Residential Property Assessed Clean Energy Financing (Regulation Z), 2434-2548 [2024-30628]
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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)
Consumer Financial Protection
Bureau.
ACTION: Final rule.
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 final rule, the CFPB
implements EGRRCPA section 307 and
amends Regulation Z to address how
TILA applies to PACE transactions.
DATES: This final rule is effective March
1, 2026.
FOR FURTHER INFORMATION CONTACT:
George Karithanom, Regulatory
Implementation and Guidance Program
Analyst, Office of Regulations, at 202–
435–7700 or https://reginquiries.
consumerfinance.gov/. If you require
this document in an alternative
electronic format, please contact CFPB_
Accessibility@cfpb.gov.
SUPPLEMENTARY INFORMATION:
SUMMARY:
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Abbreviations
The following abbreviations are used
in this final rule:
• APOR = Average Prime Offer Rate
• APR = Annual Percentage Rate
• Board = Board of Governors of the Federal
Reserve System
• CAEATFA = California Alternative Energy
and Advanced Transportation Financing
Authority
• California DFPI = California Department of
Financial Protection and Innovation
• CARES Act = Coronavirus Aid, Relief, and
Economic Security Act
• EGRRCPA = Economic Growth, Regulatory
Relief, and Consumer Protection Act
• FDIC = Federal Deposit Insurance
Corporation
• FHA = Federal Housing Administration
• FHFA = Federal Housing Finance Agency
• FRFA = Final Regulatory Flexibility
Analysis
• FTC = Federal Trade Commission
• HOEPA = Home Ownership and Equity
Protection Act
• HUD = U.S. Department of Housing and
Urban Development
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• IRFA = Initial Regulatory Flexibility
Analysis
• LTV = Loan to Value
• OCC = Office of the Comptroller of the
Currency
• NCUA = National Credit Union
Administration
• NEPA = National Environmental Policy
Act
• NPRM = Notice of Proposed Rulemaking
• PACE = Property Assessed Clean Energy
• PACE Report = Property Assessed Clean
Energy (PACE) Financing and Consumer
Financial Outcomes, a CFPB report
published on May 1, 2023
• RESPA = Real Estate Settlement
Procedures Act
• RFA = Regulatory Flexibility Act
• TILA = Truth in Lending Act
I. Summary of the Final Rule
Section 307 of the Economic Growth,
Regulatory Relief, and Consumer
Protection Act (EGRRCPA) directs the
CFPB to prescribe ability-to-repay rules
for Property Assessed Clean Energy
(PACE) financing and to apply the civil
liability provisions of the Truth in
Lending Act (TILA) for violations.1 In
this final rule, the CFPB implements
EGRRCPA section 307 and amends
Regulation Z to address the application
of TILA to ‘‘PACE transactions’’ as
defined in § 1026.43(b)(15).
This final rule:
• Clarifies an existing exclusion to
Regulation Z’s definition of credit that
relates to tax liens and tax assessments.
Specifically, the CFPB is clarifying that
the commentary’s exclusion of tax liens
and tax assessments from being
‘‘credit,’’ as defined in § 1026.2(a)(14),
applies only to involuntary tax liens and
involuntary tax assessments.
• Makes a number of adjustments to
the requirements for Loan Estimates and
Closing Disclosures under §§ 1026.37
and 1026.38 that will apply when those
disclosures are provided for PACE
transactions, including:
Æ Eliminating certain fields relating
to escrow account information;
Æ Requiring the disclosure of other
fees and amounts not included in the
principal and interest on the projected
payments table in place of disclosure of
mortgage insurance premiums;
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
1 15
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will replace disclosures on the current
forms, including disclosures relating to
assumption, late payment, servicing,
partial payment policy, and the
consumer’s liability after foreclosure;
and
Æ Clarifying how unit-periods will be
disclosed for PACE transactions.
• Provides new model forms under
H–24(H) and H–25(K) of appendix H for
the Loan Estimate and Closing
Disclosure, respectively, specifically
designed for PACE transactions, as well
as Spanish translations of those model
forms under H–28(K) for the Loan
Estimate and H–28(L) for the Closing
Disclosure.
• Exempts PACE transactions from
the requirement to establish escrow
accounts for certain higher-priced
mortgage loans, under
§ 1026.35(b)(2)(i)(E).
• Exempts PACE transactions from
the requirement to provide periodic
statements, under § 1026.41(e)(7).
• Applies Regulation Z’s ability-torepay requirements in § 1026.43 to
PACE transactions with a number of
adjustments to account for the unique
nature of PACE financing, including
requiring PACE creditors to consider
certain monthly payments that they
know or have reason to know the
consumer will have to pay into the
consumer’s escrow account as an
additional factor when making a
repayment ability determination for
PACE transactions extended to
consumers who pay their property taxes
through an escrow account on their
existing mortgage.
• Provides that a PACE transaction is
not a qualified mortgage as defined in
§ 1026.43.
• Extends the ability-to-repay
requirements, as well as TILA section
130, to any ‘‘PACE company,’’ as
defined in § 1026.43(b)(14), that is
substantially involved in making the
credit decision for a PACE transaction.
• Provides clarification regarding
how PACE and non-PACE mortgage
creditors should consider pre-existing
PACE transactions when originating
new mortgage loans.
II. Background
A. PACE Financing Market Overview
How does PACE financing work?
PACE financing enables property
owners to finance upgrades to real
property through an assessment on their
real property.2 Eligible upgrade types
2 Some States authorize PACE financing for
residential and commercial property. In this final
rule, the term PACE financing refers only to
residential PACE financing unless otherwise
indicated.
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vary by locality but often include
upgrades to promote energy efficiency
or to help prepare for natural disasters.
The voluntary financing agreements are
made between the consumer and the
consumer’s local government or a
government entity operating with the
authority of several local governments,3
and they leverage the property tax
system for administration of payments.
PACE financing is repaid through the
property tax system alongside the
consumer’s other property tax payment
obligations. PACE loans are typically
collected through the same process as
real property taxes.4 Local governments
typically fund PACE loans through bond
issuance. PACE assessments are
sometimes collateralized and sold as
securitized obligations.
PACE loans are secured by a lien on
the consumer’s real property. The liens
securing PACE loans typically have
priority under State law similar to that
of other real property tax liens, which
are superior to other mortgage liens on
the property, including those that
predated the PACE lien.5 In a
foreclosure sale, this super-priority lien
position means that any amount due on
the PACE loan is paid with the
foreclosure sale proceeds before any
proceeds will flow to other liens. The
PACE loan is tied to the property, not
the property owner. As such, the
repayment obligation remains with the
property when property ownership
transfers unless paid off at the time of
sale.
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
3 Although PACE financing programs may be
sponsored by individual local governments, many
are sponsored by intergovernmental organizations
whose membership consists of multiple local
governments.
4 See, e.g., Cal. Sts. & Hwys. Code sec. 5898.30;
Fla. Stat. sec. 163.081(1)(e); Fla. Stat. sec.
197.3632(8)(a); Mo. Stat. sec. 67.2815(5).
5 See, e.g., Cal. Sts. & Hwys. Code sec. 5898.30
(providing for ‘‘the collection of assessments in the
same manner and at the same time as the general
taxes of the city or county on real property, unless
another procedure has been authorized by the
legislative body or by statute . . . .’’); Fla. Stat. sec.
163.081(7) (‘‘The recorded agreement must provide
constructive notice that the non-ad valorem
assessment to be levied on the property constitutes
a lien of equal dignity to county taxes and
assessments from the date of recordation.’’).
However, authorizing statutes in some States
provide for subordinated-lien status for PACE
financing. See, e.g., Minn. Stat. sec. 216C.437(4);
Me. Stat. tit. 35A sec. 10156(3), (4); 24 V.S.A. sec.
3255(b). The CFPB understands that there has been
little to no loan volume in these programs. See, e.g.,
Efficiency Maine, FY2024 Annual Report, at 40,
https://www.efficiencymaine.com/docs/FY2024Annual-Report.pdf.
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operations, including tasks such as
marketing PACE financing to
consumers, training home improvement
contractors to sell PACE financing to
consumers, overseeing originations,
performing underwriting, and making
decisions about whether to extend the
loan. The PACE companies may also
contract with third-party companies to
administer different aspects of the loans
after origination. Often, PACE
companies purchase PACE bonds that
are issued by local governments to fund
the programs, which generate revenue
for the PACE companies from interest
on consumer payments. PACE
companies are also sometimes involved
in securitizing the bond obligations for
sale as asset-backed securities.
Additionally, PACE companies
frequently earn various fees related to
the transactions.6
PACE companies often rely heavily on
home improvement contractors to sell
PACE loans to consumers and facilitate
their origination. Home improvement
contractors frequently market PACE
financing directly to consumers while
selling their home improvement
services, often door-to-door. They often
serve as the primary point of contact
with consumers during the origination
process and collect application
information that the PACE companies
use to make underwriting and eligibility
determinations. The contractors may
also deliver disclosures relating to the
PACE transaction and obtain the
consumer’s signature on the financing
agreement.
Origin and Growth of PACE Programs
In 2008, California passed Assembly
Bill no. 811 to enable the first PACE
programs. The CFPB is aware of 19
States plus the District of Columbia that
currently have enabling legislation for
residential PACE financing programs,
but only a small number of States have
had active programs, primarily
California, Florida, and Missouri.7
During the early years of PACE
financing, lending activity appears to
6 See, e.g., Energy Programs Consortium, R–PACE,
Residential Property Assessed Clean Energy, A
Primer for State and Local Energy Officials (Mar.
2017), https://web.archive.org/web/
20201030223231/http:/www.energyprograms.org/
wp-content/uploads/2017/03/R-PACE-PrimerMarch-2017.pdf.
7 There has been pilot program activity for
residential PACE financing in some States. See, e.g.,
DevelopOhio, Lucas County PACE program benefits
homeowners (Aug. 16, 2019), https://
www.brickergraydon.com/DevelopOhio/LucasCounty-PACE-program-benefits-homeowners. Some
States that previously authorized residential PACE
financing programs have amended their statutes
such that PACE financing is no longer authorized
for single-family residential properties. See, e.g.,
2021 Wis. Act 175 (codified at Wis. Stat. sec.
66.0627).
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2435
have been relatively limited, with
cumulative obligations of around $200
million through 2013.8 In 2014, PACE
financing activity accelerated, peaking
in 2016 with over $1.7 billion in
investment.9 This level of activity was
maintained in 2017, but it declined
between 2018 and 2021, dropping to an
average investment of $769 million per
year during those years.10 Overall, as of
December 31, 2023, the PACE financing
industry had financed 371,000 home
upgrades, totaling over $9.1 billion.11
Common Financing Terms
According to data analyzed in a report
that the CFPB released concurrently
with its PACE proposal (PACE Report),
the term of PACE loans that were
originated between July 2014 and
December 2019 was most often 20 years,
but ranged between five and 30 years.12
The Report also finds that the interest
rates for those loans clustered around 7
to 8 percent with annual percentage
rates (APRs) averaging approximately a
percentage point higher.13 For reference,
the average prime offer rate for primary
mortgage loans was around 3.5 percent
for most of the period studied in the
PACE Report.14 Fees vary by PACE
program, but the CFPB has reviewed
agreements that include fees for
application, origination, tax
administration, lien recordation, title,
escrow, bond counsel, processing,
underwriting, and fund disbursement.
The CFPB is not aware of any PACE
obligations that are open-end or have a
negative-amortization feature.
Consumer Protection Concerns
The structure of PACE transactions
carries certain unique risks for
consumers. Primarily, the risks are due
to the fact that PACE companies and
secondary-market participants face very
low repayment risk, regardless of
whether consumers can repay.15 If a
8 See PACENation, Market Data, https://
www.pacenation.org/pace-market-data/ (last visited
Mar. 30, 2023).
9 See id.
10 See id. The latest data available on the PACE
financing industry trade association’s website is for
2023.
11 See id.
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
II.B.
13 Id.
14 See id. at 13.
15 See, e.g., Morningstar, DBRS, Rating U.S.
Property Assessed Clean Energy (PACE)
Securitizations, Aug. 2024, at 19, 20, app. A
(‘‘Given the seniority of the amortizing PACE lien
and corresponding low [loan-to-value], in the vast
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house with a PACE lien is sold through
foreclosure or tax sale, the sale proceeds
are generally assured to cover the
outstanding amounts owed on the PACE
transaction because PACE loan amounts
are a fraction of the value of the
property, the loans do not accelerate,
and the super-priority lien means that
amounts due are paid before other
mortgage debts. Additionally, because
PACE loans do not accelerate, the
remaining balance will stay with the
property for the next homeowner to pay
under the terms of the original financing
agreement.
Consumer groups have stated that
PACE companies and home
improvement contractors originate
PACE loans quickly, often on the spot,
without regard to affordability or
consumer understanding. They have
reported to the CFPB, including in
comments to the proposed rule,
deceptive sales tactics, aggressive sales
practices, and fraud. A number of PACE
industry stakeholders acknowledged in
comments to the proposal that some
consumers experienced mistreatment
before many of the current consumer
protection laws and practices were put
in place.
Consumer advocates have criticized
other aspects of PACE financing as well,
such as the high cost of funding
compared to other mortgage debt,
excessive capitalized fees, and
inadequate disclosures. They have
argued that these aspects of PACE
transactions can cause unexpected and
unaffordable tax payment spikes that
can lead to delinquency, late fees, tax
defaults, and foreclosure actions.16
majority of cases, we typically assume the
liquidation proceeds from a foreclosure sale are
sufficient to bring the [residential] PACE
Assessment current. Based on this assumption, a
main credit risk to [residential] PACE ABS
transactions is a delay in cash flow receipts related
to nonpayment of the R–PACE Assessments over
some period of time. . . . For [residential] PACE
Assessments that go through the foreclosure
process, once the process has concluded and the
property sold, the [residential] PACE Assessment is
typically considered reperforming/performing, and
collections resume according to the original
amortization schedule. Furthermore, the new
property owner is subject to subsequent to default.
The same process is then applied to the second and
subsequent round of delinquency until the
[residential] PACE Assessments are paid in full.’’).
16 See, e.g., Nat’l Consumer L. Ctr., Residential
(PACE) Loans: The Perils of Easy Money for Clean
Energy Improvements (Sept. 2017), https://
www.nclc.org/images/pdf/energy_utility_telecom/
pace/ib-pace-stories.pdf; see also Off. of the Dist.
Att’y, Cnty. of Riverside, News Release, District
Attorneys Announce $4 Million Consumer
Protection Settlement (Aug. 9, 2019), https://
rivcoda.org/community-info/news-media-archives/
district-attorneys-announce-4-million-consumerprotection-settlement; Kirsten Grind, America’s
Fastest-Growing Loan Category Has Eerie Echoes of
Subprime Crisis, Wall St. J. (Jan. 10, 2017), https://
www.wsj.com/articles/americas-fastest-growing-
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Some local officials have echoed some
of these concerns in discussions with
CFPB staff.
The CFPB’s PACE Report, discussed
under parts II.B and VI.C, bears out
some of these concerns. According to
the Report, PACE loans originated
between 2014 and 2019 increased
consumers’ property tax bills by about
$2,700 per year on average, an average
increase of about 88 percent.17 The
Report also finds that getting a PACE
loan increased mortgage delinquency
rates for consumers who had a preexisting non-PACE mortgage by 2.5
percentage points over a two-year
period following the PACE origination,
which represents an increased risk of a
mortgage delinquency by about 35
percent over two years.18
Additionally, consumer advocates
have expressed concern that some home
improvement contractors involved in
the origination of PACE transactions
provide consumers with misleading
information about potential energy
savings or promote the most expensive
energy improvements, regardless of
their actual energy conservation
benefits.19 They have noted that such
practices could result in homeowners
receiving a smaller reduction in their
utility bills than anticipated, making
PACE financing payments more difficult
to afford. Consumer advocates have also
alleged that PACE financing is
disproportionately targeted at older
Americans, consumers with limited
English proficiency or lower incomes,
and consumers in predominantly Black
or Hispanic neighborhoods.
These advocates and mortgageindustry stakeholders have also
highlighted that, although a PACE loan
technically remains with the property at
sale, most home buyers are unwilling to
take on the remaining payment
obligation for a PACE lien, or their
mortgage lender prohibits them from
doing so.20 Consumer advocates have
loan-category-has-eerie-echoes-of-subprime-crisis1484060984.
17 See PACE Report at 4.
18 See id. at 3.
19 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
(Feb. 2021), https://www.law.berkeley.edu/wpcontent/uploads/2021/02/ELC_PACE_DARK_SIDE_
RPT_2_2021.pdf.
20 See Freddie Mac, Purchase and ‘‘no cash-out’’
refinance Mortgage requirements (Mar. 31, 2022),
https://guide.freddiemac.com/app/guide/section/
4301.4. As of February 2023, guidelines from both
Fannie Mae and Freddie Mac generally prohibit
purchase of mortgages on properties with
outstanding first-lien PACE obligations. Similarly,
the Federal Housing Administration (FHA) updated
its handbook requirements in 2017 to prohibit
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reported that PACE consumers are often
unaware of these issues when agreeing
to the financing, which causes an
unanticipated financial burden when
consumers are required to pay off the
PACE loan to complete a home sale.
Mortgage industry stakeholders have
also asserted in comments to the
proposal and through other
communications that PACE financing
introduces risk to the mortgage market,
as PACE liens take priority over preexisting mortgage liens.21
Since 2015, the CFPB has received
over 125 complaints related to PACE
financing, primarily from consumers in
California and Florida. Many of the
complaints allege fraud, deceptive
practices, overly high costs, or trouble
with refinancing the consumer’s home.
Twenty-eight of the complaints involve
older adults, and five of the complaints
involve consumers with limited English
proficiency. Consumer advocates have
suggested that consumers may not be
aware of their ability to submit PACE
complaints to the CFPB database or may
have had difficulty categorizing them,
which may have resulted in a lower
number of complaints reported.
Consumers in California are also able to
submit complaints to their State PACE
regulator and submitted 313 such
complaints between 2020 and 2022
alone.22
In August 2019, Renovate America,
Inc. (Renovate), a major PACE company
at the time, reached a $4 million
settlement with six counties and one
city in California.23 The complaint, filed
in State court, alleged that Renovate
misrepresented the PACE program or
failed to make adequate disclosures
insurance of mortgage on properties with
outstanding first-lien PACE obligations. See U.S.
Dept. of Hous. & Urb. Dev., Property Assessed Clean
Energy (PACE) (Dec. 7, 2017), https://www.hud.gov/
sites/dfiles/OCHCO/documents/17-18ml.pdf.
21 See, e.g., Fed. Hous. Fin. Agency (FHFA),
FHFA Statement on Certain Energy Retrofit Loan
Programs (July 6, 2010), https://www.fhfa.gov/news/
statement/fhfa-statement-on-certain-energy-retrofitloan-programs; 85 FR 2736, FHFA Notice and
Request for Input on PACE Financing (Jan. 16,
2020); Joint Letter from Mortgage Trade Assocs. to
FHFA Director Mark Calabria (Mar. 16, 2020),
https://www.housingpolicycouncil.org/_files/ugd/
d315af_6cb569a5427f4e26ab4ef4d55038b3f6.pdf.
22 Cal. Dep’t of Fin. Prot. & Innovation, Annual
Report of Operation of Finance Lenders, Brokers,
and PACE Administrators Licensed Under the
California Financing Law, at 41 (Aug. 2023) https://
dfpi.ca.gov/wp-content/uploads/sites/337/2024/01/
2022-Annual-Report-CFL-Aggregated.pdf.
23 See Riverside Cnty. Dist. Att’y, District
Attorneys Announce $4 Million Consumer
Protection Settlement With ‘‘PACE’’ Program
Administrator Renovate America, Inc. (Aug. 9,
2019), https://rivcoda.org/community-info/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).
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about key aspects of the program,
including its government affiliation, tax
deductibility, transferability of ethe
obligations to subsequent property
owners, financing costs, and Renovate’s
contractor verification policy.24
Subsequently, in June 2021, the
California State PACE regulator moved
to revoke Renovate’s Administrator
license, required to administer a PACE
program in the State, after finding that
one of its solicitors repeatedly
defrauded homeowners in San Diego
County.25 Renovate ultimately
consented to the revocation.26
In October 2022, Ygrene Energy Fund
Inc. (Ygrene), a major PACE company,
reached a $22 million settlement with
the Federal Trade Commission (FTC)
and the State of California over
allegations regarding its conduct in the
PACE marketplace.27 In a joint
complaint, the FTC and California
alleged that Ygrene deceived consumers
about the potential financial impact of
its financing and unfairly recorded liens
on consumers’ homes without their
consent.28 The complaint further
alleged that Ygrene and its contractors
falsely told consumers that PACE
financing would not interfere with the
sale or refinancing of their homes and
used high-pressure sales tactics and
even forgery to enroll consumers into
PACE programs.29
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
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24 Id.
25 See Cal. Dep’t of Fin. Prot. & Innovation, DFPI
Moves to Revoke PACE Administrator’s License
After Finding Its Solicitor Defrauded Homeowners
(June 4, 2021), https://dfpi.ca.gov/press_release/
dfpi-moves-to-revoke-pace-administrators-licenseafter-finding-its-solicitor-defrauded-homeowners/.
26 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.-Settlement-Agreement.
pdf?emrc=090ca0.
27 See Fed. Trade Comm’n, FTC, California Act to
Stop Ygrene Energy Fund from Deceiving
Consumers about PACE Financing, Placing Liens on
Homes Without Consumers’ Consent (Oct. 28,
2022), https://www.ftc.gov/news-events/news/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.
28 Id.
29 Id.
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hardening, and electric vehicle charging
infrastructure measures.30 Since 2008,
California has passed several laws to
add and adjust consumer protections for
PACE programs, with major additions in
a series of amendments that took effect
around 2018 (collectively, 2018
California PACE Reforms). Current
California law requires that, before
executing a PACE contract, PACE
program administrators must make a
determination that the consumer has a
reasonable ability to pay the annual
payment obligations based on the
consumer’s income, assets, and current
debt obligations.31 California law also
requires, among other protections,
financial disclosures prior to
consummation; 32 a three-day right to
cancel, which is extended to five days
for older adults; 33 mandatory
confirmation-of-terms calls; 34 and
restrictions on contractor
compensation.35 Additionally,
California law imposes certain financial
requirements for consumers to be
eligible for PACE financing, including
that consumers must be current on their
property taxes and mortgage and
generally not have been party to a
bankruptcy proceeding within the
previous four years.36 There is also a
maximum permissible loan-to-value
ratio for PACE financing under
California law.37 California law exempts
government agencies from some of these
requirements.38
As part of the 2018 California PACE
Reforms, California significantly
increased the role of what is now called
California’s Department of Financial
Protection and Innovation (DFPI).39 In
2019, the DFPI began licensing PACE
program administrators and
subsequently promulgated rules
implementing some of California’s
statutory PACE provisions, which
became effective in 2021.40 DFPI also
has certain examination, investigation,
and enforcement authorities over PACE
30 See,
e.g., Cal. Sts. & Hwys. Code secs. 5898.12,
5899, 5899.3.
31 Cal. Fin. Code secs. 22686 & 22687.
32 Cal. Sts. & Hwys. Code sec. 5898.17.
33 Cal. Sts. & Hwys. Code secs. 5898.16–.17.
34 Cal. Sts. & Hwys. Code sec. 5913.
35 Cal. Sts. & Hwys. Code sec. 5923.
36 Cal. Fin. Code sec. 22684(a), (d)–(e).
37 Cal. Fin. Code sec. 22684(h).
38 Cal. Fin. Code sec. 22018(a) (exempting public
agencies from the definition of ‘‘program
administrator’’ that is subject to the ability-to-pay
requirements set forth under Cal. Fin. Code sec.
22687).
39 Cal. AB 1284 (2017–2018), Cal. SB 1087 (2017–
2018).
40 10 Cal. Code Regs. sec.1620.01 et seq.
California law uses the term ‘‘program
administrator’’ to refer to companies that are
referred to here as PACE companies. See Cal. Fin.
Code sec. 22018.
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program administrators, solicitors, and
solicitor agents.41
PACE program administrators must be
licensed by the DFPI under the
California law. They must also establish
and maintain processes for the
enrollment of PACE solicitors and
solicitor agents, including training and
background checks.42 PACE program
administrators are required to annually
share certain operational data with
DFPI.43 DFPI compiles the data in
annual reports on PACE lending in
California, which provide aggregated
information on PACE loans, PACE
program administrators and solicitors,
and consumer complaints.44
Florida
Florida authorized PACE programs in
2010 to finance projects related to
energy conservation and efficiency
improvements, renewable energy
improvements, and wind resistance
improvements.45 The State imposed
additional consumer protections for
PACE transactions, which took effect
July 2024 after the CFPB issued the
proposed rule.46 Florida law imposes
certain financial requirements to be
eligible for PACE financing, including
that consumers must be current on their
property taxes and all mortgage debts on
the property and have not been subject
to bankruptcy proceedings within the
preceding five years.47 It also includes
a maximum loan-to-value ratio,48
requires disclosures about PACE loans
and the terms of the PACE transaction,49
and requires that the estimated annual
payment amount for all PACE loans on
a property does not exceed 10 percent
of the property owner’s annual
household income.50 Additionally,
Florida law requires that the property
owner provide holders or servicers of
any existing mortgages secured by the
property with notice of their intent to
enter into a PACE financing agreement
41 Cal. Fin. Code sec. 22690. California law uses
the term ‘‘PACE solicitor’’ and ‘‘PACE solicitor
agent’’ to refer to persons authorized by program
administrators to solicit property owners to enter
into PACE assessment contracts, often home
improvement contractors. See Cal. Fin. Code sec.
22017(a)–(b).
42 Cal. Fin. Code secs. 22680–82.
43 Cal. Fin. Code sec. 22692.
44 See, e.g., Cal. Dep’t of Fin. Prot. & Innovation,
Annual Report of Operation of Finance Lenders,
Brokers, and PACE Administrators Licensed Under
the California Financing Law (Aug. 2022), https://
dfpi.ca.gov/wp-content/uploads/sites/337/2022/08/
2021-CFL-Aggregated-Annual-Report.pdf.
45 See Fla. HB 7179 (2010).
46 See Fla. SB 770 (2024), codified at Fla. Stat.
sec. 163.081.
47 Fla. Stat. sec. 163.081(3)(a).
48 Id.
49 Fla. Stat. sec. 163.081(4).
50 Fla. Stat. sec. 163.081(3)(a)(12).
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together with the maximum principal
amount to be financed and the
maximum annual assessment necessary
to repay that amount.51 Florida law also
provides that a property owner may
cancel a PACE transaction agreement
within three business days of
consummation without incurring any
financial penalty for doing so 52 and
requires a written disclosure to
prospective purchasers of a property
subject to a PACE transaction.53
Additionally, Florida law directs
counties and municipalities to maintain
processes regulating home improvement
contractors 54 and third-party program
administrators,55 regulates advertising
practices surrounding PACE
transactions,56 and sets forth
circumstances in which PACE financing
agreements may be unenforceable.57
Missouri
Missouri authorized PACE programs
in 2010 to finance projects involving
energy efficiency improvements and
renewable energy improvements.58 In
2021, Missouri enacted new legislation
imposing certain consumer protection
requirements for PACE transactions.
The law currently requires clean energy
development boards (the government
entities offering PACE programs) to
provide a disclosure form to
homeowners that shows the financing
terms, including the total amount
funded and borrowed, the fixed rate of
interest charged, the APR, and a
statement that, if the property owner
sells or refinances the property, the
owner may be required by a mortgage
lender or a purchaser to pay off the
obligation.59 It also requires verbal
confirmation of certain provisions of the
contract, imposes specific financial
requirements to execute a PACE
contract, and provides for a three-day
right to cancel.60 The 2021 legislation
also limited the term, amount of
financing, and total indebtedness
secured by the property and required
the clean energy development board to
51 Fla.
Stat. sec. 163.081(5).
Stat. sec. 163.081(6).
53 Fla. Stat. sec. 163.081(8).
54 Fla. Stat. sec. 163.083.
55 Fla. Stat. sec. 163.084.
56 Fla. Stat. sec. 163.085.
57 Fla. Stat. sec. 163.086.
58 Mo. HB 1692 (2010), codified at Mo. Rev. Stat.
sec. 67.2800(2)(8) (defining projects eligible for
financing).
59 Mo. HB 697, codified at Mo. Rev. Stat. sec.
67.2818(4).
60 Mo. HB 697, codified at Mo. Rev. Stat. sec.
67.2817(2) (financial requirements to execute an
assessment contract); 67.2817(4) (right to cancel);
67.2818(6) (verbal confirmation).
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52 Fla.
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review and approve PACE contracts.61
The new requirements became effective
January 1, 2022.62
Self-Regulatory Efforts
In addition to consumer protections
mandated by State governments, in
November 2021, the national trade
association that advocates for the PACE
financing industry announced voluntary
consumer protection policy principles
for PACE programs nationwide.63
According to the trade association, the
22 principles are designed to establish
a national framework for enhanced
accountability and transparency within
PACE programs and to offer greater
protections for all consumers, as well as
additional protections for low-income
homeowners, based on stated income,
and those over the age of 75.64 They
include provisions relating to ability-topay, financing disclosures, a right to
cancel, and foreclosure-avoidance
protections, among others.
In comments to the proposal, PACE
industry stakeholders enumerated
consumer protections that they said the
industry has adopted. These
commenters noted the use of certain
disclosures by PACE originators, as well
as other activities intended to enhance
consumers’ understanding of PACE
transactions, such as confirmation-ofterms calls. PACE industry commenters
also described industry underwriting
standards, including loan-to-value
limitations, and mandatory
confirmation that the property owner is
not in bankruptcy proceedings or
delinquent on property taxes or
mortgage payments. Industry
commenters further described industry
efforts to oversee contractors, including
efforts to verify contractors’ licensing
and insurance status, conduct
background checks for contractors,
require contractors to certify compliance
with program policies and marketing
standards, provide training to
contractors, monitor contractor
performance, terminate contractors who
violate program policies, and withhold
funds from the contractor for the project
until the project is certified as complete
by the homeowner and contractor.
These commenters stated that industry
actors closely monitor delinquency
trends and provide consumers with a
61 Mo. HB 697, codified at Mo. Rev. Stat. secs.
67.2817(2), 67.2818(2)–(3).
62 Mo. HB 697, codified at Mo. Rev. Stat. sec.
67.2840.
63 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/.
64 Id.
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right to cancel and other protections
following consummation.
B. Summary of the Rulemaking Process
Economic Growth, Regulatory Relief,
and Consumer Protection Act of 2018
The Economic Growth, Regulatory
Relief, and Consumer Protection Act
(EGRRCPA) was signed into law on May
24, 2018.65 EGRRCPA section 307
amended TILA to mandate that the
CFPB take regulatory action on PACE
financing, which it defines as
‘‘financing to cover the costs of home
improvements that results in a tax
assessment on the real property of the
consumer.’’ It requires the CFPB to
prescribe regulations that (1) carry out
the purposes of TILA section 129C(a),
and (2) apply TILA section 130 with
respect to violations under TILA section
129C(a) with respect to PACE financing.
It also requires that the regulations
account for the unique nature of PACE
financing.66 TILA section 129C(a)
contains TILA’s ability-to-repay
provisions for residential mortgage
loans, and TILA section 130 contains
civil liability provisions. Thus, section
307 requires the CFPB to apply TILA’s
ability-to-repay provisions to PACE
financing, and to apply TILA’s civil
liability provisions for violations of
those ability-to-repay provisions, all in
a way that accounts for the unique
nature of PACE financing. This final
rule discusses the implementation of the
ability-to-repay and civil liability
requirements further in the section-bysection analysis of § 1026.43.
Outreach
To learn about PACE transactions and
the industry, the CFPB has engaged with
a wide variety of stakeholders since
2015, including consumer advocates, a
range of public and private participants
in the PACE financing industry,
mortgage industry stakeholders, and
representatives from energy and
environmental groups. The engagement
has included listening sessions,
roundtable discussions, question-andanswer sessions, consultation calls
soliciting stakeholder input, briefings of
external stakeholders, panel
appearances by CFPB staff, and written
correspondence.
The CFPB’s outreach relating to PACE
financing is summarized at a high level
65 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 CFPB to ‘‘collect such information
and data that the CFPB determines is necessary’’ in
prescribing the regulations and requiring the CFPB
to ‘‘consult with State and local governments and
bond-issuing authorities.’’
66 EGRRCPA
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below.67 The outreach has
supplemented information on PACE
financing that the CFPB has gleaned
from independent research; the
comments responding to the Advance
Notice of Proposed Rulemaking and the
proposed rule, discussed below; the
data collection described below in this
in part; and information from publicly
available sources such as news reports,
research and analysis, and litigation
documents. The CFPB also consulted
with the Board and several other
Federal agencies, as addressed in part
VI.A.
the industry has been developing in
different jurisdictions. They have also
shared their views on some of the
challenges and progress the industry has
experienced as the programs have
evolved, including, for example, the
causes of fluctuations in loan volumes,
industry efforts to improve the
consumer experience, benefits of PACE
financing, and the effects of consumer
protection requirements in particular
States. Some of these stakeholders have
also shared their perspectives on
EGRRCPA section 307 and this
rulemaking.
1. Consumer Advocates
The CFPB began corresponding with
consumer advocates regarding PACE
financing in 2016. These stakeholders
have shared their concerns about
consumer risks in the PACE financing
market and stories of PACE financing
resulting in financial harm to
consumers.
The CFPB continued the engagement
after EGRRCPA section 307 passed,
meeting on numerous occasions with
individual consumer advocates and
consumer advocacy groups to discuss a
range of topics related to PACE
financing. For example, these
stakeholders have shared their
understanding of how the PACE
financing industry functions, including
the structure of the financial obligation,
the different roles of government units
and private parties, industry trends, and
the effects of State legislation on PACE
financing. They have also voiced
consumer protection concerns and
shared legal and policy analysis
regarding the implementation of
EGRRCPA section 307 and the
application of TILA to PACE
transactions.
3. State and Local Governments and
Bond-Issuing Authorities
The CFPB has conferred on numerous
occasions with State and local
governments and bond-issuing
authorities involved in PACE financing
to gather information about PACE
financing and this rulemaking,
beginning before EGRRCPA section 307
and accelerating after it took effect given
its mandate for the CFPB to ‘‘consult
with State and local governments and
bond-issuing authorities.’’ 68 The CFPB
has consulted with government
sponsors of PACE financing programs,
agencies involved in different aspects of
the programs, local property tax
collectors, public PACE financing
providers, and county and city officials.
The CFPB has engaged with bondissuing authorities on a number of
occasions, including discussions over
the phone and in person, and through
written correspondence. The CFPB has
also conferred on a number of occasions
with membership organizations
representing municipalities.
In the course of developing the final
rule, CFPB staff also conducted a series
of consultation calls to promote
awareness about the CFPB rulemaking
and gather input on topics that the
CFPB was considering addressing in
this rulemaking, including, for example,
whether the CFPB should use the same
ability-to-repay framework for PACE
financing that currently applies to
mortgage credit or a different
framework, what changes should be
made to account for the unique nature
of PACE financing, whether to apply
any existing qualified mortgage
definitions to PACE financing, how to
apply TILA’s general civil liability
provisions to violations of the ability-torepay requirements for PACE financing,
and the implications of this rulemaking
for PACE financing bonds. Before the
CFPB issued the proposal, it held a
series of calls with several stakeholder
groups, including: (1) State agencies in
2. Private PACE Industry Stakeholders
Since 2015, the CFPB has engaged on
many occasions with various private
PACE industry stakeholders, including
private PACE companies, a national
trade association, private companies
that help administer the assessments
(assessment administrators), and at least
one bond counsel. These stakeholders
have provided the CFPB a great deal of
information about PACE transactions,
industry business practices, market
trends, and the roles of different
industry participants.
Additionally, the PACE companies,
assessment administrators, and the
national trade association have shared
industry trends and their views on how
67 The CFPB also engaged in extensive outreach
with numerous stakeholders to design and complete
the CFPB data collection on PACE financing that is
discussed below.
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68 15
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the three States that currently offer
PACE, (2) California local government
officials, (3) Missouri local government
officials, (4) Florida local government
officials, and (5) State and local officials
from states that do not currently offer
PACE. CFPB staff held additional
consultation calls with State and local
governments and bond-issuing
authorities after the NPRM’s comment
period closed, to solicit additional
information and perspectives about this
rulemaking and recent market
developments.
During these outreach and
consultation efforts, public entities
involved in the operation of PACE
financing and third parties operating on
their behalf expressed divergent views
on PACE financing. For example, some
individuals from local tax collectors’
offices and other government units
expressed concern about the risks or
challenges that PACE financing can
create for consumers or local taxing
authorities. In part because of these
concerns, some government
representatives shared consumer
protection recommendations and
background information about how the
PACE financing industry operates in
particular jurisdictions. Several
localities with active PACE financing
programs expressed consumer
protection concerns and informed the
CFPB that they would welcome
application of TILA’s ability-to-repay
provisions to PACE, or that they have
implemented certain consumer
protection standards themselves. A
nonprofit organization that
administered a PACE financing program
on behalf of a local government
informed the CFPB that the locality
ended its PACE financing program,
largely due to consumer protection
concerns. One stakeholder from a tax
collector’s office asserted that, while
there are limits to PACE loan amounts
relative to the market value of the home,
standards for obtaining a home’s market
value are insufficient. This stakeholder
asserted that, as a result, PACE
consumers could owe more than the
market value of the property. This
stakeholder also asserted that interest
rates and APRs for PACE transactions
are relatively high and do not reflect the
fact that they are secure for investors
and carry relatively low administrative
costs, given that PACE transactions are
repaid through the property tax system.
Other local governments (and third
parties they work with) shared views
that reflect more positive assessments of
the industry. For example,
representatives from one government
sponsor of PACE financing (that later
ceased sponsoring new PACE financing
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originations 69) told the CFPB that the
program carries important consumer
benefits, including that it provides a
financing option for home improvement
projects that have energy and
environmental benefits, and creates
jobs. Local government representatives
in certain jurisdictions expressed
enthusiasm about aspects of PACE
financing such as increased solar panel
installations and indicated that they
think PACE financing programs
generally function well. Some
government sponsors indicated that
their PACE financing programs had
instituted a number of practices that
were consumer-protective, such as
repayment analysis, low fees, contractor
screening, or monitoring and oversight
of private entities involved in the
originations. Some government sponsors
expressed concern that Federal
regulation could negatively impact
PACE programs, and that the CFPB
should not apply TILA’s ability-to-repay
provisions or other consumer
protections to PACE financing. Several
State and local entities also informed
the CFPB that consumer complaints had
declined significantly in recent years.
A public PACE provider asserted that
PACE is an important public policy tool
that provides financing to retrofit
properties that are at risk of natural
disaster, in particular wildfires. This
stakeholder asserted that PACE
financing helps homeowners maintain
homeowners’ insurance, and that its
PACE program does not pose significant
consumer risk. It requested that public
PACE providers be exempt from the
final rule.
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4. Other Stakeholders
The CFPB’s outreach has also
included other stakeholders with an
interest in PACE financing. For
example, several times since 2016, the
CFPB has discussed PACE financing
with national and State-level mortgage
industry trade organizations. These
stakeholders have provided updates on,
for example, State-level developments
in the PACE financing industry and
analysis of Federal policy involving
PACE financing. Some have also shared
concerns, in comments to the proposal
and through other channels, about the
69 The CFPB understands that a number of
government sponsors, some of which participated
in the CFPB’s outreach, have stopped participating
in new originations. See, e.g., Jeff Horseman,
Riverside-based agency to end controversial PACE
loans for energy improvements, The PressEnterprise (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/
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potential impact of PACE financing on
mortgage industry participants, noting,
for example, the priority position of
liens securing PACE transactions
relative to non-PACE mortgage liens, the
challenges that non-PACE mortgage
industry stakeholders have in obtaining
information about PACE transactions
and attendant risks, and that non-PACE
mortgage servicers may need to collect
PACE transactions through an escrow
account, which may include advancing
their own funds if the consumer is
unable to afford the PACE financing
payment. Some mortgage industry
stakeholders have also raised consumer
protection concerns, sharing anecdotal
reports of consumer harm and asserting
that, in practice, consumers have often
had to repay the full PACE financing
balance before they have been able to
sell properties encumbered with a PACE
financing lien. Some suggested that the
CFPB should treat PACE like a nonPACE mortgage or apply TILA more
generally to PACE.
Advance Notice of Proposed
Rulemaking in 2019
On March 4, 2019, the CFPB issued an
Advance Notice of Proposed
Rulemaking to solicit information
relating to residential PACE financing.70
The purpose of the Advance Notice of
Proposed Rulemaking was to gather
information to better understand the
PACE financing market and other
information to inform a proposed
rulemaking under EGRRCPA section
307.
In response to the Advance Notice of
Proposed Rulemaking, the CFPB
received over 115 comments, which
were submitted by a variety of entities,
including individual consumers,
consumer groups, private PACE
industry participants, mortgage
stakeholders, energy and environmental
groups, and government entities, among
others. A summary of some of the legal
and policy positions reflected in the
Advance Notice of Proposed
Rulemaking comments is included in
the proposal.71
Data Collection and PACE Report
EGRRCPA section 307 authorizes the
CFPB to ‘‘collect such information and
data that the CFPB determines is
necessary’’ to support the PACE
rulemaking required by the section.72 In
October 2020, the CFPB requested PACE
financing data from all companies
providing PACE financing at that time.
70 Advance Notice of Proposed Rulemaking on
Residential Property Assessed Clean Energy
Financing, 84 FR 8479 (Mar. 8, 2019).
71 88 FR 30388, 30392.
72 15 U.S.C. 1639c(b)(3)(C)(iii)(I).
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The request was voluntary and was
intended to gather information on PACE
transaction applications and
originations between July 1, 2014, and
December 31, 2019, including basic
underwriting information used for
applications, application outcomes, and
loan terms. The CFPB also contracted
with one of the three nationwide
consumer reporting agencies to obtain
credit record data for the PACE
consumers in the PACE transaction
data.
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.73 The PACE company data
encompassed about 370,000 PACE
transaction applications submitted in
California and Florida from 2014 to
2019 and about 128,000 resulting PACE
transaction originations. The CFPB’s
contractor was able to provide matching
credit data for about 208,000 individual
PACE consumers, which included
periodic credit snapshots for each
consumer between June 2014 and June
2022. In total, the matched consumers
submitted about 286,000 PACE
applications and entered into
approximately 100,000 PACE
transactions.74
The CFPB used the acquired data to
develop a report that analyzes the
impact of PACE transactions on
consumer outcomes, with a particular
focus on mortgage delinquency. In
addition to other analyses, the Report
examines consumers who obtained
originated PACE transactions and
compares them to those who applied for
PACE transactions and were approved
but did not proceed. The report, entitled
‘‘PACE Financing and Consumer
Financial Outcomes’’ was published
concurrently with the NPRM.75
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
73 The CFPB received data from FortiFi Financial,
Home Run Financing, Renew Financial, and Ygrene
Energy Fund.
74 Matched consumers resided in census tracts
with smaller Hispanic populations, higher median
income, and lower average education compared to
consumers who were not matched. The PACE
Report verifies that weighting the sample to be more
like the full population of PACE consumers has no
meaningful effect on the main results of the Report.
PACE Report, supra note 12, at 11.
75 See PACE Report, supra note 12.
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borrowers discussed in the PACE Report
resided in census tracts with higher
percentages of Black and Hispanic
residents than the average for their
States.76 However, the effect of PACE
transactions on non-PACE mortgage
delinquency was statistically similar for
PACE borrowers in majority-white
census tracts compared to those in
census tracts that were not majority
white.77 The PACE Report also assesses
the impact of the 2018 California PACE
Reforms, discussed in part II.A. The
analysis finds that these laws improved
consumer outcomes while substantially
reducing the volume of PACE lending.78
The CFPB discusses comments that
addressed the PACE Report in part VI.
Notice of Proposed Rulemaking
The CFPB issued a proposed rule on
PACE financing on May 1, 2023,
concurrent with the PACE Report
described in this part above. The NPRM
was published in the Federal Register
on May 11, 2023,79 and the public
comment period closed on July 26,
2023.80 The CFPB proposed the
following under Regulation Z:
• To clarify an existing exclusion to
Regulation Z’s definition of credit that
relates to tax liens and tax assessments.
Specifically, the CFPB proposed to
clarify that the commentary’s exclusion
of tax liens and tax assessments from
being ‘‘credit,’’ as defined in
§ 1026.2(a)(14), applies only to
involuntary tax liens and involuntary
tax assessments.
• To make a number of adjustments
to the requirements for Loan Estimates
and Closing Disclosures under
§§ 1026.37 and 1026.38 that would
apply when those disclosures are
provided for PACE transactions.
• To provide new model forms under
H–24(H) and H–25(K) of appendix H for
the Loan Estimate and Closing
Disclosure, respectively, specifically
designed for PACE transactions.
• To exempt PACE transactions from
the requirement to establish escrow
76 Id.
at 4.
at 38–39, Figure 11.
78 Id. at 4–5.
79 88 FR 30388.
80 The CFPB received several written requests to
extend the comment period. The CFPB believes that
interested parties had sufficient time to consider the
CFPB’s proposal and prepare their responses and
did not extend the comment period beyond July 26,
2023. Seventy-six days elapsed between the date
the NPRM was published in the Federal Register
and the comment deadline, and ten additional days
elapsed between the CFPB’s issuance of the NPRM
and its publication in the Federal Register.
Additionally, the CFPB has received a number of
ex parte comments after the close of the comment
period. It has added these comments to the
rulemaking docket and considered them in
developing this final rule.
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accounts for certain higher-priced
mortgage loans, under proposed
§ 1026.35(b)(2)(i)(E).
• To exempt PACE transactions from
the requirement to provide periodic
statements, under proposed
§ 1026.41(e)(7).
• To apply the ability-to-repay
requirements in § 1026.43 to PACE
transactions with a number of specific
adjustments to account for the unique
nature of PACE financing, including
requiring PACE creditors to consider
certain monthly payments that they
know or have reason to know the
consumer will have to pay into the
consumer’s escrow account as an
additional factor when making a
repayment ability determination for
PACE transactions extended to
consumers who pay their property taxes
through an escrow account.
• To provide that a PACE transaction
is not a qualified mortgage as defined in
§ 1026.43.
• To extend the ability-to-repay
requirements and the liability
provisions of TILA section 130 to any
‘‘PACE company,’’ as defined in
proposed § 1026.43(b)(14), that is
substantially involved in making the
credit decision for a PACE transaction.
• To provide clarification regarding
how PACE and non-PACE mortgage
creditors should consider pre-existing
PACE transactions when originating
new mortgage loans.
The CFPB received over 130
comments on the proposal. A variety of
stakeholders submitted comment,
including consumers and consumer
groups, PACE companies, a public
PACE provider, government sponsors of
PACE programs, local government
entities or their membership
organizations, State agencies, a PACE
industry trade association, an
assessment administrator, home
improvement contractor stakeholders,
bond counsel, credit union
stakeholders, mortgage industry
stakeholders, environmental and energy
stakeholders, chambers of commerce,
Members of the U.S. Congress, the U.S.
Small Business Administration Office of
Advocacy, and State attorneys general.
The CFPB has considered the comments
and is adopting the proposal with
certain adjustments as described in the
sections below.
III. Legal Authority
The CFPB is finalizing amendments to
Regulation Z pursuant to its authority
under the Consumer Financial
Protection Act of 2010 (CFPA) and other
provisions of the Dodd-Frank Wall
Street Reform and Consumer Protection
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Act (Dodd-Frank Act),81 EGRRCPA
section 307, TILA, and the Real Estate
Settlement Procedures Act of 1974
(RESPA).82
A. Dodd-Frank Act
Section 1022(b)(1) of the CFPA
authorizes the CFPB to prescribe rules
‘‘as may be necessary or appropriate to
enable the CFPB to administer and carry
out the purposes and objectives of the
Federal consumer financial laws, and to
prevent evasions thereof.’’ 83 Among
other statutes, TILA, RESPA, and the
CFPA are Federal consumer financial
laws.84 Accordingly, the CFPB is
exercising its authority under CFPA
section 1022(b) to prescribe rules that
carry out the purposes and objectives of
TILA, RESPA, and the CFPA and
prevent evasion of those laws.
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 CFPB may exempt from
or modify disclosure requirements, in
whole or in part, for any class of
residential mortgage loans if the CFPB
determines that such exemption or
modification is in the interest of
consumers and in the public interest.85
Section 1401 of the Dodd-Frank Act,
which amends TILA section 103(cc)(5),
generally defines a residential mortgage
loan as any consumer credit transaction
that is secured by a mortgage on a
dwelling or on residential real property
that includes a dwelling, other than an
open-end credit plan or an extension of
credit secured by a consumer’s interest
in a timeshare plan.86 Notably, the
authority granted by section 1405(b)
applies to disclosure requirements
generally and is not limited to a specific
statute or statutes. Accordingly, 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
final rule, the CFPB has considered the
purposes of improving consumer
awareness and understanding of
transactions involving residential
81 Public
Law 111–203,124 Stat. 1376 (2010).
U.S.C. 2601 et seq.
83 12 U.S.C. 5512(b)(1).
