the benefits to 
consumers of preventing a reduction in credit score but notes again 
that the PACE Report finds that PACE transactions only lower scores by 
an average of about one point,\255\ suggesting that such benefits would 
be negligible in magnitude.
---------------------------------------------------------------------------

    \255\ PACE Report, supra note 12, at 41.
---------------------------------------------------------------------------

    In 2019, the last full year of data studied in the PACE Report, the 
four PACE companies whose data were included in the Report originated 
about 2,000 PACE transactions per month, for a total of about 24,000 
per year.\256\ For the 71.1 percent of such borrowers with a pre-
existing non-PACE mortgage,\257\ a 2.5 percentage point increase in 
mortgage delinquency would mean about 600 consumers per year struggling 
to pay the cost of their PACE transaction and incurring at least a 60-
day delinquency. Most loans that become delinquent do not end with a 
foreclosure sale.\258\ The PACE Report finds that PACE transactions 
increase the probability of a foreclosure by 0.5 percentage points over 
a two-year period.\259\
---------------------------------------------------------------------------

    \256\ Id. at Figure 16.
    \257\ Id. at 18.
    \258\ Because of generally favorable conditions in both the 
housing market and the non-PACE mortgage market in recent years, 
PACE borrowers may have been more able to avoid foreclosure by 
either selling or refinancing their homes, compared to the non-PACE 
mortgage borrowers studied in the Assessment Report using earlier 
data. Indeed, the PACE Report finds that PACE loans increased the 
probability of a consumer closing a mortgage (indicating some kind 
of prepayment), with no increase in new mortgages, suggesting a 
subset of PACE borrowers may have been induced to sell their homes. 
Although they would avoid the cost of foreclosure by doing so, 
moving is also expensive, with real estate agents' fees alone 
representing typically 5 to 6 percent of the home's value, in 
addition to other closing costs and the costs related to moving.
    \259\ See PACE Report, supra note 12, at 33. The PACE Report 
notes that the credit record data used in the PACE Report are 
limited with respect to measuring foreclosures. Nonetheless, the 
size of this effect relative to the Report's estimate of the effect 
of PACE transactions on 60-day delinquencies is consistent with 
prior CFPB research on the share of 60-day delinquencies that end in 
a foreclosure. The Bureau's 2013 RESPA Servicing Rule Assessment 
Report found that, for a range of loans that became 90-days 
delinquent from 2005 to 2014, approximately 18 to 35 percent ended 
in a foreclosure sale within three years of the initial delinquency. 
Focusing on loans that become 60-days delinquent, the same report 
found that, 18 months after an initial 60-day delinquency, between 
eight and 18 percent of loans had ended in foreclosure sale over the 
period 2001 to 2016. See CFPB, 2013 RESPA Servicing Rule Assessment 
Report (Jan. 2019), https://files.consumerfinance.gov/f/documents/cfpb_mortgage-servicing-rule-assessment_report.pdf.
---------------------------------------------------------------------------

    Assuming that 0.5 percent of consumers who engage in a PACE 
transaction would ultimately experience foreclosure as a result of the 
PACE transaction, the proposed rule could prevent about 120 
foreclosures per year, for an aggregate annual benefit of about $4 
million per year. If the proposed rule were to prevent a minimum of two 
months of late fees for each of the 600 consumers who would otherwise 
become 60-days delinquent as a result of a PACE transaction, that would 
result in additional aggregate benefits of at least $112,000 per year.
    As discussed above, the difference-in-differences analysis in the 
PACE Report also finds that credit card balances increased 
significantly for PACE borrowers who did not have a pre-existing non-
PACE mortgage, compared to the change in balances for PACE applicants 
who did not originate a loan and also did not have a pre-existing non-
PACE mortgage.\260\ The additional credit card balances incurred by 
consumers without a pre-existing non-PACE mortgage could result in 
interest charges if they are not paid in full on time.\261\ If the 
proposed rule prevented the 29.9 percent of PACE consumers without a 
pre-existing non-PACE mortgage from revolving an additional $833 in 
average credit card balances for an average of one year, with an APR of 
24 percent this could result in about $1.4 million in aggregate benefit 
annually.
---------------------------------------------------------------------------

    \260\ PACE Report, supra note 12, at 41.
    \261\ Interest charges generally do not result if a balance is 
paid in full and on time, but it stands to reason that if balances 
increased in response to another financial obligation, the consumer 
does not have the resources available to pay the balance in full. 
The PACE Report does not distinguish between revolving balances and 
``transacting'' balances that are paid in full.
---------------------------------------------------------------------------

    The proposed ATR requirements may also benefit consumers by 
increasing the likelihood that they understand the nature of PACE 
transactions, particularly in combination with the required TILA-RESPA 
integrated disclosures discussed below in the next section. Commenters 
responding to the ANPR, as well as stories in the media, have indicated 
that some PACE borrowers do not realize they are committing to a long-
term financial obligation when they agree to a PACE transaction. This 
may occur, for example, due to deceptive conduct on the part of a home 
improvement contractor marketing the PACE transaction, or due to the 
complexity and unfamiliarity of the PACE transaction itself. Whatever 
the cause, it is more likely that a consumer who is asked to produce 
documentation of their income will realize that they are signing up for 
a loan that must be repaid over time. As such, the proposed rule may 
benefit consumers who would otherwise misunderstand the nature of a 
PACE transaction. Consumers who would not agree to a PACE transaction 
if they understood its nature as a financial obligation they would need 
to repay may be more likely to understand the nature of the 
transaction, and thus decline it. In addition, even consumers who would 
still agree to the transaction understanding its nature as a financial 
obligation would be more likely to prepare for the increase to their 
property tax bill caused by the PACE transaction.
    For consumers who would not, with full understanding, agree to a 
PACE transaction, the potential benefits of the proposed rule to each 
such consumer would depend on whether the consumer would still agree to 
the home improvement contract the PACE transaction was intended to 
fund. For consumers who would have been willing to proceed with the 
home improvement project without a PACE transaction, the Bureau assumes 
that at least some would seek to pay off the PACE transaction after the 
first payment becomes due.\262\ In this case, the benefit to the 
consumer would be saving the first year of interest on the PACE 
transaction, as well as up-front fees and any capitalized interest 
accrued prior to the first payment. The PACE Report finds that the 
average fee amount for PACE transactions made between 2014 through 2020 
was $1,301, and the average capitalized interest was $1,412.\263\ The 
average interest rate was 7.6 percent.\264\ On the average original 
balance of $25,001,\265\ this would result in interest payments of 
$1,900 in the first year. Thus, each consumer would save about $4,600 
in interest and fees if they avoided a PACE transaction rather than 
repaying it after the first payment becomes due. Further, if the 
consumer otherwise would not have agreed to the home improvement 
project (i.e., the consumer only agreed to the project based on a 
misunderstanding about the

[[Page 30421]]

financing), the benefit of preventing misunderstanding is greater 
still, depending on the value the consumer nonetheless receives from 
the project.\266\
---------------------------------------------------------------------------

    \262\ If the consumer did not realize they had effectively 
agreed to a loan at origination, this would become clear when their 
next property tax bill became due. The PACE Report finds that on 
average a consumer's total property taxes likely increased by almost 
88 percent as a result of the PACE loan payment. PACE Report, supra 
note 12, at 13.
    \263\ Capitalized interest is calculated using the APR, the fee 
amounts, and the term and interest rate of the PACE transactions 
provided in the PACE Report. See id. at Table 2.
    \264\ Id.
    \265\ Id.
    \266\ Generally, the economic loss to a consumer from being 
induced to purchase something they would not otherwise purchase is 
the difference between the price paid and the consumer's willingness 
to pay for the good or service. If the consumer is not willing to 
make the purchase, by definition their willingness to pay is less 
than the price. In the context of a PACE transaction for an 
otherwise unwanted project, the consumer's willingness to pay would 
be less than the price paid to the contractor, which in turn is less 
than the full original balance due to fees and capitalized interest. 
Potentially a consumer's willingness to pay for a project could be 
zero, or even negative (i.e., the consumer would have to be paid to 
be willing to permit the project, had they understood). However, 
consumers may frequently have willingness to pay greater than zero 
for projects funded by PACE transactions, if only due to realized 
energy, water, or insurance savings.
---------------------------------------------------------------------------

    The Bureau does not have data indicating how often consumers 
currently misunderstand the nature of a PACE transaction or what share 
of those consumers would have, in the counterfactual, opted not to 
agree to the PACE transaction or the related home improvement project 
had they understood the nature of the PACE transaction. The data used 
in the PACE Report do not capture when and whether PACE transactions 
were paid off. However, publicly available data for California indicate 
that a significant fraction of PACE transactions to date were paid off 
early in the term of the transaction. The California Alternative Energy 
and Advanced Transportation Financing Authority (CAEATFA) manages a 
loss reserve fund for California PACE programs and requires PACE 
companies to submit information on new PACE transactions semi-annually, 
and to report their overall portfolio size as of June 30th of each 
year.\267\ CAEATFA reports aggregate statistics from this collection 
publicly on its website.\268\ Using this information, the Bureau can 
calculate the number of PACE transactions paid off each year as the sum 
of the prior year's total portfolio and the current year's new 
transactions, less the current year's total portfolio. This is shown in 
Table 1.
---------------------------------------------------------------------------

    \267\ See Cal. State Treasurer, Property Assessed Clean Energy 
(PACE) Loss Reserve Program, https://www.treasurer.ca.gov/caeatfa/pace/activity.asp (last visited Apr. 6, 2023).
    \268\ Id.; see also Cal. State Treasurer, PACE Loss Reserve 
Program Enrollment Activity, https://www.treasurer.ca.gov/caeatfa/pace/activity.pdf (last visited Apr. 20, 2023).
---------------------------------------------------------------------------

    According to the CAEATFA data, there were 17,401 PACE transactions 
outstanding in California as of June 30, 2014, and 202,901 new 
transactions originated after that through June 30, 2020. However, 
about 89,000 transactions were paid off during this time, based on the 
change in total outstanding portfolios, meaning that up to 40 percent 
of PACE transactions may have been paid off early. This likely 
overstates somewhat the share of transactions that were paid early, and 
it very likely overstates the share of consumers who misunderstood the 
nature of the transactions. PACE transactions can have terms as short 
as five years, such that some transactions may have simply reached 
maturity. However, the PACE Report shows that only about six percent of 
PACE transactions have terms of five years.\269\ PACE transactions may 
be paid off early for reasons other than misunderstanding the nature of 
the transaction, including if the consumer sells their home and is 
required by the buyer to pay off the PACE transaction.\270\ Still, 
given the frequency of early repayments and the substantial potential 
benefits to individual consumers of preventing a misunderstanding about 
the nature of PACE as a financial obligation, the aggregate benefits 
could be substantial. For instance, if just 10 percent of early 
repayments on PACE transactions (i.e., 4 percent of all PACE borrowers) 
were due to a misunderstanding that the proposal could address, the 
aggregate benefits would be over $4.4 million annually.\271\
---------------------------------------------------------------------------

    \269\ See PACE Report, supra note 12, at Figure A1.
    \270\ The Bureau does not have data indicating how often 
homeowners are required to pay off a PACE transaction when selling 
their home. However, as noted in part II.A.4, some mortgage lenders 
or investors prohibit making a new loan on a property with an 
outstanding PACE transaction. See supra note 16.
    \271\ Similar to the discussion above regarding the benefits of 
avoiding unaffordable PACE transactions, this calculation may 
overstate the aggregate benefits to the extent that existing State 
law in California prevents consumers from misunderstanding the 
nature of PACE transactions in that State. Given that the number of 
PACE transactions paid off each year remained high after the 
implementation of the 2018 California PACE Reforms, and given that 
the Bureau is being conservative in assuming that only 10 percent of 
early repayments were due to misunderstandings, the Bureau 
preliminarily determines that this estimate is, on balance, likely 
an underestimate.