84 CFPA section 1002(14), 12 U.S.C. 5481(14)
(defining ‘‘Federal consumer financial law’’ to
include the ‘‘enumerated consumer laws’’ and the
provisions of CFPA); CFPA section 1002(12), 12
U.S.C. 5481(12) (defining ‘‘enumerated consumer
laws’’ to include TILA and RESPA).
85 Public Law 111–203, 124 Stat. 1376, 2142
(2010) (codified at 15 U.S.C. 1601 note).
86 Public Law 111–203, 124 Stat. 1376, 2138
(2010) (codified at 15 U.S.C. 1602(cc)(5)).
82 12
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mortgage loans through the use of
disclosures and the interests of
consumers and the public. The CFPB is
finalizing these amendments pursuant
to its authority under Dodd-Frank Act
section 1405(b). For the reasons
discussed below and in the 2013 TILA–
RESPA Rule, the CFPB believes the final
rule is in the interest of consumers and
in the public interest, consistent with
Dodd-Frank Act section 1405(b).
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B. TILA
TILA section 105(a) directs the CFPB
to prescribe regulations to carry out the
purposes of TILA and provides that
such regulations may contain additional
requirements, classifications,
differentiations, or other provisions and
may further provide for such
adjustments and exceptions for all or
any class of transactions that the CFPB
judges are necessary or proper to
effectuate the purposes of TILA, to
prevent circumvention or evasion
thereof, or to facilitate compliance
therewith.87 A purpose of TILA is to
assure a meaningful disclosure of credit
terms so that the consumer will be able
to compare more readily the various
available credit terms and avoid the
uninformed use of credit.88
Additionally, a purpose of TILA
sections 129B and 129C is to assure that
consumers are offered and receive
residential mortgage loans on terms that
reasonably reflect their ability to repay
the loans and that are understandable
and not unfair, deceptive, or abusive.89
TILA section 105(b), amended by the
CFPA, requires publication of an
integrated disclosure for mortgage loan
transactions covering the disclosures
required by TILA and the disclosures
required by sections 4 and 5 of
RESPA.90 The purpose of the integrated
disclosure is to facilitate compliance
with the disclosure requirements of
TILA and RESPA and to improve
borrower understanding of the
transaction. The CFPB provided
additional discussion of this integrated
disclosure mandate in the 2013 TILA–
RESPA Rule.91
Section 105(f) of TILA, 15 U.S.C.
1604(f), authorizes the CFPB to exempt
from all or part of TILA any class of
transactions if the CFPB determines
after the consideration of certain factors
that TILA coverage does not provide a
meaningful benefit to consumers in the
form of useful information or protection.
TILA section 129C(b)(3)(A) directs the
CFPB to prescribe regulations to carry
out the purposes of the subsection.92 In
addition, TILA section 129C(b)(3)(B)(i)
authorizes the CFPB to prescribe
regulations that revise, add to, or
subtract from the criteria that define a
qualified mortgage upon a finding that
such regulations are necessary or proper
to ensure that responsible, affordable
mortgage credit remains available to
consumers in a manner consistent with
the purposes of TILA section 129C; or
are necessary and appropriate to
effectuate the purposes of TILA sections
129B and 129C, to prevent
circumvention or evasion thereof, or to
facilitate compliance with such
sections.93
In section 307 of the EGRRCPA,
codified in TILA section 129C(b)(3)(C),
Congress directed the CFPB to conduct
a rulemaking to ‘‘prescribe regulations
that carry out the purposes of [TILA’s
ATR requirements] and apply section
130 [of TILA] with respect to violations
[of the ATR requirements] with respect
to [PACE] financing, which shall
account for the unique nature of [PACE]
financing.’’ 94
C. RESPA
RESPA section 4(a), amended by the
CFPA, requires publication of an
integrated disclosure for mortgage loan
transactions covering the disclosures
required by TILA and the disclosures
required by sections 4 and 5 of
RESPA.95
Section 19(a) of RESPA authorizes the
CFPB to prescribe such rules and
regulations and to make such
interpretations and grant such
reasonable exemptions for classes of
transactions as may be necessary to
achieve the purposes of RESPA.96 One
purpose of RESPA is to effect certain
changes in the settlement process for
residential real estate that will result in
more effective advance disclosure to
home buyers and sellers of settlement
costs.97 In addition, in enacting RESPA,
Congress found that consumers are
entitled to greater and more timely
information on the nature and costs of
the settlement process and to be
protected from unnecessarily high
settlement charges caused by certain
abusive practices in some areas of the
92 15
U.S.C. 1639c(b)(3)(A).
U.S.C. 1639c(b)(3)(B)(i).
94 15 U.S.C. 1639c(b)(3)(C)(ii).
95 Public Law 111–203, 124 Stat. 1376, 2103
(2010) (codified at 12 U.S.C. 2603(a)). See
discussion of integrated disclosure above.
96 12 U.S.C. 2617(a).
97 12 U.S.C. 2601(b).
93 15
87 15
U.S.C. 1604(a).
U.S.C. 1601(a).
89 15 U.S.C. 1639b(a)(2).
90 Public Law 111–203, 124 Stat. 1376, 2108
(2010) (codified at 15 U.S.C. 1604(b)).
91 78 FR 79730, 79753–54 (Dec. 31, 2013).
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country.98 In developing rules under
RESPA section 19(a), the CFPB has
considered the purposes of RESPA,
including to effect certain changes in
the settlement process that will result in
more effective advance disclosure of
settlement costs.
IV. Discussion of the Final Rule
A. General Comments on the NPRM
The CFPB received comments
addressing several topics other than
those discussed in the section-specific
analyses below. These topics are largely
outside the scope of this rulemaking.
Super-Priority Lien Status
Many mortgage industry stakeholders
and consumer groups expressed
concerns about the super-priority status
held by liens securing PACE
transactions. Several commenters stated
that the super-priority status of PACE
liens increases risks for borrowers,
mortgage lenders, communities, and
secondary mortgage market participants.
A mortgage industry trade association
asserted that PACE transactions violate
the first-lien status of mortgages and
create risk for consumers and
communities. One mortgage industry
trade association stated that the superpriority lien status undermines
mortgage lenders’ underwriting by
increasing the loss severity during
foreclosure for the mortgage lender in a
way that was not priced in, limits
saleability of mortgages, and requires
mortgage servicers to advance funds to
secure the security interest when
consumers go delinquent on property
taxes and PACE obligations. A credit
union stated that the super-lien priority
decreases home marketability, and an
escrow association stated that
consumers have not understood the
priority status of PACE liens.
Some commenters, including a credit
union and other mortgage industry
stakeholders, described challenges with
identifying the presence of existing
PACE liens. Some commenters,
including a community bankers
association, a credit union trade
association, and a group of mortgage
industry and consumer group
stakeholders, asked the CFPB to work
with State and local governments to find
solutions to better identifying PACE
liens or downgrading their priority
status.
In contrast to these comments, a
PACE company asserted that a PACE
transaction’s super-priority lien status
98 12 U.S.C. 2601(a). In the past, RESPA section
19(a) has served as a broad source of authority to
prescribe disclosures and substantive requirements
to carry out the purposes of RESPA.
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makes PACE transactions more secure,
which allows capital markets to
embrace lower interest rates, with the
savings passed on to consumers.
Another PACE company stated that, in
California, there is a loss reserve in
place and only two claims have ever
been made, showing the concerns
related to whether the lien status would
impair the security of first mortgage
loans have not materialized.
Requests for Additional Regulatory
Requirements
Several commenters suggested
additional regulation of PACE financing
that was not contemplated in the
proposed rule. For instance, a State
housing agency association suggested
requiring PACE companies to report
PACE transactions to credit bureaus,
prohibiting prepayment penalties on
PACE transactions if the first mortgage
does not impose prepayment penalties,
regulating the types of fees allowed on
PACE transactions, and imposing
conflict-of-interest provisions on PACE
transactions like those found under
RESPA. A PACE company
recommended prohibiting payments to
home improvement contractors for
marketing services and for work done
prior to project completion. This
commenter also suggested the CFPB
craft protections against antitrust or
defamation claims for PACE companies,
similar to those available to financial
institutions who file Suspicious Activity
Reports, so that they can more
effectively share information about
problematic home improvement
contractors.
A consumer group suggested the
CFPB require independent verification
before PACE-financed work begins
(specifically, an energy audit to verify
the need for cost-effective
improvements and verifying the
consumer understands related costs and
risks) and after work is completed but
before the contractor is paid. Another
consumer group urged the CFPB to
prohibit false assertions made on social
media websites.
A consortium of consumer groups
stated that the CFPB should finalize the
proposal quickly and should monitor
and incorporate consumer protections
into other emerging lending products
intended to be environmentally friendly
(i.e., ‘‘green’’ lending products, such as
those being implemented under
Inflation Reduction Act programs), to
minimize what they characterized as
public harm and negative consequences
that resulted from the problematic
design and predatory practices of PACE
financing. A few other consumer and
environmental groups echoed the need
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for collaboration among Federal
agencies on green lending products to
share lessons learned from PACE
financing and to ensure these products
are fair, safe, affordable, and sustainable
for consumers.
National Environmental Policy Act
Two PACE companies and a PACE
industry trade association stated that the
National Environmental Policy Act
(NEPA) applies to the CFPB’s PACE
financing rulemaking. These
commenters asserted that the CFPB
should complete an environmental
impact statement under NEPA.
Specifically, commenters expressed
concerns that the proposed rule would
have a significant adverse impact on the
quality of the human environment by
causing fewer PACE loans to be
originated, thereby reducing the
environmental benefits associated with
PACE financing, including benefits
related to the reduction of water and
energy consumption.
The CFPB has prepared an
environmental assessment and finding
of no significant impact regarding the
proposed rule, to be published in the
Federal Register concurrently with this
final rule. The environmental
assessment provides the basis for the
conclusion that the proposed rule,
which the CFPB is adopting in this final
rule with small changes described
below, will not have a significant effect
on the human environment.99 In
developing the environmental
assessment, the CFPB considered
commenters’ estimates of the
environmental benefits associated with
PACE financing. As discussed in the
environmental assessment, the CFPB
found that those estimates likely
overstate the impacts on energy and
water consumption that PACE loans
provide. It also found, however, that
even assuming that the proposal would
entirely eliminate PACE financing (an
outcome the CFPB does not expect to
occur), the proposed rule would not
result in significant effects on the
human environment. Based on the
finding of no significant impact, the
CFPB determined that an environmental
impact statement need not be prepared
as some commenters suggested.
99 CFPB, Environmental Assessment and Finding
of No Significant Impact (Dec. 17, 2024).
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B. Section-by-Section Analysis
1026.2 Definitions and Rules of
Construction
1026.2(a) Definitions
1026.2(a)(14) Credit
Section 1026.2(a)(14) defines ‘‘credit’’
to mean ‘‘the right to defer payment of
debt or to incur debt and defer its
payment.’’ The CFPB proposed to clarify
that comment 2(a)(14)–1.ii’s exclusion
of tax liens and tax assessments from
the definition of credit applies only to
involuntary tax liens and involuntary
tax assessments, and not to voluntary
ones, such as PACE transactions. The
CFPB proposed to change the comment
by adding the word ‘‘involuntary’’ to
clarify which tax liens and tax
assessments are not considered credit.
Without an exclusion for voluntary tax
liens and voluntary tax assessments, the
proposal separately recognized that
PACE transactions would meet TILA’s
definition of ‘‘credit.’’ For the reasons
discussed below, the CFPB is finalizing
comment 2(a)(14)–1.ii as proposed, to
clarify that involuntary tax liens,
involuntary tax assessments, court
judgments, and court approvals of
reaffirmation of debts in bankruptcy are
not considered credit for purposes of the
regulation.100
Many commenters addressed this part
of the proposal. Consumer groups,
mortgage industry stakeholders, and a
State agency were generally supportive
of amending the comment, as well as
recognizing PACE transactions as credit.
Some of these commenters asserted that
PACE transactions meet the definition
of consumer credit under TILA and
Regulation Z and should be treated as
such. Several consumer groups stated
that Congress’s directive to prescribe
rules for PACE financing under TILA
assumes that PACE transactions will be
treated as credit because the CFPB
would otherwise have no authority to
issue regulations under TILA, as TILA
governs consumer credit. A State agency
stated that PACE transactions are clearly
a form of consumer credit, and that the
proposed amendment appears to be the
simplest and most efficient means of
allowing PACE transactions to be
subject to the requirements of TILA and
Regulation Z. Some mortgage industry
stakeholders and consumer groups
stated that, as voluntary home-secured
financing, PACE transactions are
mortgages or their functional
100 The CFPB is also finalizing a conforming
change later in the comment, inserting the word
‘‘involuntary’’ before ‘‘tax lien’’ in an illustrative
example of third-party financing that is credit for
purposes of the regulation notwithstanding the
exclusion.
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equivalents and should be treated the
same under TILA.
A number of consumer groups and
mortgage industry stakeholders stated
that applying TILA’s mortgage
requirements to PACE transactions
would curb abuses and help ensure
consumers qualify and understand
repayment obligations. Two consumer
groups expressed support for applying
the mortgage requirements under TILA
and Regulation Z to PACE transactions
and suggested a number of adjustments
to enhance consumer protections. One
credit union trade association stated
that it was critical that consumers with
PACE transactions have the same rights
and protections as with other homesecured lending, particularly because
foreclosure related to unpaid municipal
levies may involve a faster process than
a civil mortgage foreclosure.
A number of commenters suggested
covering PACE transactions as TILA
credit would be important because the
structure of PACE transactions creates
risk for consumers or other
stakeholders. Some consumer groups
and mortgage industry stakeholders
asserted that the role of private
contractors in PACE transactions has
spurred predatory practices. A few
commenters indicated that alternatives
to PACE financing, such as solar funds,
home equity lines of credit, or second
mortgages may be safer for consumers or
carry lower fees or interest rates. One
credit union league asserted various
concerns about PACE financing, such as
high interest rates, exploitation and
targeting of vulnerable consumers, risks
of losing homes, deceptive marketing
practices, and a lack of disclosures. A
few commenters made assertions about
possible negative impacts of PACE
financing on certain groups of
consumers, including older Americans,
lower-income consumers, consumers
with limited English proficiency, and
majority Black or Hispanic
communities.
Several commenters, including
consumer groups, mortgage industry
stakeholders, and environmental
groups, asserted that treating PACE
transactions like mortgages would
ensure a level playing field for market
participants. Some mortgage industry
and consumer group stakeholders stated
that the proposal would ensure that
PACE transactions receive the same
level of scrutiny and safeguards as nonPACE mortgage products. One consumer
group and one title insurance trade
association stated that PACE
transactions tend to come with higher
costs, fees, and interest rates than nonPACE mortgage products, warranting
scrutiny for the market. One
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environmental group commented that
PACE companies effectively act like
mortgage bankers without having to
comply with banking or lending
regulations.
Many PACE industry stakeholders
objected to treating PACE transactions
as credit under TILA. Some commenters
stated that PACE transactions are legally
distinguishable from consumer credit.
Several commenters, including PACE
companies and a government sponsor,
referred to State law or case law to
assert that PACE transactions are not
consumer credit or are property tax
assessments. A PACE company stated
that there is no legal difference between
voluntary and involuntary tax
assessments, and that voluntariness
does not render a tax assessment
consumer credit. This commenter also
asserted that the proposal did not
distinguish between voluntary and
involuntary court judgments, which,
like tax assessments and tax liens, were
excluded from ‘‘credit’’ under existing
comment 2(a)(14)–1.ii.
PACE companies, trade associations,
and a government sponsor of PACE
programs asserted that covering PACE
transactions as consumer credit under
TILA would not be supported by
EGRRCPA section 307 or other TILA
provisions. Several commenters stated
that treating PACE transactions as credit
would be overreach because, they
asserted, it would exceed Congress’s
narrow directive in EGRRCPA section
307 by applying TILA to all voluntary
tax assessments and tax liens.
Some commenters stated that the
CFPB lacks statutory authority to
regulate PACE transactions as proposed
because they are tax assessments subject
to State law and are not credit under
TILA. A few commenters stated that
EGRRCPA section 307’s mandate was
narrow, and that the term ‘‘consumer
credit’’ cannot be reasonably interpreted
to include PACE transactions. A few
commenters asserted that, if Congress
had intended to make definitional
changes and subject PACE transactions
to further regulation beyond ability to
repay and civil liability, it would have
said so explicitly. A PACE company
stated that EGRRCPA section 307 would
be superfluous if PACE transactions
were TILA credit because they would
already be covered. A few commenters
asserted that TILA’s preservation of
governmental immunity from certain
remedies is evidence that Congress did
not intend TILA to apply generally to
PACE transactions, since TILA liability
generally attaches to creditors, and local
governments would be creditors in
PACE transactions.
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Several commenters took issue with
the coverage of government sponsors of
PACE programs. Eight Members of the
U.S. Congress stated that local
governments that levy PACE financing
as property tax assessments are not
‘‘creditors.’’ Two membership
organizations for local governments
asserted that, since PACE government
sponsors are plausibly the ‘‘creditors’’ in
PACE transactions but are protected
from civil and criminal penalties under
TILA, the text of TILA itself forbids
including PACE financing in the
definition of credit. Another
government association asserted that,
while the public agency is the entity
entering into the financing agreements,
issuing bonds secured by the
obligations, and bearing ultimate
responsibility for their administration
and enforcement, the public agency
should not be treated as a creditor. One
government sponsor asserted that the
rule would have a disproportionate
effect on its State and would
significantly reduce PACE originations.
Many local governments and a public
PACE provider requested an exclusion
for government-operated PACE
programs. One public PACE provider
stated, among other things, that such
programs are designed to achieve public
policy objectives, are subject to rigorous
underwriting standards and other robust
consumer protections, are not driven by
a profit motive, and have not resulted in
claims of abuse or negative outcomes.
One nonprofit commenter asserted that
the likelihood of fraud, deception, and
abuse is virtually nil where a
government entity alone administers a
PACE program.
Several commenters took issue with
TILA coverage on the ground that PACE
transactions run with the underlying
property and are not personal liabilities.
One PACE company asserted that, while
TILA defines ‘‘credit’’ to mean, in part,
a ‘‘right granted by a creditor to a debtor
. . . , ’’ there are no ‘‘debtors’’ in PACE
transactions—that ‘‘debtors’’ are natural
persons to whom the credit is extended,
whereas PACE transactions are attached
to the property and are not personal
liabilities. Eight Members of the U.S.
Congress, several PACE companies,
trade associations, and a local
government organization asserted that
PACE transactions are not personal
debts but rather tax assessments that are
levied against and run with the land.
One PACE company asserted that PACE
transactions are not consumer credit
because their primary purpose is to
advance State environmental and
economic policies, whereas TILA and
Regulation Z define ‘‘consumer credit’’
in part to mean credit that is primarily
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for personal, family, or household
purposes. This commenter also stated
that PACE transactions are attached to
the property and are not personal debts.
PACE companies, government
sponsors, local government trade
groups, a PACE industry trade
association, an energy industry
stakeholder, and eight Members of U.S.
Congress opposed treating PACE
transactions as mortgages under TILA. A
PACE company stated that PACE does
not meet TILA’s definition of residential
mortgage loan, in part because the lien
will arise as a matter of State law
pursuant to governments’ power of
taxation. A different PACE company
stated that PACE transactions are not
residential mortgage loans as defined in
TILA. Several commenters, including
PACE companies and a government
sponsor, asserted that EGRRCPA section
307’s directive to ‘‘account for the
unique nature’’ of PACE transactions in
prescribing regulations indicates that
Congress did not intend to treat them as
mortgage loans. One PACE company
stated that the distinctions between
principal and interest payments and
property tax payments under TILA
point to PACE transactions being
distinct from mortgage loans. A PACE
industry trade association and a PACE
company, among others, asserted
several differences between PACE
transactions and mortgages, including
that PACE transactions do not
accelerate, are nonrecourse, and have
longer foreclosure timelines. One PACE
company stated that TILA’s
requirements are designed for higher
dollar amount mortgages. The PACE
company stated that PACE transactions
are functionally and practically
distinguishable from mortgages, and
that they are significantly smaller than
mortgages and therefore less risky for
consumers. An environmental group
and a PACE industry trade association
stated that PACE assessments have
structural protections that mortgages do
not, including that consumers have
years (versus months) for consumers to
come current on their property taxes
before local governments can initiate a
foreclosure or tax sale.
Numerous commenters, including
eight Members of the U.S. Congress,
home improvement contractors, and an
environmental group, stated that
treating PACE financing like a mortgage
loan would disregard the unique nature
of PACE transactions. The eight
Members of the U.S. Congress
characterized PACE transactions as
land-secured municipal finance, and
other commenters, including a PACE
company, a government sponsor, and
another industry stakeholder,
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characterized them as property tax
assessments imposed by government
entities to advance important public
policy purposes as mandated by State
law. Some commenters stated that State
and local governments have authorized
similar transactions for some time, and
that such transactions have only been
authorized for projects that advance
public purposes dictated by State and
local governments.
Numerous commenters, including
PACE companies, government sponsors,
membership organizations for local
governments, home improvement
contractors, energy stakeholders, and
others, expressed a wide variety of
concerns about PACE transactions being
subject broadly to TILA. They stated, for
example, that broad TILA coverage
would (1) exceed the mandate in
EGRRCPA section 307, which required
only ability-to-repay and civil liability
regulations; (2) introduce substantial
burden that would be unwarranted
given the industry’s progress on
consumer protections in recent years;
(3) deter industry actors from
participating and render the programs
nonviable or reduce PACE originations,
which they stated would reduce access
to credit, push consumers into more
expensive forms of financing, or limit
revenue options for State and local
governments.
Some commenters asserted that broad
TILA coverage would be unwarranted.
Some stated, for example, that the CFPB
lacked sufficiently reliable, recent data
or anecdotes to justify broad application
of TILA to PACE transactions. Several
commenters stated that data sources,
including the data discussed in the
PACE Report, reports issued by the
California Department of Financial
Protection and Innovation (California
DFPI), and analysis from private bond
rating agencies, for example, do not
support the conclusion that PACE
transactions are particularly harmful.
Some commenters asserted that
available data in fact demonstrates, for
example, that PACE financing correlates
with a negligible impact on credit
outcomes; that PACE financing has
relatively low delinquency rates,
sometimes lower than general aggregate
property taxes and mortgages; or that
foreclosure rates for homes with a PACE
lien are quite low. A PACE company
asserted that only two claims have been
made on the California Alternative
Energy and Advanced Transportation
Financing Authority (CAEATFA) loan
loss reserve, which the commenter
interpreted to mean that mortgage
industry concerns relating to the
priority status of PACE liens are
overblown.
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Some commenters, including PACE
companies and home improvement
contractors, pointed to specific TILA
requirements that they asserted would
pose particular challenges if applied to
PACE transactions. For example, a
PACE company and a home
improvement contractor stated that
TILA’s disclosure and appraisal
requirements do not make sense or are
overly costly for PACE transactions
compared to other mortgages, in part
because the time to close on a nonPACE mortgage is longer and the
transaction is for a much larger dollar
amount. PACE companies and home
improvement contractors asserted that
loan originator requirements would
impose undue costs and could cause
home improvement contractors to stop
offering PACE financing to consumers,
either by choice or because they could
not satisfy applicable requirements
under State law. A PACE company also
stated that Regulation Z requirements as
to the treatment of credit balances
would inhibit prepayment of property
taxes.
Numerous commenters opposed
PACE transactions being subject to the
higher-priced mortgage loan appraisal
requirement, including public and
private industry stakeholders, home
improvement contractors, and energy
groups. A PACE company, an energy
industry stakeholder, and home
improvement contractor firms asserted
that the higher-priced mortgage loan
appraisal requirement would increase
cost or delay and deter home
improvement contractor participation in
PACE programs. The PACE company
stated that the higher-priced mortgage
loan appraisal requirement and TILA’s
high-cost mortgage protections 101
would effectively cap the rates and fees
for PACE transactions, which could
make PACE financing economically
nonviable. One home improvement
contractor firm stated that the cost of an
appraisal, estimated to be $300-$500, is
unnecessary because the current
valuation process used by industry
stakeholders is more conservative than
receiving an appraisal. Two PACE
companies and an industry trade
association recommended permitting
the use of automated valuation models
(AVMs) instead of appraisals—they
asserted that AVMs are effective and
more efficient than appraisals and
already permitted under California law.
Some commenters stated that
applying TILA to PACE transactions
101 See the discussion of §§ 1026.32 and 1026.34
for a full discussion of comments pertaining to the
application of TILA’s high-cost mortgage
protections.
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would delay PACE originations.
Comments about delay in the context of
specific TILA requirements, such as the
TILA–RESPA integrated disclosure
requirements for which there is a
mandatory waiting period between
disclosure and consummation, are
discussed below. One home
improvement contractor asserted that a
delay would result in financial hardship
for contractors who do not get paid until
the consumer signs off on the project.
Another commenter stated that this
delay threatens the point-of-sale nature
of PACE transactions, which would be
detrimental because PACE transactions
allow for emergency repairs and
upgrades to help consumers obtain
homeowners insurance.
One PACE company asserted that
TILA’s right of rescission would not
benefit consumers and would be
confusing for consumers and
burdensome for States. The commenter
stated that PACE transactions are
already subject to a right to cancel under
State law and industry practice,
including a five-day right for senior
citizens under California law.
A number of commenters, including
an assessment administrator, PACE
companies, government sponsors, bond
counsel, a trade association for special
districts, and a public PACE provider
stated that the proposal would extend
TILA coverage to many assessment
financing transactions that are not
commonly known as PACE. These
commenters stated that this coverage
would create concern and uncertainty
for non-PACE financing. Some of these
commenters asserted that coverage of
non-PACE transactions would exceed
the congressional mandate provided in
EGRRCPA section 307 and impede State
and local governments’ ability to use
their taxing and bonding authorities as
they see fit. A public PACE provider
recommended covering voluntary
contractual assessments, instead of
simply voluntary assessments, to avoid
covering obligations arising from what
the commenter referred to as traditional
voluntary assessment districts.
Many commenters, including PACE
companies, a public PACE provider,
home improvement contractors, eight
Members of the U.S. Congress, an
assessment administrator, an industry
trade association, bond counsel, and a
group of State attorneys general, stated
that PACE transactions already have
sufficient consumer protections in
place. Some of these commenters stated
that PACE transactions are already
sufficiently regulated at the State and
local levels. One trade association
representing special districts stated that
State and local regulations strike an
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effective balance of consumer protection
and enabling PACE financing to achieve
its objectives. Many commenters stated
that PACE companies have instituted a
series of additional consumer
protections as well, including verifying
project completion before payment,
various consumer communications, and
oversight of home improvement
contractors. One environmental group
stated that PACE programs are
accountable to local government
oversight.
PACE industry stakeholders also
stated that the rate of consumer
complaints involving PACE transactions
has been low. A PACE company and an
industry trade association asserted that
approximately one in 1,000 PACE loans
have prompted consumer complaints
across several years. A different trade
association stated that a California DFPI
report on PACE showed only 69
complaints, and that all but two were
resolved. Two PACE companies stated
that the number of complaints has been
trending down, suggesting that industry
reforms have been effective at
addressing the consumer protection
issues from prior years.
Many commenters stated that the
proposal was premised on outdated
concerns, and that the CFPB should
have relied more heavily on more recent
trends and information. Some
commenters, including PACE
companies, a State agency, and a
government sponsor, stated that
evidence, including evidence from the
PACE Report and California DFPI
reports, for example, demonstrates that
consumer outcomes improved after
California’s and Missouri’s consumerprotection legislation took effect. Citing
to data from CAEATFA and the
Institutional Investor Journal of
Structured Finance, one PACE company
asserted that PACE financing does not
prevent subsequent home sales. This
commenter also stated that PACE
delinquency rates are improving, and
that PACE customers are usually able to
catch up on delinquent tax payments,
noting that 461 PACE delinquencies
were reflected in a 2021 annual report,
down from 889 delinquencies in the
previous year’s report. Eight Members of
the U.S. Congress stated that the
delinquency rate in Florida is lower
than in California after its 2018
California PACE Reforms.
A number of these commenters
acknowledged that, before States and
private industry stakeholders instituted
consumer protection measures, there
were concerns associated with PACE
financing. Several commenters
acknowledged that malfeasance by some
home improvement contractors created
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risk and harm for consumers. One PACE
company and a government sponsor
stated that home improvement
contractor malfeasance included, for
example, misrepresentation, forging
signatures on the loan contracts or
completion certificates, creating false
business records or contact information,
and simply disappearing after the
proceeds were disbursed. One State
regulator stated that around 45 percent
of claimants under a State-established
financial restitution program for
consumer fraud in residential solar
purchases from licensed contractors
were PACE customers, and that most of
the relevant contracts were executed
before the 2018 California PACE
Reforms took effect.
Several consumers who reported
receiving a PACE transaction described
various protections and benefits that
they received associated with the loan.
They asserted, for example, that the
PACE transactions provided financing
for home improvements on a short
timeline and lowered their
homeowner’s insurance premiums. One
home improvement contractor estimated
that 90 percent of homeowners that the
company has helped secure a PACE
loan have benefited from the program.
Several commenters asserted positive
impacts and benefits of PACE
transactions, which they asserted the
proposed rule would diminish.
Examples included (1) increased home
values, (2) increased access to
homeowner’s insurance, (3) better
access to credit for some consumers, (4)
job creation, (5) environmental benefits,
(6) lower utility bills, and (7) positive
impacts for small businesses. One
environmental group commented that
PACE transactions are unique because
they provide affordable, equitable,
fixed-rate financing for homeowners to
achieve public policy goals.
Some commenters stated that PACE
programs are uniquely designed to help
the environment and communities by
facilitating green and disaster-resilient
homes. One public PACE provider, in
discussing a recent history of natural
disasters, characterized PACE financing
as a critical public policy and public
safety tool. One PACE company stated
that local governments can tailor their
PACE programs to serve the individual
community needs.
Several commenters also stated that
PACE transactions represent a better
alternative to other financing options.
An individual commenter stated that
PACE financing provides low-cost
private capital funding to consumers,
and that given current high interest rates
on credit cards, a reduction in the
availability of PACE financing would be
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troubling for their State. An
environmental group stated that the
proposal would reduce PACE funding
access, which would push homeowners
into more expensive, less equitable
financing options that do not vet or
monitor contractors or contain anticonsumer clauses like variable rates or
prepayment penalties.
PACE industry stakeholders also
identified certain elements of the
transactions that the commenters
asserted make PACE transactions more
affordable, understandable, or secure.
These included assertions that PACE
transactions are nonrecourse and do not
accelerate upon default, and that the
total loan amount correlates to the
property value and a loan term that
cannot exceed the useful life of the
home improvement that is financed
with the PACE loan. Commenters
asserted that PACE transactions carry a
relatively low fixed interest rate, require
no downpayment, have no prepayment
penalty, and fully amortize.
Commenters noted that home
improvement contractors typically
receive no payment until the project is
complete, and that PACE transactions
can help lower insurance premiums for
homes that have been improved with a
completed PACE financed project. An
industry trade association for the PACE
industry asserted that PACE financing is
less risky than home equity lines of
credit or a second mortgage, which the
commenter said can strip equity without
a corresponding home improvement
project that would increase property
value.
At least three commenters expressed
concern that the proposed rule, if
finalized, would interfere with State
consumer protection laws that apply to
PACE transactions. A PACE company, a
government sponsor, and a trade
association asserted that the proposed
rule would complicate or conflict with
existing State laws, or interfere with
States’ ability to adjust their laws to
address concerns over time. One
commenter suggested this could
possibly result in preemption of State
laws.
A number of commenters, including
State attorneys general, PACE
companies, and bond counsel, stated
that regulating PACE transactions in this
rulemaking would be unconstitutional
under principles of federalism,
sovereign immunity, and
commandeering. Several commenters
asserted that the CFPB’s proposal would
encroach on States’ rights to use local
taxing and bonding authorities as they
see fit.
Numerous commenters asserted that
the proposal could have an impact on
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access to credit for home improvements
to improve energy efficiency of homes
or to strengthen homes’ resilience to
withstand natural disasters. A bank that
provides PACE funding stated that
PACE financing provides access to
capital to many borrowers who would
otherwise be unable to pay for energy
efficiency, renewable energy, or
resilience home improvements.
Members of the U.S. Congress stated
that PACE transactions provide low-tomoderate income families with access to
affordable financing for retrofits and
energy efficient home improvements.
Numerous commenters, including but
not limited to eight Members of the U.S.
Congress, PACE companies, and a
government association, stated that
PACE financing helps consumers
obtain, maintain, or reduce the cost of
homeowner’s insurance. A home
improvement contractor asserted that
the homeowners that use PACE
financing are the most vulnerable to
high energy bills and/or catastrophic
damage to their homes during a strong
storm or hurricane. One environmental
group asserted that California
protections caused reduced PACE
originations at a time when there are not
enough financing opportunities to meet
what they cast as overwhelming needs.
For the reasons set forth herein, the
CFPB is finalizing its proposed
amendment to comment 2(a)(14)–1.ii.
As finalized, amended comment
2(a)(14)–1.ii states that involuntary tax
liens, involuntary tax assessments, court
judgments, and court approvals of
reaffirmation of debts in bankruptcy are
not considered credit for purposes of the
regulation. By adding the word
‘‘involuntary’’ in several places to
modify the tax assessments and tax liens
excluded under comment 2(a)(14)–1.ii,
the CFPB clarifies that the comment
does not exclude tax liens and tax
assessments that arise from voluntary
contractual agreements, such as PACE
transactions. Thus, tax liens and tax
assessments that are voluntary will be
credit subject generally to TILA if they
meet the definition of credit under TILA
and Regulation Z and are not otherwise
excluded.102
The amendment brings the exclusion
in comment 2(a)(14)–1.ii in line with
the plain text definition of credit in
TILA. TILA defines ‘‘credit’’ to mean the
‘‘right granted by a creditor to a debtor
to defer payment of debt or to incur debt
and defer its payment,’’ and Regulation
Z defines ‘‘credit’’ as ‘‘the right to defer
102 Under the finalized amendment, tax liens and
tax assessments that are not voluntary for the
consumer would continue to be excluded.
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payment of debt or to incur debt and
defer its payment.’’ 103
PACE transactions easily fit these
definitions—the agreements provide for
consumers to receive funding for home
improvement projects and repay those
funds over time in installments.104
Consumers voluntarily incur these
financial obligations and are signatories
to the financing agreements. In brief,
consumers choose to take out the PACE
debt obligation and must repay it over
time.105
That PACE transactions are repaid
alongside property tax payments, do not
accelerate, are nonrecourse, or can
remain with the property after the
consumer sells the home does not
change the fundamental nature of the
transaction. Nor do other reasons
commenters asserted for why PACE
transactions should not be treated as
TILA credit—including that PACE
financing is authorized for important
public policy purposes under State law,
may have characteristics that differ from
other types of mortgage obligations, or
has produced benefits for industry
participants and communities. That
States may also have laws in place for
PACE financing is similarly
immaterial.106
103 15
U.S.C. 1602(f); 12 CFR 1026.2(a)(14).
PACE transactions as TILA credit is
consistent with the FTC’s assertion of claims
against a PACE company under the CFPB’s
Regulation N, 12 CFR part 1014, which the parties
settled pursuant to a proposed court order. See
Stipulation as to Entry of Order for Permanent
Injunction, Monetary Judgement, and Other Relief
(Oct. 28, 2022), https://www.ftc.gov/system/files/
ftc_gov/pdf/Stipulation%20-%20Dkt.%202%20%2022-cv-07864.pdf; see also part II.A (describing
the settlement). Regulation N, also known as the
Mortgage Acts and Practices—Advertising Rule,
implements section 626 of the Omnibus
Appropriations Act, 2009, as amended. 12 U.S.C.
5538. Regulation N applies to the advertising,
marketing, and sale of a ‘‘mortgage credit product,’’
defined as ‘‘any form of credit that is secured by
real property or a dwelling and that is offered or
extended to a consumer primarily for personal,
family, or household purposes.’’ 12 CFR 1014.2.
Regulation N defines ‘‘credit’’ identically to
Regulation Z but does not include any commentary
analogous to comment 2(a)(14)–1.ii to Regulation Z.
105 See also, 89 FR 68086, 68087 (Aug. 23, 2024);
89 FR 61358, 61360 (July 31, 2024).
106 States have rules in place governing
transactions that may also be subject to TILA,
including, for example, door-to-door sales (see, e.g.,
Idaho Admin. Code r. 04.02.01.160; Ohio Admin.
Code 109:4–3–11; Utah Admin. Code r. R152–11–
9; Wis. Admin. Code ATCP § 127.62) and home
improvement contractor work (see, e.g., Haw. Rev.
Stat. secs. 444–1 to 444–36; Haw. Code R. secs. 16–
77–1 to 16–77–117; La. Stat. secs. 37:2150 to
37:2764; N.J. Stat. secs. 17:16C–62 to 17:16C–94;
N.J. Stat. secs. 17:16C–95 to 17:16C–103; N.J. Stat.
sec. 56:8–151; Wash. Rev. Code secs. 19.186.005 to
19.186.060). In response to commenters’ concerns
that the proposed rule, if finalized, would interfere
with State consumer-protection laws that apply to
PACE transactions, the CFPB notes that TILA
preempts State disclosure laws only if they are
104 Treating
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Covering PACE transactions as credit
under TILA notwithstanding these
characteristics is consistent with the
treatment of other covered credit
transactions. For example, TILA
explicitly treats other nonrecourse
obligations as consumer credit,107 and
many mortgages are effectively
nonrecourse under State anti-deficiency
statutes.108 Other forms of TILA-covered
financing may also advance important
public policy purposes under State law.
To the extent there are unique aspects
of PACE transactions that warrant
adjustments, as mandated by EGRRCPA,
the CFPB is codifying amendments or
exemptions to that end, as described
below.109 The amendment to comment
2(a)(14)–1.ii does not specifically
address the coverage or characteristics
of PACE transactions; it merely removes
ambiguity that the existing regulatory
comment may have created, and that is
not reflected in the statute’s definition
of ‘‘credit.’’ Indeed, the original text of
comment 2(a)(14)–1.ii was not intended
to impinge on the statutory coverage of
voluntary transactions, such as PACE.
The Board of Governors of the Federal
Reserve System (Board) issued the
comment in 1981 when it officially
‘‘adopted, in substance’’ existing staff
opinion letters regarding Regulation
Z.110 In preamble and in several such
letters preceding issuance of the 1981
official staff interpretation, the Board
was clear that in addressing only
whether certain involuntary tax and
assessment obligations were credit
under TILA and Regulation Z. In one
letter, the Board stated that the
definition of ‘‘credit’’ ‘‘necessarily
assumes the right to avoid incurring
‘‘inconsistent’’ with it. TILA section 11(a), 15 U.S.C.
1610(a); 12 CFR 1026.28(a)(1). Additionally, any
State may apply to the CFPB to exempt a class of
transactions within the State from certain TILA and
Regulation Z provisions if the State’s law is
substantially similar to the Federal law (or, for
credit billing provisions, affords the consumer
greater protection than the Federal law) and there
is adequate provision for enforcement. 15 U.S.C.
1633; 12 CFR 1026.29(a).
107 See e.g., 12 CFR 1026.33 (requirements
applicable to nonrecourse reverse mortgages).
108 See generally Alaska Stat. sec. 34.20.090; Ariz.
Rev. Stat. secs. 33–814(G), 33–729(A); Cal. Civ.
Proc. Code secs. 580a–580d; Haw. Rev. Stat. sec.
667–38; Minn. Stat. sec. 582.30; Mont. Code secs.
71–1–232, 71–1–317; Nev. Rev. Stat. secs. 40.455,
40.458, 40.459; N.C. Gen. Stat. secs. 45–21.36, 45–
21.38, 45–21.38A; N.D. Cent. Code sec. 32–19–03;
Okla. Stat. tit. 12, secs. 686, 765, 773; Okla. Stat.
tit. 46, sec. 43; Or. Rev. Stat. sec. 86.797(2); Wash.
Rev. Code secs. 61.24.100.
109 The considerations discussed in this section as
to why PACE transactions should not be subject to
TILA also generally apply with respect to other
voluntary transactions that involve an assessment
on the property and are repaid through the property
tax system, even when they are not commonly
known as PACE transactions.
110 See 46 FR 50288, 50288, 50292 (Oct. 9, 1981).
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debt. That is, the debt must arise from
a contractual relationship, voluntarily
entered into, between the debtor and
creditor.’’ 111 Because ‘‘such a
relationship [did] not exist in the
delinquent tax arrangement case,’’ the
Board found that TILA and Regulation
Z ‘‘would not govern the
transaction.’’ 112
Other staff opinion letters contained
similar analyses,113 and the Board
reiterated this reasoning in final rule
preamble shortly before issuing the 1981
official staff interpretation, again
focusing on the involuntary nature of
the obligations as the reason they were
not credit.114 The Board explained:
Certain transactions do not involve the
voluntary incurring of debt; others do not
involve the right to defer a debt. Tax liens,
tax assessments and court judgments
(including reaffirmations of a debt discharged
in bankruptcy, if approved by a court) fall
into this category and are therefore not
covered by the regulation.115
Moreover, in this preamble and in the
1981 official staff interpretation, the
Board specifically juxtaposed the
excluded obligations with voluntary
ones, stating that, while the obligations
it was excluding are not credit, ‘‘thirdparty financing of such obligations (for
example, obtaining a bank loan to pay
off a tax lien) would constitute credit for
Truth in Lending purposes.’’ 116 There is
no indication that, in issuing the
comment excluding tax liens and tax
assessments, the Board had considered
any tax lien or tax assessment that had
originally arisen from a voluntary
contractual agreement.117
111 Fed. Rsrv. Bd., Public Information Letter No.
166 (1969).
112 Id.
113 See Fed. Rsrv. Bd., Public Information Letter
No. 153 (1969) (finding that sewer assessment
installment payments did not arise ‘‘from a
contractual relationship voluntarily entered into,
between debtor and creditor’’ and thus, that TILA
and Regulation Z would not apply); Fed. Rsrv. Bd.,
Public Information Letter No. 40 (1969) (‘‘[T]he term
‘credit’, for the purposes of Truth-in-Lending,
assumes a contractual relationship, voluntarily
entered, between creditor and debtor. Since such a
relationship [did] not exist in the case of tax
assessments by the Sewer District (and, similarly in
the case of ad valorem taxes imposed by a city),
. . . such assessments (and city taxes) would not
fall within the coverage of [TILA] or Regulation
Z.’’).
114 46 FR 20848, 20851 (Apr. 7, 1981).
115 Id.
116 Id.; see also 46 FR 50288, 50292 (Oct. 9, 1981)
(adopting the relevant comment with the same
language). In 2011, the authority to interpret TILA
and implement Regulation Z transferred to the
CFPB, which republished the 1981 Board
interpretation as an official CFPB interpretation in
comment 2(a)(14)–1.ii with no substantive changes.
117 With regard to the comment noting that the
proposal did not distinguish between voluntary and
involuntary court judgments, which are also
discussed in comment 2(a)(14)–1.ii, those
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Recognizing PACE financing as TILA
credit is consistent not only with TILA’s
definition of ‘‘credit,’’ but with the goals
of EGRRCPA section 307. By directing
the CFPB to prescribe certain
regulations for PACE financing under
TILA, in EGRRCPA section 307,
Congress evinced its intent for PACE
transactions to be covered as TILA
credit, in line with the text of the
statute. To the extent there has been
uncertainty as to whether PACE
financing is credit under TILA,
EGRRCPA section 307’s explicit choice
to address PACE financing using TILA
resolves the question.
More generally, Congress enacted
TILA in part to enable consumers ‘‘to
compare more readily the various credit
terms available’’ to them, and to ‘‘avoid
the uninformed use of credit.’’ 118 Many
commenters noted that PACE financing
can be used in place of other forms of
consumer credit (including home equity
lines of credit, personal loans, credit
cards, and mortgage loans) but there was
no consensus on which product was
best for the consumer. Ensuring that
consumers can compare these
alternatives promotes competition and
falls squarely within the congressional
intent and purpose of TILA.
Commenters concerned about coverage
of PACE transactions under TILA
provided no compelling reason why
consumers should not receive the same
disclosures and protections when
entering into a PACE transaction as
when entering into any other financing
transaction that could result in the loss
of their home. Additionally, clarifying
that voluntary tax liens and tax
assessments may still qualify as TILA
credit is necessary to prevent
circumvention or evasion of TILA’s
purposes, including as to PACE
transactions.
Regarding comments opposing TILA
coverage because PACE transactions
attach to the property, the CFPB notes
that PACE transactions are offered or
extended to consumers. Unlike
involuntary tax assessments and
liens,119 which are imposed upon real
property as a function of ownership and
without the owner’s specific consent,
PACE transactions cannot be completed
without a natural person (the
homeowner) signing a voluntary
transactions are distinct from PACE transactions
and are outside the scope of this rulemaking.
118 TILA section 102(a), 15 U.S.C. 1601(a).
119 In response to the suggestion to carve out
voluntary contractual assessments from the credit
exclusion, the CFPB concludes that adding the
word ‘‘involuntary’’ into comment 2(a)(14)–1.ii
appropriately distinguishes between transactions
that the consumer chooses to enter into and
transactions that are not voluntary for the
consumer.
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financing agreement secured by their
home; these transactions, like other
mortgage transactions, are always
offered or extended to consumers and
are secured by residential real property
that they personally own.120
Moreover, consumers who agree to
PACE transactions are functionally
responsible for ensuring their
repayment. PACE transactions are either
repaid, with interest, alongside regular
property tax payments, or, if those
payments are not made, at a tax sale or
foreclosure. Further, as several mortgage
industry stakeholders noted, before a
PACE borrower can refinance a home or
sell it, they typically must pay off the
remaining balance on the PACE
transaction or reduce the sales price to
account for the existing lien.121 In this
way, transferring a home with an
outstanding PACE transaction is no
different than transferring a property
subject to any other outstanding lien or
mortgage.
Because PACE transactions are credit
secured by residential real property,
removing the exclusion in comment
2(a)(14)–1.ii as to voluntary tax
assessments and tax liens ensures that
PACE loans are subject to TILA’s
mortgage requirements. For example,
various disclosure and other
requirements will apply to the entity
that is the ‘‘creditor’’ as defined in
§ 1026.2(a)(17), which the CFPB
120 See 12 CFR 1026.1(c)(1)(i) (stating one of the
four conditions of Regulation Z coverage is when
‘‘[t]he credit is offered or extended to consumer’’);
see also 12 CFR 1026.2(a)(12) (defining ‘‘consumer
credit’’ as that which is ‘‘offered or extended to a
consumer primarily for personal, family, or
household purposes’’); see also Fla. Stat. sec.
163.081(2) (‘‘The owner of record of the residential
property within the jurisdiction of an authorized
program may apply to the authorized program
administrator to finance a qualifying improvement.
The program administrator may only enter into a
financing agreement with the property owner.’’);
Cal. Sts. & Hwys. Code sec. 5898.20 (authorizing the
creation of PACE programs whereby ‘‘public agency
officials and property owners may enter into
voluntary contractual assessments for public
improvements and to make financing
arrangements’’).
121 Most home buyers are unwilling to take on the
remaining payment obligation for a PACE lien, or
their mortgage lender prohibits them from doing so.
Guidelines from both Fannie Mae and Freddie Mac
generally prohibit purchase of mortgages on
properties with outstanding first-lien PACE
obligations. See Fannie Mae, Property Assessed
Clean Energy Loans (Dec. 16, 2020), https://sellingguide.fanniemae.com/sel/b5-3.4-01/propertyassessed-clean-energy-loans and Freddie Mac,
Refinance of Mortgages secured by properties
subject to an energy retrofit loan (Sept. 4, 2024),
https://guide.freddiemac.com/app/guide/section/
4301.8. Similarly, the FHA updated its handbook
requirements in 2017 to prohibit insurance of
mortgage on properties with outstanding first-lien
PACE obligations, see U.S. Dept. of Hous. & Urb.
Dev., Property Assessed Clean Energy (PACE) (Dec.
7, 2017), https://www.hud.gov/sites/dfiles/OCHCO/
documents/17-18ml.pdf.
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understands is typically the government
sponsor in a PACE transaction.122 Other
requirements will apply to any entity
that operates as a ‘‘loan originator’’ for
a PACE transaction, which could
include a PACE company or home
improvement contractor depending on
the roles those entities play in a
particular transaction.123 Thus, the
clarification is necessary to effectuate
the purposes of the statute, such as
ensuring the meaningful disclosure of
credit terms to enable the consumer to
comparison shop.124 Ensuring that
voluntary consumer transactions such
as PACE are subject to the same
protections as other credit products
with similar characteristics strengthens
competition among financial
institutions and other firms engaged in
the extension of consumer credit.125
Regarding comments raising concerns
about the costs or operational challenges
that the higher-priced mortgage loan
appraisal rule could introduce, the
CFPB notes that TILA section
129H(b)(4) provides the CFPB and
certain other agencies with joint
rulemaking and exemption authority
with respect to the higher-priced
mortgage loan appraisal rule.126 As
such, any future rulemaking relating to
an higher-priced mortgage loan
appraisal rule exemption would need to
be considered and issued jointly by the
CFPB, Board, FDIC, OCC, NCUA, and
FHFA; the agencies would need to
determine that ‘‘the exemption is in the
122 Implementing TILA section 103(g),
§ 1026.2(a)(17) defines ‘‘creditor’’ generally as a
person who regularly extends consumer credit that
is subject to a finance charge or is payable by
written agreement in more than four installments,
and to whom the obligation is initially payable. The
CFPB’s understanding, consistent with comments
in response to the proposed rule and other research,
is that these characteristics apply to government
sponsors of PACE transactions in the PACE
programs that have been active.