                                                                         Table 1
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                            (a) Actual total                          (c) New        (d) Actual total
                                                              outstanding          (b) New           financings        outstanding      (e) Number paid
                           Year                            portfolio through   financings July      January 1st-    portfolio through   off ((a) + (b) +
                                                           June 30th,  prior    1st- December      December 31st,       June 30th,          (c)-(d))
                                                                  year         31st prior year      current year       current year
--------------------------------------------------------------------------------------------------------------------------------------------------------
2015.....................................................             17,401              7,022             11,515             34,308              1,630
2016.....................................................             34,308             23,206             32,743             83,904              6,353
2017.....................................................             83,904             34,036             25,850            119,082             24,708
2018.....................................................            119,082             25,764             15,482            146,403             13,925
2019.....................................................            146,403              9,982              6,967            146,525             16,827
2020.....................................................            146,525              5,541              4,793            131,200             25,659
                                                          ----------------------------------------------------------------------------------------------
    Total................................................                N/A             97,350            105,551                N/A             89,102
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: CAEATFA, https://www.treasurer.ca.gov/caeatfa/pace/activity.pdf.

    To the extent that some consumers continue to receive PACE 
transactions that they are not able to afford, the proposal would 
benefit those consumers by providing an avenue for obtaining relief 
under the civil liability provisions of TILA and Regulation Z. The 
Bureau does not have data indicating how often this would occur, 
although as noted below in its discussion of litigation costs to 
covered persons, the Bureau expects that in the long run this would be 
infrequent.
    If the rule is finalized as proposed, consumers would face the time 
costs of gathering the required documentation for an ability-to-repay 
analysis, such as finding and producing W-2s to document proof of 
income. The Bureau has previously noted in the context of

[[Page 30422]]

non-PACE mortgages that the time required to produce pay stubs or tax 
records should not be a large burden on consumers. This may differ in 
the case of PACE transactions, as these transactions are typically 
marketed in conjunction with home improvement contracts, and consumers 
may not be prepared to produce income documentation at the point of 
sale for a home improvement. In any event, the proposal likely would 
not increase time costs in a meaningful way for PACE applicants in 
California, because these consumers already must produce documentation 
similar to what might be necessary for an ATR determination as part of 
a PACE application under the proposal. In addition, the PACE Report 
indicates that at least some PACE companies have collected income 
information from applicants even in Florida, so again there may be 
little change for some consumers in that State.\272\ Further, the 
Bureau understands that, even in California after the effective date of 
the 2018 California PACE Reforms, PACE companies do not always collect 
full income documentation if other eligibility standards are not met. 
For instance, State laws governing PACE often prohibit PACE 
transactions from being made to consumers with evidence of recent 
payment difficulty, such as a recent bankruptcy, mortgage delinquency, 
or property tax delinquency. The Bureau understands that PACE companies 
in California set up their eligibility determination process to check 
these criteria before requesting income documentation from the 
consumer. The evidence in PACE Report is consistent with this--the 
Report finds that income information was not available for a sizeable 
minority of applications in California after 2018 where the application 
did not result in an originated PACE transaction.\273\
---------------------------------------------------------------------------

    \272\ See PACE Report, supra note 12, at Table 1. As noted in 
part II.A.6, in 2021, the main trade association for PACE companies 
announced a set of consumer protection policy principles that 
includes considering ability to pay, although the Bureau does not 
know to what extent this translates to requiring documentation from 
consumers where it is not required by State law.
    \273\ PACE Report, supra note 12, at Table 1.
---------------------------------------------------------------------------

    The PACE Report shows that, in 2019, the last full year for which 
data are available, the PACE companies that participated in the 
voluntary data collection received about 45,500 applications from 
prospective borrowers in Florida.\274\ As discussed further below, the 
number of applications would likely fall significantly if the proposal 
is finalized, possibly by as much as half. In addition, the PACE Report 
indicates that about a third of PACE applications in Florida after 
April 2018 included income information.\275\ Moreover, about one 
quarter of PACE applications in California after April 2018 (i.e., when 
the 2018 California PACE Reforms took effect and began requiring such 
income information as part of the ability-to-pay analysis) did 
not,\276\ indicating that such consumers in California were rejected 
before being asked for income information. Together, this suggests 
that, on average, approximately 11,400 additional consumers might be 
asked to provide income documentation annually under this rule as 
proposed.\277\ The Bureau does not have data indicating the average 
amount of time it takes a PACE applicant to produce the documentation 
for an ATR determination as would be required under the proposed rule. 
Assuming the time to be one hour and using the median hourly wage in 
Florida of $18.63,\278\ the aggregate time cost to consumers would be 
about $212,000 annually.
---------------------------------------------------------------------------

    \274\ Id. at 50.
    \275\ Id. at 10.
    \276\ Id. at Table 1.
    \277\ The calculation is the product of 45,500 current 
applications, 0.5 (the assumed reduction due to proposal), 0.67 (the 
share of Florida applications that do not currently collect income), 
and 0.75 (the share of the remaining applications that would collect 
income, based on the share in California that currently collect 
income), which equals 11,375.
    \278\ See Bureau of Lab. Stats., May 2021 State Occupational 
Employment and Wage Estimates, Florida, https://www.bls.gov/oes/current/oes_fl.htm (last visited Mar. 6, 2023).
---------------------------------------------------------------------------

    Consumers would also face costs under the proposed rule due to 
losing access to PACE financing. This would include consumers whose 
PACE applications are denied due to failing the proposed ATR 
determination, as well as consumers who do not apply for PACE as a 
consequence of the proposal.\279\ For consumers who cannot, in fact, 
afford the cost of a PACE transaction, being denied is likely a benefit 
on net. However, no ATR determination can perfectly predict ability to 
repay, and some consumers who could, in fact, afford and benefit from a 
PACE transaction may be denied as a result of the proposed rule, if 
finalized.
---------------------------------------------------------------------------

    \279\ Consumers might not apply for PACE due to the effect of 
the proposal if home improvement contractors who otherwise might 
have marketed PACE withdraw from that market, or if they opt not to 
proceed with a PACE transaction as a consequence of the provisions 
of the proposed rule.
---------------------------------------------------------------------------

    To quantify the cost to consumers of having applications for PACE 
transactions denied, the Bureau would need to be able to calculate the 
number of consumers that could afford the cost of a PACE transaction 
but would be denied as a result of the proposed rule, and the cost to 
the average consumer of being denied. The Bureau can roughly quantify 
the number of consumers and discusses this below, but it does not have 
the data necessary to quantify the average cost, and thus its 
discussion is ultimately qualitative in nature.
    The experience of California under the ability-to-pay regime of the 
2018 California PACE Reforms provides a possible benchmark as to how 
the proposed rule might affect PACE application approval rates. The 
PACE Report shows that approval rates dropped sharply in California 
following the effective date of the 2018 California PACE Reforms in 
April 2018, falling from around 55 percent to around 40 percent.\280\ 
However, the Report also finds that approval rates recovered over time, 
rising back to around 55 percent by the end of 2019. Using Florida as a 
comparison group, the Report finds that the 2018 California PACE 
Reforms lowered the approval rate for PACE applications in California 
by about seven percentage points, although this average includes both 
the initial drop and the later recovery.\281\ Although the provisions 
of the proposed rule differ from the requirements of the 2018 
California PACE Reforms, it is likely that the rule would have limited 
additional effect on PACE transaction approval rates in California. 
Instead, the proposal, if finalized, would primarily reduce approval 
rates in Florida.
---------------------------------------------------------------------------

    \280\ PACE Report, supra note 12, at Figure 16.
    \281\ Id. at Table 13.
---------------------------------------------------------------------------

    As noted above, the PACE Report indicates that PACE companies in 
Florida received about 45,500 applications in Florida in 2019, the last 
full year of data available. Again assuming that the proposed rule 
would lead to about half as many applications, and assuming that 
approval rates fall by seven percentage points, that would mean at most 
about 1,600 consumers annually might have a beneficial PACE application 
denied. This is an overcount, as many of these consumers in fact would 
not be able to afford a PACE transaction, and, moreover, the PACE 
Report shows that approval rates recovered over time. Some of the 
expected reduction in PACE applications may represent a cost to 
consumers as well, to the extent this arises from PACE financing being 
less available in general to consumers who could afford and benefit 
from it. However, as discussed above, one benefit of the proposal would 
be that consumers would be less likely to misunderstand the nature of a 
PACE

[[Page 30423]]

transaction, which would also reduce PACE applications. As also noted 
above, a substantial fraction of PACE transactions are paid off early 
in the term of those transactions, which may be related to such 
misunderstandings. Although the Bureau expects the volume of PACE 
transactions in Florida and other States would decline if the proposed 
rule were finalized, it does not have data that would indicate how much 
of this decline would be a cost to consumers who miss out on a 
transaction they would prefer to engage in, and how much is a benefit 
to consumers who had no interest in participating in a PACE transaction 
once they understood its true nature or would not have been able to 
afford the PACE transaction.
    The Bureau can characterize qualitatively the consumer costs of not 
receiving a PACE transaction. The immediate impact to a consumer who 
might otherwise have agreed to a PACE transaction but is either denied 
or is not offered a PACE transaction due to the proposed rule is that 
the consumer either must pay for the home improvement project in cash 
or with another financing product, or else the consumer must forgo the 
home improvement project.
    Paying in cash for a home-improvement project is not likely to be 
costly to consumers who choose to do so. Although this involves a 
large, upfront expenditure, it is unlikely that consumers will 
frequently agree to pay cash for a home improvement project they cannot 
afford--they will generally forgo the project instead, the costs of 
which are discussed below, or find other means of financing. Moreover, 
even if a consumer's budget might be strained in the short term by the 
expenditure, the consumer would then save on the--potentially 
substantial--cost of interest and fees on a loan.
    The impact on consumers, relative to the baseline, of using another 
credit product may be either a cost or a benefit depending on the cost 
of the other credit product. If the next best alternative has a lower 
APR than the relevant PACE transaction, consumers who may have received 
a PACE loan but did not due to the proposed rules relating to ATR could 
be better off than they would be without the proposed rule. Conversely, 
if the next best alternative for a consumer has a higher APR, those 
consumers would be worse off. The PACE Report shows that estimated APRs 
for PACE transactions averaged 8.5 percent.\282\ This is greater than 
typical rates for home equity lines of credit, but less than typical 
rates for credit cards.\283\ The interest rate on PACE transactions may 
be more or less than the cost of an unsecured loan for the same home 
improvement project, which can vary widely depending on the consumer's 
credit score.
---------------------------------------------------------------------------