123 Section 1026.36(a)(1) generally defines a ‘‘loan
originator’’ as a person who, in expectation of direct
or indirect compensation or other monetary gain or
for direct or indirect compensation or other
monetary gain, performs any of the following
activities: takes an application, offers, arranges,
assists a consumer in obtaining or applying to
obtain, negotiates, or otherwise obtains or makes an
extension of consumer credit for another person; or
through advertising or other means of
communication represents to the public that such
person can or will perform any of these activities.
See the section-by-section analysis of § 1026.41 for
discussion of servicing provisions in Regulation Z.
124 See 15 U.S.C. 1601(a).
125 Id.
126 15 U.S.C. 1639h(b)(4). Specifically, the
agencies with joint rulemaking and exemption
authority for the higher-priced mortgage loan rule
are the CFPB, the Board of Governors of the Federal
Reserve System (Board), the Federal Deposit
Insurance Corporation (FDIC), the Office of the
Comptroller of the Currency (OCC), the National
Credit Union Association (NCUA), and the Federal
Housing Finance Agency (FHFA). See TILA section
129H(b)(4)(A), 15 U.S.C. 1639h(b)(4)(A).
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public interest and promotes the safety
and soundness of creditors.’’
Regarding concerns that TILA
coverage would delay PACE
originations, other products that meet
the statutory definition of credit,
including home equity lines of credit,
personal loans, credit cards, or second
mortgages, may also be used for home
improvement projects and emergency
repairs. As discussed below, work on a
home improvement project frequently
does not and cannot start
immediately,127 and to the extent there
is urgency to originate a PACE
transaction, there are regulatory
mechanisms to permit consumers to
modify or waive the mandatory waiting
periods and receive the PACE loan
early, including the bona fide personal
financial emergency exception to the
TRID waiting periods.128 Moreover,
many commenters pointed to the pointof-sale business practice common to
PACE financing as contributing to
increased consumer risk. TILA coverage
of PACE transactions will thus help
consumers compare the various
available credit terms and ensure
competition among the various financial
institutions and other firms engaged in
the extension of consumer credit.129
The CFPB declines to adopt other
exemptions recommended by
commenters, including with regard to
PACE programs administered by
governments without the assistance of
private PACE companies, government
units as ‘‘creditors’’ under TILA with
respect to PACE transactions, or PACE
transactions secured by subordinate
liens. Although some of these factors
could lower risks for consumers, they
do not affect whether a PACE
transaction is credit under TILA. PACE
consumers in these circumstances will
benefit from TILA protections in the
ways Congress intended when codifying
TILA’s protections.
Recent efforts by States and PACE
industry stakeholders to enhance
consumer protections do not make TILA
requirements less meaningful for PACE
consumers. Further, as the PACE
industry continues to grow, some States
may not impose consumer protection
requirements similar to those under
TILA, and new private participants may
enter the industry that do not share the
same commitment to consumer
protections as current industry
stakeholders have shown in recent
years. For example, as some
commenters asserted, while PACE
borrowers may have more time to come
127 See
part VI.D.
12 CFR 1026.19(e)(1)(v) and (f)(1)(iv).
129 See 15 U.S.C. 1601(a).
128 See
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current on late payments than on a
traditional home mortgage, these
protections are highly variable from
State to State, and the ultimate result
may be the same—the loss of one’s
home due to default. The PACE Report
demonstrates—and a number of
industry stakeholders acknowledged in
comments—that, in previous years,
PACE financing created significant risk
for consumers. Nonetheless, TILA
applies regardless of the current level of
risk in any specific credit market.
In response to comments asserting the
rule unconstitutionally restricts States’
tax powers, the CFPB notes that PACE
transactions are voluntary financing
agreements between homeowners and
creditors that do not implicate or restrict
States’ sovereign taxation authority.
Moreover, Federal limits on State
taxation are authorized under the
Commerce Clause, and treating PACE
transactions as TILA credit does not
violate commandeering or related
federalism principles. Congress
expressly directed the application of
ability-to-repay rules and civil liability
provisions to PACE transactions in
EGRRCPA section 307. Rather than
directing States to enact, administer, or
enforce a Federal program, the rule
implements Congress’s mandate in
EGRRCPA section 307 to ensure that
States choosing to extend PACE credit
to consumers comply with applicable
Federal requirements.
The CFPB finalizes the amendment to
comment 2(a)(14)–1.ii pursuant to its
authority under TILA section 105(a) and
consistent with EGRRCPA section 307.
The amendment is necessary and proper
to carry out TILA’s purposes and
prevent circumvention or evasion
thereof, including the purposes of
assuring the meaningful disclosure of
credit terms and avoiding the
uninformed use of credit. Additionally,
EGRRCPA section 307 directs the CFPB
to prescribe certain regulations for
PACE financing under TILA, which
governs credit transactions. The
amendment to comment 2(a)(14)–1.ii is
necessary to remove any ambiguity that
the original comment created as to
PACE transactions and to carry out
congressional intent, both as to TILA
and EGRRCPA.
1026.32 Requirements for High-Cost
Mortgages and 1026.34 Prohibited Acts
or Practices in Connection With HighCost Mortgages
The Home Ownership and Equity
Protection Act (HOEPA) amended TILA
in 1994 to address abusive practices in
refinancing and home-equity mortgage
loans with high interest rates or high
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fees.130 The provisions of HOEPA are
implemented in Regulation Z in
§§ 1026.32 and 1026.34.131
The CFPB did not propose any
changes to these provisions and is not
amending them in this final rule.
Sections 1026.32 and 1026.34 will apply
to PACE transactions that are high-cost
mortgages under § 1026.32(a)(1) in the
same way as other high-cost
mortgages.132 The CFPB requested
comment on whether any clarification
was required with respect to how
HOEPA’s provisions, as implemented in
Regulation Z, apply to PACE
transactions that may qualify as highcost mortgages.
Several commenters supported
requiring HOEPA compliance for PACE
loans. A credit union trade association
asserted that HOEPA should apply, to
ensure that consumers with PACE loans
receive the same protections as those
with other mortgage loans. In response
to the CFPB’s specific request for
comment on the treatment of late fees,
consumer group commenters opposed
distinguishing late fees that apply under
property tax law from those that are
imposed by the PACE contract. They
recommended specifying that there is
no distinction. They asserted that such
a distinction would contravene the
intent of HOEPA—to protect vulnerable
consumers who receive relatively
expensive mortgage loans—because
property tax late penalties can be
significant and must be paid on top of
interest required by the PACE financing
agreement.
A State agency similarly stated that
HOEPA’s late fee limitations should not
be relaxed for PACE loans. This
commenter pointed to the HOEPA
provision concerning late payment
charges at § 1026.34(a)(8)(iv), which the
commenter characterized as punitive for
consumers who are more likely to
default. The commenter also stated that
PACE lenders should not be permitted
to increase interest rates after default; it
130 Public
Law 103–325, 108 Stat. 2160.
CFR part 1026.
132 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 CFPB 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.
131 12
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asserted that doing so could force
borrowers who are having difficulty into
foreclosure or inescapable debt.
A PACE company, an industry trade
association, and a PACE government
sponsor asserted that requiring HOEPA
compliance would inhibit PACE
originations. A PACE company stated
that HOEPA application would make
PACE lending cost-prohibitive or
economically nonviable. Several
asserted that HOEPA would increase
compliance costs. A PACE industry
trade association and a government
sponsor asserted that PACE programs
are already costly to administer due to
certain consumer protections or
consumer benefits, and that the CFPB
failed to consider these factors in
proposing to subject PACE transactions
to HOEPA’s requirements.
A PACE company and a government
sponsor asserted that requiring HOEPA
compliance would effectively cap the
price of PACE loans. A PACE company
and an industry trade association
opposed HOEPA application because
PACE transactions are smaller and
generate less revenue than many other
high-cost mortgage loans. The trade
association stated that lower revenue
and higher origination costs make it
more difficult to originate PACE loans
and come in under the high-cost
thresholds. One PACE company
asserted that, if the CFPB does not
exempt PACE loans, it should raise the
applicable HOEPA thresholds for PACE
transactions. Some PACE industry
commenters addressed high-cost
requirements in combination with
higher-priced mortgage loan
requirements, generally opposing both
sets of requirements.
One PACE company commented that
two high-cost requirements in
Regulation Z would make compliance
difficult or impossible: the prohibition
on loan proceeds being paid to home
improvement contractors under
§ 1026.34(a)(1), and housing counseling
certification requirements under
§ 1026.34(a)(5).
Having considered the comments, the
CFPB has determined not to adjust the
HOEPA requirements for PACE loans.
As described in the discussion of
§ 1026.2(a)(14), the CFPB is amending
commentary to Regulation Z to clarify
that voluntary transactions such as
PACE are credit under TILA
notwithstanding their integration into
the property tax system. Consumers
receiving high-cost PACE loans should
receive HOEPA protections just as
consumers receiving other high-cost
mortgage loans do.
For example, the additional
disclosures and credit counseling
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requirements will ensure consumers are
provided information to inform their
credit decisions,133 and restrictions on
certain riskier loan features will
enhance the safety of the loans.134
Additionally, the limitations on fees
that can be charged for payoff
statements may make it easier for
consumers who receive high-cost PACE
loans to access loan information at
minimal cost, which could be useful in
light of the final rule’s exemption of
PACE loans from the periodic statement
requirement under § 1026.41.135
More generally, weakening the
HOEPA requirements for PACE loans
would be inconsistent with the
governing statute. Under TILA section
129(p), the CFPB may exempt specific
mortgage products or categories of
mortgages from certain HOEPA
prohibitions if the CFPB finds that the
exemption (1) is in the interest of the
borrowing public, and (2) will apply
only to products that maintain and
strengthen homeownership and equity
protection.136
Limiting HOEPA application would
neither be in the interest of the
borrowing public nor maintain and
strengthen homeownership and equity
protection. As described in part II.A, the
super-priority status of liens securing
PACE loans means that the parties
involved in originating PACE loans have
limited incentive to ensure consumer
understanding and affordability. This
leaves consumers at risk.
The findings in the PACE Report bear
out these concerns. The PACE Report
finds that more than 70 percent of PACE
borrowers had pre-existing non-PACE
mortgages, and PACE industry
commenters suggested that the true
figure is closer to 90 percent. The PACE
Report finds that PACE lending
increased mortgage delinquency rates by
2.5 percentage points over a two-year
period—getting a PACE loan increased
the risk of mortgage delinquency by
about 35 percent.137 The PACE Report
further finds that the probability of
delinquency on a pre-existing mortgage
loan was substantially higher for PACE
consumers with low credit scores—
consumers in the sub-prime credit score
group experienced an increase in
mortgage delinquency almost two and a
half times the average effect.138
The CFPB also notes that the
exemption authority in TILA section
133 See 12 CFR 1026.32(c) (disclosure
requirements); 34(a)(5) (pre-loan counseling
requirements).
134 See 12 CFR 1026.32(d).
135 See 12 CFR 1026.34(a)(9).
136 15 U.S.C. 1639(p).
137 See PACE Report, supra note 12, at 4, 26–27.
138 See id. at 36–37.
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129(p) does not apply to certain HOEPA
requirements.
The CFPB acknowledges, as industry
commenters have noted, that lending
practices and State law have evolved
since the origination of the PACE loans
reflected in the PACE Report, that
consumers may choose to select PACE
financing despite the higher costs
relative to other forms of financing, and
that PACE financing may help some
consumers access credit or may advance
public policy purposes. These
considerations do not provide a basis for
limiting HOEPA protections.
Although some commenters asserted
that the application of HOEPA
protections would inhibit PACE lending
or make it infeasible, the CFPB
estimated that nearly two-thirds of
PACE loans studied in the PACE Report
would not have exceeded HOEPA
thresholds (including nearly 90 percent
of PACE loans in Florida).139
One PACE company asserted that
HOEPA application would prevent
payment of home improvement
contractors with funds from the PACE
loan. However, Regulation Z specifically
allows for payment of home
improvement contracts with loan
proceeds in certain circumstances.140
Although one commenter expressed
concern that HUD has not approved
housing counseling for PACE loans, in
general HUD does not approve housing
counseling for particular types of
mortgage loans. Current housing
counseling requirements include
counseling on topics such as financial
literacy and budget planning, which are
applicable irrespective of the loan
product.141
1026.35 Escrow Accounts
1026.35(b) Exemptions
1026.35(b)(2)(i)
1026.35(b)(2)(i)(E)
TILA section 129D generally requires
creditors to establish escrow accounts
for certain higher-priced mortgage
loans.142 Regulation Z implements this
requirement in § 1026.35(a) and (b). The
139 See
id. at 15–16.
1026.34(a)(1) prohibits payment to a
contractor under a home improvement contract
from the proceeds of a high-cost mortgage, other
than (1) by an instrument payable to the consumer
or jointly to the consumer and the contractor, or (2)
at the election of the consumer, through a thirdparty escrow agent in accordance with terms
established in a written agreement signed by the
consumer, the creditor, and the contractor prior to
the disbursement.
141 Dep’t of Hous. & Urb. Dev., Housing
Counseling Program Handbook (7610.1) (Apr.
2024), https://www.hud.gov/program_offices/
administration/hudclips/handbooks/hsgh/7610.1.
142 15 U.S.C. 1639d.
140 Section
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CFPB proposed to exempt PACE
transactions from this higher-priced
mortgage loan escrow requirement. For
the reasons discussed in this section,
the CFPB is finalizing the proposed
exemption.
Regulation Z defines a higher-priced
mortgage loan as a closed-end consumer
credit transaction secured by the
consumer’s principal dwelling with an
APR exceeding the average prime offer
rate (APOR) 143 for a comparable
transaction by a certain number of
percentage points.144 With certain
exemptions, Regulation Z § 1026.35(b)
prohibits creditors from extending
higher-priced mortgage loans secured by
first liens on consumers’ principal
dwellings unless an escrow account is
established before consummation for
payment of property taxes, among other
charges (higher-priced mortgage loan
escrow requirement).
The CFPB received comments on the
proposed exemption from the higherpriced mortgage loan escrow
requirement from consumer groups and
public and private PACE industry
stakeholders, none of which advocated
for retaining the requirement for PACE
transactions. A PACE company
suggested increasing applicable
thresholds to avoid higher-priced
mortgage loan requirements generally,
since PACE originators would have to
do the same amount of work as nonPACE mortgage originators but receive
only a fraction of the revenue. An
industry trade association made a
similar point, stating that the revenue
from fees and interest from PACE loans
is significantly smaller than that of nonPACE mortgage loans and that the
higher-priced mortgage loan
requirements would be unduly costly
for PACE loans.
The CFPB concludes that requiring
escrow accounts for PACE transactions
that would be subject to the higherpriced mortgage loan escrow
requirement would provide little or no
benefit to consumers and would
introduce unnecessary challenges and
costs associated with implementation
and compliance.
143 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.
144 12 CFR 1026.35(a)(1) defines higher-priced
mortgage loan 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.
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Many PACE borrowers already have
escrow accounts through their preexisting mortgage loan.145 For these
consumers, PACE payments are already
incorporated into the mortgage escrow
accounts as part of the property tax
payment. The CFPB has determined that
TILA’s higher-priced mortgage loan
escrow requirements are not warranted
for PACE borrowers who do not have an
escrow account with a pre-existing
mortgage loan.
If PACE transactions had escrow
accounts, those escrow accounts would
be governed by rules in Regulation X.146
The rules include a variety of
requirements governing, for example,
escrow account analyses, escrow
account statements, and the treatment of
surpluses, shortages, and deficiencies in
escrow accounts.147 Although these
protections serve important consumer
protection purposes with respect to the
administration of escrow accounts for
non-PACE mortgages, the consumer
benefit for PACE loans is significantly
reduced. Therefore, the CFPB has
determined that requiring compliance
would not be warranted for PACE loans
given the lack of consumer benefit.148
Further, certain escrow account
disclosures required under Regulation
X 149 and Regulation Z 150 could be
confusing in the context of PACE
transactions. 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 for the PACE loan
as part of the property tax payment.
Additionally, the escrow account
disclosures, if required for PACE
transactions, might create uncertainty
about whether the PACE transaction
affects the consumer’s pre-existing
mortgage escrow account, when
applicable.
To the extent consumers lack
information about their overall payment
obligations, and to the extent this could
lead to them receiving unaffordable
PACE loans, such concerns are better
addressed through other TILA
145 The PACE Report estimated that nearly threefourths of PACE borrowers had a mortgage loan at
the time the PACE loan was consummated. See
PACE Report, supra note 12, at 12. Several PACE
industry commenters stated that the figure is closer
to 90 percent.
146 See generally Regulation X, 12 CFR 1024.17.
147 Id.
148 Commenters to the 2008 higher-priced
mortgage loan escrows 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).
149 See 12 CFR 1024.17(g)–(j).
150 See 12 CFR 1026.37, .38.
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provisions, including the TILA–RESPA
integrated disclosures and ability-torepay requirements that are tailored to
PACE as discussed further below.151
While an escrow account can help
spread out payments and thereby reduce
the risk of payment shock or default, the
CFPB at this time concludes that the
cost and complexity of doing so for the
share of PACE borrowers without an
existing escrow account outweigh the
potential consumer benefits.
The CFPB is adopting this exemption
pursuant to TILA sections 105(a) and
105(f). Exempting PACE transactions
from the requirements of TILA section
125D is necessary or proper to effectuate
the purposes of TILA. Having
considered the factors enumerated in
TILA section 105(f), the CFPB has
determined that the requirements of
TILA section 125D would not provide a
meaningful benefit to consumers in the
form of useful information or protection.
In particular, the requirements of TILA
section 125D would significantly
complicate, hinder, and make more
expensive the credit process for PACE
transactions, and the goal of consumer
protection would not be undermined by
this exemption.
disclosure reflecting the actual terms of
the transaction.
As the CFPB explained in the 2013
TILA–RESPA Rule, the TILA–RESPA
integrated disclosure forms are designed
to make it easier for consumers to locate
key cost information to help consumers
decide whether they can afford the
loan.155 The forms also provide
information to compare different loan
offers.156 The benefits of these forms are
important for PACE borrowers just as
they are for other mortgage borrowers.
The CFPB has determined that certain
elements of the current TILA–RESPA
integrated disclosures should be
adapted so that the forms more
effectively disclose information about
PACE transactions. After proposing
amendments and considering
comments, the CFPB is finalizing the
modifications to the Loan Estimate and
Closing Disclosure described below.
Where this final rule does not provide
a PACE-specific version of a particular
provision, the existing requirements in
§§ 1026.37 and 1026.38 will apply. As
with other mortgage transactions,
elements of the forms that are not
applicable for PACE transactions may
generally be left blank.157
TILA–RESPA Integrated Disclosure
Requirements Implemented Under
Sections 1026.37 and 1026.38
Requiring the Disclosures for PACE
Transactions
Many commenters supported
implementation of the CFPB’s proposed
Loan Estimate and Closing Disclosure
for PACE transactions, including
consumer groups, mortgage industry
trade associations, a credit union league,
and a banking trade association. Several
consumer groups and credit union
leagues stated that TILA–RESPA
integrated disclosure forms would
provide consumers with detailed
information about PACE transactions,
which would improve transparency and
consumers’ ability to comparison shop.
Several mortgage industry trade
associations and consumer groups
stated that TILA–RESPA integrated
disclosure forms would improve the
process through which PACE is
marketed to consumers.
Commenters raised a number of issues
with the information that consumers
currently receive during the marketing
and origination process. For example,
some stated that PACE transactions are
often marketed through door-to-door
solicitations and are sometimes
accompanied by insufficient
disclosures. Several mortgage industry
trade associations and consumer groups
stated that some PACE solicitations
The CFPA directed the CFPB to
integrate the mortgage loan disclosures
required under TILA and RESPA
sections 4 and 5, and to publish model
disclosure forms to facilitate
compliance.152 The CFPB issued
regulatory requirements and model
forms to satisfy these statutory
obligations in 2013 (2013 TILA–RESPA
Rule).153 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
§ 1026.33.154
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. The Closing Disclosure is a final
151 See section-by-section analyses of §§ 1026.37,
1026.38, and 106.43, infra.
152 CFPA sections 1098 & 1100A, codified at 12
U.S.C. 2603(a) & 15 U.S.C. 1604(b), respectively.
153 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/.
154 See § 1026.19(e)(1) and (f)(1).
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155 78
FR 79730, 80225 (Dec. 31, 2013).
156 Id.
157 See
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include pressure to sign up and
misrepresentations of various features of
the PACE loan, including projected
energy savings.
Some commenters suggested that
these problems can contribute to
consumers’ inability to afford a PACE
loan. One consumer group indicated
that inadequate disclosures and the lack
of standardized TILA disclosure forms
often lead to unexpected and
unaffordable tax payment spikes, which
may cause delinquency and late fees.
Many commenters stated that requiring
a Loan Estimate and Closing Disclosure
for PACE transactions would alleviate
these problems and improve consumers’
experience during PACE originations.
One government sponsor of PACE
programs and one PACE company
expressed concern regarding the cost of
implementing the TILA–RESPA
integrated disclosures, particularly
because the Loan Estimate and Closing
Disclosure have what the commenters
stated are duplicative fields, and
because the forms contain fields that are
irrelevant for PACE transactions. The
government sponsor and PACE
company also asserted that requiring the
TILA–RESPA integrated disclosures
would be ill-advised because the CFPB
did not test the proposed modifications.
PACE companies and one PACE
industry trade association asserted that
the current PACE disclosure regime,
which includes among other things
disclosures and calls with the consumer
to confirm their understanding of the
transaction, is sufficient. Commenters
also stated that TILA–RESPA integrated
disclosures are better suited to nonPACE mortgage transactions, which are
larger than PACE transactions. One
PACE company asserted that
implementing TILA–RESPA integrated
disclosure forms would be burdensome
for financing transactions involving
home improvement projects, which
often involve change orders, because redisclosure would be required for every
change.
In this final rule, the CFPB is
requiring TILA–RESPA integrated
disclosures for PACE loans, with
modifications from the proposal as
described below. The CFPB is also
finalizing model forms in appendix H–
24(H) (Loan Estimate) and appendix H–
25(K) (Closing Disclosure) and Spanishlanguage versions in appendix H–28(K)
(Loan Estimate) and appendix H–28(L)
(Closing Disclosure).
The CFPB reiterates that the Loan
Estimate and Closing Disclosure provide
uniform mortgage disclosures that help
consumers readily compare financing
options, across financing products.
Disclosures provided under State law or
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voluntarily by PACE companies, while
potentially useful for consumers, would
not be a substitute. Further, with respect
to concerns that certain fields on the
TILA–RESPA integrated disclosures
would not pertain to PACE transactions,
as with other mortgage transactions,
fields that are irrelevant to particular
PACE transactions may generally be left
blank. With respect to the comment that
the forms were not tested by the CFPB,
the CFPB notes that, while the PACEspecific modifications were not tested,
the current TILA–RESPA integrated
disclosure forms, on which the PACE
forms were based, were tested by the
CFPB.
With respect to the comment that
TILA–RESPA integrated disclosure
forms are particularly burdensome for
PACE home improvement projects
because change orders would require redisclosure, the CFPB notes that many
non-PACE home improvement loans,
including those with change orders, use
the TILA–RESPA integrated disclosure
forms. Also, a revised Loan Estimate is
not required for changes in the amounts
of estimated charges for third-party
services not required by the creditor;
rather, that original estimated charge is
in good faith under the rule so long as
it was based on the best information
reasonably available to the creditor at
the time the disclosure was provided.
Further, the TILA–RESPA integrated
disclosure requirements apply to
disclosures made before or at
consummation. The rule only requires
re-disclosure post-consummation in
limited instances, primarily if an event
in connection with the settlement
occurs during the 30-calendar-day
period after consummation and that
event causes the Closing Disclosure to
become inaccurate and results in a
change to an amount paid by the
consumer from what was previously
disclosed.158
The CFPB is implementing the
disclosure requirements described in
the section-by-section analyses of
§§ 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 CFPB has determined that the
implementation would be necessary and
proper to carry out the purposes of TILA
and RESPA. The provisions that
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,
158 See
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2453
avoid the uninformed use of credit, or
facilitate compliance with TILA. In
general, the changes are intended to
make the Loan Estimate and Closing
Disclosure more effective and
understandable for PACE borrowers,
and to facilitate compliance given the
common features of PACE transactions.
The CFPB has determined that the
provisions that implement the
disclosure requirements under RESPA
section 19(a), including interpretations
discussed in the applicable section-bysection analysis, further the purposes of
RESPA and are consistent with the
CFPB’s authority under RESPA section
19(a).
For the reasons discussed in the
respective section-by-section analyses,
the CFPB is finalizing 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
CFPB has determined that the
exemptions are 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
CFPB’s determination, after considering
the factors in TILA section 105(f)(2), is
that the disclosures exempted under
this final rule would not provide
meaningful benefit to consumers in the
form of useful information or protection.
In the CFPB’s analysis, the exempted
disclosure requirements would
significantly complicate, hinder, or
make more expensive credit for PACE
transactions, and the exemptions do not
undermine the goal of consumer
protection. Where doing so would help
assure the meaningful disclosure of
credit terms and avoid the uninformed
use of credit, the final rule replaces the
exempted disclosures with disclosures
that serve similar purposes to the
existing disclosures, but that better fit
the context of PACE transactions.
Specific Recommendations for Changes
to Existing Forms
Some commenters asserted that
certain aspects of the existing Loan
Estimates or Closing Disclosures could
be confusing to consumers under the
proposal. For example, a PACE
company suggested that disclosure of
loan purpose, required under
§ 1026.37(a)(9) for the Loan Estimate
and § 1026.38(a)(5)(ii) for the Closing
Disclosure, could be confusing to
consumers. Consumer groups and a
PACE company made similar assertions
about the loan type, required under
§ 1026.37(a)(11) for the Loan Estimate
and § 1026.38(a)(5)(iv) for the Closing
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Disclosure. A PACE company stated that
the information required under
§ 1026.37(g)(3) pertaining to escrow
costs should be removed, consistent
with other aspects of the proposed form
as explained below, in part to avoid
consumer confusion. Two consumer
groups made a similar point about the
similar disclosure on the Closing
Disclosure as discussed under
§ 1026.38(u) below.
The CFPB did not propose to amend
these requirements and is not making
changes in the final rule. The existing
provisions are not likely to cause
confusion. Additionally, with respect to
the loan type and loan purpose
disclosures, referring to PACE loans in
a disclosure using mortgage
terminology, such as disclosing the loan
purpose as a ‘‘home equity loan,’’ will
not likely cause consumer confusion
and instead will help reinforce that
PACE loans are mortgages. The CFPB
also expects that consumers are less
likely to be confused by the escrowrelated fields under §§ 1026.37(g)(3) and
1026.38(g)(3) than fields referencing
escrow payments elsewhere on the form
because of their content and location on
the form. To the extent that
§§ 1026.37(g)(3) or 1026.38(g)(3) do not
apply to a particular transaction,
creditors may leave the fields blank.
The CFPB likewise is not adopting
recommendations to remove references
to PACE transactions as ‘‘loans’’ or to
limit the length of the TILA–RESPA
integrated disclosure forms, as PACE
industry stakeholders suggested. The
term ‘‘loan’’ accurately describes PACE
transactions, so its use helps avoid the
uninformed use of credit. And changing
the length requirements for PACE forms
would make them dissimilar to those
used in non-PACE transactions, which
would frustrate the purposes of TILA to
assure meaningful disclosure of credit
terms to enable consumers to compare
more readily the various credit terms
available and avoid the uninformed use
of credit.
Waiting Period
The CFPB is not amending the timing
requirements for the Loan Estimate and
Closing Disclosure for PACE
transactions. The CFPB explained in the
2013 TILA–RESPA Rule that the sevenbusiness-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.159 The
159 78 FR 79730, 79802–03 (Dec. 31, 2013); see
also id. at 79806–07 (reasoning in context of
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CFPB explained that the three-businessday period following provision of the
Closing Disclosure greatly enhances
consumer awareness and understanding
of the costs associated with the
mortgage transaction.160 As explained in
the 2013 TILA–RESPA Rule, it is
important for consumers to have a
meaningful opportunity to shop for a
mortgage loan, compare the different
financing options available, and
negotiate for favorable terms, and the
waiting period should only be waived in
the most stringent of circumstances.161
Numerous consumer groups and
mortgage industry trade associations
expressed support for adopting the
TILA–RESPA integrated disclosure
timing requirements for PACE
transactions. These commenters stated
that the waiting periods will provide
consumers time to review detailed
information and make informed
financial decisions. These commenters
asserted that consumers often feel
rushed through the origination process
for PACE transactions because they are
faced with door-to-door solicitations
from contractors who pressure them to
sign up quickly and do not provide
adequate time to review applicable
information. Several consumer groups
stated that the mandatory waiting
periods are necessary for consumers to
consider the impact of the loan on
future transactions. For example, these
groups indicated that PACE transactions
may affect a consumer’s ability to
refinance or sell their home in the
future.
Several home improvement
contractors and one PACE trade
association opposed imposing TILA–
RESPA integrated disclosure timing
requirements on PACE transactions.
These commenters stated that the
mandatory waiting periods would have
adverse effects for PACE businesses as
well as consumers. Specifically, these
commenters asserted that PACE-related
home improvements are often for
emergency situations, and that the
TILA–RESPA timing requirements
would prevent PACE companies from
starting work quickly, which would
cause harm to consumers. Some
commenters expressed concern that the
mandatory waiting periods would
impede PACE companies’ ability to
attract customers, particularly because
they would impede the point-of-sale
financing model that PACE customers
prefer.
Two PACE providers asserted that the
mandatory waiting period should not
apply to PACE loans because the
mandatory timelines were created for
non-PACE mortgages, many of which
are larger transactions than PACE loans.
One PACE company stated that waiting
periods are not required for most
financing transactions, including auto
loans, which are usually costlier than
PACE transactions. One PACE company
stated that Regulation Z provides an
exception to the timing requirements for
loans secured by a timeshare interest,
and that the regulation should similarly
make exceptions for PACE loans
because of similarities between the two
types of obligations.
One home improvement contractor
and one PACE company commented
that, because California law already
provides a right to cancel for PACE
transactions, the TILA–RESPA
integrated disclosure waiting period is
unnecessary. One PACE company stated
that the waiting period is unnecessary
because the FTC’s Cooling-Off Rule
gives consumers three days to cancel
certain sales, including sales made at
consumer’s homes.
As with the substantive disclosures,
the waiting periods associated with the
TILA–RESPA integrated disclosures will
be important for 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.162 As
explained in part II.A, PACE loans are
highly secure for investors even when
consumers cannot afford to pay. This
structure can affect incentives of
originators, making it important for
PACE consumers to have enough time to
consider the uniform disclosures. Pointof-sale originations have long been a
source of concern—many States require
a cooling-off period before home
improvement loans based on point-ofsale originations, and this precise
concern was at the root of many of
HOEPA’s original purposes.163
162 See
part II.A, supra.
To Protect Home Ownership and Equity
through Enhanced Disclosure of the Risks
Associated with Certain Mortgages: Hearings on
The Home Ownership and Equity Protection Act of
1993, Hearing on S. 924 before the S. Comm. on
Banking, Fin. & Urb. Affs., 103d Cong. (1993); The
Home Equity Protection Act of 1993, Hearings on
H.R. 3153 before the Subcomm. on Consumer Credit
& Ins. of the H. Comm. on Banking, Fin. & Urb.
Affairs, 103d Cong. (1994); Reverse Redlining;
Problems in Home Equity Lending, Hearings before
the S. Comm. on Banking, Hous., & Urb. Affs., 103d
163 See
considering amendments to bona fide personal
financial emergencies that, at least with respect to
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).
160 78 FR 79730, 79847 (Dec. 31, 2013).
161 Id. at 79806–07.
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The CFPB notes that Regulation Z
allows consumers to modify or waive
applicable waiting periods if the
consumer has a bona fide personal
financial emergency.164 Some
commenters stated that consumers may
face emergency situations necessitating
swifter originations—to the extent the
emergency is a bona fide personal
financial emergency, Regulation Z
already provides an exception.
With respect to the comment that the
mandatory waiting periods are not
appropriate for PACE loans because
PACE loans are smaller than other
mortgage loans, the CFPB notes that
neither TILA nor Regulation Z impose
different waiting periods for mortgage
loans under a certain size. Indeed, the
waiting periods under the current rule
apply to home equity loans of a similar
size to PACE transactions, many of
which may not have the same structural
risks as PACE transactions.
As to the comment that waiting
periods are not required for other types
of transactions, such as auto loans, the
CFPB notes that, unlike mortgage loans
subject to the waiting period, auto
lending is not secured by the
consumer’s real property. TILA
explicitly requires waiting periods for
credit secured by a dwelling.165
Congress specifically intended for
transactions subject to the TILA–RESPA
integrated disclosure rule to be subject
to certain waiting periods.
Regarding the comment that the CFPB
should provide for exceptions to the
timing requirements for PACE loans
because Regulation Z already does so for
timeshare loans, the CFPB notes that
PACE loans have structural risks as
described above that waiting periods
would directly address. Also, timeshare
loans are secured only by the
consumer’s fractional interest in a
timeshare unit, so the financial stakes,
while significant, are somewhat lower.
The CFPB also notes that TILA section
128(b)(2)(G)(i)(1) specifically excludes
timeshare plans from the statutory
TILA–RESPA waiting period
requirements but provides no similar
Cong. (1993) (describing potential targeting of a
widowed immigrant consumer by point-of-sale loan
originators who ‘‘came door to door trying to sell
home improvements at an inflated price, on very
severe credit terms’’); see, e.g., Home Solicitation
Sales Act of 1971, Cal. Civ. Code secs. 1689.5–
1689.13 (allows the buyer in almost any consumer
transaction involving $25 or more, which takes
place in the buyer’s home or away from the seller’s
place of business, to cancel the transaction within
three business days after signing the contract).
164 12 CFR 1026.19(e)(1)(v), (f)(1)(iv).
165 15 U.S.C. 1638(b)(2)(A).
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exclusion for other types of credit
secured by a dwelling.166
In response to the comments that the
TILA–RESPA waiting period is
unnecessary because State law or the
FTC’s Cooling-Off Rule already provides
a right to cancel PACE loans, the CFPB
notes that the waiting period applies to
other home equity loans that involve
door-to-door solicitation, and there is no
reason to exempt PACE home
improvement contractors in particular.
Also, a waiting period and a right to
cancel provide different consumer
protections. The TILA–RESPA waiting
period ensures that consumers have
time to understand the obligation and
shop before signing up, whereas rights
to cancel or rescission rights apply after
consummation. Additionally, the final
rule will provide a nationwide baseline
waiting period for PACE transactions
under Regulation Z.
Section 1026.37 Content of Disclosures
for Certain Mortgage Transactions (Loan
Estimate)
1026.37(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) sets 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. The CFPB is
finalizing § 1026.37(p) largely as
proposed.
1026.37(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, § 1026.37(c)(2) requires
the itemization of each separate periodic
payment or range of payments disclosed
on the periodic payments table. The
CFPB is finalizing changes to certain of
these requirements under
§ 1026.37(p)(1)(i) and (ii) as explained
below.
1026.37(p)(1)(i) Other Fees and
Amounts
Section 1026.37(c)(2)(ii) requires the
disclosure of the maximum amount
payable for mortgage insurance
premiums corresponding to the
166 See 15 U.S.C. 1638(b)(2)(G)(i)(1) (referring to
‘‘a plan described in’’ 11 U.S.C. 101(53D)).
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2455
principal and interest payment
disclosed on the projected payments
table, labeled ‘‘Mortgage Insurance.’’
Two consumer groups, a PACE
company, and a government sponsor of
PACE programs suggested that the field
for ‘‘Mortgage Insurance’’ that currently
appears in the projected payments table
does not fit because PACE transactions
do not carry mortgage insurance. The
consumer groups also suggested adding
a field titled ‘‘Annual Administrative
Fee’’ to capture a fee that consumers
must often pay that would not be
considered part of their principal or
interest payment.
The CFPB is adding § 1026.37(p)(1)(i)
to ensure the projected payments table
accurately discloses payment
information relevant to the PACE
transaction. Section 1026.37(p)(1)(i)
removes the mortgage insurance field
from the projected payments table for
PACE transactions because that field is
not applicable to PACE transactions as
some commenters asserted—the CFPB is
unaware of any PACE transactions that
carry mortgage insurance. In place of the
mortgage insurance field,
§ 1026.37(p)(1)(i) requires the disclosure
of ‘‘Fees and Other Amounts,’’ which
includes the maximum amount payable
for any fees or other amounts
corresponding to the periodic payment
for the PACE transaction that are not
disclosed as part of the principal and
interest disclosure under
§ 1026.37(c)(2)(i). Section
1026.37(p)(1)(i) requires that the amount
disclosed under the ‘‘Fees and Other
Amounts’’ field be included in the
calculation of the total periodic
payment under § 1026.37(c)(2)(iv) in
place of the amount disclosed for
mortgage insurance under
§ 1026.37(c)(2)(ii).
1026.37(p)(1)(ii) Escrow
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
time. The CFPB proposed to exempt
PACE transactions from the escrow
account payment disclosure
requirements under § 1026.37(c)(2)(iii).
As discussed in the analysis of
§ 1026.35(b)(2)(i)(E), the CFPB is
unaware of any PACE transactions that
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carry their own escrow accounts. Thus,
absent an exemption, the escrow
account payment field under
§ 1026.37(c)(2)(iii) would have generally
been disclosed as ‘‘0’’ if this field were
included on the Loan Estimate
associated with any PACE
transaction.167 This entry would likely
cause confusion for PACE borrowers
who pay their property taxes into preexisting escrow accounts associated
with non-PACE mortgage loans, since
PACE transactions are typically part of
the property tax payment. It also would
likely create doubt for the consumer
about whether the PACE transaction
will be repaid through the existing
escrow account. The exemption in this
final rule will mitigate this risk.
The CFPB did not receive any
comments and is finalizing proposed
§ 1026.37(p)(1), renumbered as
§ 1026.37(p)(1)(ii), to accommodate the
addition of § 1026.37(p)(1)(i), as
described above.
1026.37(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 168 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.169 Section
1026.37(c)(4)(iii) through (vi) requires
various statements about this disclosure.
Under § 1026.37(p)(2)(i) and (ii), the
CFPB proposed to retain most of these
requirements for PACE transactions,
with changes to the disclosures
currently required under
167 See
existing comment 37(c)(2)(iii)–1.
noted in the section-by-section analysis of
§ 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.’’
169 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 § 1026.37(p)(7)(i) for
discussion of the applicable unit-period for PACE
transactions.
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§ 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.170 The CFPB proposed
§ 1026.37(p)(2)(i) to provide specificity
as to the PACE payment. The CFPB
proposed to 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 CFPB
proposed to require the statement about
the PACE loan payment to be labeled
‘‘PACE Payment,’’ and the statement
about the other property taxes ‘‘Property
Taxes (not including PACE loan).’’ The
proposed changes were intended to help
consumers understand that the 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. The CFPB proposed
under § 1026.37(p)(2)(i) to eliminate this
requirement for PACE transactions. The
CFPB reasoned in the proposal that
omitting this information would avoid
potential consumer confusion for
similar reasons as explained in the
discussion of proposed § 1026.37(p)(1).
The CFPB also proposed amendments
to the requirements in § 1026.37(c)(4)(v)
and (vi). Currently, § 1026.37(c)(4)(v)
170 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 CFPB 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 CFPB is also clarifying in
this final rule 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.
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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. The CFPB proposed to
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 preexisting mortgage with an escrow
account, to contact the consumer’s
mortgage servicer for what the consumer
will owe and when. The proposed
disclosures were intended to promote
consumer understanding of PACE
transactions and their effect on any preexisting mortgage loans, and that
omitting the two existing disclosures
would not impair consumer
understanding of the transaction.
One credit union league supported
requiring the disclosure of PACE loans
separately from other property tax
obligations among the disclosure of
estimated taxes, insurance, and
assessments under proposed
§ 1026.37(p)(2)(i). The commenter stated
that homeowners would benefit from
this requirement and, more generally,
from clarification of the implications of
the PACE transaction on property taxes.
Two consumer groups also suggested
adjusting the qualitative disclosures
proposed under § 1026.37(p)(2)(ii). They
recommended including a statement
that the PACE loan would increase the
consumer’s monthly escrow payment by
a certain specific amount, as well as a
prompt for the consumer to notify their
mortgage servicer of the change and
request a short-year escrow account
analysis so that the escrow amount can
be adjusted to account for the change.
The CFPB is finalizing the proposed
changes to § 1026.37(p)(2)(i) and (ii)
with modifications. As finalized, section
§ 1026.37(p)(i) contains a small change
for precision. Section 1026.37(p)(2)(ii)
requires, in addition to the proposed
disclosure, a statement that, if the
consumer has a pre-existing mortgage
with an escrow account, the PACE loan
will increase the consumer’s escrow
payment. The CFPB agrees with
consumer group commenters that an
explicit disclosure of the impact of the
PACE loan on the consumer’s escrow
payment will be useful for consumers.
However, the recommendation to
include a prompt for the consumer to
notify their mortgage servicer of the
change and to request an escrow
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account analysis could be confusing or
too technical to be useful for some
consumers.
1026.37(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.’’ 171 In general, a creditor must
disclose: (1) the name and NMLSR
ID,172 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.
The CFPB proposed to additionally
require similar disclosures for PACE
companies if such information was not
disclosed under the requirements
described above. Specifically, under
§ 1026.37(p)(3), the CFPB proposed to
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,’’ a
term defined under § 1026.37(b)(14)).
The CFPB proposed, similar to
§ 1026.37(k)(1) through (3)’s existing
requirements with respect to creditors,
mortgage brokers, and loan officers, 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’’
171 Section 1026.37(k) also integrates the
disclosure of certain information required under
appendix C to Regulation X.
172 Under § 1026.37(k)(1), the NMLS ID refers to
the Nationwide Mortgage Licensing System and
Registry identification number.
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in the label, if any. The CFPB proposed
commentary to clarify that these
disclosures would not be required under
the proposal if the PACE company’s
contact information was otherwise
disclosed pursuant to § 1026.37(k)(1)
through (3). As proposed in comment
37(p)(3)–1, 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.
Two consumer groups recommended
mandating disclosure of the contact
information and State license number
for the home improvement contractor
involved in the PACE transaction,
stating that it would help consumers
spot potential fraud by the home
improvement company, especially if the
PACE company lists a home
improvement company that is different
from the home improvement company
with which the consumer has been
dealing.
Two consumer groups, a State agency,
and one credit union league agreed with
the CFPB’s proposed addition of a
‘‘PACE Company’’ field for disclosure of
license and contact information for the
PACE company. These consumer groups
and a PACE government sponsor also
addressed the proposal to include PACE
companies under the ‘‘Mortgage Broker’’
heading when applicable. Some
consumer groups asserted that PACE
companies are not perceived as
mortgage brokers and engage in many
activities that go beyond the services of
a mortgage broker. To avoid consumer
confusion, the consumer groups
suggested requiring the company to fill
in the ‘‘PACE Company’’ fields in all
cases, as well as ‘‘Mortgage Broker’’
fields if the company also serves as a
mortgage broker. The government
sponsor suggested that the Loan
Estimate make reference to PACE
Company instead of mortgage broker
because in practice, the two serve
different functions.
The CFPB is finalizing proposed
§ 1026.37(p)(3) with an adjustment. The
CFPB agrees with commenters that the
PACE Company’s contact information
should be disclosed under the PACE
Company field for each PACE
transaction and is finalizing this
requirement, regardless of whether such
information is also disclosed under the
mortgage broker field. This approach
will help provide clarity for consumers.
To accommodate this change, the CFPB
is not finalizing proposed comment
37(p)(3)–1.
As explained in the 2013 TILA–
RESPA Rule, disclosing the name and
NMLSR ID number, if any, for the
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creditor, mortgage broker, and loan
officers employed by such entities
provides consumers with the
information they need to conduct the
due diligence as to whether these
parties are appropriately licensed.173
Having this information may also help
consumers assess the risks associated
with services and service providers
associated with the transaction, which
in turn serves the purposes of TILA,
RESPA, and the CFPA.174 Similar
considerations apply to the disclosure of
the PACE company.
The CFPB declines the suggestion to
include fields for the home
improvement contractor’s information.
Some home equity loans used to finance
home improvement projects are
marketed by contractors, similar to
PACE transactions. Home improvement
contractor contact information is not
required for those non-PACE home
equity loans, and this final rule will
maintain consistency with respect to
PACE transactions.
1026.37(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.
The CFPB proposed to 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 CFPB
proposed for the statement to 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. The CFPB proposed to require the
creditor to label this disclosure ‘‘Selling
the Property’’ and use the term ‘‘PACE
loan’’ in the disclosure. The intent was
to further the purposes of TILA by
providing useful information about key
risks of PACE loans, thus avoiding the
uninformed use of credit.
173 78
FR 79730, 79975–76 (Dec. 31, 2013).
id.
174 See
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A number of mortgage industry trade
associations, a credit union trade
association, and consumer groups
supported the proposed disclosure.
Some stated that it would convey useful
information or counter misinformation
about whether PACE loans can be
assumed. Consumer groups and a
mortgage trade association suggested
also requiring information pertaining to
the PACE loan’s potential effect on a
consumer’s ability to refinance their
non-PACE mortgage. For example, a
mortgage trade association suggested
adding language notifying the consumer
that they may not be able to sell the
home if they do not have enough equity
after paying off various loans, including
the PACE loan. Consumer groups and a
mortgage trade association suggested
adding a disclosure that the PACE loan
may negatively affect the consumer’s
ability to refinance a pre-existing nonPACE mortgage.
After reviewing the comments, the
CFPB is finalizing the disclosure as
proposed. Although additional
information pertaining to the effect of a
PACE loan on a consumer’s ability to
refinance their non-PACE mortgage or
sell their home could be helpful to
consumers, the CFPB concludes that
such information is not necessary given
the new disclosure requiring 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 as a condition of the
sale.
1026.37(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.
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 § 1026.37(m)(4) or
otherwise. The CFPB 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 CFPB
proposed to implement TILA section
128(a)(10) for PACE transactions by
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requiring the disclosure in proposed
§ 1026.37(p)(5) rather than the existing
disclosure in § 1026.37(m)(4). The CFPB
proposed to require creditors to include
one or more statements relating to late
charges, as applicable. First, under
§ 1026.37(p)(5)(i), the CFPB proposed 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.’’ The CFPB
proposed to clarify under comment
37(p)(5)–1 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 CFPB 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 late charges, the
disclosure would not have been
required under the proposal.
Second, under § 1026.37(p)(5)(ii), the
CFPB proposed to 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. The CFPB
proposed these requirements to provide
flexibility for the creditor while
ensuring that the Loan Estimate
contains useful information about
charges that may result from a property
tax delinquency.
A credit union trade association
suggested in a comment that the CFPB
also require a disclosure of the risk of
foreclosure or tax sale. Two consumer
groups expressed support for proposed
§ 1026.37(p)(5)(i) but recommended
against finalizing § 1026.37(p)(5)(ii).
They asserted that creditors should be
required to provide specific information
about the potential charges and
penalties for untimely payment, as the
fees and penalties for late property tax
payments are clearly established and
well-known to PACE creditors and the
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information would improve consumer
understanding before consummation.
The CFPB is finalizing § 1026.37(p)(5)
and associated commentary as
proposed. The additional disclosures
recommended by commenters may be
difficult for PACE providers to disclose
in a manner that is useful to consumers
and may be unknowable at the time of
disclosure in certain circumstances,
including in jurisdictions where charges
associated with late payment that are
not specific to the PACE transactions
may not be known at the time of the
disclosure.
1026.37(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 CFPB is aware. Thus, the
CFPB proposed to implement RESPA
section 6(a) for PACE transactions by
requiring a servicing-related disclosure
that would be more valuable for PACE
borrowers.
The CFPB proposed to 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. The CFPB
proposed to 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. The CFPB proposed
to preserve the label ‘‘Servicing’’ for the
disclosure.
Two consumer groups stated that
PACE loans are not subject to transfer of
servicing rights. These groups and one
mortgage trade association suggested
that the CFPB add more language to the
disclosure about how consumers may
make their PACE payments through a
mortgage escrow account or directly to
the tax authority. The mortgage trade
association also suggested requiring
disclosure of other potential legal and
contractual implications, including the
possibility of technical default on a preexisting mortgage loan as a consequence
of the PACE loan, or consequences of
failing to pay the PACE loan in a timely
fashion.
After considering the comments, the
CFPB is finalizing § 1026.37(p)(6) as
proposed, with one change—the phrase
‘‘mortgage escrow account’’ will be
changed to ‘‘mortgage with an escrow
account’’ for readability and clarity.
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Requiring the disclosure in
§ 1026.37(p)(6) will promote the
informed use of credit. The additional
disclosures that commenters
recommended are too attenuated from
the central purpose of the disclosure in
§ 1026.37(p)(6), which is to convey
information about the servicing of the
PACE loan. Certain suggestions would
also be too vague or technical to be
useful for consumers.