    \282\ Id. at Table 2.
    \283\ Average credit card interest rates on accounts assessed 
interest were between 13 and 17 percent during the period studied by 
the PACE Report. See Fed. Rsrv. Econ. Data, Fed. Rsrv. Bank of St. 
Louis, Commercial Bank Interest Rate on Credit Card Plans, Accounts 
Assessed Interest (Apr. 8, 2023), https://fred.stlouisfed.org/series/TERMCBCCINTNS. Interest rates for personal loans averaged 
around 10 percent. See Fed. Rsrv. Econ. Data, Fed. Rsrv. Bank of St. 
Louis, Finance Rate on Personal Loans at Commercial Banks, 24 Month 
Loan (Apr. 8, 2023), https://fred.stlouisfed.org/series/TERMCBPER24NS. The median interest rate on home equity lines of 
credit was 5.34 percent in 2019 based on HMDA data. See CFPB, An 
Updated Review of the New and Revised Data Points in HMDA: Further 
Observations using the 2019 HMDA Data, (Aug. 2020), https://files.consumerfinance.gov/f/documents/cfpb_data-points_updated-review-hmda_report.pdf.
---------------------------------------------------------------------------

    The PACE Report suggests that under the proposal, many consumers 
who would not receive a PACE transaction would be able to obtain credit 
through another source, potentially at a better APR than the PACE 
transaction. The Report shows that the vast majority of PACE borrowers 
had other credit available. The report shows that almost 99 percent of 
PACE borrowers have sufficient credit history to have a credit score, 
almost 90 percent of PACE borrowers had a credit card pre-PACE, and on 
average PACE borrowers had more than seven unique credit accounts of 
any type pre-PACE.\284\ More than half of PACE borrowers had prime or 
super-prime credit scores at the time they entered into a PACE 
transaction.\285\ The Bureau notes, however, that this aspect of the 
PACE Report's analysis was limited to consumers who had a credit 
report. The Report had to exclude roughly a quarter of the consumers in 
the data submitted to the Bureau because they could not be matched to a 
credit report with the credit reporting company that acted as the 
Bureau's contractor. Some of these consumers may simply have had a 
mismatch in name or address with the credit reporting company's 
database, but likely at least some of these consumers had no credit 
report and were credit invisible. The true share of PACE borrowers with 
substantial access to credit is likely smaller than what is noted 
above.
---------------------------------------------------------------------------

    \284\ See PACE Report, supra note 12, at Table 6.
    \285\ See id. at Figure 1.
---------------------------------------------------------------------------

    If the consumer does not opt to proceed with the home improvement 
project, the cost is the loss of the benefits of that project. The 
nature of these costs would depend on the type of project and the 
reasons the consumer was considering the project. For the types of home 
improvement projects that might be eligible for PACE financing, the 
benefit of the project is primarily the energy, water, or insurance 
savings the project would have delivered.\286\ Other projects may be 
used to replace critical home equipment such as an HVAC system, without 
which the consumer would face the cost of not having that equipment. 
The Bureau does not have data available to estimate the average energy, 
water, or insurance savings actually obtained by PACE borrowers, nor is 
the Bureau aware of any research to estimate real-world savings from 
PACE transactions. One study the Bureau is aware of estimates aggregate 
energy savings from customers of one PACE company, but this is based on 
engineering estimates of the savings from each project.\287\ The 
academic literature has found that engineering estimates can frequently 
overestimate real-world savings from energy efficiency programs.\288\ 
Public comments from consumer advocacy groups in response to the ANPR 
also cited instances where consumers received smaller energy savings 
than what was advertised to them.
---------------------------------------------------------------------------

    \286\ Home values may also increase as a result of the home 
improvement projects, but generally this will be the consequence of 
capitalizing the value of future energy, water, or insurance savings 
already considered here. With respect to insurance savings, industry 
stakeholders and local government stakeholders in Florida have 
asserted to the Bureau that consumers may have difficulty obtaining 
homeowners' insurance for homes in Florida with roofs above a 
certain age. If a consumer cannot obtain homeowners' insurance on 
real property that secures a non-PACE mortgage, lenders may force-
place insurance, generally at higher premiums than consumer-
purchased insurance. PACE transactions may be used for roof 
replacements in Florida, and consumers may save on insurance costs 
if they utilize a PACE transaction for this purpose.
    \287\ Adam Rose & Dan Wei, Impacts of Property Assessed Clean 
Energy (PACE) program on the economy of California, 137 Energy Pol'y 
111087 (2020).
    \288\ See, e.g., Meredith Fowlie, Michael Greenstone & Catherine 
Wolfram, Do Energy Efficient Investments Deliver? Evidence from the 
Weatherization Assistance Program, 133 Q J of Econ. 3 (Aug. 2018).
---------------------------------------------------------------------------

Potential Benefits and Costs to Covered Persons of the Proposed 
Ability-to-Repay Provisions
    The proposed ATR provisions would primarily affect PACE companies. 
Although the Bureau understands that local government sponsors are 
generally the creditor, as defined in TILA, for PACE transactions, the 
Bureau expects that the required ATR determination, and in practice the 
liability for any failures to make that determination, would fall on 
the PACE companies that

[[Page 30424]]

run PACE programs.\289\ Although the PACE Report provides some 
information on potential impacts of the ATR provisions on PACE 
companies, many of the potential benefits and costs to PACE companies 
are outside the scope of the Report. The Bureau discusses these 
benefits and costs qualitatively here.
---------------------------------------------------------------------------

    \289\ The Bureau is aware that there may be programs authorized 
or administered by government entities that are not commonly 
understood as PACE, but that nonetheless meet the definition of PACE 
financing established in EGRRCPA section 307 and implemented under 
the proposed 12 CFR 1026.43(b)(15). Data on such programs is 
dispersed, and so the Bureau does not have sufficient information to 
reliably estimate how many such programs exist or to assess their 
current practices in providing financing. The Bureau understands 
these programs to operate independently of one another, under 
differing laws and practices. Consequently, the Bureau is unable to 
quantify (1) the number of such programs that are not commonly 
understood as PACE, but would meet the definition of PACE financing; 
(2) how many of those programs are operated by covered entities; or 
(3) the effects the proposed rule would have on each such covered 
entity. Any such program's additional costs under the proposed ATR 
provisions would depend on its current procedures. The Bureau 
requests comment on how the proposed rule may affect such programs.
---------------------------------------------------------------------------

    PACE companies may benefit from legal clarity provided by the 
proposed ATR provisions. As described above in part II.A, some PACE 
companies have been targets of legal actions from consumers and 
regulators. Some PACE companies have exited the industry citing such 
actions as at least a partial cause.\290\ These legal actions were not 
necessarily related to PACE companies consideration of consumers' 
ability to repay--many related to conduct by home improvement 
contractors who marketed the PACE transactions. However, as described 
above in reference to benefits to consumers, the act of collecting 
income documentation as part of the proposed ATR provisions may make it 
more likely that consumers correctly understand the nature of a PACE 
transaction, potentially preventing some legal actions. Again, the 
required TILA-RESPA integrated disclosures (discussed in more detail 
below) would also assist in this respect. The Bureau does not have data 
on the frequency of lawsuits facing PACE companies currently, nor does 
it have data on the claims in those lawsuits that would allow the 
Bureau to determine what share might be prevented by following the 
proposed ATR provisions.
---------------------------------------------------------------------------

    \290\ See, e.g., Decl. of Shawn Stone, CEO of Renovate America, 
In Support of Chapter 11 Petitions and First Day Motions, Case No. 
20-13172 (Bankr. D. Del. 2020).
---------------------------------------------------------------------------

    By providing a Federal ability-to-repay standard, the proposal may 
also encourage greater consistency across States. For example, the 
Bureau understands that PACE companies currently adhere to different 
processes for determining consumer eligibility for PACE transactions in 
California, involving some collection and verification of income and 
other documentation, than in Florida, where eligibility determinations 
generally involve less documentation. If the proposed rule encourages 
more standardized processes across States, this could result in reduced 
operating cost for PACE companies, which may offset some of the costs 
described below.
    More broadly, the nationwide minimum standard provided by the 
proposed rule could make it easier for PACE companies to expand into 
additional States, leading to additional business. As noted above, the 
Bureau understands that many States have legislation authorizing PACE 
transactions,\291\ but currently PACE companies are primarily active in 
just two States. Local governments in States with legislation 
authorizing PACE transactions may have a variety of reasons for opting 
not to engage with a PACE company to start a PACE program. However, the 
Bureau finds it plausible that controversies and consumer protection 
concerns discussed in part II.A.4 above may in part hold some 
government entities back from engaging in PACE. To the extent this is 
the case, the proposed rule could address those concerns and provide 
opportunities for PACE companies to grow, or for new PACE companies to 
enter the market. To the extent this occurs, the benefits could be 
considerable. The PACE Report documents that PACE origination volumes 
grew rapidly in both California and Florida when PACE companies entered 
those States.\292\ However, rapid growth may not materialize to the 
same extent in other States if the rapid growth in California and 
Florida was premised on business practices that would be prohibited by 
the proposal.
---------------------------------------------------------------------------

    \291\ See part II.A.2, supra.
    \292\ PACE Report, supra note 12, at Figure 16.
---------------------------------------------------------------------------

    Although PACE companies would likely receive some of the benefits 
discussed above from the proposed ATR provisions, PACE companies would 
also likely experience significant costs under the proposal, including 
reduced lending volumes in Florida and Missouri, one-time adjustment 
costs, and ongoing costs for training and compliance.
    The PACE Report documents that, following the effective date of the 
2018 California PACE Reforms, PACE applications and originations fell 
sharply in that State, with no corresponding decline in Florida around 
the same time.\293\ Using Florida as a control group, the Report finds 
that PACE applications in California declined by more than 3,400 per 
month due to the provisions of the 2018 California PACE Reforms, from 
an average of over 5,300 per month in that State prior to the 
reforms.\294\ The Report finds that the number of originated PACE 
transactions in California declined by about 1000 per month due to the 
2018 California PACE Reforms, representing about a 63 percent decrease 
from a pre-reform average of about 1600 originations per month in 
California.\295\ The specific requirements of the 2018 California PACE 
Reforms differ from those of the proposal, even with respect to 
provisions having to do with the California ability-to-pay requirements 
and the proposal's Federal ATR requirements, but the Bureau expects 
that PACE companies would see a similar decline in originated loans in 
other States if the proposal is finalized. Conversely, the Bureau does 
not expect that the ATR requirements in the proposal would cause an 
additional reduction in PACE transactions in California due to the 
mechanisms discussed above.
---------------------------------------------------------------------------

    \293\ Id.
    \294\ Id. at Table 13.
    \295\ Id.
---------------------------------------------------------------------------

    In addition, the decline in PACE applications in California 
following the 2018 California PACE Reforms that is documented in the 
PACE Report may have been accentuated by adjustments to firm behavior. 
That is, it is possible that PACE companies refocused marketing and 
other efforts on Florida following the implementation of the 2018 
California PACE Reforms. This type of shifting would not occur in 
response to a Federal regulation that applies nationwide, such as the 
proposed rule.
    PACE companies will also likely experience one-time adjustment 
costs to update their systems and processes to accept and consider 
income and other information related to the proposed ATR requirements. 
These costs may include software and development, training of both PACE 
company staff and home improvement contractor affiliates, and costs for 
legal and compliance review of the changes to ensure compliance with 
the regulations. The Bureau does not have data indicating the magnitude 
of these costs. However, the Bureau notes that some of these costs may 
be ameliorated by the existing requirements in California. The Bureau 
understands that all currently active PACE companies are engaged in 
PACE financing in California and thus