1026.37(p)(7) Exceptions
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1026.37(p)(7)(i) Unit-Period
Because PACE transaction payments
are repaid with the property taxes once
or twice a year, the applicable unitperiod disclosed on the Loan Estimate
would typically be annual or semiannual. The CFPB proposed for the
model form for PACE under proposed
appendix H–24(H) to use ‘‘annual’’ in
the tables disclosing loan terms and
projected payments. The CFPB
proposed under § 1026.37(p)(7)(i) that,
wherever the proposed form 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. This is similar to existing
§ 1026.37(o)(5), which permits unitperiod 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.175
Two consumer groups supported the
CFPB’s proposal. The CFPB did not
receive any other comments regarding
this part of the proposal. The CFPB is
finalizing § 1026.37(p)(7)(i) as proposed.
1026.37(p)(7)(ii) PACE Nomenclature
The CFPB 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
usefulness for consumers, the CFPB
proposed § 1026.37(p)(7)(ii) to 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.
The CFPB proposed comment
37(p)(7)(ii)–1 to provide an example of
how a creditor may substitute the name
of a specific PACE financing program
175 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.
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that is recognizable to the consumer as
PACE on the form.
The CFPB received comments from
two consumer groups supporting the
proposal but suggesting that the CFPB
clarify in regulatory text or commentary
that the nomenclature change is only
available if it will be used consistently
throughout the marketing materials and
financing documents, and that the
creditor must otherwise use the phrase
‘‘PACE loan.’’ One mortgage industry
trade association suggested requiring
that the creditor add ‘‘(a covered PACEtype financing program)’’ after the
branded name.
The CFPB is finalizing
§ 1026.37(p)(7)(ii) as proposed and
comment 37(p)(7)(ii)–1 with one change
from the proposal. In addition to
providing an example of how a creditor
may substitute the name of a specific
PACE financing program that is
recognizable to the consumer, the
comment as finalized clarifies that the
name of a specific PACE financing
program will not be recognizable to the
consumer unless it is used consistently
in financing documents for the PACE
transaction and any marketing materials
provided to the consumer. This will
increase the likelihood that the Loan
Estimate identifies the name of a
specific PACE financing program that is
recognizable to the consumer.
Section 1026.38 Content of Disclosures
for Certain Mortgage Transactions
(Closing Disclosure)
1026.38(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) set forth
modifications to the Closing Disclosure
requirements under § 1026.38 for
‘‘PACE transactions,’’ as defined under
§ 1026.43(b)(15), to account for the
unique nature of PACE. The CFPB is
finalizing § 1026.38(u) largely as
proposed.
1026.38(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,176
176 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
(not including a down payment), and to whom the
obligation is initially payable.’’ See § 1026.2(a)(17).
As noted in the discussion of § 1026.2(a)(14),
government sponsors are typically the creditors for
PACE transactions.
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2459
under the heading ‘‘Transaction
Information.’’ 177 The CFPB proposed
§ 1026.38(u)(1) to additionally require
the Closing Disclosure for a PACE
transaction to include the name of any
PACE company involved in the
transaction, labeled ‘‘PACE Company.’’
Proposed § 1026.38(u)(1) referred 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.
Two consumer groups supported
requiring the PACE company’s
identifying information under
‘‘Transaction Information.’’
The CFPB is finalizing § 1026.38(u)(1)
as proposed. As the CFPB explained in
the 2013 TILA–RESPA Rule, disclosing
the identifying information for the
borrower, seller, and lender promotes
the informed use of credit.178 Disclosing
the PACE company’s identifying
information will do the same.179
1026.38(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),180 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.
Under § 1026.38(u)(2), the CFPB
proposed changes to the projected
payments table for the Closing
Disclosure in a PACE transaction to
mirror the changes to the projected
payments table on the Loan Estimate
under § 1026.37(p)(1) and (2). The CFPB
proposed these changes for the same
177 Section 1026.38(a)(4) also integrates the
disclosure of certain information required under
appendix A to Regulation X.
178 78 FR 79730, 80002–03 (Dec. 31, 2013).
179 See part II.A for discussion of the central role
PACE companies often play in PACE transactions.
180 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 CFPB is finalizing changes to these disclosure
requirements for PACE transactions as described in
the section-by-section analysis of § 1026.37(p)(1)
and (2).
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reasons as set forth in the discussion of
§ 1026.37(p)(1) and (2) above.
For the reasons set forth in the
discussion of § 1026.37(p)(1) and (2), the
CFPB is adopting § 1026.38(u)(2) as
proposed, to state that the creditor shall
disclose the projected payments
information required by § 1026.38(c)(1)
as modified by § 1026.37(p)(1) and (2).
The final rule also removes from the
Closing Disclosure projected payments
table a reference to escrow-related
information located elsewhere on the
form. The CFPB is exempting the
escrow-related information under
§ 1026.38(u)(6).
1026.38(u)(3) Assumption
For the reasons discussed in the
section-by-section analysis of proposed
§ 1026.37(p)(4), proposed
§ 1026.38(u)(3) would have
implemented TILA section 128(a)(13)
for PACE transactions by requiring the
creditor to use the subheading ‘‘Selling
the Property,’’ instead of ‘‘Assumption,’’
and to disclose the information required
by § 1026.37(p)(4) in place of the
information required under
§ 1026.38(l)(1).
Comments received related to the
assumption disclosure are discussed in
the section-by-section analysis of
§ 1026.37(p)(4). The CFPB is adopting
§ 1026.38(u)(3) as proposed for the
reasons discussed under § 1026.37(p)(4).
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1026.38(u)(4) Late Payment
The CFPB proposed that the ‘‘Late
Payment’’ disclosure on the Closing
Disclosure for PACE transactions only
include late payment charges specific to
the PACE transaction and not charges
imposed by the State or locality for late
payment of taxes. This proposed change
parallels the changes to the Loan
Estimate, described in the section-bysection analysis of § 1026.37(p)(5).
Comments received related to the Late
Payment disclosure are discussed in the
section-by-section analysis of
§ 1026.37(p)(5). The CFPB is adopting
§ 1026.38(u)(4) as proposed for the
reasons discussed under § 1026.37(p)(5).
1026.38(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
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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. 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 preexisting 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.
The CFPB proposed to require under
§ 1026.38(u)(5) 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 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. The CFPB is
finalizing § 1026.38(u)(5) as proposed to
avoid potential inaccuracies that might
arise under existing requirements and
provide the consumer with useful
information as it relates to a PACE
transaction.
Two consumer groups stated that the
disclosure should provide more
information than proposed, such as a
statement that consumers will need to
make adjustments to their budgets to
pay the increased property payment and
a statement indicating whether State or
local law prohibits partial payments for
tax payments.
The CFPB is not adopting this
recommendation. PACE consumers are
best served with a statement directing
the consumer to contact the mortgage
servicer or tax collector for the partial
payment policy pertaining to their
particular circumstance. Certain of the
commenters’ recommended additions
are not closely related to information
about partial payments, and other
suggested disclosures could be
misleading or not useful for PACE
consumers.
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1026.38(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 § 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
§ 1026.38(l)(7) could be inaccurate for
some PACE borrowers, the CFPB
proposed § 1026.38(u)(6) to exempt
creditors in PACE transactions from the
requirement to disclose on the Closing
Disclosure the information otherwise
required under § 1026.38(l)(7).
Two consumer groups supported
specifically addressing to the proposed
exemption of the Escrow Account
disclosure under § 1026.38(u)(6). The
CFPB is finalizing § 1026.38(u)(6) as
proposed.
1026.38(u)(7) Liability After Foreclosure
or Tax Sale
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, the CFPB
proposed under § 1026.38(u)(7) to
provide that the creditor shall not
disclose the liability-after-foreclosure
disclosure described in
§ 1026.38(p)(3).181 The CFPB proposed
181 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
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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. The CFPB proposed to
require the subheading ‘‘Liability after
Foreclosure or Tax Sale.’’ This proposed
information was intended to 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.
Two consumer groups supported the
proposal to require the disclosure only
if the consumer may be responsible for
deficiency under State law but noted
that tax foreclosure is not likely to result
in a deficiency even if State law permits
the liability.
The CFPB finalizes proposed
§ 1026.38(u)(7) with modifications. As
finalized, § 1026.38(u)(7) requires that,
if the consumer may be responsible for
any deficiency after foreclosure or tax
sale under applicable State law, the
creditor shall disclose a brief statement
that, if the property is sold through
foreclosure or tax sale and the sale does
not cover the amount owed on the PACE
obligation, the consumer may be liable
for some portion of the unpaid balance
under State law, and a statement that
the consumer may want to consult an
attorney for additional information. This
information will be disclosed under the
subheading ‘‘Liability after Foreclosure
or Tax Sale.’’ The CFPB is not finalizing
the proposed requirement for the
creditor to disclose a description of any
applicable protections provided under
State anti-deficiency laws. Consumers
will be better served with a statement to
consult an attorney to understand any
applicable State protections rather than
relying on a description from the
creditor.
1026.38(u)(8) Contact Information
TILA section 128(a)(1) is currently
implemented in part by § 1026.38(r),
which generally requires certain
information to be disclosed in a separate
table, under the heading ‘‘Contact
Information.’’ 182 For transactions
without a seller, § 1026.38(r) requires
about the consumer’s liability after foreclosure. The
CFPB understands that this disclosure is unlikely
to be required on a Loan Estimate for a PACE loan.
Therefore, the final rule does not address such
language on the Loan Estimate.
182 Section 1026.38(r) also integrates the
disclosure of certain information required under
appendix A and appendix C to Regulation X.
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specified contact and licensing
information for each creditor, mortgage
broker, and settlement agent
participating in the transaction. The
CFPB proposed § 1026.38(u)(8) to
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
§ 1026.37(p)(3), the PACE company may
be a mortgage broker, in which case its
information would be required under
the existing requirements in
§ 1026.38(r); the CFPB proposed under
§ 1026.38(u)(8) not to require the
disclosure of the PACE company a
second time. As explained in the
section-by-section analysis of
§ 1026.43(b)(14), given the important
role that PACE companies play in PACE
transactions, disclosing their contact
information will be useful to consumers
and will facilitate the informed use of
credit.
Comments received relating to the
substance of proposed § 1026.38(u)(8)
are discussed in the section-by-section
analysis of § 1026.37(p)(3). As discussed
under § 1026.37(p)(3), the CFPB agrees
with commenters that the PACE
company’s contact information should
be disclosed under the PACE Company
field on the Closing Disclosure for each
PACE transaction and is finalizing this
requirement.
1026.38(u)(9) Exceptions
1026.38(u)(i) Unit-Period
To permit creditors the flexibility to
disclose the correct unit-period for each
PACE transaction, the CFPB proposed
under § 1026.38(u)(9)(i) that, wherever
proposed 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 as semi-annual
payments. The Closing Disclosure
changes in proposed § 1026.38(u)(9)(i)
would have paralleled the Loan
Estimate changes in proposed
§ 1026.37(p)(7)(i), and the CFPB
proposed § 1026.38(u)(9)(i) for the same
reasons stated in the section-by-section
analysis of § 1026.37(p)(7)(i). Proposed
§ 1026.38(u)(9)(i) was 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.’’ 183
183 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.
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2461
Comments received related to unitperiod are discussed in the section-bysection analysis of § 1026.37(p)(7)(i).
The CFPB is finalizing § 1026.38(u)(9)(i)
as proposed for the reasons discussed
under § 1026.37(p)(7)(i).
1026.38(u)(9)(ii) PACE Nomenclature
The CFPB is finalizing
§ 1026.38(u)(9)(ii)(A) and (B) relating to
certain terms used on the Closing
Disclosure for PACE transactions.
The CFPB proposed § 1026.38(u)(9)(ii)
to 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.
The CFPB proposed in comment
38(u)(9)(ii)–1 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. Comments received related
to proposed § 1026.38(u)(9)(ii) are
discussed in the section-by-section
analysis of § 1026.37(p)(7)(ii). The CFPB
is finalizing the proposal, renumbered
as § 1026.38(u)(9)(ii)(A) and comment
38(u)(9)(ii)(A)–1, subject to the
modification discussed in the sectionby-section analysis of § 1026.37(p)(7)(ii).
As modified, comment 38(u)(9)(ii)(A)–1
clarifies that the name of a specific
PACE financing program will not be
recognizable to the consumer unless it
is used consistently in financing
documents for the PACE transaction and
any marketing materials provided to the
consumer.
The CFPB is also adding
§ 1026.38(u)(9)(ii)(B), which requires
creditors of PACE transactions to use
the term ‘‘PACE contract documents’’ on
the Closing Disclosure to refer to the
appropriate loan document and security
instrument required to be disclosed
under § 1026.38(p)(2). This terminology
will improve the precision of this
disclosure for PACE transactions, as
suggested in comments.
1026.41
Periodic Statements
1026.41(e) Exemptions
1026.41(e)(7) PACE Transactions
TILA section 128(f) generally requires
periodic statements for residential
mortgage loans.184 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, past payment breakdown,
184 15
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transaction activity, contact
information, and delinquency
information.185 The CFPB proposed to
exempt PACE transactions from this
periodic statement requirement. After
considering the comments, the CFPB is
finalizing the proposed exemption for
the reasons discussed in this section.
Several commenters addressed the
proposed exemption. A government
sponsor of PACE programs expressed
support for the exemption. A State
agency did not object to the exemption,
noting that many consumers with PACE
loans would already have mortgages,
and that PACE transactions would often
be for relatively small dollar amounts.
Two consumer groups and a credit
union trade association opposed
exempting PACE transactions from the
periodic statement requirement in
§ 1026.41. These commenters
recommended requiring simplified
periodic statement disclosures that
would provide consumers with
information that would enable them to
track loan performance, verify correct
payment application, and monitor
whether the loans incur improper fees.
The consumer groups stated that
consumers currently lack such
information. They stated that simplified
periodic statements would not be
confusing for consumers despite the
intermingling of PACE payments and
property tax payments, and that any
possible confusion could be addressed
through explanatory text on the
statements. Consumer group
commenters also stated that providing
periodic statements would not create
undue burden, as local tax collectors
and authorities already provide
payment reports and other information
to PACE creditors or their contractors
that could be used to prepare an annual
statement.
The consumer groups and credit
union trade association also
recommended adjusting the Regulation
Z timing requirements for their
suggested simplified PACE periodic
statements. The credit union trade
association suggested requiring such
statements either annually or tied to
particular intervals in the loan term.
The consumer groups suggested
requiring an annual statement.
Providing simplified information on
periodic statements and including
explanatory text as some commenters
suggested could help mitigate to some
degree the risk of consumer confusion
as to the content of the forms but would
not address risks associated with
185 For purposes of § 1026.41, the term ‘‘servicer’’
includes the creditor, assignee, or servicer of the
loan, as applicable. 12 CFR 1026.41(a)(2).
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receiving two sets of disclosures. Were
periodic statement requirements applied
to PACE transactions, consumers would
receive two separate notices about
overlapping but different obligations,
likely provided by different parties, both
containing information about the PACE
loan: The local taxing authority would
provide a property tax bill, and
Regulation Z would require the creditor,
servicer, or assignee to provide periodic
statements.186 This risks consumer
confusion—for example, about whether
fields in the periodic statement include
details of the PACE financing, property
taxes, or both, or why the figures in the
periodic statement do not align with
those in their property tax statements.
This could also cause consumers to
ignore information from the separate
disclosures given that some of the
content would have similar subject
matter.
Adjusting the timing requirements for
provision of periodic statements for
PACE loans, as some commenters
suggested, would not adequately resolve
these concerns. The CFPB
acknowledges, as some commenters
asserted, that, in certain circumstances,
the parties who would be responsible
for providing periodic statements may
already have access to some of the
information needed to fill out the
periodic statements, including
information about loan performance and
delinquency. However, even in such
circumstances, that responsible parties
have such access would not resolve the
other concerns supporting the
exemption from TILA and Regulation
Z’s periodic statement requirement at
§ 1026.41 or mean that a periodic
statement requirement would not
impose a meaningful burden.
Even with the exemption in
§ 1026.41(e)(7), consumers will still
have access to some of the information
commenters recommended requiring in
a simplified periodic statement. For
example, consumers will receive
information regarding payments and
delinquency from their property tax
collectors and mortgage servicers if the
consumers have a mortgage with an
escrow account, as well as other entities
such as third-party assessment
administrators. Consumers will also be
able to obtain information about the
PACE loan by requesting payoff
statements pursuant to § 1026.36(c)(3).
Although the CFPB recognizes, as
consumer group commenters noted, that
these sources of information do not
contain as much information as periodic
statements and some will not be
provided on a regular cadence, they do
186 See
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provide at least some information to
help the consumer track the PACE loan.
The CFPB will continue to monitor the
market for consumer harm.
In addition to proposing an
exemption from the periodic statement
requirement under § 1026.41, the CFPB
requested comment on whether the final
rule should address any other mortgage
servicing requirements in Regulation Z
or Regulation X. A trade association for
State housing agencies requested that
the CFPB ensure that having a PACE
loan does not prohibit a consumer with
a federally backed mortgage loan from
having access to the same loss
mitigation options available to
consumers without PACE loans.
Regulation X, 12 CFR 1024.41, generally
sets forth requirements governing the
loss mitigation application process. The
owner or assignee of the borrower’s
mortgage loan determines the
availability of, or eligibility
requirements for, loss mitigation options
such as loan modifications, short sales,
or deeds-in-lieu of foreclosure.187 The
CFPB is not adjusting that framework in
this final rule. The final rule is also not
addressing any servicing requirements
that apply only to ‘‘servicers’’ as defined
in Regulation X, as there does not
appear to be a ‘‘servicer’’ in typical
PACE transactions.188
The CFPB finalizes the exemption of
PACE transactions from the periodic
statement requirement under
§ 1026.41(e)(7) using its authority under
TILA section 105(a) and (f) and DoddFrank Act section 1405(b). The CFPB
concludes that this exemption is
necessary and proper under TILA
section 105(a), for the reasons stated
above, to effectuate TILA’s purposes and
to facilitate compliance with its
requirements. Furthermore, the CFPB
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). This
conclusion would be true regardless of
the loan amount, borrower status
(including related financial
arrangements, financial sophistication,
187 See generally Regulation X, 12 CFR 1024.41
(setting forth loss mitigation procedures); see also
comment 41(c)(1)–2 (explaining that the regulatory
term ‘‘loss mitigation options available to a
borrower’’ refers to ‘‘those options offered by an
owner or assignee of the borrower’s mortgage
loan’’).
188 See PACE NPRM, 88 FR 30388, 30405
(explaining that there does not appear to be a
‘‘servicer’’ as defined in Regulation X in PACE
transactions where the local government taxing
authority—a governmental entity—receives the
consumer’s regular PACE payments as part of the
consumer’s larger property tax payment).
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and the importance to the borrower of
the loan), or whether the loan is secured
by the consumer’s principal residence.
Consequently, the exemption will
further the consumer protection
objectives of the statute, and help to
avoid complicating, hindering, or
making more expensive the credit
process. It 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 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. As
discussed below, the CFPB proposed
and is finalizing a number of
amendments to § 1026.43 and its
commentary to apply the ability-torepay requirements to PACE
transactions with certain PACE-specific
adjustments. The comments the CFPB
received are discussed below. The CFPB
is finalizing the amendments to
§ 1026.43 as proposed.
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1026.43(b) Definitions
Section 1026.43(b) sets forth certain
definitions for purposes of § 1026.43.
The CFPB is finalizing as proposed new
definitions for the terms PACE company
and PACE transaction in
§ 1026.43(b)(14) and (b)(15) 189 and an
amendment to the commentary to
§ 1026.43(b)(8) regarding the definition
of mortgage-related obligations.
1026.43(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
CFPB proposed to amend comment
43(b)(8)–2 to explicitly state that any
payments for pre-existing PACE
189 Rather than add these definitions into
§ 1026.43(b) where they would fall alphabetically in
the paragraph, the final rule maintains the
numbering for these definitions from the proposal.
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transactions are considered property
taxes for purposes of § 1026.43(b)(8).
The CFPB is finalizing as proposed the
amendment to comment 43(b)(8)–2.
This amendment clarifies that a creditor
must consider payments for pre-existing
PACE transactions as mortgage-related
obligations when determining the
consumer’s repayment ability.
Two consumer groups supported the
proposed amendment to comment
43(b)(8)–2, stating that it would
eliminate doubt as to whether payments
on pre-existing PACE transactions
should be included in a creditor’s
ability-to-repay determination under
§ 1026.43(c). The commenters suggested
clarifying in comment 43(b)(8)–2 that a
creditor that knows or has reason to
know that a consumer has an existing
PACE transaction does not comply with
the requirement to consider the
consumer’s monthly payment for
mortgage-related obligations under
§ 1026.43(c)(2)(v) by relying on
information provided by a governmental
organization if the information provided
does not reflect the PACE transaction.
The commenters stated that such a
change would remind creditors of the
need to diligently search for existing
PACE loans on the property when
conducting an ability-to-repay
determination under § 1026.43(c).
The CFPB declines to make the
suggested changes to comment 43(b)(8)–
2. As discussed below, the CFPB is
clarifying in comment 43(c)(3)–5 that 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.
Further, existing commentary to the
definition of mortgage-related
obligations contains a cross-reference to
creditors’ obligations to take into
account any mortgage-related
obligations under § 1026.43(c)(2)(v) for
purposes of determining a consumer’s
ability to repay.190
1026.43(b)(14) PACE Company
The CFPB proposed to add a
definition of ‘‘PACE company’’ in
§ 1026.43(b)(14) to provide clarity and
for ease of reference. The CFPB is
adopting § 1026.43(b)(14) and comment
43(b)(14)–1 as proposed.
Section 1026.43(b)(14) provides that
PACE company means a person, other
than a natural person or a government
unit, that administers the program
190 See comment 43(b)(8)–1 (referencing the
commentary to § 1026.43(c)(2)(v)).
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through which a consumer applies for
or obtains a PACE transaction. Comment
43(b)(14)–1 provides that 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.
The PACE company definition applies
to the private companies involved in
running the PACE programs. As
discussed in part II.A, most local
governments that engage in PACE
financing rely on private companies to
administer PACE programs through, for
example, marketing PACE financing to
consumers, administering originations,
making decisions about whether to
extend the loan, and enlisting home
improvement contractors to help
facilitate the originations and
implement the home improvement
projects.
Various commenters, including
consumer groups and trade associations,
supported the adoption of the proposed
definition of PACE company. In general,
they expressed that the proposed
definition adequately captures the
entities involved in administering a
PACE financing program.
One consumer group suggested that
the CFPB should expand the definition
to include contractors, subcontractors,
and others acting on behalf of the PACE
provider or contractors acting as agents
of the PACE company. They stated that
this would improve enforcement and
help avoid evasion of TILA, as it would
make the PACE companies accountable
for the contractors or subcontractors. A
State agency suggested that the CFPB
amend the proposed definition of PACE
company to include natural persons in
the business of solicitation for sales or
services associated with or reasonably
contemplated to be financed by PACE
loans.
A government sponsor of PACE
financing stated that the CFPB should
clarify the term ‘‘government unit’’
contained in the definition of a PACE
company. The commenter stated that,
under the proposed definition, it would
not be clear whether certain State
entities involved in PACE programs
would be considered a government unit
excluded from being a PACE company.
Two consumer groups supporting the
proposal suggested that the CFPB
include additional examples of what it
means to administer a PACE program,
such as, for example, accepting and
processing loan applications and
processing and finalizing the issuance of
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contractual assessments. They stated
that doing so would help prevent
possible evasion efforts that could occur
if the rule lacks sufficient specificity as
to what it means to administer a PACE
program.
The CFPB concludes that the
proposed definition of ‘‘PACE
company’’ effectively describes the
intended entities and accounts for the
unique nature of PACE financing. The
CFPB is not adopting commenters’
recommendations to expand the
proposed definition to include natural
persons or entities acting as agents of
the PACE company. As described in
§ 1026.43(i), PACE companies that are
substantially involved in making a
credit decision will be subject to the
ability-to-repay requirements and civil
liability for violations thereof. The CFPB
understands that home improvement
contractors in the PACE context perform
generally the same functions as in other
forms of home improvement loans
associated with door-to-door sales. The
CFPB therefore declines to create a
separate liability provision for home
improvement contractors in the PACE
context. The CFPB notes that the term
‘‘government unit’’ is already used in
TILA and Regulation Z, including as
part of the definition of person.191 The
CFPB declines to define the term
‘‘government unit’’ in this rulemaking.
The CFPB also declines to add to
comment 43(b)(14)–1 examples
suggested by some commenters because
such indicia would expand the
definition to cover entities not
substantially involved in making the
credit decision. Parties who merely
accept applications, for example, do not
administer these programs in a way that
would warrant coverage or liability for
the ability-to-repay requirements
described in § 1026.43.
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1026.43(b)(15) PACE Transaction
The CFPB proposed to add a
definition for the term ‘‘PACE
transaction’’ to Regulation Z that uses
the language of the EGRRCPA section
307 definition of PACE financing.192
The CFPB is adopting as proposed the
definition of ‘‘PACE transaction’’ in
§ 1026.43(b)(15). Section 1026.43(b)(15)
provides 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. This term is used in
adjustments or exemptions the CFPB is
finalizing in §§ 1026.35, 1026.37,
191 See,
192 See
e.g., 12 CFR 1026.2(a)(22).
15 U.S.C. 1639c(b)(3)(C)(i).
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1026.38, 1026.41, and 1026.43 as well as
appendix H to part 1026.
Various commenters, including
consumer groups, trade associations,
and State agencies, supported the
adoption of the proposed definition of
PACE transaction. These commenters
said the proposed definition was clear
and accurately captured the nature of
PACE transactions.
Several other commenters addressed
what the definition should cover. For
example, a PACE government sponsor
suggested that the definition should
include financing to cover the costs of
qualifying improvements that result in a
tax assessment on the real property
improved by the consumer, stating that
PACE improvements may include
projects other than those customarily
thought of as home improvements,
including installation of generators, heat
pumps, and solar arrays. Similarly, two
consumer groups stated that the PACE
transaction definition should also cover
qualifying improvements under State
law and local governmental authority
resulting in a tax assessment on the real
property of the consumer. They noted
that some States have expanded PACE
programs to include qualifying work
extending beyond the structure of a
building, such as certain fire hardening
measures or the building of a sea wall.
In addition, a PACE company suggested
that the CFPB limit the definition of
PACE transaction to cover only
financing secured by a lien that takes
priority over a pre-existing first-lien
mortgage on the subject property and
exclude from coverage PACE
transactions secured by subordinate
liens.
The CFPB finalizes the definition of
PACE transaction as proposed, which
uses the language of the EGRRCPA
section 307 definition of PACE
financing. The definition covers
financing for improvements to
residential property, including
improvements to the land on which the
structure sits. This definition of PACE
transaction also accords with other
CFPB regulations governing the home
mortgage market.193
The CFPB declines to carve out
transactions secured by subordinate
liens, as suggested by one commenter.
EGRRCPA section 307 directs the CFPB
to prescribe regulations for ‘‘PACE
financing,’’ defined as voluntary
financing to cover the costs of home
improvements that results in a tax
assessment on the real property of the
The existing ability-to-repay
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. For the reasons explained
in the proposal, the CFPB proposed 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). As discussed below, the
CFPB concludes that the existing
ability-to-repay framework set out in
§ 1026.43(c) effectively carries out the
purposes of TILA’s ability-to-repay
provisions and is generally appropriate
for PACE transactions, with adjustments
to the commentary to § 1026.43(c) and
the addition of § 1026.43(i).194 For the
reasons discussed below, the CFPB is
finalizing the amendments to the
commentary to § 1026.43(c) and new
§ 1026.43(i) as proposed.
Many commenters, including
consumer groups, banking and credit
union trade groups, and a State agency,
supported the application of the existing
ability-to-repay framework to PACE
transactions. These commenters
discussed the protections that the
ability-to-repay framework would afford
to consumers in light of the structure
and risks of PACE financing, as well as
the past perceived abuses in the PACE
industry. For example, a consumer
group asserted that requiring a creditor
to conduct an ability-to-repay
determination for a PACE transaction
would protect borrowers from potential
predatory lending practices that could
heighten foreclosure risk. A different
consumer group stated that home equity
lending is not a strong indicator of a
consumer’s ability to pay, and that the
ability-to-repay requirements can better
align project costs with the consumer’s
household finances. Consumer groups
also asserted that TILA’s ability-to-repay
193 See, e.g., 12 CFR 1003 comment 2(i)–2
(commentary to Regulation C definition of ‘‘home
improvement loan’’ stating that such loans ‘‘include
improvements both to a dwelling and to the real
property on which the dwelling is located . . . .’’).
194 See 15 U.S.C. 1639c(b)(3)(C)(ii) (directing the
CFPB to prescribe regulations that carry out the
purposes of TILA’s ability-to-repay provisions for
residential mortgage loans with respect to PACE
transactions).
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consumer; it does not distinguish among
transactions based on lien status.
1026.43(c) Repayment Ability
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requirements would increase access to
more sustainable financing.
One mortgage industry trade
association stated that adopting abilityto-repay requirements for PACE lending
would be consistent with the treatment
of other mortgage financing. A credit
union trade association suggested that
the ability-to-repay requirements would
help reduce risk to consumers and the
financial system that may follow from
expedited originations. One State
agency encouraged the CFPB to apply
ability-to-repay requirements to PACE
transactions, so long as such
requirements are not inconsistent with
requirements under California’s abilityto-pay regime for PACE transactions.195
Several commenters supporting the
proposal to adopt TILA’s ability-torepay framework for PACE loans
specifically addressed verification
requirements. Consumer groups favored
the application of income verification
requirements in TILA to PACE
transactions. Two stated that weakening
these verification requirements or other
ability-to-repay requirements would
ignore both evidence and the CFPB’s
own data suggesting abuses.
Many PACE companies and PACE
industry stakeholders, as well as a home
improvement contractor, opposed the
proposed application of TILA’s abilityto-repay standards to PACE
transactions. Several of these
commenters, including two PACE
companies and a home improvement
contractor, pointed to the success of
State laws in Florida and California in
regulating industry practices. These
commenters stated that, even if the
CFPB imposes Federal ability-to-repay
standards to PACE transactions, it
should exempt transactions that are
subject to a State-level ability-to-repay
regime. A government sponsor of PACE
programs asserted that the proposed
ability-to-repay requirements would
likely decrease PACE lending by as
much as 50 percent.
Multiple PACE companies and a
PACE industry trade association
asserted that the proposal did not
adequately account for the unique
nature of PACE financing. Several PACE
companies asserted that the proposed
requirements would not be appropriate
given current industry practices and low
delinquency rates on PACE loans. For
example, one PACE company stated that
employment verification was
unnecessary given its current
underwriting practices, which include
verifying that applicants have managed
their mortgage and property tax
payments. One PACE company stated
195 See
10 Cal. Code Regs sec. 1620.01 et seq.
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that the proposed ability-to-repay rules
were modeled on stringent requirements
applicable to purchase-money mortgage
loans that are significantly larger than
PACE loans. Another PACE company
suggested tailoring the ability-to-repay
requirements to make them less
stringent in light of the fact that PACE
loans are smaller and have smaller
margins than other mortgage debt.
PACE companies also recommended
that the CFPB account for a variety of
other factors in finalizing ability-torepay requirements, including concerns
about economic costs to homeowners
and the environment, the need for
access to credit for consumers in need
of swift financing, and characteristics of
PACE transactions including that they
are nonrecourse, no-acceleration, and
have fixed interest rates.
Commenters diverged on the question
of whether a creditor undertaking an
ability-to-repay determination for a
PACE transaction should be permitted
to consider potential energy savings that
would result from the home
improvements financed by the PACE
loan. A government sponsor suggested
that the CFPB should permit, but not
require, the consideration of potential
energy savings in an ability-to-repay
determination. A number of consumer
groups as well as mortgage-industry
trade associations encouraged the CFPB
not to permit a creditor to consider
potential energy savings, asserting that
such savings are speculative and may
not ultimately materialize.
After considering the comments
received, the CFPB is finalizing the
proposal to apply existing § 1026.43(c)
to PACE transactions. It is also
finalizing as proposed the adjustments
to the commentary to § 1026.43(c) and
new § 1026.43(i), as described in more
detail below. These aspects of the final
rule implement the directive of
EGRRCPA section 307 that the CFPB
prescribe regulations that carry out the
purposes of TILA section 129C(a) for
residential mortgage loans with respect
to PACE transactions. As explained in
the proposal, the existing ability-torepay framework will provide 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. This final
rule adopts the existing statutory and
regulatory regime governing residential
mortgage loans, with adjustments to
account for the unique nature of PACE
financing.
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2465
The CFPB declines to exempt PACE
transactions that are covered by State
laws requiring an assessment of
consumers’ repayment ability as some
commenters suggested. A uniform
Federal standard is necessary to
implement EGRRCPA section 307,
which specifically directed the CFPB to
prescribe regulations to carry out the
purposes of TILA’s ability-to-repay
requirements for PACE loans. Although
some States currently have protections
in place that may resemble TILA’s
ability-to-repay rules in some ways, not
all States with PACE-enabling
legislation have such requirements, and
no State requirements fully reflect the
Federal requirements as implemented
by this final rule. This rule will ensure
that consumers have as a baseline the
protections of TILA’s ability-to-repay
requirements. This is consistent with
TILA’s treatment of other closed-end
mortgage credit and the mandate of
EGRRCPA section 307. As discussed in
part VI.D below, the CFPB
acknowledges that this final rule may
affect PACE origination rates.
For similar reasons, the CFPB also
declines to rely upon voluntary industry
reforms or current underwriting
practices in place of TILA’s ability-torepay requirements. Although
commenters have indicated that
industry stakeholders have made
significant strides in improving
consumer protections in recent years,
new entrants may not share the same
commitment to consumer protections
and industry practices may change over
time. Voluntary practices do not ensure
the uniform applicability of Federal
consumer protections inherent in
TILA’s ability-to-repay requirements.
Moreover, the congressional mandate in
EGRRCPA section 307 instructs the
CFPB to carry out the purposes of
TILA’s ability-to-repay requirements
with respect to PACE financing.
Further, the CFPB determines that
TILA’s ability-to-repay regime is
appropriate for PACE loans
notwithstanding certain characteristics
of PACE financing or PACE programs
discussed by commenters. Section
1026.43(a) applies broadly to consumer
credit transactions secured by a
dwelling.196 As with other mortgage
lending, the importance of assessing a
consumer’s ability to afford a PACE loan
does not depend on whether the loan is
a purchase-money mortgage or home
improvement loan, the loan amount, or
whether the interest rate is fixed or
196 12 CFR 1026.43(a). As provided in 12 CFR
1026.43(a)(1)–(3), certain residential mortgage loans
are exempted from the ability-to-repay
requirements.
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adjustable. These and other
characteristics of PACE transactions
cited by PACE companies are shared by
other types of mortgages subject to
TILA’s ability-to-repay regime; they are
not unique to PACE transactions.
Applying ability-to-repay requirements
to PACE loans will substantially benefit
consumers given the structural risks
deriving from the priority lien securing
the loans, as described above.
Further, commenters’ assertions
regarding PACE companies’ incentives
and desire to be paid on schedule by the
PACE consumer are not inconsistent
with the requirements of § 1026.43 or
unique to PACE creditors or companies.
As required by the EGRRCPA, the CFPB
has accounted for the unique
characteristics of PACE transactions in
other portions of this final rule,
including, for example, the requirement
in § 1026.43(i)(1) that the ability-torepay determination for PACE
transactions account for certain
increases to escrow account payments
on the consumer’s other mortgage loan
that are caused by the PACE transaction.
The CFPB also concludes that
permitting the consideration of potential
energy savings would not be consistent
with the purposes of TILA section 129C.
The CFPB agrees with commenters’
observations that potential energy
savings are too uncertain to reliably
inform an ability-to-repay
determination. Commenters supporting
the consideration of potential energy
savings did not provide specific
recommendations to address this
uncertainty, such as, for example, how
to account for potential variability in
consumer usage patterns, external
energy prices, and technological
developments.
1026.43(c)(2) Basis for Determination
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1026.43(c)(2)(iv)
Section 1026.43(c)(2) sets forth factors
creditors must consider when making
the ability-to-repay 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 CFPB
proposed to add new comment
43(c)(2)(iv)–4 to provide additional
guidance to creditors originating PACE
transactions. For the reasons described
in the proposal and as discussed below,
the CFPB is adopting as proposed
comment 43(c)(2)(iv)–4.
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Comment 43(c)(2)(iv)–4 provides 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.
Comment 43(c)(2)(iv)–4 helps address
concerns about the prevalence of ‘‘loan
splitting’’ and ‘‘loan stacking’’ in the
PACE industry that were raised by
consumer groups and other stakeholders
in comments to the Advance Notice of
Proposed Rulemaking. As described in
those 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 CFPB’s
statistical analysis indicates that a little
more than 13 percent of PACE
borrowers between 2014 and 2019
received multiple PACE loans, with
many of these transactions originated
simultaneously or within a few months
of each other, which could be indicative
of loan splitting or stacking.197 About
one-fourth of PACE borrowers with
multiple PACE loans consummated
multiple loans in the same month, and
about three-quarters of PACE borrowers
with multiple PACE loans
consummated more than one loan
within the same 6-month period.198 In
some cases, the creditor originating the
second or successive PACE loan might
not be aware of previous loans, due to
delays in recording.
No commenters opposed the adoption
of proposed comment 43(c)(2)(iv)–4.
Several commenters, including several
consumer groups and a State agency,
supported the adoption of proposed
comment 43(c)(2)(iv)–4. These
commenters indicated that the comment
could provide an effective means of
addressing the prevalence of loan
splitting and loan stacking in the PACE
industry.
Several consumer groups supporting
the proposed comment recommended
further amendments. Two consumer
groups recommended that the CFPB
clarify further that a PACE company is
obligated to search for other PACE loans
on a property if the PACE company
knows or has reason to know that a
home improvement contractor has been
involved in loan splitting or loan
197 See
198 See
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id. at 24.
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stacking, or if the relevant home
improvement contract shows that the
total cost of a PACE transaction exceeds
the program’s loan-to-value limit. These
commenters also stated that the CFPB
should amend the definition of
‘‘simultaneous loan’’ in existing
§ 1026.43(b)(12) to include
simultaneous unsecured loans that the
PACE company has made or will make
at or before consummation of the PACE
transaction. These commenters reasoned
that this amendment would be
appropriate because many PACE
companies market unsecured home
improvement loans in tandem with
PACE loans. Several other consumer
groups stated that the CFPB should
require additional due diligence beyond
that in proposed comment 43(c)(2)(iv)–
4 to ensure there are no other PACE
liens associated with a property and
included a credit check as one example.
The CFPB declines to adopt these
recommended changes. Finalizing
comment 43(c)(2)(iv)–4 as proposed, in
concert with existing comment
43(c)(2)(iv)–2, which elaborates on the
circumstances in which a creditor
knows or has reason to know of
simultaneous loans, protects against the
practices of loan splitting and loan
stacking. Comment 43(c)(2)(iv)–2 helps
clarify, for example, that a creditor may
comply with the requirements of
§ 1026.43(c)(2)(iv) by ‘‘follow[ing]
policies and procedures that are
designed to determine whether at or
before consummation the same
consumer has applied for another credit
transaction secured by the same
dwelling.’’ The CFPB also declines to
adopt commenters’ suggestion to
expand the definition of simultaneous
loan to include simultaneous unsecured
loans 199 and notes that
§ 1026.43(c)(2)(vi) requires
consideration of a consumer’s current
debt obligations, to include unsecured
loan products.
1026.43(c)(3) Verification Using ThirdParty 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 CFPB proposed to amend comment
43(c)(3)–5 to clarify how this
199 Section 1026.43(c)(2)(iv) refers to a
‘‘simultaneous loan,’’ and § 1026.43(b)(12) defines
simultaneous loan as ‘‘another covered transaction
or home equity line of credit subject to § 1026.40
that will be secured by the same dwelling and made
to the same consumer at or before consummation
of the covered transaction or, if to be made after
consummation, will cover closing costs of the first
covered transaction.’’
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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 CFPB
proposed to amend comment 43(c)(3)–5
to clarify that 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. For example, if a consumer
informs the creditor of an existing PACE
transaction during the application
process, the creditor does not comply
with § 1026.43(c)(2)(v) 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 received limited comments
on this aspect of the proposal.
Commenters who addressed the
proposed amendment to comment
43(c)(3)–5, including a few consumer
groups and a State agency, were
supportive of the proposed amendment.
The CFPB finalizes as proposed the
amendment to comment 43(c)(3)–5.
1026.43(i) PACE Transactions
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1026.43(i)(1)
Many consumers who obtain PACE
transactions have pre-existing mortgages
that require the payment of property
taxes through an escrow account.201
Consumers with such pre-existing
mortgages will typically also make their
PACE transaction payments through
their existing escrow account. Under
200 As discussed above, the CFPB is finalizing its
proposal 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 the section-by-section analysis of
§ 1026.43(b)(8), supra.
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).
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certain circumstances, the addition of
payments for a PACE transaction can
result in a sharp increase in the
consumer’s escrow payments. 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, and
more than a quarter of PACE borrowers’
property tax payments likely increased
by double or more.202 This increase is
relevant to the consumer’s ability to
repay the PACE transaction. The CFPB
proposed 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
monthly payment amount considered
under § 1026.43(c)(2)(iii). For the
reasons described below, the CFPB is
finalizing § 1026.43(i)(1) as proposed.
Section 1026.43(i)(1) requires the
ability-to-repay determination for PACE
loans to consider, in addition to the
factors in § 1026.43(c)(2)(i) through
(viii), any monthly payments that the
creditor knows or has reason to know
the consumer will have to pay into an
escrow account as a result of the PACE
transaction that are in excess of the
monthly payment amount considered
under § 1026.43(c)(2)(viii).
Section 1026.43(i)(1)(i) and (ii)
provides additional detail on the 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,203 and as explained
in the proposal, the CFPB understands
that servicers frequently charge the full
allowable amount of this cushion.
Accordingly, § 1026.43(i)(1)(i) provides
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 Regulation X, § 1024.17(c)(1),
unless the creditor reasonably expects
202 See
203 12
PO 00000
PACE Report, supra note 12, at 13.
CFR 1024.17(c)(1).
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2467
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.
Section 1026.43(i)(1)(ii) addresses the
payment spike that can result from a
delay in incorporating the PACE
transaction into the consumer’s escrow
payments. PACE transactions are
distinct from non-PACE mortgage loans
in many respects, including the timing
of when the first PACE payment is due
and their annual or semi-annual
repayment schedule. Consumers who
are required to make their PACE
payments through their existing escrow
account 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.204
The CFPB 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.
Accordingly, § 1026.43(i)(1)(ii) requires
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.
Numerous commenters, including
consumer groups, a State agency, and a
mortgage-industry trade association,
supported the adoption of proposed
§ 1026.43(i)(1). These commenters
discussed the possibility of large escrow
payment increases resulting from PACE
transactions and the associated lack of
transparency for consumers seeking to
understand the effect of a PACE
transaction on their future payments.
For example, consumer groups stated
that the annual escrow analysis is often
conducted before the upcoming year’s
tax bills are issued, meaning that the
escrow payment calculation does not
reflect the actual amount owed. They
expressed that, if there is a large,
unanticipated increase in the property
tax bill, such as from the addition of a
PACE loan, the servicer will advance
204 A servicer must conduct an escrow account
analysis every 12 months but may, and in some
cases must, do so more frequently. See generally 12
CFR 1024.17(c)(3) (discussing annual escrow
account analyses).
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the full amount owed and the escrow
account will carry a deficiency forward.
These commenters stated that, at the
next annual escrow account analysis,
the servicer will calculate the new
escrow payment by adding to the base
payment a reserve cushion of up to onesixth (1⁄6) of the annual property
charges, an amount sufficient to cover
the prior year’s PACE payment, and an
amount to cover the upcoming year’s
PACE payment that was not accounted
for in the prior year’s escrow analysis.
They asserted that the resulting
adjustment to the escrow account causes
consumers to experience a sharp
increase in their escrow payment many
months—or even over a year—after the
PACE transaction was originated.
These consumer groups stated that the
way PACE programs currently address
the interaction between PACE
transactions and escrow accounts is
inadequate to address this predictable
payment spike. They expressed that, for
example, PACE companies do not
provide consumers information on the
estimated effect of the PACE transaction
on their existing escrow account or help
PACE consumers communicate with
their mortgage servicer regarding their
escrow account. They stated further that
consumer advocates have found in
many cases that PACE borrowers
experience severe payment shocks when
a mortgage servicer ultimately
incorporates a PACE loan into a
consumer’s escrow account.
Consumer groups supporting the
proposal recommended that the CFPB
require consideration of the borrower’s
most recent escrow account statement
and the expected timing of the first tax
bill following the consummation of the
PACE transaction. These commenters
also suggested that the CFPB amend
§ 1026.43(c)(5)(ii) to include PACE
transactions. Section 1026.43(c)(5)(ii)
sets forth special rules for the
calculation of the monthly payment for
loans with a balloon payment, interestonly loans, and negative amortization
loans,205 and the commenters suggested
that the CFPB provide for similar
treatment for PACE transactions.
Several commenters, including
mortgage-industry trade associations,
consumer groups, and a PACE company,
stated that the CFPB should require
notification to a consumer’s pre-existing
mortgage servicer when a PACE
transaction is originated, to protect
consumers with mortgage escrows from
payment spikes. Two consumer groups
expressed that this approach would be
beneficial because the mortgage servicer
is more likely than the consumer to
205 See
12 CFR 1026.43(c)(5)(ii).
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have the necessary information and
understanding of escrow mechanics to
anticipate escrow shocks. Mortgageindustry trade associations stated that
such notification would promptly
educate consumers on the true
consequences of the PACE transaction
and promote servicers’ awareness of a
potential priority lien. One PACE
company stated that the CFPB should
require mortgage servicers to timely
update escrow account payments
following the PACE transaction
origination.
Several PACE industry stakeholders
opposed the adoption of proposed
§ 1026.43(i)(1). Two PACE companies
asserted that evidence of escrow
payment spikes is limited, and that,
where payment shocks do occur, the
cause is untimely escrow account
analyses by mortgage servicers. One
PACE company stated that escrow
spikes cannot be foreseeable to a PACE
company because it might not be able to
ascertain when the consumer’s mortgage
servicer will conduct its next analysis.
This commenter recommended that the
CFPB substitute a servicer notification
requirement in place of proposed
§ 1026.43(i)(1)(ii) because it stated that a
notification requirement is adequate to
alleviate escrow payment spikes.
Another PACE company stated that, in
California, existing PACE contracts
direct the consumer to inform their
servicer of their annual PACE payment
and that Florida law requires consumers
to notify their mortgage servicer of the
consumer’s intent to enter into a
financing agreement along with the
maximum principal amount to be
financed.
Having considered the comments
received, the CFPB is finalizing
§ 1026.43(i)(1) as proposed. Requiring
PACE creditors to consider foreseeable
changes to escrow payments caused by
the repayment of the PACE loan is
entirely consistent with the statutory
mandate. If, as some commenters to the
proposal noted, the servicer analyzes
the escrow account before property tax
bills are issued, the servicer will
advance the full property tax amount,
including the amount owed on the
PACE transaction. The escrow account
is then likely to carry a negative balance
(a deficiency) due to the prior year’s
PACE payment. As part of the next
escrow account analysis, the servicer
will add the upcoming year’s PACE
payment that was not accounted for in
the prior year’s escrow analysis to the
anticipated disbursements, which will
likely cause the anticipated escrow
account balance to fall short of the target
required by the servicer to pay all
escrow disbursements for the coming
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year (an escrow shortage). The servicer
may then require the borrower to pay
additional monthly deposits to the
account to eliminate the deficiency, the
shortage, or both, and adjust the reserve
cushion to account for the PACE loan,
causing the required escrow payment to
increase. While 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.
The CFPB acknowledges one PACE
company’s concern that creditors may
not know the exact timing of when the
servicer will conduct its next escrow
account analysis, which could impact
the amount of any escrow spike.
However, PACE creditors can comply
with § 1026.43(i)(1) using information
that is available to them at the time of
the ability-to-repay determination.
Additionally, PACE creditors have the
option to meet the requirement in
§ 1026.43(i)(1)(ii) regarding expected
escrow shortages or deficiencies by
promptly notifying the servicer about
the new PACE transaction. Where a
creditor provides prompt notification to
the servicer, the CFPB concludes that it
is 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 for the purposes of
§ 1026.43(i)(1)(ii). More generally, while
§ 1026.43(i)(1)(ii) does require creditors
to take into account the possibility of an
escrow shortage, it does not require
creditors to accurately predict the exact
amount of a shortage or deficiency on
the monthly payment that the consumer
will be required to pay into the
consumer’s escrow account.
With regard to commenters’
suggestion to amend § 1026.43(c)(5)(ii)
to include PACE transactions, the CFPB
concludes that § 1026.43(i)(1) is
sufficient to address the risks of
increased escrow payments. The CFPB
also declines to require creditors to
consider the consumer’s most recent
escrow account statement and the
expected timing of the first tax bill
following the consummation of the
PACE transaction. PACE creditors have
flexibility to determine on a case-bycase basis how best to ensure that
consumers have the ability to repay
their PACE loans in light of escrow
delays. In exercising that flexibility, the
CFPB expects that many creditors will
find it helpful to review the consumer’s
most recent escrow account statement
and the expected timing of the first tax
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bill following consummation. The CFPB
is not finalizing any servicer notification
requirements, but PACE creditors
voluntarily may notify a consumer’s
servicer of the PACE transaction and
doing so could aid creditors in ensuring
affordability and making the ability-torepay determination, as discussed
above.