[[Page 30425]]

must already have systems in place to allow for collection of income 
information and other documentation needed for the ATR determination 
the proposal would require. The Bureau thus expects that costs related 
to software changes would be relatively small, and that costs for 
training would likely be less than if there were no existing ability-
to-pay requirements for PACE in any jurisdiction. The Bureau 
acknowledges that legal and compliance review costs would likely apply 
in all States, as the specific proposed requirements differ from the 
requirements of California State law and regulation.
    PACE companies may also experience additional litigation costs due 
to alleged violations of the proposed ATR provisions. As noted earlier 
in this analysis, the Bureau is proposing to apply civil liability in 
TILA section 130 to PACE companies that are substantially involved in 
making the credit decision. As the Bureau stated in the January 2013 
Final Rule, even creditors making good faith efforts when documenting, 
verifying, and underwriting a loan may still face some legal challenges 
from consumers ex-post. This will occur when a consumer proves unable 
to repay a loan and wrongly believes (or chooses to assert) that the 
creditor failed to properly assess the consumer's ability to repay 
before making the loan. This will likely result in some litigation 
expense, although the Bureau believes that over time, that expense will 
likely diminish as experience with litigation yields a more precise 
understanding regarding what level of compliance is considered 
sufficient. After some experience, litigation expense will most likely 
result where compliance is insufficient or from limited novel sets of 
facts and circumstances where some ambiguity remains. Moreover, as 
Bureau also stated in the January 2013 Final Rule, the Bureau believes 
that even without the benefit of any presumption of compliance, the 
actual increase in costs from the litigation risk associated with 
ability-to-repay requirements would be quite modest. This is a function 
of the relatively small number of potential claims, the relatively 
small size of those claims, and the relatively low likelihood of claims 
being filed and successfully prosecuted. The Bureau notes that 
litigation likely would arise only when a consumer in fact was unable 
to repay the loan (i.e., was seriously delinquent or had defaulted), 
and even then only if the consumer elects to assert a claim and, in all 
likelihood, only if the consumer is able to secure a lawyer to provide 
representation; the consumer can prevail only upon proving that the 
creditor lacked a reasonable and good faith belief in the consumer's 
ability to repay at consummation or failed to consider the statutory 
factors in arriving at that belief.
    Beyond PACE companies, the proposed ATR provisions would impose 
some costs on local government entities and home improvement 
contractors.\296\
---------------------------------------------------------------------------

    \296\ Local government entities and home improvement contractors 
currently involved in PACE transactions may or may not be covered 
persons depending on the specific facts and circumstances of their 
involvement in PACE financing; to the extent they are not covered 
persons the Bureau exercises its discretion to consider benefits, 
costs and impacts to these entities.
---------------------------------------------------------------------------

    Some local government entities would also experience costs due to 
the proposed ATR provisions, if finalized. The Bureau understands that 
local government entities receive some revenues from originated PACE 
transactions, in the form of fees, or a small percentage of the PACE 
payments collected through consumers' property tax bills. The Bureau 
does not have data indicating the average revenue that government 
entities receive from each PACE transaction. To the extent that the 
proposal reduces the volume of PACE transactions, the Bureau expects 
that it would also reduce revenue to such government entities, in 
proportion to the revenue they currently receive from such 
transactions. Similar to the discussion above related to PACE 
companies, the Bureau expects that government entities in California 
would be less affected by the proposed rule than government entities in 
other States. If, as discussed above, the proposal were to facilitate 
growth of PACE transactions in States that do not currently have active 
programs, local government entities in those State might benefit as a 
result.
    Home improvement contractors involved in PACE transactions would 
experience costs under the proposal due to the additional staff time 
required to collect the required information for the proposed ATR 
determination. As with time costs for consumers discussed above, the 
Bureau assumes these costs would primarily affect home improvement 
contractors in Florida and that the volume of applications in Florida 
would decrease from current levels if the proposal is finalized; see 
above for details. The PACE Report indicates that roofs and disaster 
hardening are the most common type of project for PACE transactions in 
Florida, and so the Bureau uses the median wage for roofers in Florida, 
$18.43 per hour,\297\ to value the time costs to home improvement 
contractors. Under these assumptions, the total costs to home 
improvement contractors from additional staff time would total about 
$210,000 annually.\298\
---------------------------------------------------------------------------

    \297\ See Bureau of Lab. Stats., May 2021 State Occupational 
Employment and Wage Estimates, Florida, https://www.bls.gov/oes/current/oes_fl.htm (last visited Mar. 6, 2023).
    \298\ In the January 2013 Final Rule, the Bureau noted that most 
non-PACE mortgage lenders already collected income information as 
part of the normal course of business, and so assumed no significant 
costs relative to the baseline. See 78 FR 6546 (Jan. 30, 2013). This 
likely would not be the case for PACE companies outside of 
California. The Bureau requests comment on the actual time costs of 
gathering this information and typical wages of staff employed to 
collect it.
---------------------------------------------------------------------------

Potential Benefits and Costs to Consumers and Covered Persons of 
Clarifying That PACE Financing Is Credit
    The proposal would revise the official commentary for Regulation Z 
to clarify that PACE transactions are credit for purposes of TILA.\299\ 
In practice, this would impose a number of new requirements on PACE 
companies and other covered persons. Some relevant provisions whose 
benefits and costs are discussed below include (1) a three-day right of 
recission; \300\ (2) disclosure requirements, including provision of 
relevant TILA-RESPA integrated disclosure forms and a mandatory waiting 
period between provision of the disclosure and consummation; \301\ (3) 
requirements related to loan originators; \302\ and (4) certain 
requirements for PACE transactions that meet the definitions of a high-
cost mortgage or a higher-priced mortgage loan.\303\ The Bureau is not 
addressing in depth certain other provisions.\304\
---------------------------------------------------------------------------

    \299\ See section-by-section analysis of proposed Sec.  
1026.2(a)(14), supra.
    \300\ Consumers have the right to rescind within three business 
days of consummation, delivery of the notice informing the consumer 
of the right to rescind, or delivery of all material disclosures, 
whichever occurs last. If the notice or disclosures are not 
delivered, the right to rescind expires three years after 
consummation. See 12 CFR 1026.23(a)(3)(i).
    \301\ See, e.g., 12 CFR 1026.37, 1026.38.
    \302\ See, e.g., 12 CFR 1026.36(a)(1)(i), 1026.36(d)-(g).
    \303\ 12 CFR 1026.32, 1026.34.
    \304\ For instance, PACE companies would also be required to 
comply with the prohibition on prepayment penalties under 12 CFR 
1026.43(g), but the Bureau does not expect this would create 
significant costs or benefits for consumers or covered persons, as 
the Bureau understands that PACE loans being made currently do not 
include these penalties. PACE contracts would also be prohibited 
from requiring the use of mandatory arbitration under 12 CFR 
1026.36(h), but the Bureau does not have information sufficient to 
determine the extent to which PACE contracts currently include 
mandatory arbitration clauses. To the extent mandatory arbitration 
clauses are currently in use, consumers and covered persons could 
incur benefits and costs as a result of this prohibition.

---------------------------------------------------------------------------

[[Page 30426]]

    The right of recission could benefit consumers and impose costs on 
covered persons to the extent that consumers decide a PACE transaction 
is not appropriate for them during the rescission period and exercise 
the right. As discussed above, many PACE borrowers pay off their PACE 
transactions early, which suggests that some of these consumers may 
decide they do not want a PACE transaction after origination, or may 
not have intended to take out the PACE transaction at all. A rescission 
period could give consumers more time to exercise such preferences. 
However, the Bureau does not have data indicating whether PACE 
borrowers typically realize such a preference during the three-day 
period following origination of a PACE transaction. In addition, PACE 
borrowers in California already have a three-day right to cancel under 
State law,\305\ and PACE companies may currently voluntarily provide a 
recission option outside of California. As a result, the Bureau expects 
the application of this provision of TILA to impose few benefits or 
costs on consumers and covered persons.
---------------------------------------------------------------------------

    \305\ Consumers have the option to cancel within three business 
days after signing the agreement, receipt of the Financing Estimate 
and Disclosure, or receipt of the cancellation notice, whichever 
occurs last. See Cal. Sts. & Hwys. Code sec. 5898.16.
---------------------------------------------------------------------------

    The disclosure requirements would likely benefit consumers by 
increasing their understanding of the terms of the PACE transaction and 
mandating a waiting period between disclosure and consummation. As 
discussed above in the context of collecting income information, 
mandating disclosures and a waiting period for PACE transactions 
conforming with TILA-RESPA integrated disclosure requirements would 
make it more likely that consumers understand the terms of their 
proposed PACE transactions. The disclosure requirements would also 
likely increase understanding of the fundamental nature of PACE 
transactions as financial obligations that must be repaid over time. 
The potential benefits of avoiding consumer misunderstanding of the 
nature of a PACE transaction are discussed above.
    By providing detailed information about the terms and payment 
amounts expected in a PACE transaction, TILA-RESPA integrated 
disclosures may also assist consumers in preparing for their first PACE 
payment, which can be a significant shock to their finances regardless 
of whether the consumer pays their property taxes directly or through a 
pre-existing mortgage escrow account. The PACE Report finds that the 
average PACE consumer's property tax bill likely nearly doubles as a 
result of the PACE assessment.\306\ Particularly for consumers who do 
not pay property taxes through an escrow account, this can be a major 
expenditure shock. For consumers who do pay property taxes through an 
escrow account, the Report finds that mortgage payments increase 
substantially over the two years following the PACE transaction, 
indicating an expenditure shock as well.\307\ Some of the disclosures 
on the proposed modified TILA-RESPA integrated disclosure form for PACE 
transactions may prompt consumers with a pre-existing non-PACE mortgage 
to inform their mortgage servicer of the PACE transaction. This, in 
turn, could prompt the servicer to conduct an escrow analysis to 
account for the PACE payment sooner than it otherwise would have and 
thus create a smaller monthly payment increase for the consumer.
---------------------------------------------------------------------------

    \306\ PACE Report, supra note 12, at 13.
    \307\ Id. at 18-20.
---------------------------------------------------------------------------

    PACE companies would experience one-time adjustment costs related 
to the TILA-RESPA integrated disclosure if the proposal is finalized. 
The Bureau understands that PACE companies generally provide some 
disclosures with similar information at the point of sale, but not in 
the format or with precisely the same information as the disclosure 
that would be required under the proposal. The Bureau expects that 
ongoing costs will be minimal relative to the baseline, since PACE 
companies already provide disclosures. To the extent that the proposed 
TILA-RESPA integrated disclosures for PACE require that PACE companies 
gather information that they do not currently collect, they may face 
additional costs of gathering that information if the proposal is 
finalized.
    The required seven-day waiting period between provision of the Loan 
Estimate and consummation may also impose costs on both PACE companies 
and the home improvement contractors who market PACE transactions. As 
discussed in part II.A.4 above, the Bureau understands that, currently, 
PACE transactions are frequently originated on the spot, on the same 
day as the home improvement contractor approaches the consumer about a 
potential project. PACE industry stakeholders have expressed to the 
Bureau that this speed of origination is necessary to compete with 
unsecured financing options. It is possible that the seven-day waiting 
period would lead to a further reduction in PACE transaction volume due 
to reduced contractor participation if contractors prefer to offer only 
credit options that do not have such a waiting period. No States 
currently have a similar mandatory waiting period under State law as 
far as the Bureau is aware, so this aspect of the proposal would likely 
affect PACE lending volumes in all States. The Bureau does not have 
data to indicate how large this effect might be.
    TILA and Regulation Z include a variety of provisions that apply to 
loan originators. With current PACE industry practices, the Bureau 
understands that, if the proposal is finalized, these provisions would 
primarily apply to home improvement contractors. If home improvement 
contractors continue in their current roles and act as loan originators 
for PACE transactions, both the individual contractors and related 
companies would face compliance costs, including costs relating to 
applicable State or Federal licensing and registration 
requirements.\308\ The Bureau does not have data available to quantify 
the costs to home improvement contractors from complying with TILA as 
loan originators.
---------------------------------------------------------------------------

    \308\ 12 CFR 1026.36(f).
---------------------------------------------------------------------------

    It is possible that, if the proposal is finalized, home improvement 
contractors would opt not to bear the cost of complying with TILA 
provisions to the extent they apply and would instead exit the PACE 
market. The home improvement contractors themselves would incur costs 
in this case. The Bureau does not have data available to estimate these 
costs. The costs to home improvement contractors from exiting the PACE 
industry depend on what would happen to prospective home improvement 
contracts for which PACE financing would no longer be an option. If 
contractors are able to make the sale of the home improvement contract 
based on a cash payment or another financial product, they generally 
would not experience any cost.\309\ However, contractors could lose 
some sales due to the unavailability of a PACE transaction as a 
financing option. The Bureau does not have data that would indicate how 
frequently this would happen. It is also possible that, if the proposal 
enables PACE financing to expand into additional States, home 
improvement contractors in those States would benefit from additional 
business. Again,

[[Page 30427]]

the Bureau does not have data that would indicate how many contractors 
might benefit if this were to occur, or how much they would benefit.
---------------------------------------------------------------------------

    \309\ The Bureau's understanding is that home improvement 
contractors do not receive a commission from PACE companies for 
originating a PACE contract. To the extent that contractors do 
receive commissions, exiting the PACE market would cost them these 
commissions, although they might be replaced by commissions from an 
alternate financial product, if any.
---------------------------------------------------------------------------

    Consumers may experience both costs and benefits due to the 
proposed application of TILA's loan originator provisions to PACE, if 
finalized. The costs and benefits to consumers of not being offered a 
PACE transaction are discussed above in this analysis; that discussion 
also applies to cases where consumers are not offered a PACE 
transaction because the home improvement contractor has exited the PACE 
market. To the extent that home improvement contractors opt to remain 
in the PACE market or PACE transactions are marketed by PACE companies 
or local governments directly as a result of the proposal being 
finalized, consumers may benefit from such changes to the way PACE 
transactions are marketed. Many consumer protection issues identified 
in the comments responding to the ANPR are related to conduct by home 
improvement contractors. Either mandatory compliance with TILA's loan 
originator provisions by home improvement contractors, or a shift to 
marketing PACE transactions directly by PACE companies or local 
governments could ameliorate some of these issues.
    Finally, under TILA, certain additional protections apply to high-
cost mortgages as defined by HOEPA. High-cost mortgages generally 
include those that: (1) have an APR 6.5 or 8.5 percentage points higher 
than the APOR for a comparable transaction, depending on whether it is 
a first- or subordinate-lien mortgage; (2) have points and fees 
exceeding 5 percent of the total loan amount or the lesser of 8 percent 
of the total loan amount or $1,000 (adjusted annually for inflation), 
depending on the size of the transaction; or (3) include certain 
prepayment penalties.\310\ Few PACE transactions have appear to have 
APRs high enough to meet the first prong,\311\ and the Bureau 
understands that more recent PACE transactions generally do not include 
prepayment penalties, although certain early PACE contracts did include 
prepayment penalties. The PACE Report finds that about 35 percent of 
PACE transactions in the data the Report studies had up-front fees 
exceeding the relevant HOEPA points-and-fees threshold.\312\ However, 
this varied sharply by State, with over half of all PACE transactions 
in California having fees exceeding the threshold, compared to just 8 
percent of PACE transactions in Florida.\313\
---------------------------------------------------------------------------

    \310\ See TILA section 103(bb)(1)(A); 12 CFR 1026.32(a)(1).
    \311\ See PACE Report, supra note 12, at 15 (finding that 96 
percent of PACE transactions made between 2014 and 2020 had 
estimated APR-APOR spreads below 6.5 percent).
    \312\ Id. at Table 5.
    \313\ Id.
---------------------------------------------------------------------------

    Some of the requirements of HOEPA may be difficult for PACE 
companies to comply with. This could lead to PACE companies declining 
to make PACE transactions that would be high-cost mortgages. Given the 
variation in fees across States, it seems possible that PACE companies 
could make PACE transactions profitably with lower fees than they 
currently do. As a result, the Bureau expects that, if the proposal is 
finalized, PACE companies would reduce fees or interest rates on PACE 
transactions that would otherwise exceed HOEPA thresholds rather than 
declining to make a PACE transaction at all. This would impose costs on 
PACE companies and the affiliated local government entities in the form 
of lost revenue and will benefit PACE consumers by the same measure.
    PACE companies may also experience costs due to the requirements of 
Regulation Z with respect to higher-priced mortgage loans. Regulation Z 
generally requires creditors to obtain a written appraisal of the 
property to be mortgaged prior to consummating higher-priced mortgage 
loans if the amount of credit extended exceeds a certain threshold--
currently $31,000 in 2023--and to provide the consumer with a written 
copy of the appraisal.\314\ The PACE Report indicates that about a 
quarter of PACE transactions originated between June 2014 and July 2020 
had original principal amounts above that threshold, and moreover shows 
that most PACE transactions have APR-APOR spreads above the threshold 
for higher-priced mortgage loans.\315\ The Bureau understands that PACE 
companies typically do not obtain written appraisals for properties 
securing PACE transactions, relying instead on automated valuation 
models. Switching to written appraisals, or lowering loan amounts to be 
under the threshold, would impose costs on PACE companies. Consumers 
may also experience costs to the extent that the price of conducting an 
appraisal is passed on to them. The Bureau does not have data on the 
amount of these costs, and requests comment on this.
---------------------------------------------------------------------------

    \314\ See generally 12 CFR 1026.35(c); comment 35(c)(2)(ii)-3.
    \315\ See PACE Report, supra note 12, at Table 2, Table 5.
---------------------------------------------------------------------------

E. Potential Specific Impacts of the Proposed Rule on Access to Credit

    As discussed above, the proposal, if finalized, may reduce access 
to PACE credit. Potential PACE borrowers who cannot qualify for a PACE 
transaction due to the proposed ATR analysis will not have access to 
PACE credit. As also noted above, the PACE Report finds that the 
implementation of the 2018 California PACE Reforms, which included a 
required ability-to-pay analysis, resulted in a substantial reduction 
in new PACE transactions.\316\ Some of the decrease in California was 
likely due to increased denials of PACE applications, and some was 
likely due to reduced marketing of PACE transactions, such as reduced 
participation by home improvement contractors. It seems likely that, if 
the rule is finalized as proposed, a similar reduction would occur in 
other States. However, it is not clear how much of the reduction in 
PACE transactions in California was due to credit supply factors, 
versus reduced demand for PACE transactions. As discussed above, a 
substantial fraction of PACE transactions are paid off early, 
suggesting that at least some consumers who engage in a PACE 
transaction currently may not desire to have a long-term financial 
obligation. Some provisions of the proposed rule could prompt some 
consumers to avoid the transaction, which would reduce the volume of 
PACE transactions, but this would be due to a reduction in demand for 
credit, not a change in access to credit. In addition, consumers who 
have a PACE application denied, or who are not offered an opportunity 
to apply for a PACE transaction, may be able to access other forms of 
credit, potentially at more favorable APRs.
---------------------------------------------------------------------------

    \316\ Id. at 45.
---------------------------------------------------------------------------

    To the extent that the legal clarity provided by the proposal were 
to enable PACE financing to expand into additional States, this would 
increase access to PACE credit for consumers in those States.
    The Bureau quantifies the potential impacts of the proposal on 
access to credit in its discussion above in part IX.D where possible 
but seeks comment on this issue, particularly in the form of additional 
studies or data that might inform the potential impact of the proposal 
on access to credit.

[[Page 30428]]

F. Potential Specific Impacts on Consumers in Rural Areas and 
Depository Institutions With Less Than $10 Billion in Assets

    The proposed rule would not have a significant impact on consumers 
in rural areas. If anything, the proposed rule would impact consumers 
in rural areas less than consumers in non-rural areas. The PACE Report 
shows that consumers who take part in PACE transactions are less likely 
to live in rural areas than other consumers in their States. Moreover, 
the Report notes that California and Florida, the States with the most 
PACE lending to date, have the smallest and sixth-smallest rural 
population shares among all States, respectively.
    The Bureau understands that depository institutions of any size are 
not typically involved with PACE transactions, and thus the proposed 
rule would have no direct impact on such entities, regardless of asset 
size.