1026.43(i)(2)
EGRRCPA section 307 requires the
CFPB to prescribe regulations that carry
out the purposes of TILA section
129C(a) with respect to PACE
transactions. The CFPB proposed in
§ 1026.43(i)(2) to apply the Regulation Z
ability-to-repay framework to PACE
transactions without providing for a
qualified mortgage presumption of
compliance for PACE transactions. For
the reasons provided below, the CFPB is
finalizing § 1026.43(i)(2) as proposed.
Section 1026.43(i)(2) provides that,
notwithstanding § 1026.43(e)(2), (e)(5),
(e)(7), or (f), a PACE transaction is not
a qualified mortgage as defined in
§ 1026.43. This provision excludes
PACE transactions from eligibility for
each of these qualified mortgage
categories in § 1026.43, General
Qualified Mortgage, Small Creditor
Qualified Mortgage, Seasoned Qualified
Mortgage, and Balloon-Payment
Qualified Mortgage.206 The CFPB
concludes that it would be
inappropriate to provide PACE
transactions eligibility for a
presumption of compliance with the
ability-to-repay requirements,
particularly given the risk that PACE
loans are not affordable and the lack of
creditor incentives to consider
repayment ability in this market.
A purpose of the qualified mortgage
provisions in 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.207 TILA section
129C(b)(3)(B)(i) authorizes the CFPB to
prescribe regulations that revise, add to,
or subtract from the criteria that define
a qualified mortgage upon a finding that
such regulations are necessary or proper
to ensure that responsible, affordable
mortgage credit remains available to
consumers in a manner consistent with
the purposes of TILA section 129C; or
206 The CFPB also appreciates that, as a
consequence of this final rule, PACE transactions
will not be permitted to include prepayment
penalties. 15 U.S.C. 1639c(c); 12 CFR 1026.43(g).
The CFPB understands that, in general, PACE
transactions currently do not include these
penalties.
207 15 U.S.C. 1639b(a)(2).
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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.208
The CFPB finds that the nature of
PACE transactions raises serious risks
that make it unreasonable to presume
creditor compliance with the ability-torepay requirements. First, certain
aspects of PACE financing can result in
unaffordable payments that can lead to
delinquency, late fees, tax defaults, and
foreclosure actions. Second, creditors
originating PACE transactions bear
minimal risk of loss related to the
transaction due to PACE’s structure and
lien position and therefore have reduced
incentives to assure that the mortgages
made are affordable, as required by the
statute. Further, the pricing model and
risk structure associated with PACE
transactions may make any price-based
criterion—including the pricing
thresholds set forth for the General
Qualified Mortgage category in
§ 1026.43(e)(2)(vi) and any PACEspecific thresholds the CFPB might
develop—an inappropriate measure of a
consumer’s repayment ability at
consummation.
A variety of commenters, including
several consumer groups, a State
agency, and mortgage industry
stakeholders, expressed support for the
CFPB’s proposal to exclude PACE
transactions from qualified mortgage
eligibility. Some of these commenters
asserted that no qualified mortgage
eligibility would be appropriate because
PACE lending carries certain risks for
consumers. A State agency stated that
the risks of PACE lending are not yet
fully understood. One mortgage
industry stakeholder stated that
mortgage market safeguards are absent
in the PACE industry.
Multiple PACE companies opposed
the CFPB’s proposal and articulated
several reasons why PACE transactions
should be eligible for qualified mortgage
status. As discussed in more detail in
the section-by-section analysis of
§ 1026.2(a)(14), these commenters
challenged the CFPB’s reliance on the
PACE Report and stated that State
legislation and industry-led reforms
have improved outcomes for PACE
consumers. One PACE company stated
that the CFPB should reconsider the
exclusion of PACE transactions from
qualified mortgage status because local
governmental entities oversee the PACE
industry and could address consumer
protection concerns through their
revocation processes.
208 15
PO 00000
A few PACE companies disagreed
with the CFPB’s determination that
PACE creditors may lack incentive to
ensure repayment ability. One PACE
company stated that ensuring low
delinquency and default rates among
properties with PACE loans is important
for bond ratings. Another asserted that
it is most cost effective to be repaid on
schedule by PACE consumers rather
than collecting payments through other
means. This commenter also expressed
that, if PACE consumers are not
regularly repaying their PACE loans,
PACE companies could suffer
reputational risks and other negative
effects in the secondary market.
PACE companies also asserted that
the exclusion of PACE transactions from
qualified mortgage status would have an
adverse impact on the availability of
PACE credit and could lead consumers
to rely on less regulated and more
expensive products. These commenters
stated that the CFPB failed to adequately
weigh access-to-credit concerns in
conducting its evaluation of the
proposal’s costs and benefits. One PACE
company asserted that the proposal’s
exclusion of PACE transactions from
qualified mortgage status runs contrary
to the purposes of TILA 129C because
it threatens to constrict the availability
of PACE credit. It added that regulatory
safe harbors such as the application of
qualified mortgage status may facilitate
industry compliance and help to
minimize litigation associated with
uncertain compliance obligations. This
commenter asserted that the CFPB’s
proposal would impose an ability-torepay regime that would be more
onerous than that applicable to
mortgage loans, which it stated are
typically significantly larger than PACE
transactions.
One PACE company recommended
that, in lieu of excluding PACE loans
from qualified mortgage eligibility, the
CFPB could provide a qualified
mortgage status for PACE transactions
that would impose other guardrails for
these loans. This commenter pointed to
protections put into place for
Government-Sponsored Enterprise
Patch Qualified Mortgage loans 209 and
209 See generally 78 FR 6408 (Jan. 30, 2013). In
the January 2013 Final Rule, the CFPB established
a temporary category of qualified mortgage loans
consisting of mortgages that (1) comply with the
same loan-feature prohibitions and points-and-fees
limits as General Qualified Mortgage loans and (2)
are eligible to be purchased or guaranteed by Fannie
Mae or Freddie Mac while under the
conservatorship of the FHFA. The provision that
created this loan category is commonly known as
the GSE Patch. Unlike for General Qualified
Mortgage loans, the January 2013 Final Rule did not
prescribe a DTI limit for Temporary GSE Qualified
U.S.C. 1639c(b)(3)(B)(i).
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suggested that a qualified mortgage for
PACE could include certain propertybased underwriting requirements, such
as no existing liens on the property and
no recent property tax delinquencies, in
addition to prohibiting certain loan
characteristics, such as negative
amortization, balloon payments, or
prepayment penalties. One PACE
company disagreed with the CFPB’s
proposed rationale for not making PACE
loans eligible for the Small Creditor
Qualified Mortgage category. This
commenter asserted that the role cities
and counties play in authorizing PACE
programs with PACE companies serves
to increase PACE companies’
community focus. It stated further that
local governments expect PACE
companies to focus on the communities
they serve and that they work together
to provide timely services to
constituents.
Finally, one PACE company asserted
that Congress evinced no intent to single
out PACE transactions as categorically
ineligible for qualified mortgage status
in the EGRRCPA. This commenter
stated that, while EGRRCPA section 307
does not mention TILA section
129C(b)—it requires ability-to-repay
regulations under TILA section 129C(a),
whereas 129C(b) is the subsection
providing for qualified mortgage—
EGRRCPA section 307 itself is an insert
into subsection 129C(b). The commenter
stated further that TILA subsection
129C(b) describes a way to comply with
TILA subsection 129C(a) and that TILA
elsewhere refers only to 129C(a) in cases
where subsection 129C(b) is relevant.
After considering the comments
received, the CFPB is finalizing
§ 1026.43(i)(2) as proposed. The CFPB
determines that it is inappropriate to
provide PACE transactions eligibility for
a presumption of compliance with the
ability-to-repay requirements for the
reasons discussed below. As the CFPB
explained in the proposal, certain
aspects of PACE financing create 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 of payments,
due simultaneously with large property
tax payments, may render PACE loans
unaffordable.
Mortgage loans. The Temporary GSE Qualified
Mortgage loan definition has expired.
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Available data that show the broader
effect that PACE loans have on
consumers’ finances highlight
affordability risks inherent in PACE
financing. The PACE Report finds clear
evidence that PACE transactions
increase non-PACE mortgage
delinquency rates.210 For consumers
with a pre-existing non-PACE mortgage,
getting a PACE loan increased the
probability of a 60-day delinquency on
their non-PACE mortgage by 2.5
percentage points over a two-year
period as compared to consumers who
applied and were approved for, but did
not obtain, a PACE loan.211 For
comparison, the average two-year nonPACE mortgage delinquency rate for
originated borrowers was 7.1 percent
prior to obtaining their PACE loan.212
This means that for the average
consumer with a pre-existing non-PACE
mortgage who obtains a PACE loan,
their probability of delinquency on their
non-PACE mortgage increases 35
percent relative to a scenario in which
the consumer does not obtain PACE
financing.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-anda-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 twoyear period.215 The CFPB acknowledges,
as industry commenters have noted, that
lending practices and State law have
evolved since the origination of the
PACE loans reflected in the PACE
Report. In spite of these improvements,
however, the structural risks of PACE
loans remain, and future industry
participants may not have the same
210 A large majority of PACE consumers 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.
211 Id. at 26–27. As in the CFPB’s analysis in its
2020 final rule (General Qualified Mortgage 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.
212 Id. at 27.
213 Id.
214 Id. at 36–37.
215 Id. at 33.
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commitment to consumer protections as
those that have made the recent
improvements. Also, PACE programs
could expand to new States that may
not have consumer protection laws for
PACE loans. Further, the local
government oversight and the
revocation process cited by one
commenter do not alleviate the inherent
affordability risks associated with PACE
transactions or affect the CFPB’s
statutory obligations to assure that
mortgage lending is both responsible
and affordable.
The lien status of PACE loans also
heightens the risk of negative outcomes
for consumers and weakens incentives
for PACE creditors and PACE
companies to ensure that consumers
have the ability to repay. As noted,
under most PACE-enabling statutes, the
liens securing PACE loans 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.216 In the
event of foreclosure, any amount owed
on the PACE loan 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 VI.A, 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 that, for the more than 70 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.217 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.
Although certain market pressures
may provide some incentive to ensure
low delinquency and default rates as
PACE companies asserted—including
pressures from the secondary market for
PACE securities—the structure of PACE
transactions significantly limits
creditors’ economic incentives to
determine repayment ability and raises
216 See, e.g., Cal. Sts. & Hwys. Code sec. 5898.30;
Fla. Stat. sec. 163.081(7).
217 PACE Report, supra note 12, at 18.
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risks of consumer harm. A qualified
mortgage category with the guardrails
for PACE loans suggested by one
commenter would not address these
risks inherent to the structure of PACE.
TILA specifically excludes from the
qualified mortgage definition loans with
certain risky features and lending
practices that are well known to present
significant risks to consumers, including
loans with negative amortization or
interest-only features and (for the most
part) balloon loans.218 PACE
transactions likewise have features that
create significant risks to consumers; the
CFPB finds that a presumption of
compliance for PACE financing is not
warranted.
The CFPB also concludes that the
rationales for the existing qualified
mortgage categories do not apply for
PACE transactions. In its 2020 final rule
(General Qualified Mortgage Final
Rule),219 the CFPB 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 loans
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 CFPB having APRs
between 8.2 and 9 percent.222 For
reference, the average prime offer rate
for primary mortgage loans was around
3.5 percent during the timeframe
covered by the PACE Report, varying
somewhat over time and by loan
term.223 The CFPB’s available data
indicate that pricing of PACE loans is
primarily correlated with State and
property type and does not appear to be
an indicator of a consumer’s ability to
repay. The PACE Report confirms that
PACE loans are generally not priced
based on traditional measures of credit
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218 In
the January 2013 Final Rule, the CFPB
observed that the clear intent of Congress was to
ensure that loans with qualified mortgage 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’s
apparent intent to provide incentives to creditors to
make qualified mortgages, since they have less risky
features and terms’’).
219 85 FR 86308 (Dec. 29, 2020).
220 Id. at 86361.
221 See generally part VI.A.
222 PACE Report, supra note 12, at table 2.
223 Id. at 13.
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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
Further, while the CFPB’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 Qualified
Mortgage 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
CFPB’s research, PACE transactions
with rate spreads above 3.5 percentage
points and between 2.25 and 3.49
percentage points increase delinquency
rates on a consumer’s non-PACE
mortgage by an estimated 2.8 and a 1.4
percentage points, respectively, and
PACE transactions with rate spreads
below 2.25 percentage points have
almost zero effect on non-PACE
mortgage delinquency.226
Nonetheless, the CFPB concludes that
this limited data would not be sufficient
to provide a basis for applying the
current General Qualified Mortgage
pricing thresholds to PACE transactions
even if a qualified mortgage were not
otherwise inappropriate for the reasons
discussed above. As discussed in the
PACE Report, it is not clear what drives
variation in the pricing of PACE loans,
but it does not appear to be a function
of traditional measures of credit risk.227
Rather, in this context it is more
plausible that the larger rate spreads
contributed to the increased credit risk.
As a result, even though the PACE
Report finds that PACE transactions
with low rate spreads had relatively
better delinquency outcomes on the
associated mortgages, the CFPB
concludes that it is not reasonable to
presume that a creditor that offers a
PACE transaction with a low APR and
meets the other factors required for a
General Qualified Mortgage has made a
224 Id.
at 22–23.
to the General Qualified Mortgage
Final Rule, a loan generally meets the General
Qualified Mortgage 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 Qualified Mortgages, 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 Id. at 23.
225 Pursuant
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reasonable and good faith determination
of the individual consumer’s ability to
repay.228
The Small Creditor Qualified
Mortgage category in § 1026.43(e)(5)
extends qualified mortgage status to
covered transactions that are originated
by creditors that meet certain size
criteria and that satisfy certain other
requirements. The CFPB created the
Small Creditor Qualified Mortgage
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 qualified mortgage status to
loans that meet the criteria in
§ 1026.43(e)(5), including that the
creditor consider and verify the
consumer’s DTI or residual income.229
The CFPB 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. Although local
governments authorize PACE programs
and may work closely with PACE
companies in their communities, 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 Qualified Mortgage. In
contrast to the CFPB’s findings with
respect to many small creditors, the
CFPB is not persuaded that PACE
228 The CFPB is also skeptical that defining a
category of qualified mortgages for PACE
transactions based on a specific DTI threshold
would be suitable for PACE. Additionally, given the
risk factors described above, the statutory
requirements for qualified mortgage may not be
satisfied by defining a category of qualified
mortgages for low-DTI PACE transactions.
Moreover, the CFPB’s available evidence does not
demonstrate a correlation between a PACE
consumer’s DTI and non-PACE mortgage outcomes.
The CFPB 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 Qualified Mortgage Final Rule, a criterion
for the General Qualified Mortgage category. Id. at
48–49. 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 CFPB doubts that a
presumption of compliance would be appropriate
given the unique characteristics of PACE
transactions discussed above.
229 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.’’).
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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.230 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 likely
these entities will be repaid even in the
event of foreclosure or other borrower
distress.
Similarly, the reasoning for the
Seasoned Qualified Mortgage loan
category set out in § 1026.43(e)(7) would
not apply to PACE transactions. In 2020,
the CFPB created the Seasoned
Qualified Mortgage 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, and as
noted above, 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 a creditor’s good faith and
reasonable determination of a
borrower’s ability to repay at
consummation. Given this, the CFPB
determines that it is not appropriate to
extend the presumption of compliance
to these circumstances.
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 ability-to-repay
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
230 See
80 FR 59947 (Oct. 2, 2015).
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three or six payments because PACE
transactions are paid annually or semiannually. Evidence of successful
performance over only three or six
payments is not sufficiently probative of
the creditor’s compliance with the
ability-to-repay requirements at
consummation for PACE transactions to
create a presumption of compliance.
Similar concerns apply to the
Balloon-Payment Qualified Mortgage
category in § 1026.43(f). Section
1026.43(f) permits balloon-payment
loans originated by small creditors that
operate in rural or underserved areas to
qualify for qualified mortgage status,
even though balloon-payment loans are
generally not eligible for General
Qualified Mortgage status. In addition to
the general reasons discussed above for
not having a qualified mortgage
definition for PACE, the same specific
concerns noted above with respect to
the Small Creditor Qualified Mortgage—
namely, that the involvement of
nationwide PACE companies limits the
applicability of any special features of
small creditors relevant to the Small
Creditor Qualified Mortgage—are
equally applicable to the BalloonPayment Qualified Mortgage criteria.
Moreover, the CFPB is not currently
aware of PACE financing with balloon
payments.
This determination is consistent with
EGRRCPA section 307. EGRRCPA
section 307 makes no mention of PACE
loans qualifying for a presumption of
compliance with the ability-to-repay
requirements it directed the CFPB 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 may make 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 (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 qualified mortgages) or
otherwise indicate that the CFPB’s
adoption of ability-to-repay
requirements specific to PACE loans
should make further allowance for any
presumption of compliance with those
requirements. Instead, by requiring that
the CFPB ‘‘account for the unique
nature’’ of PACE financing, the CFPB
understands that Congress concluded
that elements of the existing ability-torepay regime for residential mortgage
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loans—including the qualified mortgage
provisions—may not be appropriate in
the case of PACE financing.
This determination is also consistent
with the relevant statutory authority
under TILA sections 129C(b)(3)(C)(ii),
129C(b)(3)(B)(i), and 105(a). TILA
section 129C(b)(3)(A) directs the CFPB
to prescribe regulations to carry out the
purposes of section 129C and TILA
section 129C(b)(3)(B)(i) in turn
authorizes the CFPB to prescribe
regulations that revise, add to, or
subtract from the criteria that define a
qualified mortgage upon a finding that
such regulations are necessary or proper
to ensure that responsible, affordable
mortgage credit remains available to
consumers in a manner consistent with
the purposes of this section, are
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 CFPB 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 ability-torepay and qualified mortgage provisions
and the unique nature of PACE
financing, the CFPB concludes that
there is ample reason not to extend a
presumption of compliance with the
ability-to-repay requirements to PACE
transactions.
The CFPB recognizes that
§ 1026.43(i)(2) may impact the
availability of PACE credit. The CFPB
finds that any credit access impacts
must be justified against the consumer
protection risks of extending qualified
mortgage status to PACE transactions.
TILA section 129C authorizes the CFPB
to modify the qualified mortgage criteria
where necessary to ensure the
availability of responsible, affordable
mortgage credit.231 The above analysis
and the PACE Report call into question
the extent to which the availability of
PACE transactions increases the supply
of such credit.
1026.43(i)(3)
EGRRCPA section 307 requires the
CFPB to ‘‘prescribe regulations that
carry out the purposes of [TILA’s ATR
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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 ability-torepay requirement. The CFPB proposed
§ 1026.43(i)(3) to also apply the
requirements of § 1026.43 to any PACE
company that is substantially involved
in making the credit decision for a
PACE transaction. The CFPB is
finalizing § 1026.43(i)(3) as proposed.
Section 1026.43(i)(3) clarifies that a
PACE company is ‘‘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.
Section 1026.43(i)(3) also applies TILA
section 130 232 to covered PACE
companies that fail to comply with
§ 1026.43.
Several consumer groups supported
extending ability-to-repay requirements
to PACE companies in addition to PACE
creditors. Two stated that defining
‘‘creditor’’ to include PACE companies
for purposes of § 1026.43 would
implement EGRRCPA section 307’s
mandate to consider the unique
characteristics of PACE. One consumer
group, as discussed under
§ 1026.43(b)(14), supported including
home improvement contractors or
subcontractors under the definition of
‘‘PACE company’’ to expand the parties
who would be subject to the ability-torepay requirements.
A number of consumer groups, a
mortgage-industry trade association, a
State agency, and an individual
commenter also supported applying
TILA civil liability for violations of the
PACE ability-to-repay rules. They
stated, for example, that the civil
liability provisions could deter
predatory behavior, mitigate
unaffordable PACE lending, reduce
default and foreclosure risk for
borrowers, and afford consumers
remedies in the face of TILA violations.
Certain of these consumer groups, as
well as a State agency, specifically
supported making PACE companies
subject to civil liability under TILA.
Two consumer groups stated that
defining ‘‘creditor’’ to include PACE
companies for purposes of TILA section
130 would carry out the mandate in
EGRRCPA section 307 to consider the
unique characteristics of PACE. They
also asserted that such coverage would
be appropriate because PACE
232 15
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government sponsors delegate
origination and underwriting processes
to PACE companies, and that PACE
consumers perceive the PACE
companies as creditors. They also stated
that PACE companies assert defenses in
litigation that ordinarily apply only to
government entities, on the theory that
the association with a government
sponsor cloaks the PACE company with
the same defenses and insulates them
from liability. They and other consumer
groups stated that applying the abilityto-repay and civil liability requirements
to PACE companies would ensure that
State assessment laws do not preclude
consumers from obtaining relief for
TILA violations.
Several consumer group commenters
suggested extending ability-to-repay or
civil liability requirements further, to
include home improvement contractors
who sell PACE financing in the course
of selling their home improvement
products and help originate the loans.
Several PACE companies opposed the
application of TILA section 130 to PACE
companies for violations of § 1026.43.
One PACE company asserted that the
CFPB lacks authority to subject PACE
companies to ability-to-repay
requirements or civil liability under
TILA. It stated that the fact that
government creditors are insulated from
liability authority under TILA section
113(b) means that Congress did not
intend liability under TILA section 130
to extend to PACE companies.233
As discussed in the analysis of
§ 1026.2(a)(14) above, a number of
commenters opposed covering
government entities as creditors under
TILA or treating PACE loans as TILA
credit. One PACE company stated in
support of this position that it would be
incongruous to apply the proposed
TILA requirements to local government
entities acting as PACE creditors along
with the protections afforded to them
under section TILA section 113(b). A
government sponsor of PACE programs
raised sovereign immunity objections to
the application of TILA liability. It also
asserted that PACE companies may opt
to leave the PACE market if subject to
civil liability under TILA.
The CFPB is finalizing § 1026.43(i)(3)
as proposed. PACE companies play an
extensive role in PACE financing
programs, as described in part II.A. In
exchange, PACE companies typically
receive part of the profit from PACE
financing. Given the role that PACE
companies play in PACE financing, the
233 TILA section 113(b) provides that ‘‘[n]o civil
or criminal penalty provided under this subsection
for any violation thereof may be imposed upon . . .
any State or political subdivision thereof, or any
agency of any State or political subdivision.’’
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2473
incentive structure of PACE lending,
and the fact that PACE companies will
often be the parties implementing any
ability-to-repay requirements, the CFPB
concludes that application of § 1026.43
to PACE companies that are
substantially involved in making the
credit decision, in addition to creditors,
is appropriate and consistent with the
Congressional mandate in EGRRCPA
section 307 to implement regulations
that carry out the purposes of TILA’s
ability-to-repay provisions. A PACE
company that makes the credit decision,
makes a recommendation as to whether
to extend credit, or applies criteria used
in making the credit decision is
‘‘substantially involved’’ in making the
credit decision. A PACE company is not
substantially involved in making the
credit decision for purposes of
§ 1026.43(i)(3) if it merely solicits
applications, collects application
information, or performs administrative
tasks. Applying section 130 to covered
PACE companies will 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.
The application of TILA section 130
to covered PACE companies will also
enhance consumers’ ability to obtain
remedies for violation of the ability-torepay rules. TILA section 113(b) 234
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
protections. Therefore, without
application of section 130 to PACE
companies, PACE consumers could be
limited in their ability to obtain
remedies for violations of the ability-torepay requirements, frustrating the
purposes of TILA and EGRRCPA section
307 by potentially allowing for
circumvention or evasion of the abilityto-repay requirements. Moreover,
Congress specifically directed the CFPB
to apply section 130’s liability
provisions to PACE.
The CFPB declines to extend liability
under TILA to home improvement
contractors who sell PACE financing to
the consumer or assist in the origination
process if they are not PACE companies
substantially involved in making the
credit decision or otherwise liable under
TILA. Finalizing § 1026.43(i)(3) as
proposed provides adequate protections
and remedies for consumers in the
PACE marketplace. Additionally, the
CFPB understands that home
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improvement contractors are not
currently substantially involved in
credit decisions for PACE transactions.
The CFPB is only extending liability to
parties who are PACE companies as
defined in § 1026.43(b)(14) that are
substantially involved in making the
credit decision for a PACE transaction.
Regarding a government sponsor’s
comment that § 1026.43(i)(3) could
result in PACE companies exiting the
market, while the CFPB acknowledges
that some PACE companies may decide
to exit the industry rather than be liable
for the obligation to make good-faith
determinations of consumers’ ability to
repay their PACE loans, EGRRCPA
section 307 mandates the extension of
liability in circumstances where PACE
loans are made without consideration of
ability to repay.
The CFPB uses 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.
Appendix H—Closed-End Model Forms
and Clauses
The CFPB is finalizing forms H–24(H),
H–25(K), H–28(K), and H–28(L) to
appendix H to Regulation Z. Forms H–
24(H) and H–25(K) 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. Forms H–24(H) and H–
25(K) 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
Closing Disclosure—Modification to
Closing Disclosure for Transaction Not
Involving Seller.
The CFPB stated in the proposal that
it planned to publish translations of
forms H–24(H) and H–25(K) if it
finalized the proposed additions to
appendix H. As discussed above,
consumer advocates have expressed
concerns that the PACE market lacks
adequate consumer protections,
including concerns that PACE financing
is disproportionately targeted at
consumers with limited English
proficiency. Generally, CFPB
stakeholders have underscored the
importance of language access as a way
of ensuring fair and competitive access
to financial services and products. The
CFPB believes that competitive,
transparent, and fair markets are
supported by providing translations of
key material in the customer’s preferred
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language, along with the corresponding
English-language material. Accordingly,
the CFPB is making available forms H–
28(K) and H–28(L), which are Spanish
translations of forms H–24(H) and H–
25(K), for PACE creditors that wish to
use them. Use of these translations is
not required under the final rule, but the
CFPB is providing them as an
implementation resource for PACE
lenders.235
Two consumer groups noted in
comments that the proposed model form
for the Loan Estimate omitted the
appraisal disclosure required under
§ 1026.37(m)(1) and recommended its
inclusion because appraisals play a key
role in PACE underwriting. The CFPB is
finalizing the model forms to include
the appraisal disclosure.
The CFPB is also finalizing several
additional pages for the Loan Estimates
and Closing Disclosures, to reflect
variations in the information required or
permitted to be disclosed.
V. Effective and Compliance Date
Consistent with TILA section 105(d),
the CFPB proposed that the final rule
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. For the reasons
discussed below, the CFPB is finalizing
an effective date of March 1, 2026.
A PACE company submitted comment
to the proposal recommending an
effective date of at least 30 months from
the publication of this final rule. The
commenter asserted that an extended
period to come into compliance is
warranted by the breadth and
complexity of the proposal. It stated that
the proposal would impact all aspects of
its business, requiring substantial
updates to software, systems, and
policies and procedures. It also stated
that coming into compliance would
require collaboration with other
industry stakeholders, including
government sponsors and home
improvement contractors, and that the
CFPB should allow industry
participants adequate time to work with
consultants and legal professionals to
understand the various requirements.
The PACE company stated that the
CFPB provided the mortgage industry
nearly two years to come into
compliance with the 2013 TILA–RESPA
Rule, citing the significant cost and
system and software changes, and that
the changes in this proposed rule would
be more significant than those in the
2013 TILA–RESPA Rule.
The CFPB determines that an effective
date of March 1, 2026, provides
sufficient time for covered parties to
come into compliance. The ability-torepay and TILA–RESPA integrated
disclosure requirements have been in
place since 2013, albeit with certain
adjustments over time. Many of the
operational and regulatory complexities
have been resolved in that time.
VI. CFPA Section 1022(b) Analysis
A. Overview
In developing this final rule, the CFPB
has considered the rule’s potential
benefits, costs, and impacts in
accordance with section 1022(b)(2)(A) of
the CFPA.236 The CFPB requested
comment on the preliminary analysis
presented in the proposed rule and
submissions of additional data that
could inform the CFPB’s analysis of the
benefits, costs, and impacts, and the
discussion below reflects comments
received. In developing the final rule
and the proposed rule, the CFPB
consulted with the appropriate
prudential regulators and other Federal
agencies, including regarding
consistency with any prudential,
market, or systemic objectives
administered by these agencies.237 As
discussed in part II.B above, the CFPB
also has consulted with State and local
governments and bond-issuing
authorities, in accordance with
EGRRCPA section 307.238
One consumer advocate stated
generally that the CFPB’s 1022(b)
analysis in the proposal was appropriate
and satisfied the CFPB’s burden to
consider costs, benefits and impacts.
Provisions To Be Analyzed
Although the final rule has several
parts, for purposes of this 1022(b)(2)(A)
analysis, the CFPB’s discussion groups
the 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
provision to apply the ability-to-repay
requirements of § 1026.43 to PACE
transactions, with certain adjustments to
account for the unique nature of PACE,
including denying eligibility for any
qualified mortgage categories; and (2)
the provision 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
236 12
235 See
12 CFR 1026.37(o)(5)(ii) and
1026.38(t)(5)(viii).
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U.S.C. 5512(b)(2)(A).
U.S.C. 5512(b)(2)(B).
238 15 U.S.C. 1639c(b)(3)(C)(iii)(II).
237 12
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credit, such as PACE transactions, are
credit for purposes of TILA.
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Economic Framework
Before discussing the potential
benefits, costs, and impacts specific to
this final rule, in the proposal the CFPB
provided 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 CFPB has previously
discussed the general economics of
ability-to-repay determinations in the
January 2013 Final Rule and
elsewhere,239 and focused in the
proposal 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 CFPB
noted that, even prior to the then-new
ability-to-repay requirements of
Regulation Z, most mortgage lenders
voluntarily collected income
information as part of their normal
business practices, even as the January
2013 Final Rule was adopted to prevent
lenders who did not follow this practice
from harming consumers and the
financial system. 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.240 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.241
239 See, e.g., 78 FR 35430, 35492–97 (June 12,
2013).
240 This holds empirically as well. In the General
Qualified Mortgage Final Rule, the CFPB 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).
241 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
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The market for PACE financing has
some notable differences from the
typical non-PACE mortgage market, and
these differences dampen or eliminate
the economic incentive for PACE
companies 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
non-PACE mortgage,242 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
structured as obligations attached to the
real property, rather than to the
consumer, any remaining amounts owed
on the PACE loan 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.243 Moreover, the PACE Report
finds that PACE transactions are not
priced based on individual risk.244 The
PACE Report notes that estimated APRs
for PACE transactions are tightly
bunched, with about half of estimated
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.
242 PACE Report, supra note 12, at 18.
243 Id. at Table 1.
244 Id. at 23.
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PACE APRs between 8.2 and 9
percent.245 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.246
In response to the proposal, one PACE
company disagreed with the above
analysis, stating that PACE companies
do have an intrinsic incentive to
consider ability to repay due to the
importance of bond ratings. According
to the commenter, PACE companies’
business models depend on being able
to securitize and sell bonds backed by
PACE loans, and a high delinquency
rate would impact the ratings of those
bonds, affecting PACE companies’
profits.
With respect to the commenter’s
assertion that default rates of PACE
loans affect bond ratings, and thus
provide an incentive to ensure ability to
repay, the CFPB makes two responses.
First, as noted above, consumers with a
non-PACE mortgage generally will not
default on a PACE loan directly even if
they cannot afford the PACE loan, as
any property tax delinquency will be
paid by a mortgage servicer. The CFPB
found in the PACE Report that at least
70 percent of PACE borrowers have a
non-PACE mortgage, although PACE
industry commenters stated this was an
undercount, and that a fraction closer to
90 percent of PACE borrowers had a
non-PACE mortgage. This creates an
artificially low default rate that would
be observed by bond investors and
would tend to reduce the incentives of
PACE companies to ensure that PACE
loans are affordable for consumers.
Second, the commenter’s assertion that
PACE companies have an incentive to
ensure ability to repay is belied by the
conduct of PACE companies to date.
The CFPB understands that PACE
companies generally have not
undertaken ability-to-repay analyses
with attributes similar to the TILA
requirements where they have not been
required to by applicable law. For
example, PACE companies did not
generally collect or verify income of
PACE borrowers in California until they
were required to by the 2018 California
PACE Reforms. Similarly, PACE
companies generally did not collect
income information in Florida until its
recent law change in 2024, despite
having developed systems to capture
income information to comply with
applicable requirements in California.
245 Id.
246 Id.
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Accordingly, the CFPB concludes that
PACE companies lack the incentive to
ensure their borrowers’ ability to repay
absent legal requirement to do so.
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B. Baseline for Analysis
In evaluating the final rule’s benefits,
costs, and impacts, the CFPB considers
the impacts against a baseline in which
the CFPB 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
clarification in this final rule that only
involuntary tax liens and involuntary
tax assessments are excluded from being
credit under Regulation Z (such that the
commentary does not exclude PACE
transactions), the baseline assumes that
the current practices of PACE industry
stakeholders are not consistent with
treating PACE financing as TILA credit.
The CFPB notes that, since the
publication of the proposal, the baseline
has shifted due to changes in State laws.
Florida has passed legislation that
requires verification of consumers’
household income among other
consumer protections.247
The CFPB did not receive comments
regarding its choice of baseline.
C. Data Limitations and Quantification
of Benefits, Costs, and Impacts
The discussion below relies on
information that the CFPB has obtained
from industry, other regulatory agencies,
and publicly available sources,
including reports published by the
CFPB. These sources form the basis for
the CFPB’s consideration of the likely
impacts of this final rule. The CFPB
provides estimates, to the extent
possible, of the potential benefits and
costs to consumers and covered persons
of this rule, given available data.
Among other sources, this discussion
relies on the CFPB’s PACE Report, as
described in part II.B.4 above. The
Report utilizes data on applications for
PACE transactions initiated between
July 1, 2014, and December 31, 2019,
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 (‘‘Originated
Consumers’’) to those who were
approved but did not have an originated
transaction (‘‘Application-Only
Consumers’’). The Report uses a
difference-in-differences regression
247 See
Fla. Stat. sec. 163.081(3)(a)(12).
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methodology, essentially comparing the
changes in outcomes like mortgage
delinquency for Originated Consumers
before and after their PACE transactions
were originated to the same changes for
Application-Only Consumers. In this
discussion of the benefits, costs, and
impacts of the final rule, the CFPB
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.248 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.249
The CFPB 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 Advance Notice of
Proposed Rulemaking.
The CFPB acknowledges several
important limitations that prevent a full
determination of benefits, costs, and
impacts. The CFPB 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.250 The data used in the
Report to evaluate consumer impacts are
restricted primarily to consumers with a
credit record. Further, the comparison
groups used in the difference-indifferences analysis are reasonable but
imperfect. In addition, while the 2018
California PACE Reforms are
informative to the CFPB’s consideration
of the impacts of this final rule on
consumers and covered persons, this
final rule has different requirements
from the State laws that made up the
2018 California 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 final rule’s
benefits, costs, and impacts. General
economic principles and the CFPB’s
expertise, together with the available
data, provide insight into these benefits,
costs, and impacts. In the proposal, the
CFPB requested additional data or
studies that could help quantify the
benefits and costs to consumers and
248 During the year immediately after
consummation of a PACE transaction, PACE
payments generally have not been included in a
consumer’s property tax bill. As discussed further
below, it would not be appropriate to include this
period in an analysis of the affordability of PACE
loans.
249 Florida’s recent State law requiring
consideration of a borrower’s income was enacted
in 2024, after the period studied in the PACE report.
250 Id. at 52.
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covered persons of the rule.
Commenters largely did not provide
such information, except as described
below.
PACE industry stakeholders raised a
number of concerns regarding the PACE
Report’s methodology.
A PACE company took issue with the
fact that the data request only allowed
PACE companies to submit information
for a single property owner, and the fact
that if a property was owned by
multiple consumers, the CFPB’s
contractor received identifying
information on just one of the
consumers for matching purposes. The
commenter stated that, based on its own
records, 50 percent of properties with
PACE loans are jointly owned and thus
had multiple PACE loan applicants on
a single loan. The commenter asserted
that, by excluding from the analysis
outcomes for these other applicants, the
PACE Report cannot reliably make
conclusions on the impact of PACE
loans on consumer outcomes.
The CFPB acknowledges that its data
collection only sent information on one
consumer per PACE loan to the CFPB’s
contractor for matching. While this
means that some consumers who have
PACE loans were not included in the
PACE Report’s analysis, the CFPB does
not agree that this aspect of the data
collection biased the results of the PACE
Report substantively. Where a PACE
loan borrower has a joint non-PACE
mortgage with another person, the nonPACE mortgage will appear on both
consumers’ credit records, such that the
analysis in the PACE Report would still
track whether that household had
difficulty paying their non-PACE
mortgage. Thus, on balance, the CFPB
finds that tracking the outcomes of one
consumer per PACE loan is sufficiently
informative of the household’s financial
outcomes.
Two PACE companies and an
industry trade association stated that the
PACE Report did not identify all PACE
borrowers who had a pre-existing nonPACE mortgage. The PACE Report finds
that 70 percent of PACE borrowers had
a non-PACE mortgage prior to receiving
a PACE loan; commenters stated that
this fraction is closer to 90 percent. The
commenters asserted that by failing to
identify all those with a mortgage in the
sample, the CFPB did not accurately
capture the impact of PACE borrowing.
The CFPB acknowledges that the true
share of PACE borrowers with a preexisting non-PACE mortgage is likely
higher than the 70 percent identified in
the PACE Report. In cases where the
non-PACE mortgage is in the name of
only one member of a household while
the PACE loan is in the name of another
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member, the methodology used by the
CFPB’s contractor to extract the data
used in the PACE Report would omit
the non-PACE mortgage. However, the
CFPB does not agree that this limitation
biases or undermines the results of the
Report. There is no evidence to suggest
that PACE consumers whom the CFPB
might have incorrectly categorized as
not having a non-PACE mortgage had
better outcomes than those who were
correctly categorized.
One PACE company stated that it was
not appropriate for the PACE Report to
analyze credit card balances, as
homeowners with and without PACE
loans use credit cards differently, and
increased credit card balances cannot be
attributed to having a PACE loan. The
commenter asserted that homeowners
who financed some projects through a
PACE loan may be undertaking
additional home improvement projects
on their homes and paying for these
using credit cards if the additional
projects are not PACE-eligible. In
addition, two PACE companies stated
that the PACE Report shows that the
analysis for credit card balances did not
meet the required assumptions for a
valid difference-in-differences analysis,
as it showed balances for Originated
Consumers increasing relative to
Application-Only Consumers prior to
the PACE loan application.
The CFPB agrees that homeowners
with and without PACE loans may use
credit cards differently. The results in
the PACE Report describing the impact
of PACE loans on credit card balances
are not relied upon for the final rule.
The CFPB primarily relies on the
mortgage estimates included in the
PACE Report for this 1022(b) analysis,
as described further below.
A PACE company and an industry
trade association stated that the
methodology used in the PACE Report
was invalid because it did not
distinguish between the general impact
of taking out new credit and the specific
features of PACE loans such as paying
through property tax bills. The
commenters suggested that any resulting
negative impacts found in the PACE
Report as resulting from a PACE loan
are just the result of consumers taking
on more debt of any kind, rather than
being specific to PACE financing. One of
the commenters noted that increased
spending and higher debt amounts
negatively impact credit score. They
stated that because credit score is
treated as an outcome in the PACE
Report, consumers with a PACE loan
will necessarily perform worse.
The CFPB acknowledges that the
estimates in the PACE Report evaluating
the impact of a PACE loan include the
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impact of additional debt in general, as
well as the specific features of PACE
loans that differ from other forms of
credit. However, the CFPB views this as
the correct way to evaluate the costs of
PACE loans for consumers and thus the
potential benefits of the rule in
preventing such loans. PACE loans have
a variety of features that are relevant to
whether consumers can repay,
including but not limited to the
structure of the obligations, the way
they are marketed by home
improvement contractors and PACE
companies, the potential that consumers
would take on a home improvement
contract that might not otherwise occur,
and the infrequent payment cycle
relative to non-PACE mortgages, as well
as imposing additional debt on the
consumer. But for the purposes of this
rule, to determine whether consumers
have difficulties affording PACE loans,
the CFPB must determine the impact of
all of these features collectively. That is,
regardless of whether it is true, as the
commenters assert, that it is not feasible
to disentangle the impact on consumers
of the various features of PACE loans,
the CFPB maintains that this would not
answer the relevant question. The
overall impact of PACE loans on
consumers is the relevant quantity for
this analysis.
One public PACE provider and its
associated local government expressed
concern that the CFPB did not use data
provided by Sonoma County, California.
The commenters stated that
government-run PACE programs such as
the program in Sonoma County are
unique, since they are entirely
administered by the local government
and not a PACE company. They asserted
that the tax delinquency rate on loans in
the Sonoma County PACE program are
low, around 0.5 percent, similar to the
annual delinquency rate for all secured
parcels in the county. The commenters
noted that, in the Sonoma County
program, property owners have a
minimum of five years to cure
delinquencies before the property is
subject to sale through a tax defaulted
auction.
While Sonoma County provided data,
it was not sufficiently detailed to be
used in the PACE Report. The Report’s
main analyses rely on comparing
consumers with PACE loans to those
who were approved for a PACE loan but
did not end up getting one. Sonoma
County provided information on about
400 originated PACE loans but did not
provide information on applications
that did not result in a loan. Given the
CFPB’s methodology in the PACE
Report, it would not have been possible
to analyze the outcomes of Sonoma
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County’s government-run program
separate from those of privately-run
PACE programs considered in the
Report.
Several PACE companies stated that
the control group of Application-Only
Consumers used in the PACE Report is
not comparable to Originated
Consumers, and that this undermines
the results of the Report. One
commenter asserted that the comparison
is invalid because the CFPB did not
check that the two groups were
comparable on loan-to-value ratio of the
underlying mortgage, unemployment,
income stability over time, variability in
mortgage payments, negative equity in
property, or income verification
procedures used by the lender. Another
commenter asserted that the PACE
Report characterizes the two groups as
having largely similar credit
characteristics prior to their PACE
application dates but disagreed with
this characterization, stating that the
PACE Report shows that Originated
Consumers were somewhat more likely
to have a mortgage, student loan
payments, and auto loans than
Application-Only Consumers.
Additionally, the commenter noted that
Originated Consumers had higher
average monthly mortgage payments,
higher credit card balances, lower credit
card limits, and lower incomes than
Application-Only Consumers.
On balance, the CFPB finds the
Application-Only Consumers to be a
reasonable control group for the effect of
PACE loans on consumer outcomes. As
discussed in more detail below,
although small differences exist
between Application-Only Consumers
and Originated Consumers on some
observable characteristics, ApplicationOnly Consumers are much more similar
to Originated Consumers than alternate
control groups suggested by commenters
or considered in the PACE Report.
Contrary to the views of the
commenters, the PACE Report includes
extensive analysis to substantiate the
similarity of the primary control group
of Application-Only Consumers to
Originated Consumers. Appendix B of
the PACE Report includes several
robustness checks exploring alternate
control groups, all of which are
consistent with the results based on the
main control group of Application-Only
Consumers. For example, the PACE
Report includes an analysis where
consumers whose applications for a
PACE loan were denied are included in
the control group. We would expect that
this comparison would dampen the
negative impact of PACE loans since
these denied consumers likely would
have worse financial outcomes
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compared to Application-Only
Consumers. The PACE Report instead
finds that including these denied
consumers in the control group along
with approved Application-Only
Consumers increases the magnitude of
the impact of PACE loans on mortgage
delinquency, and using only denied
consumers as the control group
increases the magnitude more.
Two PACE companies and an
industry trade association stated that the
analysis in the PACE Report overstates
any negative effects of PACE loans on
consumers because it excludes the
period immediately after each PACE
loan was originated. Commenters noted
that consumers may be receiving
benefits from the home improvement
funded by a PACE loan during this
period while not making loan payments
yet.
The CFPB disagrees with the assertion
of some commenters that the CFPB
should have considered the effect of
PACE loans on consumer outcomes
between the date of loan origination and
the date the first payment was due.
Consumers cannot be delinquent or
have difficulty making payments before
their loan payments are due, so there is
no basis to evaluate affordability during
this period.
One PACE company stated that the
PACE Report does not correctly handle
consumers with multiple PACE loans,
resulting in inflated non-PACE mortgage
delinquency rates. The commenter
asserted that if a consumer has multiple
PACE loans, they may have multiple
properties with multiple mortgages, and
thus have more opportunity to be
delinquent on any non-PACE mortgage
even if only one of their PACE loans is
delinquent.
The CFPB does not agree with certain
commenters that the PACE Report’s
inclusion of consumers with multiple
PACE loans inflated the Report’s
estimates of delinquency outcomes. The
CFPB notes that the PACE Report
includes a version of its analysis that
excluded consumers with multiple
PACE loans entirely, and this analysis
found substantively the same result as
the main analysis that included
consumers with multiple loans.251
One PACE company stated that the
PACE Report incorrectly states that the
CFPB requested data for consumers who
applied for PACE loans through June
2020, an error that was repeated in the
proposal. The commenter noted that the
CFPB in fact requested and received
data on PACE applications through
December 31, 2019. The commenter
asserted that the error was significant
251 See
PACE Report at 64–65.
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for the data analysis in the PACE Report
because data from 2020 and later would
be more reflective of current market
conditions.
The CFPB acknowledges that the body
of the PACE Report incorrectly states
that the CFPB requested PACE loans
originated and PACE applications
submitted through June 2020, when in
fact it requested data through December
2019. It is also true that this error was
repeated in the proposal. The PACE
Report includes the original data request
in Appendix C, which includes the
correct dates. However, this is not a
material error. The Report is clear that
all estimates include only loans where
it was possible to follow a consumer for
three years after origination. This
effectively excludes any loan originated
in late 2019 or after. Any loans
originated in 2020 or later would not
have been usable for the main analysis
of the PACE Report, even if they were
requested and provided by the PACE
companies.
Two commenters asserted that the
1022(b) analysis did not appropriately
incorporate recent changes in the PACE
industry. One PACE company asserted
that the analysis included in the PACE
Report is no longer relevant because
PACE financing has changed since the
period covered by the Report. The PACE
Report includes data on PACE
applications through 2019. The
commenter stated that, in 2021, the
industry imposed self-regulatory
measures to address many of the PACE
Report’s concerns. The commenter
further stated, as noted in the CFPB’s
proposal, consumer complaints have
declined in recent years. The
commenter asserted that more recent
data would better reflect this
improvement. Similarly, an industry
trade association suggested that since
they believe that the proposed 1022(b)
analysis focused on the change in
mortgage delinquency over a sample
period that is unlike the current PACE
environment, the CFPB should have
primarily relied on estimates from the
PACE Report that are specific to the
time period after the 2018 California
PACE Reforms. The commenter asserted
that the current environment includes
the 2018 California PACE Reforms, and
that relying on the overall estimate
overstated the present costs and benefits
of the proposal.
The CFPB does not agree with the
commenter’s assertion that it was
inappropriate to focus on PACE loans
originated during the period covered by
the PACE Report. The PACE Report
covers the period spanning the
implementation of 2018 California
PACE Reforms and presents results
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separately for loans originated before
and after these Reforms became law.
The PACE Report finds that PACE loans
still increase primary mortgage
delinquency in California during the
post-Reform period. The CFPB
acknowledges that the benefits of the
rule may be lower than the estimates
discussed below if some State laws
provide protections covered by the rule.
The CFPB does not believe this
undermines its analysis of benefits,
costs and impacts, and discusses how
this affects its choice of baseline above.
A State-level chamber of congress,
eight Members of the U.S. Congress, and
a State government unit stated that the
proposal seemed to be targeting Florida
and would impose costs on Florida
entities specifically. The commenters
stated that the proposed rule
highlighted some Florida-specific
impacts of the rule, such as an expected
decrease in applications in that State,
and stated that home improvement
contractors and government entities in
Florida would experience additional
costs. The commenters expressed
concern that the proposed rule would
have a disproportionate impact on
Floridians who have limited financial
means or limited access to credit.
The rule will apply to covered parties
and covered transactions nationwide,
not only those in Florida. PACE
companies have chosen to operate PACE
programs in just Florida, California, and
Missouri currently, and this rule will
apply equally in all States. Additionally,
there are multiple other States with
legislation enabling PACE financing.
The rule will apply equally to covered
parties who begin to operate PACE
programs in other States as well.
One PACE company criticized the
CFPB for various aspects of the
limitations of the data used in the
proposed rule and enumerated the
number of times that the CFPB stated
that it lacked information on costs
relevant to the proposal. The commenter
stated that some of this missing
information was crucial, and that the
proposal lacked insight into costs for
PACE companies and home
improvement contractors to comply
with the rule, or costs for consumers to
undertake appraisals.
The CFPB used all data that were
available and requested comment and
data from the public both generally and
on specific areas where the CFPB lacked
information to quantify potential costs
and benefits. As noted below, the CFPB
largely did not receive any specific
information from commenters regarding
the impact analysis topics on which it
sought comment.