X. Regulatory Flexibility Act Analysis

    The Regulatory Flexibility Act (RFA) generally requires an agency 
to conduct an initial regulatory flexibility analysis (IRFA) and a 
final regulatory flexibility analysis of any rule subject to notice-
and-comment rulemaking requirements unless the agency certifies that 
the rule will not have a significant economic impact on a substantial 
number of small entities (SISNOSE).\317\ The Bureau is also subject to 
specific additional procedures under the RFA involving convening a 
panel to consult with small business representatives before proposing a 
rule for which an IRFA is required.\318\ As the below analysis shows, 
an IRFA is not required for this proposal because the proposal, if 
adopted, would not have a SISNOSE.\319\
---------------------------------------------------------------------------

    \317\ 5 U.S.C. 601 et seq.
    \318\ 5 U.S.C. 609.
    \319\ This analysis considers collectively the potential impacts 
of all aspects of the proposal on small entities, including both the 
affirmative proposed new requirements and the proposed revisions to 
the official commentary.
---------------------------------------------------------------------------

    Small entities, for purposes of the RFA, include both small 
businesses as defined by the Small Business Administration, and small 
government jurisdictions, defined as jurisdictions with a population of 
less than 50,000.\320\
---------------------------------------------------------------------------

    \320\ 5 U.S.C. 601(3), 601(5).
---------------------------------------------------------------------------

    For the reasons discussed below, the Bureau does not believe that 
the proposed rule will have a SISNOSE. While it is possible that the 
proposed rule would have a significant impact on some entities, based 
on the information available it appears that most of those entities are 
not ``small'' as defined by the RFA, and that any small entities that 
may be impacted, significantly or otherwise, are unlikely to constitute 
a substantial number of small entities.
    The Bureau understands that any economic impact from the proposed 
rule would primarily fall on PACE companies, as defined under proposed 
Sec.  1026.43(b)(14). Most of these entities are private firms. A small 
number of local government entities administer their own PACE programs, 
and may be affected in similar ways as PACE companies. The proposed 
rule may also have a direct economic impact on the local government 
entities that authorize PACE programs within their jurisdictions and 
are parties to the financing agreements but do not otherwise administer 
the originations, and it may also have a direct economic impact on the 
home improvement contractors who market PACE to consumers.
    The Bureau is aware of five entities that currently are 
administering PACE programs as commonly understood, including four 
private firms and one local government entity. Based on the information 
available to the Bureau, none of these entities currently are small 
entities. The local government entity that directly originates PACE 
transactions has population greater than 50,000.\321\
---------------------------------------------------------------------------

    \321\ Sonoma County operates its own PACE program, called Sonoma 
County Energy Independence Program. Sonoma County, California had 
population 485,887 in 2021, according to the Census Bureau. See U.S. 
Census Bureau, Annual Estimates of the Resident Population for 
Counties in California: April 1, 2020 to July 1, 2021, https://www2.census.gov/programs-surveys/popest/tables/2020-2021/counties/totals/co-est2021-pop-06.xlsx.
---------------------------------------------------------------------------

    For private firms, Small Business Administration (SBA) size 
standards differ by industry based on the 6-digit North American 
Industry Classification System (NAICS) industry code that represents 
the primary business of a firm.\322\ For private firms whose primary 
business is originating PACE transactions, the relevant SBA threshold 
is $47 million in annual receipts.\323\ The Bureau's understanding is 
that PACE companies' annual receipts for purposes of the SBA criteria 
are based on the principal balance of the financing obligations they 
originate in a given year.\324\ This is consistent with how PACE 
companies tend to describe the volume of their business.\325\
---------------------------------------------------------------------------

    \322\ The NAICS system is produced by a partnership between the 
Office of Management and Budget and partner agencies in Canada and 
Mexico, with the aim of providing a consistent framework for 
analyzing industry statistics.
    \323\ The SBA generally defines receipts as `` `total income' . 
. . plus `cost of goods sold', as these terms are defined and 
reported on Internal Revenue Service (IRS) tax return forms.'' The 
SBA provides that the classification should be based on a five-year 
average of receipts, with adjustments if a firm has been in business 
for less than five full fiscal years. See 13 CFR 121.104. PACE is a 
small and relatively new industry that began around 2008, and there 
is more than one 6-digit NAICS industry that could reasonably apply 
to PACE companies (the NAICS system is comprehensive, such that 
every firm should fit into exactly one 6-digit industry code). The 
6-digit NAICS industry codes that private PACE companies could 
arguably belong to include codes 522292 (Real Estate Credit), code 
522299 (International, Secondary Market, and All Other Nondepository 
Credit Intermediation), or code 523910 (Miscellaneous 
Intermediation). See U.S. Census Bureau, North American Industry 
Classification System 2022, https://www.census.gov/naics/?58967?yearbck=2022. For all these industries the SBA size threshold 
is $47 million in annual receipts. 13 CFR 121.201.
    \324\ This will somewhat undercount annual receipts, which would 
also include revenues the firms receive from the sale of PACE 
securities to the secondary market.
    \325\ See, e.g., Ygrene Energy Fund Inc., RE: Advanced Notice of 
Proposed Rulemaking on Residential Property Assessed Clean Energy 
(RIN 3170-AA84) (May 7, 2019) (describing the change in the volume 
of PACE assessments following the 2017 California PACE statute 
legislation in terms of the change in number of assessments and 
dollar value of those assessments).
---------------------------------------------------------------------------

    Based on the evidence available to the Bureau, it does not appear 
likely that any of the currently active private PACE companies averaged 
less than $47 million in annual receipts over the past five years.\326\ 
Moreover, even if some PACE companies are small entities, PACE 
companies would not represent a substantial number of the small 
entities in any of the industries they could reasonably be classified 
in, which have between hundreds and thousands of small firms.\327\ Even 
if all currently

[[Page 30429]]

operating PACE companies were small, they would not represent a 
substantial number within any of the relevant 6-digit NAICS industries.
---------------------------------------------------------------------------

    \326\ Although the data used in the Bureau's PACE Report did not 
identify revenue separately by individual companies, publicly 
available data from CAEATFA indicates that the currently active PACE 
companies generally averaged over $50 million in new PACE 
transactions in California alone between 2018 and 2020. See Cal. 
Alt. Energy & Advanced Transp. Fin. Auth., PACE Loss Reserve Program 
Enrollment Activity (Mar. 2021) https://www.treasurer.ca.gov/caeatfa/pace/activity.pdf. Moreover, the PACE Report shows that PACE 
lending in Florida exceeded that in California after 2018. 
Similarly, statistics from the PACE trade association indicate that 
the PACE industry made around $500 million in new PACE transactions 
in 2021. See PACE Nation, PACE Market Data (updated Dec. 31, 2021), 
https://www.pacenation.org/pace-market-data/. Even if these revenues 
were not evenly distributed among the four companies, it seems 
unlikely that any one company had revenues less than $47 million 
averaged over five years.
    \327\ The Bureau can determine the approximate number of small 
firms active in each industry through the 2017 Economic Census (the 
most recent version available at this writing), which gives counts 
of firms categorized by NAICS code and annual revenues. See U.S. 
Census Bureau, 2017 Economic Census, Finance and Insurance (NAICS 
Sector 52), Establishment and Firm Size Statistics, https://www.census.gov/data/tables/2017/econ/economic-census/naics-sector-52.html. The revenue categories in the public Economic Census data 
do not line up perfectly with the SBA size thresholds, but even 
excluding categories that overlap the threshold, the 2017 Economic 
Census indicates that there were at least 2,372 small firms in the 
Real Estate Credit industry, at least 1,725 small firms in the 
International, Secondary Market, and All Other Nondepository Credit 
Intermediation industry, at least 1,573 small firms in the All Other 
Nondepository Credit Intermediation industry and at least 6,715 in 
the Miscellaneous Intermediation industry.
---------------------------------------------------------------------------

    The Bureau also considered whether a substantial number of small 
government entities could experience a significant impact if this 
proposal were finalized. As noted above, the Bureau is only aware of 
one government entity that is currently acting as its own administrator 
to provide PACE financing as it is commonly understood, and it is not 
small under the RFA. However, other government entities authorize and 
oversee PACE programs, are parties to the financing agreements, and 
receive some revenues from the program.\328\ To the extent that the 
proposed rule could directly impact these other government entities, 
the Bureau must consider whether the proposed rule would create a 
significant economic impact on a substantial number of these entities.
---------------------------------------------------------------------------

    \328\ As discussed in part VII above, the Bureau understands 
that government entities are legally the ``creditor'' for purposes 
of the TILA requirements as implemented in Regulation Z. See 12 CFR 
1026.2(a)(17). However, for programs administered by PACE companies, 
in general the Bureau does not expect significant economic impact on 
these government entities from these provisions, as the Bureau 
expects that the private PACE companies will continue to administer 
origination activity on behalf of the government entities, such that 
most of the economic burden will fall on the private entities. As 
discussed above, an exception to this would be small government 
entities running programs that are not commonly understood as PACE 
but meet the definition of PACE financing under proposed 12 CFR 
1026.43(b)(15). Even in this case, the Bureau does not believe the 
rule would impose a significant economic impact, as such programs 
represent a small fraction of any given entity's overall revenue.
---------------------------------------------------------------------------

    As discussed above, under the RFA, government entities are small if 
they have populations of less than 50,000. The 19 States plus the 
District of Columbia which the Bureau understands currently have 
legislation authorizing PACE contained 17,209 total small governments, 
consisting of 715 counties, 7,716 incorporated places and 8,778 minor 
civil divisions.\329\ Of these small governments, currently, only small 
governments in California, Florida, and Missouri would be directly 
impacted by the proposed rule in any meaningful way because they are 
the only States with active PACE programs.\330\ There are exactly 2,000 
small government entities in those three States combined, consisting of 
134 counties, 1,583 incorporated places, and 283 minor civil districts. 
Even if all government entities in the three States were significantly 
impacted by the rule (which is unlikely, as not all local governments 
in those States sponsor PACE programs), this would be only about 11.6 
percent of small government entities in States with active PACE 
legislation, which the Bureau does not consider to be a substantial 
number. In addition, those small government entities that would be 
directly impacted by the proposed rule are unlikely to receive a 
significant proportion of their revenue from PACE financing, such that 
even eliminating this revenue stream would not cause a significant 
economic impact.\331\
---------------------------------------------------------------------------

    \329\ The States used for this calculation are Arkansas, 
California, Colorado, Connecticut, Florida, Georgia, Illinois, 
Maine, Maryland, Minnesota, Missouri, Nebraska, New Jersey, New 
Mexico, New York, Ohio, Rhode Island, Vermont, and Wyoming.
    \330\ See PACENation, PACE Programs, https://www.pacenation.org/pace-programs/ (``Residential PACE is currently offered in 
California, Florida, and Missouri.'') (last visited Mar. 16, 2023).
    \331\ The Bureau understands that local government entities are 
typically funded in large part by property taxes. Although the PACE 
Report finds that PACE assessments can nearly double property tax 
payments for individual homeowners, the Bureau understands that most 
of the revenue of those payments accrues to the investors in the 
resulting PACE bonds. Moreover, the vast majority of residential 
properties in any given jurisdiction do not have PACE assessments. 
As such, revenue related to PACE received by small government 
entities will typically be a small fraction of overall revenue.
---------------------------------------------------------------------------

    The proposed rule may impact the home improvement contractors who 
market and help originate PACE financing. Here again it appears that 
the rule would not directly impact a substantial number of small 
entities, even assuming that any small home improvement contractor 
would experience a significant economic impact. In the most recent 
Economic Census there were more than 233,000 small entities in the 
relevant NAICS codes for home improvement contractors.\332\ By 
comparison, there are currently approximately 2,000 firms registered in 
California as PACE solicitors.\333\ Even if all of these entities are 
small and there were a similar number of small entities acting as PACE 
solicitors in Missouri and Florida, this would be less than three 
percent of all relevant small entities, and so not a substantial 
number.\334\
---------------------------------------------------------------------------

    \332\ Home improvement contractors that serve as solicitors for 
PACE fall under NAICS industry codes 236118, (``Residential 
Remodelers''), 238150 (``Glass and glazing contractors''), 238160 
(``Roofing contractors''), 238170 (``Siding Contractors''), 238210 
(``Electrical contractors''), and 238220 (``Plumbing, heating, and 
air-conditioning contractors''). See U.S. Census Bureau, North 
American Industry Classification System 2022, https://www.census.gov/naics/?58967?yearbck=2022. The relevant SBA threshold 
for industry 236118 is $45 million per year in annual receipts; for 
the other industries the threshold is $19 million. 13 CFR 121.201. 
According to the 2017 Economic Census, these industries had at least 
70,000, 4,600, 14,000, 6,000, 58,000, and 81,000 small entities, 
respectively. See U.S. Census Bureau, 2017 Economic Census, 
Construction (NAICS Sector 23), Establishment and Firm Size 
Statistics, https://www.census.gov/data/tables/2017/econ/economic-census/naics-sector-23.html. The Economic Census data does not 
disaggregate firm counts by State at the 6-digit NAICS level.
    \333\ See Cal. Dep't of Fin. Prot. & Innovation, Enrolled PACE 
Solicitors Search (updated Feb. 27, 2023), https://dfpi.ca.gov/pace-program-administrators/pace-solicitor-search/?emrc=63ee970c63d06 for 
California's database of solicitors, however note that many 
companies are duplicated to the extent they are enrolled with 
multiple PACE companies. California law and regulation defines a 
``PACE solicitor'' as a person authorized by a program administrator 
to solicit a property owner to enter into an assessment contract. 
Cal. Fin. Code sec. 22017(a); see also 10 Cal. Code Regs. sec. 
1620.02(f).
    \334\ Limiting consideration to contractors operating in States 
with PACE legislation is not appropriate in this case. Unlike local 
governments, contractors can and do operate across State lines, so 
contractors currently operating in non-PACE States could possibly be 
affected by the proposed rule if finalized. As a result, it makes 
sense to consider all home improvement contractors as part of the 
total for purposes of the ``substantial number'' calculation. In 
addition, the Economic Census does not provide industry-level data 
disaggregated by State in a way that would allow the Bureau to 
determine the number of firms by industry and annual revenue.
---------------------------------------------------------------------------

    Accordingly, the Director hereby certifies that this proposal, if 
adopted, would not have a significant economic impact on a substantial 
number of small entities. Thus, neither an IRFA nor a small business 
review panel is required for this proposal. The Bureau requests comment 
on the analysis above and requests any relevant data.

XI. Paperwork Reduction Act

    The information collections contained within TILA and Regulation Z 
are approved under OMB Control Number 3170-0015. The current expiration 
date for this approval is May 31, 2023. The Bureau has determined that 
this proposed rule would not impose any new information collections or 
revise any existing recordkeeping, reporting, or disclosure 
requirements on covered entities or members of the public that would be 
collections of information requiring approval by the Office of 
Management and Budget under the Paperwork Reduction Act.

XII. Severability

    The Bureau preliminarily intends that, if any provision of the 
final rule, or any application of a provision, is stayed or determined 
to be invalid, the remaining provisions or applications are severable 
and shall continue in effect.

[[Page 30430]]

List of Subjects in 12 CFR Part 1026

    Consumer protection, Credit, Housing, Mortgage servicing, 
Mortgages, Truth-in-lending.

Authority and Issuance

    For the reasons set forth in the preamble, the CFPB proposes to 
amend Regulation Z, 12 CFR part 1026, as set forth below:

PART 1026--TRUTH IN LENDING ACT (REGULATION Z)

0
1. The authority citation for part 1026 continues to read as follows:

    Authority: 12 U.S.C. 2601, 2603-2605, 2607, 2609, 2617, 3353, 
5511, 5512, 5532, 5581; 15 U.S.C. 1601 et seq.

Subpart E--Special Rules for Certain Home Mortgage Transactions

0
2. Amend Sec.  1026.35 by adding paragraph (b)(2)(i)(E) to read as 
follows:


Sec.  1026.35  Requirements for higher-priced mortgage loans.

* * * * *
    (b) * * *
    (2) * * *
    (i) * * *
    (E) A PACE transaction, as defined in Sec.  1026.43(b)(15).
* * * * *
0
3. Amend Sec.  1026.37 by adding paragraph (p) to read as follows:


Sec.  1026.37  Content of disclosures for certain mortgage transactions 
(Loan Estimate).

* * * * *
    (p) PACE transactions. For PACE transactions as defined in Sec.  
1026.43(b)(15), the creditor must comply with the requirements of this 
section with the following modifications:
    (1) Escrow account. The creditor shall not disclose the information 
in paragraph (c)(2)(iii) of this section.
    (2) Taxes, insurance, and assessments. (i) In lieu of the 
information required by paragraph (c)(4)(iv), the creditor shall 
disclose a statement of whether the amount disclosed pursuant to 
paragraph (c)(4)(ii) of this section includes payments for the PACE 
transaction, labeled ``PACE Payment''; payments for other property 
taxes, labeled ``Property Taxes (not including PACE loan)''; amounts 
identified in Sec.  1026.4(b)(8); and other amounts described in 
paragraph (c)(4)(ii) of this section, along with a description of any 
such other amounts;
    (ii) In lieu of the information required by paragraph (c)(4)(v) and 
(vi), a statement that the PACE transaction, described as a ``PACE 
loan,'' will be part of the property tax payment and a statement 
directing the consumer, if the consumer has a pre-existing mortgage 
with an escrow account, to contact the consumer's mortgage servicer for 
what the consumer will owe and when.
    (3) Contact information. If the PACE company as defined in 12 CFR 
1026.43(b)(14) is not otherwise disclosed pursuant to paragraphs (k)(1) 
through (3) of this section, the creditor shall disclose the name, 
NMLSR ID (labeled ``NMLS ID/License ID''), email address, and telephone 
number of the PACE company (labeled ``PACE Company''). In the event the 
PACE company has not been assigned an NMLSR ID, the creditor shall 
disclose the license number or other unique identifier issued by the 
applicable jurisdiction or regulating body with which the PACE company 
is licensed and/or registered, with the abbreviation for the State of 
the applicable jurisdiction or regulatory body stated before the word 
``License'' in the label, if any.
    (4) Assumption. In lieu of the statement required by paragraph 
(m)(2) of this section, a statement that, if the consumer sells the 
property, the buyer or the buyer's mortgage lender may require the 
consumer to pay off the PACE transaction, using the term ``PACE loan'' 
as a condition of the sale, labeled ``Selling the Property.''
    (5) Late Payment. In lieu of the statement required by paragraph 
(m)(4) of this section:
    (i) A statement detailing any charge specific to the transaction 
that may be imposed for a late payment, stated as a dollar amount or 
percentage charge of the late payment amount, and the number of days 
that a payment must be late to trigger the late payment fee, labeled 
``Late payment,'' and
    (ii) For any charge that is not specific to the transaction:
    (A) A statement that, if the consumer's property tax payment is 
late, the consumer may be subject to penalties and late fees 
established by the consumer's property tax collector, and directing the 
consumer to contact the consumer's property tax collector for more 
information, or
    (B) A statement describing any charges that may result from 
property tax delinquency that are not specific to the PACE transaction. 
The statement may include dollar amounts or percentage charges and the 
number of days that a payment must be late to trigger the late payment 
fee.
    (6) Servicing. In lieu of the statement required by paragraph 
(m)(6) of this section, a statement that the consumer will pay the PACE 
transaction, using the term ``PACE loan,'' as part of the consumer's 
property tax payment, and a statement directing the consumer, if the 
consumer has a mortgage escrow account that includes the consumer's 
property tax payments, to contact the consumer's mortgage servicer for 
what the consumer will owe and when.
    (7) Exceptions--(i) Unit-period. Wherever form H-24(H) of appendix 
H uses ``annual'' to describe the frequency of any payments or the 
applicable unit-period, the creditor shall use the appropriate term to 
reflect the transaction's terms, such as semi-annual payments.
    (ii) PACE nomenclature. Wherever this section requires disclosure 
of the word ``PACE'' or form H-24(H) of appendix H to this part uses 
the term ``PACE,'' the creditor may substitute the name of a specific 
PACE financing program that will be recognizable to the consumer.
0
4. Amend Sec.  1026.38 by adding paragraph (u) to read as follows:


Sec.  1026.38  Content of disclosures for certain mortgage transactions 
(Closing Disclosure).

* * * * *
    (u) PACE transactions. For PACE transactions as defined in Sec.  
1026.43(b)(15), the creditor must comply with the requirements of this 
section with the following modifications:
    (1) Transaction information. In addition to the other disclosures 
required under paragraph (a)(4) of this section under the heading 
``Transaction Information,'' the creditor shall disclose the name of 
any PACE company involved in the transaction, labeled ``PACE Company.'' 
For purposes of this paragraph (u)(1), ``PACE company'' has the same 
meaning as in Sec.  1026.43(b)(14).
    (2) Projected payments. The creditor shall disclose the information 
required by paragraph (c)(1) of this section as modified by Sec.  
1026.37(p)(1) through (2) and shall omit the information required by 
paragraph (c)(2).
    (3) Assumption. In lieu of the information required by paragraph 
(l)(1) of this section, the creditor shall use the subheading ``Selling 
the Property'' and disclose the information required by Sec.  
1026.37(p)(4).
    (4) Late payment. In lieu of the information required by paragraph 
(l)(3) of this section, under the subheading ``Late Payment,'' the 
creditor shall disclose the information required by Sec.  
1026.37(p)(5).
    (5) Partial payment policy. In lieu of the information required by 
paragraph (l)(5) of the section, under the

[[Page 30431]]

subheading ``Partial Payments,'' the creditor shall disclose a 
statement directing the consumer to contact the mortgage servicer about 
the partial payment policy for the account if the consumer has a 
mortgage escrow account for property taxes and to contact the tax 
collector about the tax collector's partial payment policy if the 
consumer pays property taxes directly to the tax authority.
    (6) Escrow account. The creditor shall not disclose the information 
required by paragraph (l)(7) of this section.
    (7) Liability after foreclosure. The creditor shall not disclose 
the information required by paragraph (p)(3) of this section. If the 
consumer may be responsible for any deficiency after foreclosure or tax 
sale under applicable State law, the creditor shall instead disclose a 
brief statement that the consumer may have such responsibility, a 
description of any applicable protections provided under State anti-
deficiency laws, and a statement that the consumer should consult an 
attorney for additional information, under the subheading ``Liability 
after Foreclosure or Tax Sale.''
    (8) Contact information. If the PACE company is not otherwise 
disclosed pursuant to paragraph (r) of this section, the creditor shall 
disclose the information described in paragraph (r)(1)-(7) of this 
section for the PACE company, as defined in Sec.  1026.43(b)(14) (under 
the subheading ``PACE Company'').
    (9) Exceptions--(i) Unit-period. Wherever form H-25(K) of appendix 
H uses ``annual'' to describe the frequency of any payments or the 
applicable unit-period, the creditor shall use the appropriate term to 
reflect the transaction's terms, such semi-annual payments.
    (ii) PACE nomenclature. Wherever this section requires disclosure 
of the word ``PACE'' or form H-25(K) of appendix H to this part uses 
the term ``PACE,'' the creditor may substitute the name of a specific 
PACE financing program that will be recognizable to the consumer.
0
5. Amend Sec.  1026.41 by adding paragraph (e)(7) to read as follows:


Sec.  1026.41  Periodic statements for residential mortgage loans.

* * * * *
    (e) * * *
    (7) PACE transactions. PACE transactions, as defined in Sec.  
1026.43(b)(15), are exempt from the requirements of this section.
* * * * *
0
6. Amend Sec.  1026.43 by adding paragraphs (b)(14), (b)(15), and (i) 
to read as follows:


Sec.  1026.43  Minimum standards for transactions secured by a 
dwelling.