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The same PACE company also stated
that the data in the PACE Report are
flawed because not all consumers were
matched to credit records from the
consumer reporting agency that served
as the CFPB’s contractor as described in
part II.B. The commenter particularly
disputed the CFPB’s assertion, in the
PACE Report, that 99 percent of PACE
borrowers had sufficient credit histories
to have a credit score. The commenter
stated that the 99 percent figure ignores
the 22 percent of consumers that were
not matched to credit record data. They
stated further that omitting this 22
percent of PACE applicants is
problematic for many of the Report’s
conclusions, including the assumption
that PACE customers have access to
other credit.
The CFPB does not agree with the
commenters’ assertion that the match
rate of the data used in the PACE Report
was problematic. As discussed in the
PACE Report, while some PACE
consumers who did not match to credit
report data were likely credit invisible
(consumers who do not appear in credit
record data), others may have been
unmatched due to data issues from
either the PACE companies or the credit
reporting company. The matching in the
Report was based only on name and
address, due in part to concerns by the
PACE companies about sharing more
identifying information. While this
matching was largely successful, an
imperfect match rate is unsurprising
given that addresses could be out of
date, or names could include spelling
errors. Essentially all PACE consumers
who matched to credit record data had
other credit available, meaning that at
least 77 percent of PACE consumers had
other credit options, supporting the
CFPB’s conclusion that PACE
consumers had other credit options.
One PACE company asserted that,
since the CFPB made methodological
decisions that trimmed the sample used
in the PACE Report, the resulting
sample was unrepresentative. The
commenter asserted that the main
analysis in the PACE Report omits
consumers who were not matched to
credit bureau data or who did not have
mortgage payments due prior to the
PACE loan origination date. The
commenter also asserted that consumers
who were not matched to the credit
record data likely were credit
invisible.252 The commenter asserted
252 This commenter seemed to conflate consumers
with thin credit files—those with insufficient
information on their credit reports to generate a
credit score—with consumers who do not appear in
credit record databases at all. The PACE Report data
includes all consumers for whom the CFPB’s
contractor could successfully match, regardless of
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that the population of consumers who
were not in the data of the CFPB’s
contractor would have benefitted from a
PACE loan because of their lack of
access to other credit products, and that
it was a mistake to assume in the PACE
Report that the unmatched consumers
would perform the same as the matched
consumers. The commenter also
asserted that, for some of the analyses in
the PACE Report that focus on mortgage
outcomes, requiring the consumers in
the sample to have had a mortgage in
the credit bureau data excluded new
homeowners. The commenter also took
issue with limiting the sample used in
the static difference-in-differences
model to those who have two years of
credit bureau data before their PACE
loan origination date and three years
following.
The CFPB also does not agree with
commenters that estimates of the PACE
Report were biased by the consumers
who were not able to be matched to
credit record data. It is possible that
these unmatched consumers were credit
invisible, but this seems unlikely to be
true in the vast majority of cases since
PACE borrowers must be homeowners
and most home purchases are funded by
mortgages.253 Even mortgages that are
paid in full will remain on a consumer’s
credit report, potentially indefinitely,
and thus would provide a potential
match for the CFPB’s contractor, even if
the consumer otherwise had no active
credit accounts. Moreover, while the
CFPB does not have data indicating
what share of PACE consumers are
credit invisible, it is reasonable to
expect that the share of consumers who
are credit invisible is proportional to the
share who are visible but have credit
files too thin to calculate a credit score.
As noted above, 99 percent of PACE
consumers that the CFPB’s contractor
was able to match were also scored,
compared to about 90 percent of the
U.S. population overall.254 This suggests
that PACE consumers are if anything
less likely to be credit invisible than the
average U.S. consumer. Thus, the most
reasonable conclusion is that most of
the individuals who were not matched
whether that consumer had sufficient credit history
to be scored. To avoid confusion, the CFPB
characterizes the comment as being in reference to
consumers who do not have a credit record.
253 See Nat’l Assoc. of Realtors, Highlights from
the Profile of Home Buyers and Sellers, https://
www.nar.realtor/research-and-statistics/researchreports/highlights-from-the-profile-of-home-buyersand-sellers (showing 80% of home purchases
funded by a mortgage in 2023).
254 See e.g., FICO, More than 232 Million U.S.
Consumers Can Be Scored by the FICO Score Suite,
FICO Blog (Aug. 2021), https://www.fico.com/blogs/
more-232-million-us-consumers-can-be-scored-ficoscore-suite.
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were not matched due to mismatches in
addresses or names between the PACE
company data and the credit reporting
company data.
The CFPB acknowledges that, as some
commenters asserted, the Static model
in the PACE Report, which was cited for
the main estimates in the proposal’s
1022(b) analysis and again below, omits
consumers who do not have sufficient
data before and after their PACE loans
were originated. Although this
inevitably reduces the sample size
somewhat,255 there is no reason to
believe that the consumers who were
excluded due to a lack of sufficient data
before or after the PACE origination are
dissimilar to those who were included.
In particular, the Dynamic model from
the PACE Report generally includes all
consumers regardless of whether they
have full data before and after the PACE
origination and finds substantively
similar estimates to the Static model.
A PACE company commenter
criticized the fact that the CFPB’s data
request asked for a single application
approval date for the PACE loan. The
commenter stated that this date
definition was ambiguous because it
could be the date the financing
agreement was executed or the date the
contractor and property owner received
the notice to proceed, among other
possibilities. The commenter asserted
that PACE companies interpreted this
date in inconsistent ways, and that the
PACE Report may have incorrectly
counted some applications as not going
forward when the recorded assessment
may just be missing.
The CFPB acknowledges the
challenges that commenters raised with
defining relevant dates in its PACE data
collection but disagrees that this
undermines the conclusions of the
PACE Report. The CFPB consulted at
length with PACE companies, including
the commenter who expressed concerns
with the date specifications, prior to
issuing its data request. Given the
inherent challenges of issuing a single,
standardized data request to multiple
private companies, the CFPB’s
voluntary data collection was
reasonably specific with respect to
identifying date specifications. Further,
the PACE Report includes robustness
analysis using alternate date definitions,
which yielded substantively similar
results.
One PACE company asserted that the
PACE Report’s treatment of the date
when PACE payments are due was
improper, making the findings of the
Report invalid. In the PACE Report, the
CFPB described that the ‘‘treatment’’ by
255 See
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a PACE loan occurs when the first PACE
payment was due or would have been
due. The commenter stated that,
because Application-Only Consumers
did not obtain PACE financing, the
CFPB should not refer to the period after
the first PACE payment would have
been due for these consumers as the
post-treatment period, because they did
not receive a PACE loan and thus
experienced no ‘‘treatment.’’ The
commenter further stated that any
delinquencies associated with nonPACE alternative financing for
Application-Only consumers would be
included in the pre-treatment period,
biasing the PACE Report’s estimates of
the effect of PACE loans on consumer
financial outcomes towards zero.
The CFPB does not agree with some
commenters’ assertion that the
imprecision in the dates used in the
PACE Report invalidates the results of
the Report. If anything, measurement
error of this nature would increase the
likelihood of finding no impact of PACE
loans on consumer financial outcomes.
In general, measurement error in a
regression analysis such as the one in
the PACE Report would tend to bias
results towards zero, that is, toward
finding that PACE loans have no impact
on consumer financial outcomes. This is
not what is found in the PACE Report.
One PACE company expressed
concern that the PACE Report includes
PACE loans with a performance window
during the COVID–19 pandemic. The
commenter asserted that the pandemic
impacted credit performance outcomes
for many Americans. The commenter
also asserted that, during this time,
mortgages and student loans were
subject to forbearance programs, and
that forbearance was also available for
some property tax payments. The
commenter also stated that there is not
a methodological strategy that would
have allowed the authors of the PACE
Report to disentangle the impact of the
pandemic from the impact of PACE
loans on consumers’ financial outcomes.
The CFPB does not agree with
commenters that the use of information
during the COVID–19 pandemic
undermines the conclusions of the
Report that were relied on in the
proposal and in this final rule. Despite
widespread economic disruption during
the pandemic, mortgage delinquency
rates fell during the early days of the
pandemic and remained low for
years.256 This was due in part to
256 See e.g., Ryan Sandler & Judith Ricks, The
Early Effects of the COVID–19 Pandemic on
Consumer Credit, Off. of Rsch. Issue Brief, CFPB
(Aug. 2020), https://files.consumerfinance.gov/f/
documents/cfpb_early-effects-covid-19-consumercredit_issue-brief.pdf (showing the reported rate of
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assistance and forbearance programs
such as those issued under the CARES
Act enacted by Congress in March
2020.257 With mortgage delinquency
rates suppressed generally for all
consumers during the pandemic, if
anything, the CFPB would expect the
gap in mortgage delinquency rates
between PACE consumers and
Application-Only Consumers to be
compressed during this period, leading
to a smaller estimated effect of PACE on
primary mortgage delinquency during
the study period compared to prepandemic, independent of the true
average impact of PACE loans on
consumers’ finances. Indeed, although
the PACE Report documents that PACE
loans had a smaller impact on mortgage
delinquency for loans originated after
2018, a point cited by several industry
commenters, it is precisely these loans
that were potentially impacted by the
COVID–19 pandemic. The reduced
impact of PACE loans on mortgage
delinquency during this period may be
due in part to the overall reduction in
mortgage delinquency due to pandemic
assistance and forbearance programs.
Commenters generally did not
provide additional data or studies about
the benefits and costs of the proposed
rule, with one notable exception. A
PACE industry trade association
obtained the same data as was used in
the PACE Report from the consumer
reporting agency that served as the
CFPB’s contractor. The trade association
conducted analysis of the data. The
results of this analysis are described in
a comment from the trade association
itself, as well as in comments from
individual PACE companies. The CFPB
new delinquencies on mortgage loan accounts fell
between March 2020 and June 2020, after being flat
or increasing gradually for the year prior.); Lisa J.
Dettling & Lauren Lambie-Hanson, Why is the
Default Rate So Low? How Economic Conditions
and Public Policies Have Shaped Mortgage and
Auto Delinquencies During the COVID–19
Pandemic, FEDS Notes, Bd. of Governors of the
Fed. Rsrv. Sys. (Mar. 4, 2021), https://doi.org/
10.17016/2380-7172.2854 (showing mortgage
delinquencies fell throughout the pandemic); Ryan
Sandler, Delinquencies on Credit Accounts
Continue to be Low Despite the Pandemic, CFPB
(June 16, 2021), https://www.consumerfinance.gov/
about-us/blog/delinquencies-on-credit-accountscontinue-to-be-low-despite-the-pandemic/ (showing
new delinquencies on mortgages remained low
from July 2020 through April 2021); Ctr. for
Microeconomic Data, Quarterly Report on
Household Debt and Credit 2024, Fed. Rsrv. Bank
of NY Rsch. & Stat. Grp. (Nov. 2024), https://
www.newyorkfed.org/medialibrary/interactives/
householdcredit/data/pdf/HHDC_2024Q3 (showing
that transitions into serious delinquency for
mortgages were historically low compared to 2009
through early 2024, nationally and in Texas and
California).
257 See Coronavirus Aid, Relief, and Economic
Security Act, Public Law 116–136 (Mar. 27, 2020)
https://www.congress.gov/bill/116th-congress/
house-bill/748/text (CARES Act).
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refers to the data and analysis in these
comments collectively as ‘‘the Trade
Group Analysis.’’ The Trade Group
Analysis did not include a formal
regression analysis to control for other
factors, such as a difference-indifferences analysis as used in the PACE
Report and did not report any measures
of statistical precision. Instead, the
Trade Group Analysis claims to
compare the raw average rates of nonPACE mortgage delinquency across
different groups, using different
comparison groups and sample choices
than were used in the PACE Report, as
described below.
The Trade Group Analysis compared
outcomes between Originated
Consumers (nominally as defined in the
PACE Report) and an alternate control
group, a subset of Application-Only
Consumers who took out a secured loan
after applying for the PACE loan and
whose non-PACE mortgage payment
increased by at least $1,000 after
applying for the PACE loan.258 The
analysis was further limited to
applications for both groups that were
received between July 2018 and
December 2018. The proposed control
group consisted of 312 homeowners.
The Trade Group Analysis found that
homeowners who received PACE
financing had better outcomes than the
control group. For example, three years
after the expected loan origination date,
the 90-day mortgage delinquency rate
was 5.3 percentage points higher for the
alternate control group than for
Originated Consumers.
The Trade Group Analysis also
presented results based on a control
group it refers to as ‘‘Standard
Financing’’ consumers, which it
described as a group of consumers who
resided in the same ZIP code as an
Originated Consumer and took on
between $15,000 and $40,000 of debt
from a company that ‘‘typically provides
home improvement financing,’’ between
July 2018 and June 2019. The types of
debt for the control group included a
mix of credit types, including credit
cards, second mortgages, and home
improvement loans. The comparison
shows these Standard Financing
consumers performing worse on several
delinquency outcomes and on credit
score compared to Originated
258 The Trade Group Analysis uses alternate terms
for the relevant groups of PACE consumers than the
terms Originated Consumers and Application-Only
Consumers used in the PACE Report. To avoid
confusion, the CFPB in this discussion refers to the
groups that are comparable to those used in the
PACE Report using the terms from the Report, and
the alternate groups suggested by the commenters
as alternate control groups.
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Consumers and Application-Only
Consumers.
The Trade Group Analysis includes
data for the period after a PACE loan is
originated but before payments become
due. The Trade Group Analysis finds
that including this window shows
improved credit performance for
Originated Consumers compared to
Application-Only Consumers.
Commenters note that consumers may
be receiving benefits from the PACE
home improvement during this period
even though they are not yet making
PACE loan payments. One commenter
asserted that omitting repayment data
from the year following the PACE loan
origination date accounts for about half
of the difference in the mortgage
delinquency rate between the PACE
homeowners and the Application-Only
homeowners.
Finally, the Trade Group Analysis
reported data on consumer credit scores.
The Trade Group Analysis found that
the average credit score for Originated
Consumers who applied for a PACE
loan from the second half of June 2019
through June 2020 increased 1.25 points
more than the average for ApplicationOnly Consumers over a three-year
period. A PACE company stated that the
improving trend in outcomes over time
deserved additional analysis and that
relying on earlier data is misleading.
The commenter stated that the
improvement in credit scores from 2019
to 2020 should be examined further to
confirm that the trend continued
through 2021 and into the future. As
with the analysis of delinquency
outcomes, the Trade Group Analysis
does not conduct any statistical analysis
to account for variation in other factors,
but rather simply compares averages for
the different groups, without reporting
sample sizes or measures of statistical
precision.
The CFPB does not agree that the
alternate control groups suggested in the
Trade Group Analysis are informative
about the effect of PACE loans on
consumer financial outcomes. At the
outset, the CFPB notes that the goal for
choosing a control group for a
difference-in-differences analysis is to
find a group that will capture the
counterfactual. That is, the control
group should capture how outcomes
would have changed for the treated
group had they not been treated. It is
reasonable to expect that ApplicationOnly Consumers would capture that
counterfactual trend for Originated
Consumers—consumers in both groups
were approached by a home
improvement contractor marketing the
PACE loan, agreed to apply for a PACE
loan, and were approved for a PACE
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loan. The PACE Report includes
analysis supporting the assumption that
these two groups had similar trends in
their financial outcomes prior to
applying for a PACE loan. In addition,
the CFPB reiterates that the relevant
quantity for purposes of this rule is the
overall effect of PACE loans, including
the way they are marketed and the fact
that they may induce consumers into
undertaking a home improvement
project in the first place, or into
financing a project that they might
otherwise pay cash for.
Additionally, the CFPB notes that the
alternate control groups suggested by
the Trade Group Analysis are aimed at
limiting attention to consumers who
have chosen to finance a home
improvement project. While in principle
this might be an appropriate strategy to
disentangle the effects of PACE
marketing from the unique features of
the loans, that will not identify the
overall impact of PACE loans on
consumer financial outcomes, which is
the relevant issue for the CFPB.
With respect to the Trade Group
Analysis’s approach to use only
Application-Only consumers whose
mortgage payments increased
significantly, the CFPB notes that this
subsample is small and highly selected.
As the commenter notes, this control
group contains only 312 consumers—
compared to 46,906 in the full
Application-Only group. This suggested
control group is too small to have
statistical power necessary to draw
conclusions about the effect of PACE on
consumer financial outcomes, even if
the commenter had conducted a full
regression analysis.259 Furthermore,
again, this alternate control group
would not capture the overall effect of
PACE transactions on consumers’
financial outcomes, which the CFPB
finds to be the relevant issue here.
The ‘‘standard financing’’ control
group is also problematic. The statistics
provided by the commenters show that
259 Although the commenter did not supply
confidence bands or other measures of statistical
precision, some arithmetic shows that there was no
reasonable expectation that a sample size of 312
would be sufficient. For example, the PACE Report
estimates that PACE loans increased non-PACE
mortgage delinquency by 2.5 percentage points,
with a standard error of 0.00234. A 95 percent
confidence interval includes values within about 2
standard errors above and below the central
estimate. The PACE Report’s estimates were based
on 46,906 observations in the control group, 150
times larger than the alternate group offered by the
commenter. Standard errors scale with the square
root of sample size, such that, as a first
approximation, we would expect standard errors
about 12 times larger for the commenter’s estimate
compared to those in the PACE Report, and a 95
percent confidence interval for a sample size of 312
would likely cover more than 6 percentage points
on either side of a central estimate.
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this control group was very different
from Originated Consumers along
several key dimensions, including credit
score and delinquency rate prior to
origination. For instance, within the
subsample of PACE applications that
the Trade Group Analysis chose to focus
on, the average non-PACE mortgage
delinquency rates for Originated
Consumers and Application-Only
Consumers prior to their PACE
application was about 7 percent for both
groups. The ‘‘standard financing’’ group
had a delinquency rate of just 0.61
percent.260 The Trade Group Analysis
even notes that this control group had
much higher credit scores than PACE
borrowers. The commenters asserted
that this is to be expected given that
standard financing companies primarily
market to higher-credit score
individuals; however, this is precisely
why the standard financing group is not
a reasonable control group.
The CFPB notes that the PACE Report
does analyze the effect of PACE loans in
more recent years and continued to find
that PACE loans increase non-mortgage
delinquency. The CFPB also notes that
due to the payment structure of PACE
loans, it is impossible to fully evaluate
affordability without a lag of several
years. As discussed above, PACE loans
may have a delay of up to a year and
a half between origination and the due
date of the first property tax bill that
includes the PACE transaction. Because
property taxes are typically billed
annually or semi-annually, it is difficult
to evaluate affordability without
considering a period of at least two
years after payments begin, as even a
period of this length includes only two
or possibly four payments. As a result,
a methodology similar to what was done
in the Static Model of the PACE
Report—requiring three years of nonPACE mortgage payment information
after the origination of the PACE loan—
is necessary. This means that even if the
CFPB could gather and analyze
additional data on more recent PACE
loans with no delay, it would not be
feasible to study the affordability of
PACE loans originated after around
2021. Given that gathering and
260 The delinquency rates for the ‘‘standard
financing’’ group are so low, in fact, that the CFPB
questions whether they were calculated in a way
that is comparable to the rates for PACE applicants.
The Trade Group Analysis describes that data on
the ‘‘standard financing’’ group as aggregated
statistics provided by the credit reporting company,
rather than account-level information as in the data
obtained by the CFPB and nominally used for the
other groups in the Trade Group Analysis. It is not
clear from the comments whether the credit
reporting company necessarily calculated
aggregated delinquency rates in the same way as in
the PACE Report, or the same way as the Trade
Group Analysis did for other groups.
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analyzing data is not an instantaneous
process, the data considered in the
PACE Report, including PACE loans
originated through 2019, is as timely as
is reasonably feasible.
For the reasons described above, the
CFPB continues to rely on the PACE
Report, among other sources, as the
basis for the CFPB’s consideration of the
likely impacts of this final rule.
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 abilityto-repay provisions, and the
clarification that only involuntary tax
liens and involuntary tax assessments
are excluded from being treated as
credit under TILA.
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Potential Benefits and Costs to
Consumers and Covered Persons From
the Ability-To-Repay Provisions
The final rule amends § 1026.43,
which generally requires an ability-torepay analysis before originating a
mortgage loan, to explicitly include
PACE transactions, with several
adjustments for the unique nature of
PACE. The rule also provides that a
PACE transaction is not a qualified
mortgage as defined in § 1026.43.
Although the CFPB uses the overall
estimates of the effect of PACE loans on
consumer financial outcomes from the
PACE Report to illustrate possible
aggregate benefits and costs of the
ability-to-repay provisions of the rule,
the CFPB notes that both benefits and
costs may differ due to the changes in
State laws in recent years. Both
California and Florida now require
PACE companies to verify income
before making a PACE loan, such that
this final rule may have less impact than
might be expected in a world where
PACE companies did not always verify
prospective borrowers’ income, as was
the case prior to 2018 in California and
prior to 2024 in Florida. It is unclear to
what extent the impacts of these State
laws replicate the impacts of the
protections included in this rule. In
particular, Florida’s recent statute only
requires that annual PACE loan
payments be less than 10 percent of
annual household income.261 Data from
the PACE Report suggests that PACE
loans with payments above this
threshold are rare, such that consumers
would rarely have an application for a
PACE loan denied due to Florida’s
261 See
Fla. Stat. sec. 163.081(3)(a)(12).
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income requirement.262 However,
merely verifying income may have
benefits and costs. The final rule
generally will not create benefits or
costs related to verifying income, as this
is now required at baseline under State
laws in States where PACE is most
active.
Potential Benefits and Costs to
Consumers of the Ability-To-Repay
Provisions
Benefits of Reducing Non-PACE
Mortgage Delinquency Caused by
Unaffordable PACE Transactions
Under the final rule, consumers who
are not found to have a reasonable
ability to repay the loan would not be
able to obtain a PACE loan. In general,
the CFPB expects that consumers who
will be denied PACE transactions due to
the required ability-to-repay
determination would otherwise struggle
to repay the cost of the PACE
transaction. These consumers generally
will benefit from the rule.
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.263
Two PACE companies characterized
the estimated effect of a PACE loan on
non-PACE mortgage delinquency from
the PACE Report as small. These
commenters also stated that the CFPB’s
estimate was not meaningful, because
the PACE Report shows the effect of
PACE loans on non-PACE mortgage
delinquency was short-lived, with nonPACE delinquency increasing
immediately after PACE payments
become due, and gradually returning to
normal over the subsequent 24 months.
The CFPB does not agree with the
commenter’s characterization of the
effect of a PACE transaction on mortgage
delinquency being small. The PACE
Report shows that the baseline rate of
mortgage delinquency among PACE
borrowers in the two years prior to
receiving a PACE loan was 7.2 percent,
262 See PACE Report, supra note 12, at Table 2
(showing that 75% of PACE loans had annual
payments of less than $3,300, while 75% of PACE
borrowers with reported income had annual income
above $54,000, such that even a relatively high
payment for a relatively low-income PACE loan
borrower would be well under 10% of income).
263 Id.
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such that the PACE loan increased the
risk of delinquency by 35 percent
relative to that baseline. With respect to
the PACE Report finding impacts of
PACE loans on delinquency primarily
early in the term of the loans, the CFPB
notes that delinquency early in the term
of a loan is a more direct signal of the
affordability of the loan than later
delinquency.264
PACE industry stakeholders also
expressed skepticism about the CFPB’s
estimated effect of PACE loans on nonPACE mortgage delinquency generally,
citing instead data on property tax
delinquencies. Specifically, a PACE
company cited a report by a bond rating
agency suggesting a delinquency rate of
3 to 4 percent on PACE loans, while a
special assessment administrator stated
that properties with PACE loans it
managed experienced a property tax
delinquency rate of 2 to 3 percent.
Industry commenters’
characterization of property tax
delinquency rates of PACE borrowers is
problematic. As discussed above,
property tax payments are paid by
mortgage servicers for consumers who
have a mortgage with an escrow
account, and even for mortgages without
a pre-existing escrow account, servicers
will generally establish an escrow
account to pay an otherwise delinquent
property tax bill. As a result, a property
tax delinquency would generally only
manifest in the data cited by
commenters if the borrower does not
have a mortgage. This means that the
true share of consumers who are unable
to afford a PACE loan is likely
significantly higher than the 2 to 4
percent property tax delinquency rate
cited by the commenters. Moreover, a
local government commenter that runs
its own PACE program asserted that its
loans had a tax delinquency rate of
around 0.5 percent, suggesting that
privately-run PACE programs have
significantly higher tax delinquency
rates than could be explained by
unrelated shocks to consumers’ income
or expenses.
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
264 See
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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
all PACE borrowers), a 3.8 percentage
point increase for consumers with nearprime credit scores (23.4 percent of all
PACE borrowers), and a 6.2 percentage
point increase for consumers with
subprime credit scores (20.4 percent of
all PACE borrowers).265 The consumers
with subprime credit scores would be
the most likely to be excluded by the
ability-to-repay analysis that the final
rule requires. Credit score tends to be
correlated with income. Moreover,
credit scores are based on credit history,
and the ability-to-repay requirements in
the final rule require consideration of
credit history.
A PACE company stated that the
PACE Report’s finding of larger impacts
for borrowers with sub-prime credit
scores had no bearing on the
affordability of PACE loans. The
commenter asserted that consumers
with sub-prime credit scores are
inherently more likely to default on a
non-PACE mortgage, regardless of
whether they take up a PACE loan, such
that larger increases in delinquency for
this group are not related to the specific
effect of PACE loans on that group.
The CFPB also does not agree that the
higher delinquency risk of low-credit
score individuals invalidates the results
for that subgroup reported in the PACE
Report. The subgroup analyses in the
PACE Report were limited to members
of each subgroup in both the Originated
Consumers and Application-Only
Consumer groups. This means that lowcredit score individuals are compared to
other low-credit score individuals, with
a similarly high underlying risk of
mortgage default. The fact that
Originated Consumers with lower credit
scores saw a larger increase in
delinquency than Originated Consumers
with higher credit scores is thus
relevant to demonstrate that lower
credit score individuals may be more
negatively impacted by PACE
transactions.
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
265 Id.
at Figure 10.
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little more than 10 percent of originated
borrowers in Florida during that
time.266 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 this final rule’s ability-to-repay
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.267 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.268 However, the Report also
finds that the effect of PACE
transactions 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.269 The PACE Report is
inconclusive with respect to whether
income or a calculation of DTI predicted
negative effects of PACE transactions 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.270
One PACE company took issue with
the CFPB’s finding in the 1022(b)(2)(A)
analysis of the proposal that collecting
income information from potential
PACE borrowers could lead to better
outcomes. The CFPB’s discussion of this
subject was based on the PACE Report’s
finding that PACE outcomes improved
in California relative to borrowers in
266 Id.
at Table 1.
45.
268 Id. at 46.
269 Id. at 46–47.
270 Id. at 47–48.
267 Id.at
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Florida after the implementation of the
California PACE Reforms. The
commenter stated that the PACE
Report’s analyses of the 2018 California
PACE Reforms were not valid, as the
Report considered only the first
effective date of the statutes collectively
referred to as ‘‘the 2018 California PACE
Reforms,’’ ignoring the effective dates of
statutes that became effective later in
2018. The commenter also stated that
the CFPB did not account for the fact
that the 2018 California PACE Reforms
were endogenous—that is, that the laws
were not implemented in California by
chance, such that other unrelated factors
may have contributed to both the
implementation of the 2018 California
PACE Reforms and any subsequent
changes in PACE lending in California.
The CFPB reiterates, as it said in the
proposal and again in this final rule,
that this analysis was suggestive rather
than causal. The CFPB agrees that the
2018 California PACE Reforms may not
constitute an exogenous, natural
experiment, and that the measured
changes in the effect of PACE loans in
California on consumers following the
implementation of those statutes may
not reflect the causal impact of the laws.
However, the PACE Report’s use of the
2018 California PACE Reforms as a
benchmark to inform the potential
impact of requiring the collection of
income information remains appropriate
to inform the CFPB’s analysis of
benefits, costs and impacts of this final
rule.
In addition, the CFPB does not agree
that the variety of implementation dates
of the 2018 California PACE Reforms
was material to the analysis in the PACE
Report. First, the difference is a matter
of months, such that most PACE loans
that were considered to be subject to the
2018 California PACE Reforms in the
PACE Report were originated after all of
the component statutes were in place.
Further, by using the first
implementation date as the date of
‘‘treatment’’ by the State laws, one
would expect later laws contributing to
the overall effect to bias the effect of the
Reforms toward zero (as some loans
originated in 2018 were in fact only
partially treated, but were considered in
the analysis to be fully treated,
potentially lowering the estimated
impact).
The facts documented by the PACE
Report, described above, indicate that
the ability-to-repay provisions in this
final rule will likely prevent some
consumers who cannot afford a PACE
transaction from entering into a PACE
transaction and suffering negative
consequences as a result of that
transaction.
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Quantifying Aggregate Benefits of
Preventing Unaffordable PACE
Transactions
Consumers who become delinquent
on their mortgages will, at a minimum,
incur late fees on their payments. If a
PACE transaction causes a borrower to
be in delinquency for a longer period of
time, 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 transactions on
credit scores—perhaps in part because
PACE borrowers tended to already have
relatively low credit scores prior to the
PACE transaction. The CFPB quantifies
the individual and aggregate monetary
benefits of avoiding these consumer
harms below to the extent possible
given the data available to the CFPB
from the PACE Report, information
provided by commenters, and other data
sources. The CFPB uses the estimates
from the PACE Report of the average
effect of PACE transactions on consumer
financial outcomes to estimate these
benefits but notes that these estimates
likely overstate aggregate benefits to the
extent that State laws already protect
consumers from some unaffordable
PACE transactions.
The PACE Report finds that the
average monthly mortgage payment for
consumers with PACE transactions
originated between 2014 and 2019 was
$1,877.271 Assuming a late fee of 5
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.
Two PACE companies stated that the
CFPB’s estimate of late fee costs related
to PACE loan-induced delinquencies in
the proposal was not significant and
that this generally indicated that the
benefits to consumers of preventing
non-PACE mortgage delinquencies due
to PACE transactions were limited.
However, the CFPB did not assert that
this was the only cost of potentially
unaffordable PACE loans, only that it
was a cost that can be readily
quantified. The CFPB discusses other
potential costs, including from potential
foreclosures, in the proposal and below
in this final rule.
Foreclosure is extremely costly, both
to the consumer who experiences
foreclosure and to society at large. In its
2021 RESPA Mortgage Servicing Rule,
the CFPB 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.272
The CFPB adopts the same assumption
here with an adjustment for inflation,
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 2024 dollars,
the benefit of an avoided foreclosure is
at least $35,538.
The CFPB 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.273 This
small effect on credit scores likely
combines large reductions in scores for
consumers who became delinquent on
their non-PACE mortgages with zero or
positive effects for consumers who are
able to afford PACE loans; regardless,
this suggests that the aggregate benefits
from credit score changes would be
negligible in magnitude.
Two PACE companies stated that
credit score is a key measure of
consumers’ financial health, and further
stated because the PACE Report does
not find evidence of an effect of PACE
loans on PACE borrowers’ credit scores,
this means that PACE loans are not
harmful, or else that the methodology of
the PACE Report is flawed.
The CFPB does not agree with the
assessment that credit score is the only
outcome that matters for consumers,
such that the lack of an average credit
score impact means that PACE loans
under the baseline impose no costs on
consumers. Credit scores can be a useful
measure of credit health but are not the
only measure of potential impacts to
consumers. The PACE Report
documents impacts that lead to
significant costs to consumers, such as
mortgage delinquency, independent of
any changes in average credit scores.
Further, the PACE Report documents
that PACE borrowers tended to have
relatively low credit scores on average.
The credit scores of individuals with
lower scores are often relatively
insensitive to marginal negative
information such as an additional
delinquency. The CFPB also does not
agree that the lack of an effect on
average credit scores combined with
increased mortgage delinquency
indicates a problem with the
272 See
271 Id.
at 16.
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methodology of the PACE Report, as a
commenter suggested. While the CFPB
views the increase in non-PACE
mortgage delinquency as significant and
evidence that consumers have difficulty
repaying PACE loans, the share of PACE
consumers who experience negative
credit outcomes is small enough in
absolute size that the average change in
credit score would be expected to be
relatively small. Indeed, the estimated
average effect of PACE loans on credit
scores from the PACE Report is
consistent with a large negative credit
score effect for PACE consumers who
became delinquent on a non-PACE
mortgage due to the PACE loan.
Specifically, the PACE Report estimates
that a PACE loan reduces consumers’
credit scores by an average of 1.65
points, with a 95 percent confidence
interval spanning from 0.98 to 2.32
points. If this change in credit scores
were concentrated in the 2.5 percent of
Originated Consumers for whom PACE
loans caused a 60-day mortgage
delinquency, with no average effect on
the credit scores of other consumers,
that would mean the affected consumers
would have credit scores reduced by an
average of about 65 points. While the
effect of a mortgage delinquency on
credit scores depends on a number of
factors, including the rest of the
consumer’s credit history, the CFPB
finds this is a plausible effect size. As
such, the small overall average effect of
PACE loans on Originated Consumers’
credit scores does not suggest problems
with the methodology of the PACE
Report.
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.274 For
the 71.1 percent of such borrowers with
a pre-existing non-PACE mortgage,275 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.276 The PACE Report
274 Id.
at Figure 16.
at 18.
276 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
CFPB’s 2013 RESPA Servicing Rule 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
275 Id.
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finds that PACE transactions increase
the probability of a foreclosure by 0.5
percentage points over a two-year
period.277
Assuming that 0.5 percent of
consumers who engage in a PACE
transaction will ultimately experience
foreclosure as a result of the PACE
transaction, this final rule could prevent
about 120 foreclosures per year, for an
aggregate annual benefit to consumers of
about $4.2 million per year. If the 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.
Multiple PACE industry commenters
disagreed with the CFPB’s assessment of
the potential impacts of the rule on
prevented foreclosures. Two PACE
companies stated that the data in the
PACE Report only capture initiated
foreclosures, while not all foreclosures
are completed. These commenters also
cited an academic study of PACE using
data from early in California’s PACE
program, which found a completed
foreclosure rate on PACE-encumbered
properties of about 0.5 percent by
2015.278 A PACE industry trade
association stated that it would be
impossible for the proposed rule to
prevent 120 foreclosures per year as the
proposed 1022(b) analysis projected,
because in California there had only
been seven foreclosures of PACEmortgages, 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. See
CFPB, 2013 RESPA Servicing Rule Assessment
Report (Jan. 2019), https://files.
consumerfinance.gov/f/documents/cfpb_mortgageservicing-rule-assessment_report.pdf.
277 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
CFPB’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
Report (Jan. 2019), https://files.consumerfinance.
gov/f/documents/cfpb_mortgage-servicing-ruleassessment_report.pdf.
278 Laurie S. Goodman & Jun Zhu, PACE Loans:
Does Sale Value Reflect Improvements?, 21 The
Journal of Structured Fin., no. 4 (2016).
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encumbered properties since 2019; the
commenter did not cite any source for
this statistic. In addition, one PACE
company stated that the statewide
foreclosure rates for California and
Florida were similar to the national
average, demonstrating that PACE loans
do not cause a large number of
foreclosures. The same commenter also
stated that the PACE Loss Reserve
Program in California, established to
compensate non-PACE mortgage holders
for losses related to foreclosures on
properties with PACE loans, had no
claims between 2014 and 2020 and only
two claims between 2020 and 2023. The
commenter further stated that this
meant that PACE loans do not
contribute to default on non-PACE
mortgages.
The CFPB acknowledged above and in
the proposal that the credit record data
used in the PACE Report cannot reliably
distinguish between initiated and
completed foreclosures but notes that
this does not mean the data are limited
to initiated foreclosures. Indeed, as
discussed above, the ratio of the PACE
Report’s estimated effect on foreclosures
to the estimated effect on 60-day
delinquency is consistent with other
evidence on the share of 60-day
delinquent mortgages that end in a
foreclosure sale. In addition, the CFPB
notes that even an initiated foreclosure
that is not ultimately completed
imposes significant costs on consumers,
including fees, time costs, and distress,
even if these costs are more difficult to
quantify.
The CFPB is not aware of the
underlying data behind the statistic
cited by the PACE industry trade
association that there were only seven
foreclosures in California on PACEencumbered properties since 2019.
However, it is not plausible that this is
the total number of properties with a
PACE loan that had a completed
foreclosure in California since 2019.
Even if PACE loans had no effect on the
probability of foreclosure, a small
percentage of consumers face
foreclosure every year for reasons
unrelated to PACE transactions, and this
base rate alone should account for more
than seven foreclosures. For instance,
the PACE Report indicates that about
0.8 percent of Originated Consumers
had at least one foreclosure in the two
years prior to taking out a PACE loan.279
Even allowing that not all of these
foreclosures would ultimately have been
completed, this translates to at least a
few hundred foreclosures in total.
Unless PACE loans drastically
decreased the rate of foreclosure, which
279 See
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would be inconsistent with the PACE
Report’s other findings on non-PACE
mortgage delinquency, it is unlikely that
there have been only 7 completed
foreclosures over the past 5 years.280 It
is possible that the commenter was
referring to the number of completed tax
foreclosures initiated by the taxing
authority. A low rate of completed
foreclosures initiated by the taxing
authority would be consistent with
other comments indicating that tax
foreclosures are infrequent and take a
considerable amount of time and the
CFPB’s conclusion discussed above that
consumers struggling with paying a
PACE loan will rarely default on the
PACE loan payments themselves, but
rather will become delinquent on their
non-PACE mortgage. Because of this
conclusion, the number of tax
foreclosures does not reflect the
potential benefits of the rule in
preventing all types of foreclosures, nor
does it reflect on the methodology of the
PACE Report.
The CFPB does not find the average
foreclosure rates in California and
Florida relative to the national average
to be a relevant consideration as some
commenters suggested. Given the
relatively small scale of the PACE
industry and the size of the effect of
PACE loans on foreclosure estimated in
the PACE Report, the CFPB would not
expect PACE loans to measurably
impact the foreclosure rate statewide.
The CFPB also does not find the usage
of the California PACE Loss Reserve
Program to be a relevant consideration.
Non-PACE mortgage-holders will only
incur losses due to a PACE loan-related
foreclosure if the foreclosed property
has less equity than outstanding PACE
payments at the foreclosure sale. The
period from 2014 through the present
represents a time of rising house prices
in California, and moreover California
State law imposed maximum combined
loan-to-value ratios for PACE loans.281
As a result, it is unsurprising that
foreclosures in California related to
PACE loans would not result in claims
on the PACE Loss Reserve Program.
Other Benefits of Preventing
Unaffordable PACE Loans
In the proposal, the CFPB discussed
the benefits to consumers implied by
the finding from the PACE Report that
credit card balances increased
significantly for PACE borrowers who
did not have a pre-existing non-PACE
280 The CFPB also notes that the period following
2019 is a difficult time to study foreclosures as an
outcome, as mortgage forbearance required by the
CARES Act in 2020 and 2021 prevented many
foreclosures from proceeding.
281 Cal. Fin. Code sec. 22684(h).
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mortgage, compared to the change in
balances for PACE applicants who did
not receive a PACE loan and also did
not have a pre-existing non-PACE
mortgage.282 As discussed above, the
CFPB agrees with commenters that this
finding is, at best, merely suggestive, as
the PACE Report shows that, unlike the
Report’s estimates for mortgage
delinquency, the estimates for credit
card balances did not meet the required
assumptions for a valid difference-indifferences analysis. While it is
plausible that consumers who do not
have a non-PACE mortgage will incur
credit card debt as a result of an
unaffordable PACE loan, the CFPB does
not have a reliable estimate of whether
or how much this will be prevented by
this rule.
A PACE company opined that credit
card delinquency would have been a
more relevant outcome to study than
non-PACE mortgage delinquency
because consumers may prioritize
mortgage payments over credit card
payments. The commenter also noted
that the PACE Report’s analysis of credit
card delinquency included more data
than the analysis of mortgage
delinquency, as the delinquency
analysis for each type of credit studied
in the Report was limited to consumers
with the relevant type of credit prior to
obtaining a PACE loan, and more
consumers had credit cards than nonPACE mortgages. Separately, a PACE
industry trade association stated that the
CFPB’s estimate of credit card interest
savings was overstated because, if PACE
loans were not available, consumers
would pay for the same home
improvement projects with a credit card
instead, likely incurring significant
interest charges as a result in the view
of the commenter.
The CFPB does not agree that credit
card delinquency is a better or more
central outcome to study than nonPACE mortgage delinquency. As
discussed above, for the substantial
majority of consumers with a preexisting non-PACE mortgage, failure to
pay a PACE loan will manifest in the
data as a mortgage delinquency. The
PACE Report shows that PACE loans
clearly increase non-PACE mortgage
delinquency, with less clear effects on
credit card delinquency. Also, the
relative sample sizes of PACE borrowers
who had credit cards compared to PACE
borrowers with pre-existing non-PACE
mortgages are irrelevant. The PACE
Report shows that the sample of PACE
borrowers with a pre-existing non-PACE
mortgage was large enough that the
resulting difference-in-differences
282 See
PACE Report, supra note 12, at 41.
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estimates were precise, with reasonably
small standard errors.
Credit card delinquency rates may be
informative for consumers without a
non-PACE mortgage, although the CFPB
notes that industry commenters also
held that many consumers in the PACE
Report’s data who appeared not to have
a non-PACE mortgage likely in fact had
a mortgage, such that we would not
expect a strong effect on credit card
delinquency or balances in this group.
Indeed, if those comments are correct,
the effect of PACE loans on consumers’
credit card outcomes is probably more
negative than what was estimated in the
PACE Report.
With respect to the commenter’s
assertion that consumers will use credit
cards if a PACE loan is not available,
and thus incur additional interest
charges, the CFPB finds this to be
unlikely for multiple reasons. First, the
PACE Report shows that, if anything,
Originated Consumers tend to have
higher credit card balances than
Application-Only Consumers. While
there are limitations to that finding,
discussed above in part VI.C, it is
clearly inconsistent with the notion that
credit card usage will increase absent a
PACE loan. In addition, the commenter
presupposes that, absent a PACE loan,
the consumer would necessarily engage
in the home improvement project at all.
To the extent that some consumers
continue to receive PACE transactions
that they are not able to afford in
contravention of the ability-to-repay
requirements of this final rule, the rule
will benefit those consumers by
providing an avenue for obtaining relief
under the civil liability provisions of
TILA and Regulation Z. The CFPB does
not have data indicating how often this
would occur, although as noted below
in its discussion of litigation costs to
covered persons, the CFPB expects that
this would be infrequent in the long
run.
Costs of the Ability-to-Repay Provisions
to Consumers
In the proposal, the CFPB discussed
the possibility that consumers would
face the time costs of gathering the
required documentation for an abilityto-repay analysis, such as finding and
producing W–2s to document proof of
income. The CFPB has previously noted
in the context of non-PACE mortgages
that the time required to produce pay
stubs or tax records should not be a
large burden on consumers. This may
have been different in the past in the
case of PACE transactions, as these
transactions are typically marketed in
conjunction with home improvement
contracts, and consumers may not be
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prepared to produce income
documentation at the point of sale for a
home improvement. However, given
recent changes in State law, the rule
likely will not increase time costs in a
meaningful way for PACE applicants
because these consumers already must
produce at least some documentation
similar to what will be necessary for an
ability-to-repay determination as part of
a PACE application under the rule.
Producing income information is also
likely to be required by alternative
financing options to a PACE transaction,
as this is generally required for home
improvement loans covered by TILA.
Consumers will also face costs under
the rule due to losing access to PACE
financing. This includes consumers
whose PACE applications are denied
due to failing the ability-to-repay
determination, as well as consumers
who do not apply for a PACE loan as a
consequence of the rule.283 For
consumers who cannot, in fact, afford
the cost of a PACE transaction, being
denied is likely a benefit on net, as
discussed above. However, some
consumers who could, in fact, afford
and benefit from a PACE transaction
may be denied as a result of the rule.
To quantify the cost to consumers of
having applications for PACE
transactions denied, the CFPB would
need to be able to calculate the number
of consumers that could afford the cost
of a PACE transaction and would benefit
from it but would be denied as a result
of the rule, and the cost to the average
consumer of being denied. The CFPB
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 rule
will 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, but then fully recovered in
2019. Initially, approval rates fell from
around 55 percent to around 40
percent.284 However, the Report finds
that approval rates recovered over time,
rising back to around 55 percent by the
283 Consumers might not apply for a PACE loan
due to the effect of the rule if home improvement
contractors who otherwise might have marketed
PACE financing withdraw from that market, or if
the consumers opt not to proceed with a PACE
transaction as a consequence of the provisions of
the rule.
284 See PACE Report, supra note 12, at Figure 16.
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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 7
percentage points, although this average
includes both the initial drop and the
later recovery.285 Although the
provisions of the rule differ from the
requirements of the 2018 California
PACE Reforms, it is likely that the rule
will have limited additional effect on
PACE transaction approval rates in
California. Instead, the rule will
primarily reduce approval rates instates
that have not adopted robust ability-torepay provisions. While Florida now
has a requirement for PACE companies
to confirm consumers’ income, the
statute generally provides that the total
financing cannot exceed 10 percent of
the property owner’s annual household
income,286 which, as discussed above, is
a threshold unlikely to cause many
consumers to be rejected.
The CFPB can calculate an upper
bound on the number of PACE
applicants who are likely to be denied
due to the rule, using the change in
approval rates discussed above, along
with the number of PACE loan
applications received by PACE
companies at the baseline. The PACE
Report indicates that PACE companies
received about 45,500 applications in
Florida in 2019. As discussed further in
the CFPB’s analysis of benefits and costs
to covered persons, the PACE Report
shows that applications fell in
California by more than half following
the 2018 California PACE Reforms and
did not recover over time. Assuming
that the same has occurred in Florida
since 2019 due to Florida’s change in
State law, this would mean that PACE
companies currently receive around
22,750 applications annually for which
they do not currently apply robust
ability-to-repay standards as would be
required by the rule. Assuming that
approval rates fall by 7 percentage
points due to the rule, that would mean
at most about 1,600 consumers annually
might have a PACE application that they
could afford, and from which they may
benefit, be 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
285 Id.
at Table 13.
Stat. sec. 163.081(3)(a)(12).
286 Fla.
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could afford and benefit from it.
However, as discussed below, one
benefit of the rule will be that
consumers will be less likely to
misunderstand the nature of a PACE
transaction, which will also reduce
PACE applications. As also discussed
below, 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 CFPB expects the volume
of PACE transactions in some States
may decline as a result of this rule, it
does not have data that would indicate
how much of this decline will 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 CFPB 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
rule’s provisions relating to ability-torepay 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 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 do not due to
the rule’s provisions relating to abilityto-repay could be better off than they
would be without the 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 originated
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2487
between 2014 and 2019 averaged 8.5
percent.287 Information provided by
commenters, confirmed by data from
bond rating agencies for PACE loanbacked securities, indicated that more
recent PACE loans have interest rates of
around 10 percent.288 Given that the
PACE Report finds that PACE loans had
fees sufficient to raise the APR a full
percentage point above the interest rate,
it is reasonable to conclude that current
APRs for PACE loans are about 11
percent. This is greater than typical
rates for home equity lines of credit and
much greater than the interest rate for a
cash-out refinance, but less than typical
rates for credit cards.289 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 in part on the consumer’s
credit score.
The PACE Report suggests that under
the final rule, many consumers who will
not receive a PACE transaction will 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 between
2014 and 2019 had sufficient credit
history to have a credit score, almost 90
percent of PACE borrowers had a credit
card pre-PACE transaction, and on
average PACE borrowers had more than
seven unique credit accounts of any
type pre-PACE transaction.290 More
than half of PACE borrowers had prime
or super-prime credit scores at the time
287 Id.
at Table 2.
e.g., Morningstar, DBRS, Rating U.S.
Property Assessed Clean Energy (PACE)
Securitizations (Aug. 2024).
289 Average credit card interest rates on accounts
assessed interest were between 13 and 17 percent
during the period studied by the PACE Report; the
average as of 2024 is between 22 and 23 percent.
See Fed. Rsrv. Econ. Data, Fed. Rsrv. Bank of St.
Louis, Commercial Bank Interest Rate on Credit
Card Plans, Accounts Assessed Interest (Oct. 2,
2024), https://fred.stlouisfed.org/series/
TERMCBCCINTNS. Interest rates for personal loans
averaged around 10 percent during the period
studied by the PACE Report, and rose to about 12
percent in 2024. See Fed. Rsrv. Econ. Data, Fed.
Rsrv. Bank of St. Louis, Finance Rate on Personal
Loans at Commercial Banks, 24 Month Loan (Oct.
2, 2024), 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_datapoints_updated-review-hmda_report.pdf. In 2023,
the most recent year available, the same data show
a median rate of 7.99 percent. See CFPB, HMDA
Data Browser, https://ffiec.cfpb.gov/data-browser/.
290 See PACE Report, supra note 12, at Table 6.
288 See
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they entered into a PACE transaction.291
However, as discussed above in part
VI.C, this aspect of the PACE Report’s
analysis was limited to consumers for
whom the CFPB’s contractor was able to
match to its credit record data. As
discussed above, while most of these
unmatched consumers likely have had a
mismatch in name or address with the
credit reporting company’s database,
likely at least some of these consumers
had no credit report and were credit
invisible. Credit invisible PACE
consumers may not have ready access to
credit other than PACE loans.
Two PACE companies disagreed with
the CFPB’s conclusion in the proposal
that PACE loan borrowers who would
not receive a PACE loan under the rule
would have access to other forms of
credit, potentially at lower cost, should
they decide to proceed with the same
home improvement project. The
commenters stated that it was
inappropriate for the CFPB to compare
PACE loan APRs to APRs for home
equity loans and HELOCs, as home
equity loans and HELOCs typically have
tighter credit standards than PACE
loans. One of these commenters noted
that the proposal cited interest rates
from 2019 and earlier and stated that
interest rates and APRs for home equity
loans and HELOCs have risen
substantially since 2021, along with
interest rates throughout the economy.
A PACE company stated that, if PACE
loan borrowers had access to other
forms of credit and chose to take out a
PACE loan, PACE must have been
especially appealing to those
consumers.
With respect to comments asserting
that the CFPB should have compared
APRs on PACE loans to a different
benchmark, as the CFPB discussed in
the proposal and again in this final rule,
it is not obvious what interest rate is
most appropriate as a benchmark for
PACE loans. Reasonable arguments can
be made for comparing PACE loans to
multiple products, each of which have
significantly different average interest
rates. Plausible comparisons include
first-lien mortgages, home equity loans,
home equity lines of credit, personal
loans, home improvement loans, and
credit cards. PACE loans have notably
higher rates than some of these products
but lower rates than credit cards. The
CFPB notes that the information from
the commenters was contradictory on
this point. For instance, one PACE
company suggested that, due to recent
increases in interest rates for non-PACE
mortgages, the average APR for PACE
loans of 7.6 percent cited in the PACE
291 See
id. at Figure 1.
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Report and the proposal was now on par
with interest rates for HELOCs.
However, the same commenter also
noted that its recently originated PACE
loans have an average interest rate of 9.9
percent. This suggests that PACE loans
continue to have interest rates several
percentage points higher than nonPACE mortgages or HELOCs.
The CFPB does not agree with
commenters’ assertion that borrowers
taking out PACE loans, despite having
access to other forms of credit, is
relevant to evaluating the benefits of
PACE, or to the cost to consumers of
making PACE loans less accessible. As
PACE industry stakeholders themselves
asserted in comments, point-of-sale
origination is a key feature of PACE
financing as it currently exists—home
improvement contractors often present a
PACE loan as a financing option in the
course of marketing their services doorto-door. PACE industry and home
improvement contractor commenters
alike noted the importance of swift
originations under the current business
model for PACE loans. Among other
concerns, commenters asserted that
consumers and home improvement
contractors would select other financing
options if PACE originations were not
swift. While swift originations may have
advantages to industry stakeholders in
particular, swift originations can
impede consumers’ ability to make an
informed decision about the transaction.
In such situations, it can be more
difficult to compare options for
financing a home improvement contract,
or even to compare options for the home
improvement contract itself. As such,
while a PACE loan could be the best
choice for a particular consumer, the
fact that the consumer had other options
but chose a PACE loan says little about
the appeal of the PACE loan relative to
other options.
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.292 Other projects may be
292 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 CFPB
that consumers may have difficulty obtaining
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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 CFPB
does not have data available to estimate
the average energy, water, or insurance
savings actually obtained by PACE
borrowers, nor is the CFPB aware of any
research to estimate real-world savings
from PACE transactions. One study the
CFPB 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.293 The academic
literature has found that engineering
estimates can frequently overestimate
real-world savings from energy
efficiency programs.294 Public
comments from consumer advocacy
groups in response to the Advance
Notice of Proposed Rulemaking also
cited instances where consumers
received smaller energy savings than
what was advertised to them.
Multiple PACE industry stakeholders
stated that the home improvement
projects funded by PACE loans have
benefits to PACE loan borrowers and to
society at large and stated that a cost of
the proposed rule would be to remove
those benefits. The commenters cited a
variety of benefits, including reductions
in energy use, reductions in
homeowner’s insurance costs, increased
jobs, and increased home values. The
commenters did not provide specific
data on this point beyond the academic
study based on engineering models that
the CFPB cited in the proposal.295
The CFPB acknowledged in the
proposal that, to the extent that PACE
loans currently fund beneficial home
improvement projects that would not
occur without a PACE loan, the rule
would impose costs by eliminating the
benefits of those projects. However, as
the CFPB also noted in the proposal,
many projects funded by PACE loans
would likely have been completed
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.
293 Adam Rose & Dan Wei, Impacts of Property
Assessed Clean Energy (PACE) program on the
economy of California, 137 Energy Pol’y 111087
(2020).
294 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).
295 Adam Rose & Dan Wei, Impacts of Property
Assessed Clean Energy (PACE) program on the
economy of California, 137 Energy Pol’y 111087
(2020).
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without PACE loans. This can be seen
in the high frequency of pre-payment of
PACE loans and the broad availability of
other credit to PACE loans documented
in the PACE Report. Other funding
mechanisms might come at a higher or
lower cost to consumers than a PACE
loan (discussed further above), but in
either event would deliver any benefits
of the home improvement projects
themselves.
A mortgage industry trade association
stated that the CFPB’s proposed 1022(b)
analysis omitted a potential benefit to
consumers of the rule: avoiding a tax
sale. The commenter stated that
consumers who do not have a preexisting non-PACE mortgage are at risk
of a tax sale in the event that they fail
to pay a PACE loan. The commenter
stated that the CFPB should have
considered the benefit to consumers of
avoiding this risk as a potential benefit
of the rule, to the extent that the rule
prevents consumers from taking out
unaffordable PACE loans.
The CFPB agrees with the comment
that another potential negative outcome
for consumers who cannot afford a
PACE loan could occur if consumers
lose their home through a property tax
sale. The CFPB does not have data
available to quantify this impact, nor
did any commenter provide relevant
data.
Industry commenters identified
additional costs to consumers of not
having access to affordable PACE loans
beyond the costs discussed above, or
otherwise criticized the CFPB’s analysis
of this issue.
A PACE company and several home
improvement contractors stated that
consumers often use PACE loans for
emergency situations, such as a
replacement of a failed air conditioner
during times of high heat. The
commenters stated that, in such
situations, consumers cannot wait days
for work to begin and would suffer
potentially severe consequences if they
cannot finance the emergency work. The
PACE company cited statistics from the
California Department of Financial
Protection and Innovation that the
commenter asserted demonstrated that
an emergency exemption allowed under
California State law was used
frequently.
The CFPB notes that Regulation Z
already has provisions for emergency
exceptions to the waiting period
requirements under the TILA–RESPA
integrated disclosure rules.296 If a
296 See 12 CFR 1026.19(e)(1)(v), (f)(1)(iv)
(providing for the modification or waiver of
applicable waiting periods if the consumer
determines that the extension of credit is needed to
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consumer determines that an extension
of credit is needed to meet a bona fide
personal financial emergency, the
consumer will be permitted to modify or
waive the mandatory waiting periods
and receive the PACE loan early. The
CFPB also notes that, although data
from the California Department of
Financial Protection and Innovation
indicates some PACE loans in that State
have taken advantage of the emergency
provisions in California State law, the
number of these loans is quite small,
and most of the emergency loans were
not related to HVAC projects as asserted
by commenters. For instance, in 2021,
there were about 5,700 PACE loans in
California, but only 42 that used the
emergency provision, and of these only
three involved an HVAC replacement;
the remaining projects were related to
energy efficiency improvements.297
One PACE company and a PACE
industry trade association stated that the
CFPB failed to sufficiently consider the
costs to disadvantaged groups, such as
seniors and minority borrowers, of
losing access to PACE loans. A PACE
company also stated that, because PACE
companies do not determine eligibility
based on credit history, the product is
inherently non-discriminatory. The
commenter cited the finding from the
PACE Report that PACE loans similarly
impact consumers in majority Hispanic
census tracts, compared to consumers in
majority white census tracts. The
commenter also cited the finding from
the PACE Report that older borrowers
were affected similarly to younger
borrowers. The commenter stated that
these findings meant that Black,
Hispanic, and older borrowers
specifically benefit from PACE loans.
The CFPB does not agree with the
commenters asserting that it failed to
consider costs of the proposal to older
borrowers or to Black or Hispanic
borrowers. As the commenters note, the
PACE Report includes separate
estimates of the effect of PACE loans on
mortgage delinquency by demographic
characteristics. The PACE Report finds
similar impacts on consumers residing
in majority-minority census tracts as on
consumers in majority-white census
tracts, and also finds similar effects on
younger and older borrowers. However,
the findings of the PACE Report do not
provide evidence that older borrowers
meet a bona fide personal financial emergency and
provides the creditor a dated written statement).
297 See 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 table 18 and table
35 (Aug. 2023). https://dfpi.ca.gov/wp-content/
uploads/sites/337/2024/01/2022-Annual-ReportCFL-Aggregated.pdf.
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benefit from PACE loans more than
younger borrowers, nor that minority
borrowers benefit more than white
borrowers. Rather, PACE loans seem to
be equally affordable to consumers from
each group. There is no evidence,
including in the PACE Report, that
indicates that Black or Hispanic
consumers or older consumers are
uniquely harmed or benefited by PACE
loans at baseline, and so the CFPB did
not discuss this finding in the proposal.
Finally, a PACE industry trade
association stated that losing access to
PACE loans would result in consumers
losing PACE companies’ oversight of
home improvement contractors. This
commenter stated that home
improvement contractors in general
frequently engage in deceptive
marketing and other problematic
business practices, but contractors
acting as solicitors for PACE companies
are held to a higher standard. The
commenter stated that reducing access
to PACE loans would increase
consumers’ exposure to non-PACEaffiliated contractors.
The CFPB acknowledges, as the
commenters suggest, that reduced
access to PACE financing could also
change the behavior of the average home
improvement contractor that consumers
encounter—contractors no longer
marketing PACE loans may no longer
need to adhere to certain practices that
PACE industry participants have put in
place to help protect consumers, for
example. The CFPB does not have data
available to quantify these potential
effects. However, even to the extent that
this final rule reduces the use of PACE
loans, the CFPB does not expect the rule
to generally worsen the conduct of
home improvement contractors on
average as home improvement
contractors who currently market PACE
loans make up a small fraction of home
improvement contractors in the States
where they operate (see part VII for
further discussion).
Potential Benefits and Costs to Covered
Persons of the Ability-To-Repay
Provisions
The ability-to-repay provisions would
primarily affect PACE companies.
Although the CFPB understands that
local government sponsors are generally
the creditor, as defined in TILA, for
PACE transactions, the CFPB expects
that the required ability-to-repay
determination, and in practice the
liability for any failures to make that
determination, would fall on the PACE
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companies that run PACE programs.298
Although the PACE Report provides
some information on potential impacts
of the ability-to-repay provisions on
PACE companies, many of the potential
benefits and costs to PACE companies
are outside the scope of the Report. The
CFPB discusses these benefits and costs
qualitatively here.
PACE companies may benefit from
legal clarity provided by the ability-torepay 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.299 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, the required TILA–RESPA
integrated disclosures (discussed in
more detail below) may make it more
likely that consumers correctly
understand the nature of a PACE
transaction, potentially preventing some
legal actions. The CFPB 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 CFPB to
determine what share might be
prevented by following the ability-torepay provisions.
By providing a Federal ability-torepay standard, the rule may also
encourage greater consistency across
States. For example, the CFPB
understands that PACE companies
currently adhere to different processes
for determining consumer eligibility for
PACE transactions in California,
298 The CFPB 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 12 CFR 1026.43(b)(15). Data on
such programs is dispersed, and so the CFPB does
not have sufficient information to reliably estimate
how many such programs exist or to assess their
current practices in providing financing. The CFPB
understands these programs to operate
independently of one another, under differing laws
and practices. Consequently, the CFPB is unable to
quantify (1) the number of such programs; (2) how
many of those programs are operated by covered
entities; or (3) the effects the rule will have on each
such covered entity. Any such program’s additional
costs under the ability-to-repay provisions would
depend on its current procedures. Although some
commenters—who were not themselves operating
or affiliated with such programs—cited examples of
programs of this nature, commenters did not
provide information regarding any of the quantities
noted above.
299 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).
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involving some collection and
verification of income and other
documentation, than in Florida, where
eligibility determinations generally
involve less documentation. If the 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, imposing a nationwide
minimum ability-to-repay standard
could make it easier for PACE
companies to expand into additional
States, leading to additional business.
As noted above, many States have
legislation authorizing PACE
transactions,300 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 CFPB finds it
plausible that controversies and
consumer protection concerns discussed
in part II.A above may in part hold some
government entities back from engaging
in PACE. To the extent this is the case,
the final rule may 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.301 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 will be
prohibited by the rule.
Although PACE companies will likely
receive some of the benefits discussed
above from the ability-to-repay
provisions, PACE companies will also
likely experience significant costs,
including reduced lending volumes,
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.302 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
300 See
301 See
part II.A.2, supra.
PACE Report, supra note 12, at Figure 16.
302 Id.
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average of over 5,300 per month in that
State prior to the reforms.303 The Report
finds that the number of originated
PACE transactions in California
declined by about 1,000 per month due
to the 2018 California PACE Reforms,
representing about a 63 percent decrease
from a pre-reform average of about 1,600
originations per month in California.304
The specific requirements of the 2018
California PACE Reforms differ from
those of this final rule, even with
respect to provisions having to do with
the California ability-to-pay
requirements and this rule’s ability-torepay requirements, but the CFPB
expects that following ability-to-repay
requirements in States without similarly
robust ability-to-repay provisions will
lead to a similar decline in originated
loans for PACE in those States.
However, the CFPB notes again that, in
the specific case of Florida, the recent
change in Florida State law has created
some elements of an ability-to-repay
regime at baseline. While that change in
State law likely will lead to a reduction
in originations, that decline is not an
impact of this final rule. The CFPB does
not expect that the ability-to-repay
requirements in this rule will 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 firms’ 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 for the
same reasons in response to a Federal
regulation that applies nationwide, such
as this rule.
Multiple individual and industry
commenters stated that the annual
number of PACE loans might fall by half
due to the rule. However, the
commenters generally did not provide
any additional data or analysis on this
point, but rather cited the CFPB’s
estimate from the proposal.
The CFPB reaffirms its proposed
estimate that PACE lending might fall
by as much as half in states that did not
previously require consideration of
income, primarily due to reduced
application volume, as opposed to longterm reductions in approvals of
submitted applications. However, the
CFPB notes that, since the proposal was
issued in May 2023, Florida has begun
303 Id.
at Table 13.
304 Id.
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requiring PACE companies to verify
income information. To the extent that
the requirement to collect income
information was responsible for
reductions in PACE lending in
California (for instance, because home
improvement contractors are reluctant
to do so and respond by ceasing to
market PACE loans), the CFPB expects
that such a reduction has already
occurred or started to occur in Florida,
such that the rule will not reduce PACE
lending to the same extent as was
estimated in the proposal.
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
ability-to-repay 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 CFPB does not have
data indicating the magnitude of these
costs. However, the CFPB notes that
some of these costs may be ameliorated
by existing State requirements. The
CFPB understands that all currently
active PACE companies already have
systems in place to allow for collection
of income information and other
documentation needed for the ability-torepay determination the rule requires.
The CFPB thus expects that costs related
to software changes will 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 CFPB
acknowledges that legal and compliance
review costs would likely apply in all
States, as the specific requirements of
the rule differ from the requirements of
State laws and regulations. PACE
industry stakeholders did not indicate
that one-time adjustment costs such as
software changes would be significant,
and generally did not call out legal and
compliance review as major costs of the
proposal.
PACE companies may also experience
additional litigation costs due to alleged
violations of the ability-to-repay
provisions. As noted earlier in this
analysis, the final rule applies civil
liability in TILA section 130 to PACE
companies that are substantially
involved in making the credit decision.
As the CFPB stated in the January 2013
Final Rule, even creditors making good
faith compliance efforts when
documenting, verifying, and
underwriting a loan may still face some
legal challenges from consumers. This
could occur when a consumer proves
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unable to repay a PACE 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. As discussed in
the January 2013 Final Rule, this will
likely result in some litigation expense,
although the CFPB 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 a body of case law
develops, 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 the
CFPB also stated in the January 2013
Final Rule, the CFPB 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 CFPB
notes that litigation likely would arise
only when a consumer in fact is unable
to repay the loan (i.e., is seriously
delinquent or has 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 failed to make
a reasonable and good faith
determination that the consumer did not
have an ability to repay at or before
consummation or failed to consider the
enumerated factors in arriving at that
determination.
Beyond PACE companies, the abilityto-repay provisions will impose some
costs on local government entities and
home improvement contractors.305
Some local government entities will
experience costs due to the ability-torepay provisions. The CFPB
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 payments. The
CFPB does not have data indicating the
305 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 CFPB exercises its discretion to
consider benefits, costs and impacts to these
entities.
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2491
average revenue that government
entities receive from each PACE
transaction, and commenters did not
address this point. To the extent that the
rule reduces the volume of PACE
transactions, the CFPB expects that it
will also reduce revenue to such
government entities, in proportion to
the revenue they currently receive from
such transactions. If, as discussed
above, the rule facilitates growth of
PACE transactions in States that do not
currently have active programs, local
government entities in those State might
benefit as a result.
In the proposal, the CFPB discussed
the possibility that 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
ability-to-repay determination.
However, as Florida State law now
requires PACE companies to verify
consumers’ income before
consummating a PACE transaction, it is
unlikely that the rule will significantly
increase costs in this respect.
A special assessment administrator
noted that PACE loans represented more
than 50 percent of its revenue and
expressed concern about a decline in
this revenue due to the proposal.
The CFPB acknowledges that the rule
will likely impose costs on special
assessment administrators who carry
out the logistics of placing PACE
transactions on county tax rolls, in
proportion to the share of revenue they
currently receive from PACE loans.
Potential Benefits and Costs to
Consumers and Covered Persons of
Clarifying That PACE Financing Is
Credit
The rule revises the official
commentary for Regulation Z to clarify
that PACE transactions are credit for
purposes of TILA.306 In practice, this
imposes 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 right of recission; 307
(2) disclosure requirements, including
provision of relevant TILA–RESPA
integrated disclosure forms and
306 See section-by-section analysis of
§ 1026.2(a)(14), supra.
307 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, upon transfer of all of
the consumer’s interest in the property, or upon
sale of the property, whichever occurs first. See 12
CFR 1026.23(a)(3)(i).
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mandatory waiting periods between
provision of the disclosures and
consummation; 308 (3) requirements
related to loan originators; 309 and (4)
certain requirements for PACE
transactions that meet the definitions of
a high-cost mortgage or a higher-priced
mortgage loan.310 The CFPB is not
addressing in depth other provisions.311
As with the ability-to-repay provisions
discussed above, the CFPB expects that,
in practice, most benefits and costs that
derive from requirements for PACE
creditors will ultimately be borne by
PACE companies.
Benefits and Costs of the Right of
Recission
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.
A rescission period could give
consumers more time to exercise such
preferences. However, the CFPB 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 and Florida
already have a three-day right to cancel
under State law,312 and PACE
companies may currently voluntarily
provide a recission option independent
of these requirements. As a result, the
CFPB expects the application of this
provision of TILA to impose few
benefits or costs on consumers and
covered persons when the required
308 See,
309 See,
e.g., 12 CFR 1026.19(e)(1)(iii), (f)(1)(ii).
e.g., 12 CFR 1026.36(a)(1)(i), 1026.36(d)–
(g).
310 12
CFR 1026.32, 1026.34.
instance, PACE companies would also be
required to comply with the prohibition on
prepayment penalties under 12 CFR 1026.43(g), but
the CFPB does not expect this would create
significant costs or benefits for consumers or
covered persons, as the CFPB 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 CFPB
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.
312 In California, 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. In Florida, a property owner may
generally cancel a financing agreement within three
business days after signing without penalty. See
Fla. Stat. sec. 163.081(6).
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311 For
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TILA notice and material disclosures are
provided.
TILA provides an extended rescission
period of up to three years when the
required TILA notice and material
disclosures are not provided.313 The
CFPB does not have data that would
allow it to estimate how often the
extended rescission period would be
available to PACE consumers.
Benefits and Costs of TILA–RESPA
Integrated Disclosure Requirements
The disclosure requirements will
likely benefit consumers by increasing
their understanding of the terms of the
PACE transaction and mandating a
waiting period between disclosure and
consummation. Mandating disclosures
and a waiting period for PACE
transactions conforming with TILA–
RESPA integrated disclosure
requirements will make it more likely
that consumers understand the terms of
their proposed PACE transactions. The
TILA–RESPA integrated disclosure
requirements will also help consumers
comparison shop among financing
options. Both the information in the
disclosures and the waiting period will
better enable consumers to compare the
terms of a PACE loan to the terms of
other credit options that may be
available to them, particularly other
credit products that are secured by the
consumer’s home. As discussed above,
PACE loans have higher interest rates
than other available credit products
secured by the consumer’s home. The
disclosure requirements will also likely
increase understanding of the
fundamental nature of PACE
transactions as financial obligations that
must be repaid over time.
Commenters responding to the
Advance Notice of Proposed
Rulemaking, as well as media accounts,
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 receives
the required TILA–RESPA disclosures
will realize that they are signing up for
a loan that must be repaid over time. As
such, the 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
313 15
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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, have agreed to a
PACE transaction, the potential benefits
of the final rule 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 CFPB assumes that at
least some would seek to pay off the
PACE transaction after the first payment
becomes due.314 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 2019 was $1,301, and the
average capitalized interest was
$1,412.315 The average interest rate was
7.6 percent.316 On the average original
balance of $25,001,317 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
financing), the benefit of preventing
misunderstanding is greater still,
depending on the value the consumer
nonetheless receives from the project.318
314 If the consumer did not realize they had
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.
315 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.
316 Id.
317 Id.
318 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
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The CFPB does not have data
indicating how often consumers
currently misunderstand the nature of a
PACE transaction. To the extent that
consumers currently misunderstand the
nature of a PACE transaction, the CFPB
does not have data indicating what
those consumers might have done in the
counterfactual, including what share
might have proceeded with the PACE
transaction, what share might have
proceeded with the home improvement
project with another financing option,
or paying cash, and what share might
have opted not to proceed with the
home improvement project at all. 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.319 CAEATFA
reports aggregate statistics from this
collection publicly on its website.320
Using this information, the CFPB 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 below.
According to the CAEATFA data,
there were 17,401 PACE transactions
outstanding in California as of June 30,
2014, and 218,549 new transactions
originated after that through June 30,
2023. However, about 150,000
transactions were paid off during this
time, based on the change in total
outstanding portfolios, meaning that up
to about 64 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
2493
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 6 percent of PACE
transactions have terms of five years.321
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.322 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.,
6 percent of all PACE borrowers, or
roughly 1,430 annually) were due to a
misunderstanding that the rule could
address, the aggregate benefits would be
over $6.6 million annually based on
each consumer with a misunderstanding
saving $4,600 in interest and fees.323
TABLE 1
Year
2015
2016
2017
2018
2019
2020
2021
2022
2023
(a)
Actual total
outstanding portfolio
through June 30th,
prior year
(b)
New financings
July 1st–
December 31st,
prior year
(c)
New financings
January 1st–
June 30th,
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
121,088
146,397
146,516
131,195
115,715
96,772
7,022
23,206
34,036
25,764
9,982
5,541
4,999
2,443
1,623
11,515
32,743
25,850
15,482
6,967
4,793
3,343
1,969
1,287
34,308
83,904
121,088
146,397
146,516
131,195
115,715
96,772
85,375
1,630
6,353
24,708
13,925
16,827
25,659
23,822
23,355
14,307
Total ....................................
N/A
114,607
103,942
N/A
150,575
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Source: CAEATFA, https://www.treasurer.ca.gov/caeatfa/pace/activity.pdf.
Consumer groups echoed their
comments from the Advance Notice of
Proposed Rulemaking that consumers
frequently misunderstand the nature of
PACE loans. Conversely, PACE industry
commenters disagreed with the
proposal’s assumption that a portion of
consumers who pre-paid their PACE
loans did so because they had
misunderstood the nature of the product
and would not have taken the loan had
they understood. These commenters
took issue with the CFPB’s discussion in
the proposal of the potential benefit of
avoiding misunderstandings of the
nature of PACE loans. The commenters
stated it was arbitrary and not based on
data for the CFPB to assume that the 10
percent of PACE loans that were prepaid were due to consumer
misunderstanding. Some of these
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.
319 See Cal. State Treasurer, Property Assessed
Clean Energy (PACE) Loss Reserve Program, https://
www.treasurer.ca.gov/caeatfa/pace/activity.asp
(last visited Oct. 22, 2024).
320 Id.; see also Cal. State Treasurer, PACE Loss
Reserve Program Enrollment Activity, https://
www.treasurer.ca.gov/caeatfa/pace/enrollmentactivity.xlsx (last visited Oct. 22, 2024).
321 See PACE Report, supra note 12, at Figure A1.
322 The CFPB 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 19.
323 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 prevents consumers from misunderstanding the
nature of PACE transactions. 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 CFPB is being
conservative in assuming for illustrative purposes
that only 10 percent of early repayments were due
to misunderstandings, the CFPB has determined
that this estimate is, on balance, likely an
underestimate.
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commenters further stated that prepayments of PACE loan were partly or
primarily due to consumers taking
advantage of low interest rates to
refinance their PACE loans.
The CFPB emphasizes that the
calculation discussed above is intended
to be illustrative, not definitive. The
CFPB does not have specific data as to
the share of consumers who
misunderstand the nature of a PACE
loan and would not take out a PACE
loan had they understood. The
calculation above is intended to provide
a sense of scale for the potential
benefits: If most pre-paid PACE loans
are loans that the consumer understood
the nature of or would have taken out
with full understanding, but a small
fraction are not, the benefits would be
as stated above. If the rate of
misunderstandings that are addressed
by this final rule were larger or smaller,
the benefit of the rule to consumers
would be proportionately larger or
smaller as well. In assuming for
illustrative purposes that the vast
majority of pre-payments were
unrelated to consumers
misunderstanding the nature of the debt
obligations, the CFPB is erring toward
being conservative in its estimate. The
CFPB also notes that the commenters’
explanation that refinances account for
frequent repayments is at odds with the
arguments offered by some PACE
industry stakeholders that PACE
borrowers generally do not have other
credit options at a lower cost than a
PACE loan.
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 loan.324 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.325 Some of the disclosures on the
modified TILA–RESPA integrated
disclosure form for PACE transactions
324 See
325 Id.
PACE Report, supra note 12, at 13.
at 18–20.
may prompt consumers with a preexisting 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.
Several commenters took issue with
the additional disclosures required by
the rule. A PACE industry trade
association stated that the ‘‘welcome
calls’’ employed by its members served
as a more effective disclosure than
TILA–RESPA integrated disclosure
forms delivered on paper. A PACE
company noted that the proposal’s
requirement to provide TILA–RESPA
integrated disclosure forms would be
costly. The commenter noted that the
disclosures would be duplicative in
light of existing disclosures required by
State law. In addition, the same
commenter stated that requiring both
Closing Disclosures and Loan Estimates
would impose unnecessary costs,
because there typically are not
settlement services that consumers can
shop for in between the initial loan
estimate and closing. The result, in the
stated view of the commenter, would be
two nearly identical disclosures that
would impose costs on PACE
companies with no benefit to
consumers. However, a different PACE
company stated that the TILA–RESPA
integrated disclosure forms would be
costly because of the need for new
disclosures when changes to the home
improvement contract are made and
stated that such changes were very
common. Commenters did not provide
specific figures as to the cost of the
required disclosures.
The CFPB recognizes that the TILA–
RESPA integrated disclosure forms
required by the rule could result in
consumers receiving multiple
disclosures required by both Federal
and State law as well as any other
disclosures PACE companies provide
voluntarily.326 The CFPB also
recognizes that TILA and Regulation Z
may require redisclosure if certain
aspects of the transaction change. Given
the reports of consumer confusion as to
the nature of PACE loans in the past, the
CFPB determines that, on balance,
consumers will benefit from the TILA
and Regulation Z. The CFPB
acknowledges that provision of the
disclosures will be costly for PACE
companies and may be costly for home
improvement contractors as well,
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326 See
PO 00000
supra note 106.
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depending on how the disclosures are
provided.
PACE companies will experience onetime adjustment costs related to the
TILA–RESPA integrated disclosure. The
CFPB 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 will be required
under the final rule. The CFPB expects
that ongoing costs will be minimal
relative to the baseline, since PACE
companies already provide disclosures.
To the extent that the 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.
A PACE company stated generally
that it would be costly for PACE
companies to comply with the
requirements of Regulation Z that would
follow if PACE financing is credit under
TILA. The commenter stated that the
average cost of documenting ability-torepay and providing TILA–RESPA
integrated disclosure forms was $8,600
per loan, citing a non-PACE mortgage
industry estimate of the average cost of
non-PACE mortgage originations. The
commenter further suggested that the
cost for PACE companies would be
higher still, on the order of $13,000, in
line with an estimate from the same
source for small independent mortgage
lenders.
While the CFPB acknowledges that
PACE creditors or other covered parties
may incur costs to comply with the
requirements of Regulation Z, the CFPB
notes that the commenter’s estimate of
$8,600 or more per loan is unlikely to
be accurate. The commenter cited a
Freddie Mac study that estimates $8,600
as the entire cost of originating a
mortgage, including underwriting,
recording, cost of funds, and more.327
That study also states that refinance
mortgages are cheaper to originate than
this benchmark. Refinance mortgages
are likely a better benchmark for the
costs of originating a PACE loan, as
some of the costs involved in facilitating
a home purchase are not present in the
case of a PACE loan.
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
327 See Freddie Mac, Cost to Originate Study:
How Digital Offerings Impact Loan Production
Costs (Nov. 2021), https://web.archive.org/web/
20230717225358/https://sf.freddiemac.com/docs/
pdf/report/cost-to-originate.pdf.
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discussed in part II.A, the CFPB
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 CFPB that this speed of
origination is necessary to compete with
unsecured financing options. It is
possible that the seven-day waiting
period will 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 CFPB is aware,
so this aspect of the rule will likely
affect PACE lending volumes in all
States. The CFPB does not have data to
indicate how large this effect might be.
PACE industry stakeholders,
including PACE companies, home
improvement contractors and a
government sponsor, expressed concern
that the required seven-day waiting
period between provision of the Loan
Estimate and consummation would be
particularly costly for their business.
Multiple PACE companies noted that
this may be costly to consumers as well
in cases where PACE loans are used to
fund emergency repairs. A PACE
industry trade association cited a survey
of home improvement contractors
which showed that 60 percent of
homeowners choose a home
improvement contractor in less than 72
hours. The commenter noted that PACE
companies are competing with other
forms of financing, such as unsecured
home improvement loans, that are
available immediately, such that a
seven-day waiting period would put
PACE loans at a competitive
disadvantage.
As discussed above, the CFPB notes
that TILA and Regulation Z already
include an exception that would allow
consumers to modify or waive
applicable waiting periods between
disclosure and consummation if the
consumer determines that the extension
of credit is needed to meet a bona fide
personal financial emergency.328 As
such, the CFPB does not believe the
required waiting period will generally
impose costs on consumers in the event
of bona fide personal financial
emergencies.
The CFPB acknowledges that the
seven-day waiting period may delay the
start date of projects that are financed by
PACE loans but does not agree with the
commenters that the delay is
328 See
12 CFR 1026.19(e)(1)(v), (f)(1)(iv).
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incompatible with the way that
consumers choose contractors for home
improvement work. While it may be the
case that consumers prefer to choose a
contractor quickly, work on a home
improvement project frequently does
not start immediately. For many projects
funded by PACE loans, permits are
required by State or local laws before
work can begin, materials must be
obtained, and the contractor may have
a queue of other projects they must
complete first. As such, it is unlikely
that a delay of several days to finalize
financing is inherently incompatible
with a home improvement contractors’
business model.
Benefits and Costs of Loan Originator
Provisions
TILA and Regulation Z include a
variety of provisions that apply to loan
originators. With current PACE industry
practices, the CFPB understands that
these provisions will primarily apply to
home improvement contractors under
the final rule. 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.329 The CFPB does not
have data available to quantify the costs
to home improvement contractors from
complying with TILA as loan
originators.
Home improvement contractor
commenters generally noted that
complying with the loan originator
requirements of TILA and Regulation Z
would be costly. Several home
improvement contractors stated this
generally, but some commenters
provided specific costs. A home
improvement contractor trade
association and one PACE company
stated that becoming a loan originator in
California would require 20 hours of
training in addition to application,
licensing, and testing fees. Commenters
cited amounts between $400 and $800
as the total annual cost per contractor
acting as a mortgage loan originator.
Several home improvement contractors
and other PACE industry stakeholders
further stated that the applicable State
requirements in California and Florida
had other provisions for loan originators
that are incompatible with PACE
financing, including that loan
originators must be employed by a
licensed mortgage broker or lender.
These commenters generally expressed
that these types of requirements would
329 12
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2495
severely limit or eliminate PACE
lending because home improvement
contractors would be unable or
unwilling to satisfy them. One home
improvement contractor noted that the
costs to comply with Regulation Z were
more affordable for non-PACE mortgage
lenders than for small contractors.
With respect to the cost of home
improvement contractors becoming loan
originators under TILA or the SAFE Act,
the CFPB finds the cost estimates
offered by some commenters—on the
order of $800 annually per contractor—
to be a reasonable estimate. The CFPB
does not believe these costs will, by
themselves, generally lead home
improvement contractors to exit the
PACE loan market. Some home
improvement contractor commenters
stated that large fractions of their annual
business are funded by PACE loans,
citing figures as high as 80 percent.
Against this amount of revenue, the
increased fixed cost of licensing sales
staff and estimators generally would not
cause a contractor to become
unprofitable. The CFPB also notes that
projects funded by PACE transactions
seem to be particularly profitable for
contractors in some cases. Public data
from California indicate that around a
sixth of PACE loans made in that State
in 2022 involved a payment from the
contractor to the PACE company,
whether as a buydown, seller’s points,
or other payment.330 The average such
payment was over $6,000 in 2022. For
this to be rational behavior, the
underlying projects must have been
more profitable, again suggesting that
incurring the fixed costs of loan
originator licensing and testing would
be feasible for contractors.
With respect to conflicts between the
requirements of Federal and State law,
or additional Federal requirements
where State law already imposes
compliance obligations, the CFPB
acknowledges that there may be some
additional compliance burden on PACE
companies and home improvement
contractors, but the CFPB does not
expect major disruptions to the PACE
market due to these requirements in the
long term. State law requirements vary,
but depending on the requirements it
may, for instance, be possible for home
improvement contractors and PACE
companies to satisfy a requirement for
loan originator licensing by contactors
and PACE companies registering as
mortgage brokers and lenders
330 See Cal. Dep’t of Fin. Prot. & Innovation,
Annual Report of Operation of Finance Lenders,
Brokers, and PACE Administrators Licensed Under
the California Financing Law, at 41 (Aug. 2023),
https://dfpi.ca.gov/wp-content/uploads/sites/337/
2024/01/2022-Annual-Report-CFL-Aggregated.pdf.
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respectively. PACE companies and
home improvement contractors may
incur one-time adjustment costs to make
these changes, but this is unlikely to
make it impossible for home
improvement contractors to market
PACE loans, as some commenters
claimed. In addition, both California
and Florida have in recent years made
changes to their PACE financing laws to
increase consumer protections for PACE
transactions, while continuing extant
PACE programs. Should any State’s
laws with respect to loan originators
under the SAFE Act be truly
incompatible with the current business
model for PACE, the CFPB finds it likely
that the States will make adjustments to
their laws to allow PACE lending to
continue.
It is possible that some home
improvement contractors will opt not to
bear the cost of complying with TILA
provisions to the extent they apply and
will instead exit the PACE market. The
home improvement contractors
themselves would incur costs in this
case. The CFPB does not have data
available to estimate these costs. The
costs to home improvement contractors
from exiting the PACE industry depend
on what happens to prospective home
improvement contracts for which PACE
financing is 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.331 However,
contractors could lose some sales due to
the unavailability of a PACE transaction
as a financing option. The CFPB does
not have data that would indicate how
frequently this will happen. It is also
possible that, if the rule enables PACE
financing to expand into additional
States, home improvement contractors
in those States will benefit from
additional business. Again, the CFPB
does not have data that would indicate
how many contractors might benefit if
this were to occur, or how much they
would benefit.
It is also possible that PACE
companies may shift their business
practices so that home improvement
contractors do not explicitly solicit
331 The CFPB’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 will
cost them these commissions, although they might
be replaced by commissions from an alternate
financial product, if any. Conversely, to the extent
that contractors currently make payments to PACE
lenders as part of originating a PACE loan, as
currently occurs for around one sixth of PACE loans
in California, exiting the PACE market will save
contractors that expense.
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consumers for PACE transactions, but
instead provide referrals to a PACE
company to apply for a PACE
transaction with the PACE company
directly. In this case, the costs of
compliance with the requirements of
TILA and Regulation Z relating to loan
originators would fall on PACE
companies, although home
improvement contractors may still
experience costs due to this change in
business model. The CFPB does not
have data available to quantify these
costs, and commenters did not address
this possibility.
A PACE industry trade association
and a PACE government sponsor
expressed concern that small home
improvement contractors would exit the
PACE market but did not provide
specific figures on this point. Several
home improvement contractors stated
that a large fraction of their business is
financed by PACE loans, with estimates
ranging from 35 percent to 80 percent.
Consumers may experience both costs
and benefits due to the application of
TILA’s loan originator provisions to
PACE. 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 originated by PACE
companies or local governments directly
as a result of the rule, consumers may
benefit from such changes to the way
PACE transactions are marketed. Many
consumer protection issues identified in
the comments responding to the
Advance Notice of Proposed
Rulemaking and NPRM are related in
large part to conduct by home
improvement contractors. Either
mandatory compliance with TILA’s loan
originator provisions by home
improvement contractors, or a shift to
originating PACE transactions directly
by PACE companies or local
governments could ameliorate some of
these issues.
A PACE company criticized the
CFPB’s discussion of this issue in the
proposal, stating that the CFPB had not
specifically identified consumer
protection issues that this aspect of the
rule would solve, nor provided evidence
that those problems exist. The CFPB
discusses the consumer protection
issues with PACE financing, including
regarding the conduct of home
improvement contractors above in part
II.A. The CFPB acknowledges that its
analysis of the costs and benefits to
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consumers of having home
improvement contractors treated as loan
originators under Regulation Z is
qualitative in nature. Commenters did
not provide any specific costs or
benefits of these provisions. The CFPB’s
analysis is based on the information
available, and it maintains the analysis
stated above.
Benefits and Costs Related to PACE
Loans That Are High Cost Mortgages
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.332 Few
PACE transactions appear to have APRs
high enough to meet the first prong,333
and the CFPB 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 pointsand-fees threshold.334 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.335
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
CFPB expects that PACE companies will
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 will impose costs on PACE
companies and the affiliated local
332 See TILA section 103(bb)(1)(A); 12 CFR
1026.32(a)(1).
333 See PACE Report, supra note 12, at 15 (finding
that 96 percent of PACE transactions made between
2014 and 2019 had estimated APR–APOR spreads
below 6.5 percent).
334 Id. at Table 5.
335 Id.
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government entities in the form of lost
revenue and will benefit PACE
consumers by the same measure.
A PACE company stated that it would
be impossible for PACE loans to comply
with some requirements of Regulation Z
for high-cost mortgages as defined by
HOEPA and Regulation Z. The
commenter stated that the high-cost
mortgage definition under HOEPA
would function as a cap on loan
amounts and fees.
As discussed above in the discussion
of §§ 1026.32 and 1026.34, high-cost
PACE loans will be able to comply with
the HOEPA requirements involving
payments to home improvement
contractors and credit counseling that
one PACE company asserted would
pose challenges, although the CFPB
acknowledges these or other HOEPA
requirements may create costs for PACE
companies and home improvement
contractors. In addition, as discussed
above in this part, to the extent that
HOEPA compliance is infeasible or costprohibitive, the CFPB agrees with the
commenters that PACE companies will
likely respond by adjusting loan terms
to avoid making loans that are high-cost
mortgages under HOEPA. This would
impose costs on PACE companies and
PACE creditors, and benefit consumers
in equal measure. Given that the PACE
Report shows that PACE companies
charge significantly lower fees and have
a much smaller share of loans that
would be high-cost mortgages under
HOEPA, for PACE loans in Florida as
compared to PACE loans in California,
the CFPB does not expect that changes
in fee amounts would make PACE loans
non-viable.
Benefits and Costs Related to PACE
Loans That Are Higher-Priced Mortgage
Loans
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—$32,400 in 2024—
and to provide the consumer with a
written copy of the appraisal.336 The
PACE Report indicates that about a
quarter of PACE transactions originated
between June 2014 and December 2019
had original principal amounts above
that threshold, and moreover shows that
most PACE transactions have APR–
APOR spreads above the threshold for
336 See generally 12 CFR 1026.35(c); comment
35(c)(2)(ii)–3.
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higher-priced mortgage loans.337 The
CFPB 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 will also
experience costs to the extent that the
price of conducting an appraisal is
passed on to them.
Several home improvement
contractors expressed concern regarding
the cost of Regulation Z with respect to
higher-price mortgage loans as defined
under TILA and Regulation Z,
specifically the requirement to obtain an
in-person appraisal for loans with initial
principal above a certain threshold.338
Commenters stated that the higherpriced mortgage loan appraisal
requirement would provide limited
benefit; one commenter estimated that it
would cost $300–500 or more.
Commenters generally indicated that the
cost of an appraisal would be passed on
to consumers, with some home
improvement contractors stating further
that they expected to require consumers
to pay this fee up front, creating
difficulties with an origination process
for PACE loans that currently does not
require any up-front fees. One home
improvement contractor commenter
stated that the appraisal requirement
would lead to a 35 percent reduction in
its business and result in layoffs. Other
home improvement contractors stated
that half of their customers would be
unable to use PACE loans as a means of
financing due to the upfront cost or
delay resulting from the appraisal
requirement.
PACE industry stakeholders also
expressed concern that the appraisal
requirement for PACE loans meeting the
definition of higher-priced mortgage
loans would be costly and unnecessary.
The commenters cited the PACE Report,
which shows that 25 percent of PACE
loans had initial balances that would
exceed the threshold to require an
appraisal for higher-priced mortgage
loans.339 Commenters further expressed
337 See PACE Report, supra note 12, at Table 2,
Table 5.
338 See generally 12 CFR 1026.35(c); comment
35(c)(2)(ii)–3.
339 The PACE Report lists the 25th, 50th, and 75th
percentiles for several characteristics of PACE loans
originated between June 2014 and December 2019.
Coincidentally, the 75th percentile for original
principal balance was $31,060, meaning that 25
percent of PACE loans in the data had higher initial
balances, and 75 percent had lower initial balances,
and essentially the same percentage would be above
and below exactly $31,000, the threshold at the
time of the proposal.
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concern stating that an in-person
appraisal would be unnecessary, as
PACE companies are already required
by State law to estimate home values
using multiple automated valuation
models, with strict limits on allowable
loan-to-value ratios based on those
outputs.
The CFPB acknowledges that
requiring an in-person appraisal for
PACE loans that are higher-priced
mortgage loans subject to the
requirements of § 1026.35(c) will
impose costs on PACE companies and
home improvement contractors, and on
consumers to the extent that costs are
passed through. As commenters noted,
the PACE Report estimates that over 96
percent of PACE loans originated
between 2014 and 2019 would have
been higher-priced mortgage loans
under the Regulation Z definition, and
about one quarter had initial balances
high enough to be subject to the
appraisal requirement.340 Recent data
from State regulators and bond rating
agencies indicate that average PACE
transaction balances have increased
since 2019, suggesting that a larger
fraction would be subject to the
requirement. Appraisal fees quoted by
commenters, on the order of $400, are
a reasonable estimate of these costs. In
addition, PACE companies and home
improvement contractors will likely
incur some costs to arrange the
appraisal, if only in staff time, beyond
the direct appraisal fee. Commenters did
not provide data or information
suggesting the magnitude of these costs.
Although some commenters suggested
that appraisals would need to be paid
for by consumers up front, it is not clear
why these fees would be treated
differently from other fees currently
associated with PACE loans, and
commenters did not explain why this
would be the case. Because it is
currently commonplace for a variety of
fees to be included in the initial
principal balance of a PACE loan, the
CFPB finds it most likely that any
appraisal fee would also be included in
the principal and passed on to
consumers in full. As with the waiting
period required for the TILA–RESPA
integrated disclosure forms, discussed
above, the CFPB does not expect that
any delay in arranging an appraisal will
be incompatible with the way that
consumers choose contractors for home
improvement work.
The CFPB further acknowledges that
the appraisal requirement, where it
applies, might discourage consumers
from pursuing a PACE loan. The
340 See PACE Report, supra note 12, at Table 2
and Table 5.
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additional friction of scheduling a time
with an appraiser may dissuade
consumers from taking out a PACE loan
at all. To the extent this occurs, PACE
loans that would otherwise be above
applicable thresholds would not occur,
leading to costs for industry participants
and potentially costs and benefits to
consumers as described above in this
part. Some home improvement
contractor commenters asserted
particular fractions of their business,
such as half or 35 percent, that would
be lost due to an appraisal requirement.
The CFPB notes that the requirement
only applies to loans with initial
balance above a certain threshold—
$32,400 in 2024—such that estimates
that half or more PACE loans would be
lost seem unlikely based on data from
the PACE Report.341 Further, it is likely
that some home improvement
contractors and PACE companies will
respond to the appraisal requirement by
reducing the cost of the home
improvement projects, whether by
proposing smaller projects or charging
lower prices, in order to reduce balances
below applicable thresholds.
Contractors may also be able to reduce
the total cost of proposed projects, and
thus the balance of any PACE
transaction, by reducing or eliminating
payments to PACE companies such as
seller’s points, as currently occurs for
about one sixth of PACE loans in
California. While these changes may
impose further costs on industry
participants, it seems unlikely that
PACE loan originations would fall by as
much as half solely due to the appraisal
requirement for higher-price mortgage
loans.
E. Potential Specific Impacts of the Rule
on Access to Credit
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As discussed above, the final rule may
reduce access to PACE credit. Potential
PACE borrowers who cannot qualify for
a PACE transaction due to the ability-torepay requirements will not have access
to PACE credit. As also noted above, the
341 12 CFR 1026.35(c); comment 35(c)(2)(ii)–3.
The PACE Report indicates the median original
balance of PACE loans originated between June
2014 and December 2019 was $20,629, with an
average of $25,001. Although data from bond rating
companies indicates that the average balance has
increased for more recent loans, to around $31,000,
the median is almost certainly still substantially
lower, given that the distribution of PACE loan
original balances, like most installment loans, is
right skewed, with a small number of very high
balance loans that increases the average above the
median. Given these facts, the median original
balance for new PACE loans is almost certainly well
below the threshold that would require an inperson appraisal, such that less than half of PACE
loans will be subject to this requirement if PACE
lenders and home improvement contractors do not
change their behavior.
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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.342 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. However, given that Florida
now requires PACE companies to
confirm consumers’ income before
making a PACE loan, it is possible that
the rule will not significantly reduce
PACE lending beyond what has already
occurred at baseline. Moreover, 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 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, might be able to
access other forms of credit, potentially
at more favorable APRs.
To the extent that the legal clarity
provided by the rule enables PACE
financing to expand into additional
States, this would increase access to
PACE credit for consumers in those
States.
The CFPB quantifies the potential
impacts of the rule on access to credit
in its discussion in part VI.D where
possible. The CFPB sought comment on
this issue in the proposal, particularly
in the form of additional studies or data
that might inform the potential impact
of the proposal on access to credit.
Commenters did not provide any
additional information beyond the
qualitative discussion summarized here
and above. That is, commenters noted
that access to PACE credit would be
reduced but provided no specific data or
figures.
342 PACE
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F. Potential Specific Impacts on
Consumers in Rural Areas and
Depository Institutions With Less Than
$10 Billion in Assets
The rule will not have a significant
impact on consumers in rural areas. If
anything, the rule will 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 sixthsmallest rural population shares among
all States, respectively.
The CFPB understands that
depository institutions of any size are
not typically directly involved with
PACE transactions, and thus the rule
will have no direct impact on such
entities, regardless of asset size.
Commenters did not address these
specific impacts.
VII. 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 (FRFA) 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).343
The CFPB 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.344 In the proposal, the
CFPB determined that an IRFA was not
required because the proposal, if
finalized, would not have a SISNOSE.
For the reasons discussed below, the
CFPB does not believe that the final rule
will have a SISNOSE.345 While it is
possible that the rule will 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.
Small entities, for purposes of the
RFA, include both small businesses as
343 5
U.S.C. 601 et seq.
U.S.C. 609.
345 This analysis considers collectively the
potential impacts of all aspects of the final rule on
small entities, including both the affirmative new
requirements and the revisions to the official
commentary.
344 5
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defined by the Small Business
Administration (SBA), and small
government jurisdictions, defined as
jurisdictions with a population of less
than 50,000.346
The CFPB understands that any
economic impact from the rule will
primarily fall on PACE companies, as
defined under § 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 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 CFPB 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 CFPB, none
of these entities currently are small
entities. The local government entity
that directly originates PACE
transactions has population greater than
50,000.347
For private firms, 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.348 For private firms whose primary
business is originating PACE
transactions, the relevant SBA threshold
is $47 million in annual receipts.349 The
346 5
U.S.C. 601(3), 601(5).