* * * * *
    (b) * * *
    (14) PACE company means a person, other than a natural person or a 
government unit, that administers the program through which a consumer 
applies for or obtains a PACE transaction.
    (15) PACE transaction means financing to cover the costs of home 
improvements that results in a tax assessment on the real property of 
the consumer.
* * * * *
    (i) PACE transactions. (1) For PACE transactions extended to 
consumers who pay their property taxes through an escrow account, in 
making the repayment ability determination required under paragraphs 
(c)(1) and (2) of this section, a creditor must consider the factors 
identified in paragraphs (c)(2)(i) through (viii) of this section and 
also must consider any monthly payments that the creditor knows or has 
reason to know the consumer will have to pay into any escrow account as 
a result of the PACE transaction that are in excess of the monthly 
payment amount considered under paragraph (c)(2)(iii) of this section, 
taking into account:
    (i) The cushion of one-sixth (\1/6\) of the estimated total annual 
payments attributable to the PACE transaction from the escrow account 
that the servicer may charge under 12 CFR 1024.17(c)(1), unless the 
creditor reasonably expects that no such cushion will be required or 
unless the creditor reasonably expects that a different cushion amount 
will be required, in which case the creditor must use that amount; and
    (ii) If the timing for when the servicer is expected to learn of 
the PACE transaction is likely to result in a shortage or deficiency in 
the consumer's escrow account, the expected effect of any such shortage 
or deficiency on the monthly payment that the consumer will be required 
to pay into the consumer's escrow account.
    (2) Notwithstanding paragraphs (e)(2), (e)(5), (e)(7), or (f) of 
this section, a PACE transaction is not a qualified mortgage as defined 
in this section.
    (3) For a PACE transaction, the requirements of this section apply 
to both the creditor and any PACE company that is substantially 
involved in making the credit decision. A PACE company is substantially 
involved in making the credit decision if it, as to a particular 
consumer, makes the credit decision, makes a recommendation as to 
whether to extend credit, or applies criteria used in making the credit 
decision. In the case of any failure by any such PACE company to comply 
with any requirement imposed under this section, section 130 of the 
Truth in Lending Act, 15 U.S.C. 1640, shall be applied with respect to 
any such failure by substituting ``PACE company'' for ``creditor'' each 
place such term appears in each such subsection.
0
7. Appendix H to part 1026 is amended by adding the entries for Model 
Forms H-24(H) and H-25(K) to read as follows:

Appendix H to Part 1026--Closed-End Model Forms and Clauses

* * * * *
H-24(H) Mortgage Loan Transaction Loan Estimate--Model Form for PACE 
Transactions
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* * * * *
H-25(K) Mortgage Loan Transaction Closing Disclosure--Model Form for 
PACE Transactions
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* * * * *
0
8. Amend Supplement I to Part 1026--Official Interpretations, as 
follows:
0
a. Under Section 1026.2--Definitions and Rules of Construction, in 
2(a)(14) Credit, revise comment 2(a)(14)1.ii;
0
b. Under Section 1026.37--Content of disclosures for certain mortgage 
transactions (Loan Estimate), add as a heading 37(p) PACE transactions 
and add the following comments: 37(p)(3) Contact information; 37(p)(5) 
Late payment; 37(p)(7) Form of disclosures--Exceptions; and 
37(p)(7)(ii) PACE nomenclature;
0
c. Under Section 1026.38--Content of disclosures for certain mortgage 
transactions (Closing Disclosure), add as headings 38(u) PACE 
transactions and (u)(9) Exceptions and add the following comment: 
38(u)(9)(ii) PACE Nomenclature;
0
d. Under Section 1026.43--Minimum standards for transactions secured by 
a dwelling,

[[Page 30440]]

0
i. in 43(b)(8) Mortgage-related obligations, revise comment 43(b)(8)-2,
0
ii. add as a heading 43(b)(14) PACE company and add comment 43(b)(14)-
1,
0
iii. in 43(c) Repayment ability, add comment 43(c)(2)(iv)-4, and revise 
comment 43(c)(3)-5; and
0
e. Under Appendix H--Closed-End Forms and Clauses, revise comment-30.
    The additions and revisions read as follows:

Supplement I to Part 1026--Official Interpretations

* * * * *
Section 1026.2--Definitions and Rules of Construction
* * * * *
    2(a)(14) Credit.
    1. Exclusions. The following situations are not considered 
credit for purposes of the regulation:
    i. * * *
    ii. Involuntary tax liens, involuntary tax assessments, court 
judgments, and court approvals of reaffirmation of debts in 
bankruptcy. However, third-party financing of such obligations (for 
example, a bank loan obtained to pay off an involuntary tax lien) is 
credit for purposes of the regulation.
* * * * *
Section 1026.37--Content of disclosures for certain mortgage 
transactions (Loan Estimate).
* * * * *
    37(p) PACE transactions.
    37(p)(3) Contact information.
    1. Section 1026.37(p)(3) requires disclosure of information 
about the PACE company if the PACE company is not otherwise 
disclosed pursuant to Sec.  1026.37(k)(1) through (3). For example, 
if a PACE company is a mortgage broker as defined in Sec.  
1026.36(a)(2), then the name of the PACE company is disclosed as a 
mortgage broker and the field for PACE company may be left blank. 
See comments 1026.37(k)-1 and-2 for more guidance.
    37(p)(5) Late payment.
    1. For purposes of Sec.  1026.37(p)(5), a charge is specific to 
the PACE transaction if the property tax collector does not impose 
the same charges for general property tax delinquencies.
    37(p)(7) Form of disclosures--Exceptions.
    37(p)(7)(ii) PACE nomenclature.
    1. Wherever Sec.  1026.37 requires disclosure of the word 
``PACE'' or form H-24(H) in appendix H uses the term ``PACE,'' Sec.  
1026.37(p)(7)(ii) permits a creditor to substitute an alternative 
name for the specific PACE financing program that will be 
recognizable to the consumer. For example, if the name XYZ Financing 
is used in marketing and branding a PACE transaction to the 
consumer, such that XYZ Financing will be recognizable to the 
consumer, the creditor may substitute the name XYZ Financing for 
PACE on the Loan Estimate.

Section 1026.38--Content of disclosures for certain mortgage 
transactions (Closing Disclosure).
* * * * *
    38(u)--PACE transactions
    38(u)(9) Exceptions.
    38(u)(9)(ii) PACE nomenclature.
    1. Wherever Sec.  1026.38 requires disclosure of the word 
``PACE'' or form H-25(K) in appendix H uses the term ``PACE,'' Sec.  
1026.38(u)(9)(ii) permits a creditor to substitute an alternative 
name for the specific PACE financing program that will be 
recognizable to the consumer. For example, if the name XYZ Financing 
is used in marketing and branding a PACE transaction to the 
consumer, such that XYZ Financing will be recognizable to the 
consumer, the creditor may substitute the name XYZ Financing for 
PACE on the Closing Disclosure.
* * * * *
Section 1026.43--Minimum standards for transactions secured by a 
dwelling
* * * * *
    43(b)(8) Mortgage-related obligations.
* * * * *
    2. Property taxes. Section 1026.43(b)(8) includes property taxes 
in the evaluation of mortgage-related obligations. Obligations that 
are related to the ownership or use of real property and paid to a 
taxing authority, whether on a monthly, quarterly, annual, or other 
basis, are property taxes for purposes of Sec.  1026.43(b)(8). 
Section 1026.43(b)(8) includes obligations that are equivalent to 
property taxes, even if such obligations are not denominated as 
``taxes.'' For example, governments may establish or allow 
independent districts with the authority to impose levies on 
properties within the district to fund a special purpose, such as a 
local development bond district, water district, or other public 
purpose. These levies may be referred to as taxes, assessments, 
surcharges, or by some other name. For purposes of Sec.  
1026.43(b)(8), these are property taxes and are included in the 
determination of mortgage-related obligations. Any payments for pre-
existing PACE transactions are considered property taxes for 
purposes of Sec.  1026.43(b)(8).
* * * * *
    43(b)(14) PACE company.
    1. Indicia of whether a person administers a PACE financing 
program for purposes of Sec.  1026.43(b)(14) include, for example, 
marketing PACE financing to consumers, developing or implementing 
policies and procedures for the origination process, being 
substantially involved in making a credit decision, or extending an 
offer to the consumer.
* * * * *
    43(c) Repayment ability.
* * * * *
    43(c)(2) Basis for determination.
* * * * *
    Paragraph 43(c)(2)(iv).
* * * * *
    4. Knows or has reason to know--PACE transaction. In addition to 
the guidance provided under comment 43(c)(2)(iv)-2, a creditor 
originating a PACE transaction knows or has reason to know of any 
simultaneous loans that are PACE transactions if the transactions 
are included in any existing database or registry of PACE 
transactions that includes the geographic area in which the property 
is located and to which the creditor has access.
* * * * *
    43(c)(3) Verification using third-party records.
* * * * *
    5. Verification of mortgage-related obligations. Creditors must 
make the repayment ability determination required under Sec.  
1026.43(c)(2) based on information verified from reasonably reliable 
records. For general guidance regarding verification see comments 
43(c)(3)-1 and -2, which discuss verification using third-party 
records. With respect to the verification of mortgage-related 
obligations that are property taxes required to be considered under 
Sec.  1026.43(c)(2)(v), a record is reasonably reliable if the 
information in the record was provided by a governmental 
organization, such as a taxing authority or local government. The 
creditor complies with Sec.  1026.43(c)(2)(v) by relying on property 
taxes referenced in the title report if the source of the property 
tax information was a local taxing authority. A creditor that knows 
or has reason to know that a consumer has an existing PACE 
transaction does not comply with Sec.  1026.43(c)(2)(v) by relying 
on information provided by a governmental organization, either 
directly or indirectly, if the information provided does not reflect 
the PACE transaction. With respect to other information in a record 
provided by an entity assessing charges, such as a homeowners 
association, the creditor complies with Sec.  1026.43(c)(2)(v) if it 
relies on homeowners association billing statements provided by the 
seller. Records are also reasonably reliable if the information in 
the record was obtained from a valid and legally executed contract. 
For example, the creditor complies with Sec.  1026.43(c)(2)(v) by 
relying on the amount of monthly ground rent referenced in the 
ground rent agreement currently in effect and applicable to the 
subject property. Records, other than those discussed above, may be 
reasonably reliable for purposes of Sec.  1026.43(c)(2)(v) if the 
source provided the information objectively.
* * * * *
Appendix H--Closed-End Forms and Clauses
* * * * *
    30. Standard Loan Estimate and Closing Disclosure forms. Forms 
H-24(A) through (H), H-25(A) through (K), and H-28(A) through (J) 
are model forms for the disclosures required under Sec. Sec.  
1026.37 and 1026.38. However, pursuant to Sec. Sec.  1026.37(o)(3) 
and 1026.38(t)(3), for federally related mortgage loans forms H-
24(A) through (H) and H-25(A) through (K) are standard forms 
required to be used for the disclosures required under Sec. Sec.  
1026.37 and 1026.38, respectively.
* * * * *

Rohit Chopra,
Director, Consumer Financial Protection Bureau.
[FR Doc. 2023-09468 Filed 5-10-23; 8:45 am]
BILLING CODE 4810-AM-P

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