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.
348 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.
349 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
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CFPB’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.350 This is consistent with how
PACE companies tend to describe the
volume of their business.351
Based on the evidence available to the
CFPB, 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.352 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.353 Even if all currently
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.
350 This will somewhat undercount annual
receipts, which would also include revenues the
firms receive from the sale of PACE securities to the
secondary market.
351 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).
352 Although the data used in the CFPB’s PACE
Report does 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 $700 million in new PACE transactions in
2023. See PACENation, PACE Market Data (updated
Dec. 31, 2023), https://www.pacenation.org/pacemarket-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.
353 The CFPB 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
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2499
operating PACE companies were small,
they would not represent a substantial
number within any of the relevant 6digit NAICS industries.
The CFPB also considered whether a
substantial number of small government
entities could experience a significant
impact under the final rule. As noted
above, the CFPB 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 programs.354 To
the extent that the rule could directly
impact these other government entities,
the CFPB must consider whether the
rule will 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.
Nationwide in 2020 there were 41,615
small government entities, including
2,153 counties, 18,709 incorporated
places, and 20,753 minor civil divisions.
The 19 States plus the District of
Columbia, which the CFPB 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.355 Of these small
governments, currently, only small
governments in California, Florida, and
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.
354 As discussed in part VII above, the CFPB
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 CFPB does not
expect significant economic impact on these
government entities from these provisions, as the
CFPB 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 12 CFR 1026.43(b)(15). Even in this case, the
CFPB 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.
355 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.
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Missouri could be directly impacted by
the rule in any meaningful way. 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
divisions. Even if all government
entities in the three States were
significantly impacted by the rule
(which is unlikely, as most local
governments in those States, especially
those below county level, do not
themselves sponsor PACE programs),
this would be only about 11.6 percent
of small government entities in States
with active PACE legislation and 4.8
percent of small government entities
nationwide, which the CFPB does not
consider to be a substantial number. In
addition, those small government
entities that would be directly impacted
by the 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.356
The rule may impact the home
improvement contractors who market
and help originate PACE financing. Here
again it appears that the rule will not
directly impact a substantial number of
small entities, even assuming that any
small home improvement contractor
will 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.357 By comparison, there are
356 The CFPB 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 CFPB
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.
357 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
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currently approximately 3,000 firms
registered in California as PACE
solicitors.358 Even if all of these entities
are small and there were a similar
number of small entities acting as PACE
solicitors in Florida and Missouri, this
would be less than 3 percent of all
relevant small entities, and so not a
substantial number.359
Some home improvement contractors
stated that they disagreed with the
CFPB’s preliminary decision to certify
that the proposal would not have a
SISNOSE. These commenters did not
provide any specific details challenging
the RFA analysis in the proposed rule,
such as the number of home
improvement contractors who would be
affected by the rule. Similarly, a home
improvement contractor trade
association and a PACE government
sponsor stated that the CFPB lacked
data on costs to home improvement
contractors in the proposal, although
again these commenters did not provide
any specific data as to home
improvement contractor costs.
The CFPB acknowledges that limited
information is available as to the costs
of the rule for small home improvement
contractors. However, as discussed
above this is not dispositive—even
assuming that every small home
improvement contractor who is
impacted by the rule experiences a
significant impact, this would not
constitute a substantial number of small
entities. As such, for purposes of the
RFA, the specific costs to impacted
small home improvement contractors
would not create significant impact on
a substantial number of small entities.
The CFPB discusses some costs to home
data does not disaggregate firm counts by State at
the 6-digit NAICS level.
358 See Cal. Dep’t of Fin. Prot. & Innovation,
Enrolled PACE Solicitors Search, https://
dfpi.ca.gov/regulated-industries/property-assessedclean-energy-pace-program-administrators/
enrolled-pace-solicitors-search/ (last updated Dec.
4, 2024), 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).
359 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 final rule.
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 CFPB to determine the
number of firms by industry and annual revenue.
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improvement contractors, small and
otherwise, in part VI above.
PACE industry stakeholders also
stated that they disagreed with the
CFPB’s decision to certify that the
proposal would not have a SISNOSE.
One PACE company stated that the
CFPB should have obtained more
specific information on NAICS codes
and revenues for PACE companies to
determine whether these entities were
small businesses as defined by the RFA.
However, this commenter did not share
its own NAICS code nor its annual
revenue, or include other relevant data.
Another PACE company stated that
there were additional costs to small
government entities beyond those
described above but did not specify
what those costs were. A third PACE
company asserted that the CFPB only
considered costs to home improvement
contractors, ignoring impacts on PACE
companies and local governments. This
commenter further stated that currently
active PACE companies are all small
businesses although the commenter did
not provide any information to support
that claim.
The CFPB reiterates that, for purposes
of the RFA, a PACE company would
only be a small business if it meets the
SBA’s size standards for its industry,
which would entail average annual
revenues of less than $47 million over
a five year period. Commenters did not
dispute the CFPB’s conclusion that the
total dollar amount of PACE loans
originated was an appropriate measure
of revenue, nor that the existing PACE
lenders had revenue above $47 million
by that metric.
The SBA Office of Advocacy provided
a comment letter to the CFPB in
response to the proposed rule as well.
This letter raised questions about the
basis of the CFPB’s SISNOSE
determination. The SBA Office of
Advocacy asserted that the CFPB used
the incorrect denominator for
determining whether a substantial
number of small entities would be
affected by the rule. Specifically, the
SBA Office of Advocacy stated that the
CFPB should have limited its
consideration of home improvement
contractors to those who participate in
PACE financing, rather than all home
improvement contractors. The SBA
Office of Advocacy similarly asserted
that the CFPB should have compared
the number of small PACE companies,
if any, to the PACE financing industry
only, and the number of small
government entities affected to the
number of small government entities
only in the three states where
residential PACE financing was
available at the time of the proposal. A
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PACE company made a similar
comment with respect to the choice of
comparison groups. The SBA Office of
Advocacy also asserted that the CFPB
had not conducted a ‘‘threshold
analysis’’ as part of its RFA analysis.
Echoing comments from the home
improvement industry described above,
the SBA Office of Advocacy letter raised
questions about the lack of data on costs
to home improvement contractors in the
proposal.
The CFPB does not agree with the
suggested methodological approach
with respect to the denominator for
determining whether a substantial
number of small entities are impacted
by the rule. The CFPB agrees that
agencies should consider only firms that
are actively participating in the relevant
industry, as opposed to those which are
nominally registered or tangentially
participating. However, the CFPB has
determined that the relevant industry
for the affected entities is not limited to
entities engaging in PACE financing,
and the final rule would not have a
substantial impact on a significant
number of firms in the relevant
industries.
With respect to home improvement
contractors, considering the industry to
only include contractors acting as
solicitors for PACE companies would be
inappropriate, as these contractors are
not a distinct market from other home
improvement contractors. These
contractors compete in the home
remodeling market with home
improvement contractors who do not
offer PACE. Indeed, this is one reason
that industry commenters offered for
why the rule would be burdensome—
that contractors offering PACE financing
to potential customers would find it
more difficult to compete with home
improvement contractors who do not
offer financing or who offer other types
of financing.
Further, although the CFPB includes
all registered PACE solicitors as part of
the numerator in its analysis, in fact
many of these firms likely are not active
participants in marketing PACE
financing. Data indicates that there were
more PACE solicitors registered in
California than there were PACE loans
in 2023.360 Given that some home
improvement contractor commenters
indicated that large fractions of their
business were funded by PACE loans
(presumably indicating multiple loans
per year), this means that many
registered PACE solicitors are not
actively involved in the market. The
CFPB includes these firms as part of the
numerator in its analysis to err toward
finding a larger share of impacted small
entities; nonetheless it does not find
that a substantial number of small home
improvement contractors would be
impacted by the rule. By extension, the
CFPB does not find that a substantial
number of small home improvement
contractors would experience a
significant impact.
Similarly, the CFPB does not agree
that the relevant comparison group for
small government entities should have
been further limited to small
government entities in States where
PACE is currently available. The
relevant ‘‘industry’’ in this context is
local governments with property taxing
authority which arguably includes all
such small government entities
nationwide. The CFPB also notes that
even within the States with active PACE
programs, the vast majority of small
government entities will not be affected
by the rule. PACE programs are almost
exclusively authorized by counties or
government conglomerates (most of
which are not small as defined by the
RFA), such that the rule generally will
not have any impact on most
incorporated places or minor civil
divisions. Small county governments
only represent about 7 percent of small
government entities in states with active
PACE programs. Even if all small county
governments in the States with active
programs experienced a significant
impact due to the rule (which, as
discussed above, the CFPB does not
expect to be the case) and the CFPB
limited the denominator to small
government entities in California,
Florida and Missouri, the rule still
would not impose a significant impact
on a substantial number of small
government entities.
Accordingly, the Director hereby
certifies that this rule will not have a
significant economic impact on a
substantial number of small entities.
Thus, neither an IRFA nor a small
business review panel was required for
the proposal, and a FRFA is not
required for this final rule.
360 See Cal. State Treasurer, Property Assessed
Clean Energy (PACE) Loss Reserve Program, https://
www.treasurer.ca.gov/caeatfa/pace/activity.asp
(indicating 2,373 PACE loans originated in
California in 2023) see also Cal. Dep’t of Fin. Prot.
& Innovation, Enrolled PACE Solicitors Search
(updated Oct. 8, 2024), https://dfpi.ca.gov/paceprogram-administrators/pace-solicitor-search/
?emrc=63ee970c63d06 (showing 2,891 enrolled
PACE solicitor companies).
VIII. 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, 2026. The
CFPB has determined that this rule does
not impose any new information
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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.
IX. Congressional Review Act
Pursuant to the Congressional Review
Act (5 U.S.C. 801 et seq.), the CFPB will
submit a report containing this rule and
other required information to the U.S.
Senate, the U.S. House of
Representatives, and the Comptroller
General of the United States at least 60
days prior to the rule’s published
effective date. The Office of Information
and Regulatory Affairs has designated
this rule as a ‘‘major rule’’ as defined by
5 U.S.C. 804(2).
X. Severability
The CFPB proposed the following
statement regarding severability and
received no comments. The CFPB is
finalizing as proposed.
If any provision of this 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.
List of Subjects in 12 CFR Part 1026
Advertising. Banks, banking,
Consumer protection, Credit, Credit
unions, Mortgages, National banks,
Reporting and recordkeeping
requirements, Savings associations,
Truth-in-lending.
Authority and Issuance
For the reasons set forth in the
preamble, the CFPB amends Regulation
Z, 12 CFR part 1026, as follows:
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, 3354, 5511, 5512,
5532, 5581; 15 U.S.C. 1601 et seq.
Subpart E—Special Rules for Certain
Home Mortgage Transactions
2. Section 1026.35(b)(2)(i) is amended
by adding paragraph (E) to read as
follows:
■
§ 1026.35 Requirements for higher-priced
mortgage loans.
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(2) * *
(i) * *
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(E) A PACE transaction, as defined in
§ 1026.43(b)(15).
*
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*
*
■ 3. Section 1026.37 is amended by
adding paragraph (p) to read as follows:
§ 1026.37 Content of disclosures for
certain mortgage transactions (Loan
Estimate).
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(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) Itemization. (i) In lieu of the
information required by paragraph
(c)(2)(ii) of this section, the maximum
amount payable for any fees or other
amounts corresponding to the periodic
payment for the PACE transaction that
are not disclosed pursuant to paragraph
(c)(2)(i) of this section, labeled ‘‘Fees or
Other Amounts.’’ The amount disclosed
under this paragraph (p)(1)(i) of this
section must be included in the
calculation under paragraph (c)(2)(iv) of
this section in place of the amount
disclosed under paragraph (c)(2)(ii) of
this section.
(ii) The creditor shall not disclose the
information in paragraph (c)(2)(iii) of
this section.
(2) Taxes, insurance, and
assessments. The creditor shall disclose:
(i) In lieu of the information required
by paragraph (c)(4)(iv) of this section, 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) of this
section, a statement that the PACE
transaction, described as a ‘‘PACE
loan,’’ will be part of the property tax
payment, a statement that, if the
consumer has a pre-existing mortgage
with an escrow account, the PACE loan
will increase the consumer’s escrow
payment, and a statement directing the
consumer to contact the consumer’s
mortgage servicer for what the consumer
will owe and when.
(3) Contact information. In addition to
the information required in 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
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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 with an
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
to this part uses ‘‘annual’’ to describe
the frequency of any payments or the
applicable unit-period, the creditor shall
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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. Section 1026.38 is amended 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) and (2) and
shall omit the information required by
paragraph (c)(2) of this section.
(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
subheading ‘‘Partial Payment,’’ 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 with an
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.
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(7) Liability after foreclosure or tax
sale. 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, if the
property is sold through foreclosure or
tax sale and the sale does not cover the
amount owed on the PACE obligation,
the consumer may be liable for some
portion of the unpaid balance under
State law, and a statement that the
consumer may want to consult an
attorney for additional information,
under the subheading ‘‘Liability after
Foreclosure or Tax Sale.’’
(8) Contact information. 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
to this part 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. (A) 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.
(B) In disclosing the information
required under paragraph (p)(2) of this
section, the creditor shall use the term
‘‘PACE contract documents’’ to refer to
the appropriate loan document and
security instrument.
5. Section 1026.41 is amended by
adding paragraph (e)(7) to read as
follows:
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§ 1026.41 Periodic statements for
residential mortgage loans.
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(7) PACE transactions. PACE
transactions, as defined in
§ 1026.43(b)(15), are exempt from the
requirements of this section.
*
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*
■ 6. Section 1026.43 is amended by
adding paragraphs (b)(14) and (15), and
paragraph (i) to read as follows:
§ 1026.43 Minimum standards for
transactions secured by a dwelling.
*
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(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 paragraph (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
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servicer may charge under
§ 1024.17(c)(1) of this chapter, 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 Model Forms H–
24(H), H–25(K), H–28(K), and H–28(L)
to read as follows:
Appendix H to Part 1026—Closed-End
Model Forms and Clauses
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■ 8. Supplement I to Part 1026—Official
Interpretations is amended by:
■ a. Under Section 1026.2—Definitions
and Rules of Construction, revising
2(a)(14) Credit;
■ b. Under Section 1026.37—Content of
disclosures for certain mortgage
transactions (Loan Estimate), add (p)
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PACE transactions at the end of the
section;
■ c. Under Section 1026.38—Content of
disclosures for certain mortgage
transactions (Closing Disclosure), add
38(u)—PACE transactions;
■ d. Under Section 1026.43—Minimum
standards for transactions secured by a
dwelling;
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i. Revising 43(b)(8) Mortgage-related
obligations;
■ ii. Adding 43(b)(14) PACE company;
■ iii. Revising Paragraph 43(c)(2)(iv);
■ iv. Revising 43(c)(3) Verification using
third-party records, and
■ e. Under Appendix H–Closed-End
Forms and Clauses revising paragraph
30.
■
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The revisions and additions read as
follows:
Supplement I to Part 1026—Official
Interpretations
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Section 1026.2—Definitions and Rules of
Construction
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2(a)(14) Credit
1. Exclusions. The following situations are
not considered credit for purposes of the
regulation:
i. Layaway plans, unless the consumer is
contractually obligated to continue making
payments. Whether the consumer is so
obligated is a matter to be determined under
applicable law. The fact that the consumer is
not entitled to a refund of any amounts paid
towards the cash price of the merchandise
does not bring layaways within the definition
of credit.
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.
iii. Insurance premium plans that involve
payment in installments with each
installment representing the payment for
insurance coverage for a certain future period
of time, unless the consumer is contractually
obligated to continue making payments.
iv. Home improvement transactions that
involve progress payments, if the consumer
pays, as the work progresses, only for work
completed and has no contractual obligation
to continue making payments.
v. Borrowing against the accrued cash
value of an insurance policy or a pension
account, if there is no independent obligation
to repay.
vi. Letters of credit.
vii. The execution of option contracts.
However, there may be an extension of credit
when the option is exercised, if there is an
agreement at that time to defer payment of a
debt.
viii. Investment plans in which the party
extending capital to the consumer risks the
loss of the capital advanced. This includes,
for example, an arrangement with a home
purchaser in which the investor pays a
portion of the downpayment and of the
periodic mortgage payments in return for an
ownership interest in the property, and
shares in any gain or loss of property value.
ix. Mortgage assistance plans administered
by a government agency in which a portion
of the consumer’s monthly payment amount
is paid by the agency. No finance charge is
imposed on the subsidy amount, and that
amount is due in a lump-sum payment on a
set date or upon the occurrence of certain
events. (If payment is not made when due,
a new note imposing a finance charge may
be written, which may then be subject to the
regulation.)
2. Payday loans; deferred presentment.
Credit includes a transaction in which a cash
advance is made to a consumer in exchange
for the consumer’s personal check, or in
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exchange for the consumer’s authorization to
debit the consumer’s deposit account, and
where the parties agree either that the check
will not be cashed or deposited, or that the
consumer’s deposit account will not be
debited, until a designated future date. This
type of transaction is often referred to as a
‘‘payday loan’’ or ‘‘payday advance’’ or
‘‘deferred-presentment loan.’’ A fee charged
in connection with such a transaction may be
a finance charge for purposes of § 1026.4,
regardless of how the fee is characterized
under State law. Where the fee charged
constitutes a finance charge under § 1026.4
and the person advancing funds regularly
extends consumer credit, that person is a
creditor and is required to provide
disclosures consistent with the requirements
of Regulation Z. (See § 1026.2(a)(17).)
3. Transactions on the asset features of
prepaid accounts when there are insufficient
or unavailable funds. Credit includes
authorization of a transaction on the asset
feature of a prepaid account as defined in
§ 1026.61 where the consumer has
insufficient or unavailable funds in the asset
feature of the prepaid account at the time the
transaction is authorized to cover the amount
of the transaction. It also includes settlement
of a transaction on the asset feature of a
prepaid account where the consumer has
insufficient or unavailable funds in the asset
feature of the prepaid account at the time the
transaction is settled to cover the amount of
the transaction. This includes a transaction
where the consumer has sufficient or
available funds in the asset feature of a
prepaid account to cover the amount of the
transaction at the time the transaction is
authorized but insufficient or unavailable
funds in the asset feature of the prepaid
account to cover the transaction amount at
the time the transaction is settled. See
§ 1026.61 and related commentary on the
applicability of this regulation to credit that
is extended in connection with a prepaid
account.
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Section 1026.37—Content of Disclosures for
Certain Mortgage Transactions (Loan
Estimate)
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37(p) PACE Transactions
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) Exceptions
37(p)(7)(ii) PACE Nomenclature
1. Wherever § 1026.37 requires disclosure
of the word ‘‘PACE’’ or form H–24(H) of
appendix H uses the term ‘‘PACE,’’
§ 1026.37(p)(7)(ii) permits a creditor to
substitute the name of a specific PACE
financing program that will be recognizable
to the consumer in lieu of the term ‘‘PACE.’’
The name of a specific PACE financing
program will not be recognizable to the
consumer unless it is used consistently in
financing documents for the PACE
transaction and any marketing materials
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provided to the consumer. For example, if
the name XYZ Financing is used in
marketing materials and financing
documents for the PACE transaction
provided 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)
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38(u)—PACE Transactions
38(u)(9) Exceptions
38(u)(9)(ii)(A) PACE Nomenclature
1. Wherever § 1026.38 requires disclosure
of the word ‘‘PACE’’ or form H–25(K) of
appendix H uses the term ‘‘PACE,’’
§ 1026.38(u)(9)(ii)(A) permits a creditor to
substitute the name of a specific PACE
financing program that will be recognizable
to the consumer in lieu of the term ‘‘PACE.’’
The name of a specific PACE financing
program will not be recognizable to the
consumer unless it is used consistently in
financing documents for the PACE
transaction and any marketing materials
provided to the consumer. For example, if
the name XYZ Financing is used in
marketing materials and financing
documents provided to the consumer for the
PACE transaction, such that XYZ Financing
will be recognizable to the consumer, the
creditor may substitute the name XYZ
Financing for PACE on the Closing
Disclosure.
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Section 1026.43–Minimum Standards for
Transactions Secured by a Dwelling
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43(b)(8) Mortgage-Related Obligations
1. General. Section 1026.43(b)(8) defines
mortgage-related obligations, which must be
considered in determining a consumer’s
ability to repay pursuant to § 1026.43(c).
Section 1026.43(b)(8) includes, in the
evaluation of mortgage-related obligations,
fees and special assessments owed to a
condominium, cooperative, or homeowners
association. Section 1026.43(b)(8) includes
ground rent and leasehold payments in the
definition of mortgage-related obligations.
See commentary to § 1026.43(c)(2)(v)
regarding the requirement to take into
account any mortgage-related obligations for
purposes of determining a consumer’s ability
to repay.
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
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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).
3. Insurance premiums and similar
charges. Section 1026.43(b)(8) includes in the
evaluation of mortgage-related obligations
premiums and similar charges identified in
§ 1026.4(b)(5), (7), (8), or (10) that are
required by the creditor. This includes all
premiums or charges related to coverage
protecting the creditor against a consumer’s
default, credit loss, collateral loss, or similar
loss, if the consumer is required to pay the
premium or charge. For example, if Federal
law requires flood insurance to be obtained
in connection with the mortgage loan, the
flood insurance premium is a mortgagerelated obligation for purposes of
§ 1026.43(b)(8). Section 1026.43(b)(8) does
not include premiums or similar charges
identified in § 1026.4(b)(5), (7), (8), or (10)
that are not required by the creditor and that
the consumer purchases voluntarily. For
example:
i. If a creditor does not require earthquake
insurance to be obtained in connection with
the mortgage loan, but the consumer
voluntarily chooses to purchase such
insurance, the earthquake insurance
premium is not a mortgage-related obligation
for purposes of § 1026.43(b)(8).
ii. If a creditor requires a minimum amount
of coverage for homeowners’ insurance and
the consumer voluntarily chooses to
purchase a more comprehensive amount of
coverage, the portion of the premium
allocated to the required minimum coverage
is a mortgage-related obligation for purposes
of § 1026.43(b)(8), while the portion of the
premium allocated to the more
comprehensive coverage voluntarily
purchased by the consumer is not a
mortgage-related obligation for purposes of
§ 1026.43(b)(8).
iii. If the consumer purchases insurance or
similar coverage not required by the creditor
at consummation without having requested
the specific non-required insurance or
similar coverage and without having agreed
to the premium or charge for the specific
non-required insurance or similar coverage
prior to consummation, the premium or
charge is not voluntary for purposes of
§ 1026.43(b)(8) and is a mortgage-related
obligation.
4. Mortgage insurance, guarantee, or
similar charges. Section 1026.43(b)(8)
includes in the evaluation of mortgagerelated obligations premiums or charges
protecting the creditor against the consumer’s
default or other credit loss. This includes all
premiums or similar charges, whether
denominated as mortgage insurance,
guarantee, or otherwise, as determined
according to applicable State or Federal law.
For example, monthly ‘‘private mortgage
insurance’’ payments paid to a nongovernmental entity, annual ‘‘guarantee fee’’
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payments required by a Federal housing
program, and a quarterly ‘‘mortgage
insurance’’ payment paid to a State agency
administering a housing program are all
mortgage-related obligations for purposes of
§ 1026.43(b)(8). Section 1026.43(b)(8)
includes these charges in the definition of
mortgage-related obligations if the creditor
requires the consumer to pay them, even if
the consumer is not legally obligated to pay
the charges under the terms of the insurance
program. For example, if a mortgage
insurance program obligates the creditor to
make recurring mortgage insurance
payments, and the creditor requires the
consumer to reimburse the creditor for such
recurring payments, the consumer’s
payments are mortgage-related obligations for
purposes of § 1026.43(b)(8). However, if a
mortgage insurance program obligates the
creditor to make recurring mortgage
insurance payments, and the creditor does
not require the consumer to reimburse the
creditor for the cost of the mortgage
insurance payments, the recurring mortgage
insurance payments are not mortgage-related
obligations for purposes of § 1026.43(b)(8).
5. Relation to the finance charge. Section
1026.43(b)(8) includes in the evaluation of
mortgage-related obligations premiums and
similar charges identified in § 1026.4(b)(5),
(7), (8), or (10) that are required by the
creditor. These premiums and similar
charges are mortgage-related obligations
regardless of whether the premium or similar
charge is excluded from the finance charge
pursuant to § 1026.4(d). For example, a
premium for insurance against loss or
damage to the property written in connection
with the credit transaction is a premium
identified in § 1026.4(b)(8). If this premium
is required by the creditor, the premium is
a mortgage-related obligation pursuant to
§ 1026.43(b)(8), regardless of whether the
premium is excluded from the finance charge
pursuant to § 1026.4(d)(2).
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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
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43(c)(2) Basis for Determination
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Paragraph 43(c)(2)(iv)
1. Home equity lines of credit. For
purposes of § 1026.43(c)(2)(iv), a
simultaneous loan includes any covered
transaction or home equity line of credit
(HELOC) subject to § 1026.40 that will be
made to the same consumer at or before
consummation of the covered transaction and
secured by the same dwelling that secures
the covered transaction. A HELOC that is a
simultaneous loan that the creditor knows or
has reason to know about must be considered
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as a mortgage obligation in determining a
consumer’s ability to repay the covered
transaction even though the HELOC is not a
covered transaction subject to § 1026.43. See
§ 1026.43(a) discussing the scope of this
section. ‘‘Simultaneous loan’’ is defined in
§ 1026.43(b)(12). For further explanation of
‘‘same consumer,’’ see comment 43(b)(12)–2.
2. Knows or has reason to know. In
determining a consumer’s repayment ability
for a covered transaction under
§ 1026.43(c)(2), a creditor must consider the
consumer’s payment obligation on any
simultaneous loan that the creditor knows or
has reason to know will be or has been made
at or before consummation of the covered
transaction. For example, where a covered
transaction is a home purchase loan, the
creditor must consider the consumer’s
periodic payment obligation for any
‘‘piggyback’’ second-lien loan that the
creditor knows or has reason to know will be
used to finance part of the consumer’s down
payment. The creditor complies with this
requirement where, for example, the creditor
follows policies and procedures that are
designed to determine whether at or before
consummation the same consumer has
applied for another credit transaction secured
by the same dwelling. To illustrate, assume
a creditor receives an application for a home
purchase loan where the requested loan
amount is less than the home purchase price.
The creditor’s policies and procedures must
require the consumer to state the source of
the down payment and provide verification.
If the creditor determines the source of the
down payment is another extension of credit
that will be made to the same consumer at
or before consummation and secured by the
same dwelling, the creditor knows or has
reason to know of the simultaneous loan and
must consider the simultaneous loan.
Alternatively, if the creditor has information
that suggests the down payment source is the
consumer’s existing assets, the creditor
would be under no further obligation to
determine whether a simultaneous loan will
be extended at or before consummation of the
covered transaction. The creditor is not
obligated to investigate beyond reasonable
underwriting policies and procedures to
determine whether a simultaneous loan will
be extended at or before consummation of the
covered transaction.
3. Scope of timing. For purposes of
§ 1026.43(c)(2)(iv), a simultaneous loan
includes a loan that comes into existence
concurrently with the covered transaction
subject to § 1026.43(c). A simultaneous loan
does not include a credit transaction that
occurs after consummation of the covered
transaction that is subject to this section.
However, any simultaneous loan that
specifically covers closing costs of the
covered transaction, but is scheduled to be
extended after consummation must be
considered for the purposes of
§ 1026.43(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
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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.
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43(c)(3) Verification Using Third-Party
Records
1. Records specific to the individual
consumer. Records a creditor uses for
verification under § 1026.43(c)(3) and (4)
must be specific to the individual consumer.
Records regarding average incomes in the
consumer’s geographic location or average
wages paid by the consumer’s employer, for
example, are not specific to the individual
consumer and are not sufficient for
verification.
2. Obtaining records. To conduct
verification under § 1026.43(c)(3) and (4), a
creditor may obtain records from a thirdparty service provider, such as a party the
consumer’s employer uses to respond to
income verification requests, as long as the
records are reasonably reliable and specific to
the individual consumer. A creditor also may
obtain third-party records directly from the
consumer, likewise as long as the records are
reasonably reliable and specific to the
individual consumer. For example, a creditor
using payroll statements to verify the
consumer’s income, as allowed under
§ 1026.43(c)(4)(iii), may obtain the payroll
statements from the consumer.
3. Credit report as a reasonably reliable
third-party record. A credit report generally
is considered a reasonably reliable thirdparty record under § 1026.43(c)(3) for
purposes of verifying items customarily
found on a credit report, such as the
consumer’s current debt obligations, monthly
debts, and credit history. Section
1026.43(c)(3) generally does not require
creditors to obtain additional reasonably
reliable third-party records to verify
information contained in a credit report. For
example, if a credit report states the existence
and amount of a consumer’s debt obligation,
the creditor is not required to obtain
additional verification of the existence or
amount of that obligation. In contrast, a
credit report does not serve as a reasonably
reliably third-party record for purposes of
verifying items that do not appear on the
credit report. For example, certain monthly
debt obligations, such as legal obligations
like alimony or child support, may not be
reflected on a credit report. Thus, a credit
report that does not list a consumer’s
monthly alimony obligation does not serve as
a reasonably reliable third-party record for
purposes of verifying that obligation. If a
credit report reflects a current debt obligation
that a consumer has not listed on the
application, the creditor complies with
§ 1026.43(c)(3) if the creditor considers the
existence and amount of the debt obligation
as it is reflected in the credit report.
However, in some cases a creditor may know
or have reason to know that a credit report
may be inaccurate in whole or in part. For
example, a creditor may have information
indicating that a credit report is subject to a
fraud alert, extended alert, active duty alert,
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or similar alert identified in 15 U.S.C. 1681c–
1 or that a debt obligation listed on a credit
report is subject to a statement of dispute
pursuant to 15 U.S.C. 1681i(b). A creditor
may also have other reasonably reliable thirdparty records or other information or
evidence that the creditor reasonably finds to
be reliable that contradict the credit report or
otherwise indicate that the credit report is
inaccurate. If a creditor knows or has reason
to know that a credit report may be
inaccurate in whole or in part, the creditor
complies with § 1026.43(c)(3) by disregarding
an inaccurate or disputed item, items, or
credit report, but does not have to obtain
additional third-party records. The creditor
may also, but is not required, to obtain other
reasonably reliable third-party records to
verify information with respect to which the
credit report, or item therein, may be
inaccurate. For example, the creditor might
obtain statements or bank records regarding
a particular debt obligation subject to a
statement of dispute. See also comment
43(c)(3)–6, which describes a situation in
which a consumer reports a debt obligation
that is not listed on a credit report.
4. Verification of simultaneous loans.
Although a credit report may be used to
verify current obligations, it will not reflect
a simultaneous loan that has not yet been
consummated and may not reflect a loan that
has just recently been consummated. If the
creditor knows or has reason to know that
there will be a simultaneous loan extended
at or before consummation, the creditor may
verify the simultaneous loan by obtaining
third-party verification from the third-party
creditor of the simultaneous loan. For
example, the creditor may obtain a copy of
the promissory note or other written
verification from the third-party creditor. For
further guidance, see comments 43(c)(3)–1
and –2 discussing verification using thirdparty 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
PO 00000
Frm 00116
Fmt 4701
Sfmt 9990
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.
6. Verification of current debt obligations.
Section 1026.43(c)(3) does not require
creditors to obtain additional records to
verify the existence or amount of obligations
shown on a consumer’s credit report or listed
on the consumer’s application, absent
circumstances described in comment
43(c)(3)–3. Under § 1026.43(c)(3)(iii), if a
creditor relies on a consumer’s credit report
to verify a consumer’s current debt
obligations and the consumer’s application
lists a debt obligation not shown on the
credit report, the creditor may consider the
existence and amount of the obligation as it
is stated on the consumer’s application. The
creditor is not required to further verify the
existence or amount of the obligation, absent
circumstances described in comment
43(c)(3)–3.
7. Verification of credit history. To verify
credit history, a creditor may, for example,
look to credit reports from credit bureaus or
to reasonably reliable third-party records that
evidence nontraditional credit references,
such as evidence of rental payment history or
public utility payments.
8. Verification of military employment. A
creditor may verify the employment status of
military personnel by using a military Leave
and Earnings Statement or by using the
electronic database maintained by the
Department of Defense to facilitate
identification of consumers covered by credit
protections provided pursuant to 10 U.S.C.
987.
*
*
*
*
*
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 (L) 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. 2024–30628 Filed 1–8–25; 8:45 am]
BILLING CODE 4810–AM–P
E:\FR\FM\10JAR6.SGM
10JAR6
Agencies
- CONSUMER FINANCIAL PROTECTION BUREAU
[Federal Register Volume 90, Number 6 (Friday, January 10, 2025)]
[Rules and Regulations]
[Pages 2434-2548]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-30628]
[[Page 2433]]
Vol. 90
Friday,
No. 6
January 10, 2025
Part VI
Consumer Financial Protection Bureau
-----------------------------------------------------------------------
12 CFR Part 1026
Residential Property Assessed Clean Energy Financing (Regulation Z);
Final Rule
Federal Register / Vol. 90, No. 6 / Friday, January 10, 2025 / Rules
and Regulations
[[Page 2434]]
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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: Final rule.
-----------------------------------------------------------------------
SUMMARY: Section 307 of the Economic Growth, Regulatory Relief, and
Consumer Protection Act (EGRRCPA) directs the Consumer Financial
Protection Bureau (CFPB or Bureau) to prescribe ability-to-repay rules
for Property Assessed Clean Energy (PACE) financing and to apply the
civil liability provisions of the Truth in Lending Act (TILA) for
violations. PACE financing is financing to cover the costs of home
improvements that results in a tax assessment on the real property of
the consumer. In this final rule, the CFPB implements EGRRCPA section
307 and amends Regulation Z to address how TILA applies to PACE
transactions.
DATES: This final rule is effective March 1, 2026.
FOR FURTHER INFORMATION CONTACT: George Karithanom, Regulatory
Implementation and Guidance Program Analyst, Office of Regulations, at
202-435-7700 or https://reginquiries.consumerfinance.gov/. If you
require this document in an alternative electronic format, please
contact [email protected].
SUPPLEMENTARY INFORMATION:
Abbreviations
The following abbreviations are used in this final rule:
APOR = Average Prime Offer Rate
APR = Annual Percentage Rate
Board = Board of Governors of the Federal Reserve System
CAEATFA = California Alternative Energy and Advanced
Transportation Financing Authority
California DFPI = California Department of Financial
Protection and Innovation
CARES Act = Coronavirus Aid, Relief, and Economic Security
Act
EGRRCPA = Economic Growth, Regulatory Relief, and Consumer
Protection Act
FDIC = Federal Deposit Insurance Corporation
FHA = Federal Housing Administration
FHFA = Federal Housing Finance Agency
FRFA = Final Regulatory Flexibility Analysis
FTC = Federal Trade Commission
HOEPA = Home Ownership and Equity Protection Act
HUD = U.S. Department of Housing and Urban Development
IRFA = Initial Regulatory Flexibility Analysis
LTV = Loan to Value
OCC = Office of the Comptroller of the Currency
NCUA = National Credit Union Administration
NEPA = National Environmental Policy Act
NPRM = Notice of Proposed Rulemaking
PACE = Property Assessed Clean Energy
PACE Report = Property Assessed Clean Energy (PACE)
Financing and Consumer Financial Outcomes, a CFPB report published
on May 1, 2023
RESPA = Real Estate Settlement Procedures Act
RFA = Regulatory Flexibility Act
TILA = Truth in Lending Act
I. Summary of the Final Rule
Section 307 of the Economic Growth, Regulatory Relief, and Consumer
Protection Act (EGRRCPA) directs the CFPB to prescribe ability-to-repay
rules for Property Assessed Clean Energy (PACE) financing and to apply
the civil liability provisions of the Truth in Lending Act (TILA) for
violations.\1\ In this final rule, the CFPB implements EGRRCPA section
307 and amends Regulation Z to address the application of TILA to
``PACE transactions'' as defined in Sec. 1026.43(b)(15).
---------------------------------------------------------------------------
\1\ 15 U.S.C. 1639c(b)(3)(C).
---------------------------------------------------------------------------
This final rule:
Clarifies an existing exclusion to Regulation Z's
definition of credit that relates to tax liens and tax assessments.
Specifically, the CFPB is clarifying that the commentary's exclusion of
tax liens and tax assessments from being ``credit,'' as defined in
Sec. 1026.2(a)(14), applies only to involuntary tax liens and
involuntary tax assessments.
Makes a number of adjustments to the requirements for Loan
Estimates and Closing Disclosures under Sec. Sec. 1026.37 and 1026.38
that will apply when those disclosures are provided for PACE
transactions, including:
[cir] Eliminating certain fields relating to escrow account
information;
[cir] Requiring the disclosure of other fees and amounts not
included in the principal and interest on the projected payments table
in place of disclosure of mortgage insurance premiums;
[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 will replace disclosures on the current forms,
including disclosures relating to assumption, late payment, servicing,
partial payment policy, and the consumer's liability after foreclosure;
and
[cir] Clarifying how unit-periods will be disclosed for PACE
transactions.
Provides new model forms under H-24(H) and H-25(K) of
appendix H for the Loan Estimate and Closing Disclosure, respectively,
specifically designed for PACE transactions, as well as Spanish
translations of those model forms under H-28(K) for the Loan Estimate
and H-28(L) for the Closing Disclosure.
Exempts PACE transactions from the requirement to
establish escrow accounts for certain higher-priced mortgage loans,
under Sec. 1026.35(b)(2)(i)(E).
Exempts PACE transactions from the requirement to provide
periodic statements, under Sec. 1026.41(e)(7).
Applies Regulation Z's ability-to-repay requirements in
Sec. 1026.43 to PACE transactions with a number of adjustments to
account for the unique nature of PACE financing, including requiring
PACE creditors to consider certain monthly payments that they know or
have reason to know the consumer will have to pay into the consumer's
escrow account as an additional factor when making a repayment ability
determination for PACE transactions extended to consumers who pay their
property taxes through an escrow account on their existing mortgage.
Provides that a PACE transaction is not a qualified
mortgage as defined in Sec. 1026.43.
Extends the ability-to-repay requirements, as well as TILA
section 130, to any ``PACE company,'' as defined in Sec.
1026.43(b)(14), that is substantially involved in making the credit
decision for a PACE transaction.
Provides clarification regarding how PACE and non-PACE
mortgage creditors should consider pre-existing PACE transactions when
originating new mortgage loans.
II. Background
A. PACE Financing Market Overview
How does PACE financing work?
PACE financing enables property owners to finance upgrades to real
property through an assessment on their real property.\2\ Eligible
upgrade types
[[Page 2435]]
vary by locality but often include upgrades to promote energy
efficiency or to help prepare for natural disasters. The voluntary
financing agreements are made between the consumer and the consumer's
local government or a government entity operating with the authority of
several local governments,\3\ and they leverage the property tax system
for administration of payments. PACE financing is repaid through the
property tax system alongside the consumer's other property tax payment
obligations. PACE loans are typically collected through the same
process as real property taxes.\4\ Local governments typically fund
PACE loans through bond issuance. PACE assessments are sometimes
collateralized and sold as securitized obligations.
---------------------------------------------------------------------------
\2\ Some States authorize PACE financing for residential and
commercial property. In this final rule, the term PACE financing
refers only to residential PACE financing unless otherwise
indicated.
\3\ Although PACE financing programs may be sponsored by
individual local governments, many are sponsored by
intergovernmental organizations whose membership consists of
multiple local governments.
\4\ See, e.g., Cal. Sts. & Hwys. Code sec. 5898.30; Fla. Stat.
sec. 163.081(1)(e); Fla. Stat. sec. 197.3632(8)(a); Mo. Stat. sec.
67.2815(5).
---------------------------------------------------------------------------
PACE loans are secured by a lien on the consumer's real property.
The liens securing PACE loans typically have priority under State law
similar to that of other real property tax liens, which are superior to
other mortgage liens on the property, including those that predated the
PACE lien.\5\ In a foreclosure sale, this super-priority lien position
means that any amount due on the PACE loan is paid with the foreclosure
sale proceeds before any proceeds will flow to other liens. The PACE
loan is tied to the property, not the property owner. As such, the
repayment obligation remains with the property when property ownership
transfers unless paid off at the time of sale.
---------------------------------------------------------------------------
\5\ See, e.g., Cal. Sts. & Hwys. Code sec. 5898.30 (providing
for ``the collection of assessments in the same manner and at the
same time as the general taxes of the city or county on real
property, unless another procedure has been authorized by the
legislative body or by statute . . . .''); Fla. Stat. sec.
163.081(7) (``The recorded agreement must provide constructive
notice that the non-ad valorem assessment to be levied on the
property constitutes a lien of equal dignity to county taxes and
assessments from the date of recordation.''). However, authorizing
statutes in some States provide for subordinated-lien status for
PACE financing. See, e.g., Minn. Stat. sec. 216C.437(4); Me. Stat.
tit. 35A sec. 10156(3), (4); 24 V.S.A. sec. 3255(b). The CFPB
understands that there has been little to no loan volume in these
programs. See, e.g., Efficiency Maine, FY2024 Annual Report, at 40,
https://www.efficiencymaine.com/docs/FY2024-Annual-Report.pdf.
---------------------------------------------------------------------------
Although some local governments operate PACE financing programs
directly, most contract with private PACE companies to operate the
programs. These private companies generally handle the day-to-day
operations, including tasks such as marketing PACE financing to
consumers, training home improvement contractors to sell PACE financing
to consumers, overseeing originations, performing underwriting, and
making decisions about whether to extend the loan. The PACE companies
may also contract with third-party companies to administer different
aspects of the loans after origination. Often, PACE companies purchase
PACE bonds that are issued by local governments to fund the programs,
which generate revenue for the PACE companies from interest on consumer
payments. PACE companies are also sometimes involved in securitizing
the bond obligations for sale as asset-backed securities. Additionally,
PACE companies frequently earn various fees related to the
transactions.\6\
---------------------------------------------------------------------------
\6\ See, e.g., Energy Programs Consortium, R-PACE, Residential
Property Assessed Clean Energy, A Primer for State and Local Energy
Officials (Mar. 2017), https://web.archive.org/web/20201030223231/http:/www.energyprograms.org/wp-content/uploads/2017/03/R-PACE-Primer-March-2017.pdf.
---------------------------------------------------------------------------
PACE companies often rely heavily on home improvement contractors
to sell PACE loans to consumers and facilitate their origination. Home
improvement contractors frequently market PACE financing directly to
consumers while selling their home improvement services, often door-to-
door. They often serve as the primary point of contact with consumers
during the origination process and collect application information that
the PACE companies use to make underwriting and eligibility
determinations. The contractors may also deliver disclosures relating
to the PACE transaction and obtain the consumer's signature on the
financing agreement.
Origin and Growth of PACE Programs
In 2008, California passed Assembly Bill no. 811 to enable the
first PACE programs. The CFPB is aware of 19 States plus the District
of Columbia that currently have enabling legislation for residential
PACE financing programs, but only a small number of States have had
active programs, primarily California, Florida, and Missouri.\7\
---------------------------------------------------------------------------
\7\ There has been pilot program activity for residential PACE
financing in some States. See, e.g., DevelopOhio, Lucas County PACE
program benefits homeowners (Aug. 16, 2019), https://www.brickergraydon.com/DevelopOhio/Lucas-County-PACE-program-benefits-homeowners. Some States that previously authorized
residential PACE financing programs have amended their statutes such
that PACE financing is no longer authorized for single-family
residential properties. See, e.g., 2021 Wis. Act 175 (codified at
Wis. Stat. sec. 66.0627).
---------------------------------------------------------------------------
During the early years of PACE financing, lending activity appears
to have been relatively limited, with cumulative obligations of around
$200 million through 2013.\8\ In 2014, PACE financing activity
accelerated, peaking in 2016 with over $1.7 billion in investment.\9\
This level of activity was maintained in 2017, but it declined between
2018 and 2021, dropping to an average investment of $769 million per
year during those years.\10\ Overall, as of December 31, 2023, the PACE
financing industry had financed 371,000 home upgrades, totaling over
$9.1 billion.\11\
---------------------------------------------------------------------------
\8\ See PACENation, Market Data, https://www.pacenation.org/pace-market-data/ (last visited Mar. 30, 2023).
\9\ See id.
\10\ See id. The latest data available on the PACE financing
industry trade association's website is for 2023.
\11\ See id.
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Common Financing Terms
According to data analyzed in a report that the CFPB released
concurrently with its PACE proposal (PACE Report), the term of PACE
loans that were originated between July 2014 and December 2019 was most
often 20 years, but ranged between five and 30 years.\12\ The Report
also finds that the interest rates for those loans clustered around 7
to 8 percent with annual percentage rates (APRs) averaging
approximately a percentage point higher.\13\ For reference, the average
prime offer rate for primary mortgage loans was around 3.5 percent for
most of the period studied in the PACE Report.\14\ Fees vary by PACE
program, but the CFPB has reviewed agreements that include fees for
application, origination, tax administration, lien recordation, title,
escrow, bond counsel, processing, underwriting, and fund disbursement.
The CFPB is not aware of any PACE obligations that are open-end or have
a negative-amortization feature.
---------------------------------------------------------------------------
\12\ See CFPB, PACE Financing and Consumer Financial Outcomes at
Table 2 (May 2023), https://files.consumerfinance.gov/f/documents/cfpb_pace-rulemaking-report_2023-04.pdf. (PACE Report). The PACE
Report is discussed in more detail in part II.B.
\13\ Id.
\14\ See id. at 13.
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Consumer Protection Concerns
The structure of PACE transactions carries certain unique risks for
consumers. Primarily, the risks are due to the fact that PACE companies
and secondary-market participants face very low repayment risk,
regardless of whether consumers can repay.\15\ If a
[[Page 2436]]
house with a PACE lien is sold through foreclosure or tax sale, the
sale proceeds are generally assured to cover the outstanding amounts
owed on the PACE transaction because PACE loan amounts are a fraction
of the value of the property, the loans do not accelerate, and the
super-priority lien means that amounts due are paid before other
mortgage debts. Additionally, because PACE loans do not accelerate, the
remaining balance will stay with the property for the next homeowner to
pay under the terms of the original financing agreement.
---------------------------------------------------------------------------
\15\ See, e.g., Morningstar, DBRS, Rating U.S. Property Assessed
Clean Energy (PACE) Securitizations, Aug. 2024, at 19, 20, app. A
(``Given the seniority of the amortizing PACE lien and corresponding
low [loan-to-value], in the vast majority of cases, we typically
assume the liquidation proceeds from a foreclosure sale are
sufficient to bring the [residential] PACE Assessment current. Based
on this assumption, a main credit risk to [residential] PACE ABS
transactions is a delay in cash flow receipts related to nonpayment
of the R-PACE Assessments over some period of time. . . . For
[residential] PACE Assessments that go through the foreclosure
process, once the process has concluded and the property sold, the
[residential] PACE Assessment is typically considered reperforming/
performing, and collections resume according to the original
amortization schedule. Furthermore, the new property owner is
subject to subsequent to default. The same process is then applied
to the second and subsequent round of delinquency until the
[residential] PACE Assessments are paid in full.'').
---------------------------------------------------------------------------
Consumer groups have stated that PACE companies and home
improvement contractors originate PACE loans quickly, often on the
spot, without regard to affordability or consumer understanding. They
have reported to the CFPB, including in comments to the proposed rule,
deceptive sales tactics, aggressive sales practices, and fraud. A
number of PACE industry stakeholders acknowledged in comments to the
proposal that some consumers experienced mistreatment before many of
the current consumer protection laws and practices were put in place.
Consumer advocates have criticized other aspects of PACE financing
as well, such as the high cost of funding compared to other mortgage
debt, excessive capitalized fees, and inadequate disclosures. They have
argued that these aspects of PACE transactions can cause unexpected and
unaffordable tax payment spikes that can lead to delinquency, late
fees, tax defaults, and foreclosure actions.\16\ Some local officials
have echoed some of these concerns in discussions with CFPB staff.
---------------------------------------------------------------------------
\16\ See, e.g., Nat'l Consumer L. Ctr., Residential (PACE)
Loans: The Perils of Easy Money for Clean Energy Improvements (Sept.
2017), https://www.nclc.org/images/pdf/energy_utility_telecom/pace/ib-pace-stories.pdf; see also Off. of the Dist. Att'y, Cnty. of
Riverside, News Release, District Attorneys Announce $4 Million
Consumer Protection Settlement (Aug. 9, 2019), https://rivcoda.org/community-info/news-media-archives/district-attorneys-announce-4-million-consumer-protection-settlement; Kirsten Grind, America's
Fastest-Growing Loan Category Has Eerie Echoes of Subprime Crisis,
Wall St. J. (Jan. 10, 2017), https://www.wsj.com/articles/americas-fastest-growing-loan-category-has-eerie-echoes-of-subprime-crisis-1484060984.
---------------------------------------------------------------------------
The CFPB's PACE Report, discussed under parts II.B and VI.C, bears
out some of these concerns. According to the Report, PACE loans
originated between 2014 and 2019 increased consumers' property tax
bills by about $2,700 per year on average, an average increase of about
88 percent.\17\ The Report also finds that getting a PACE loan
increased mortgage delinquency rates for consumers who had a pre-
existing non-PACE mortgage by 2.5 percentage points over a two-year
period following the PACE origination, which represents an increased
risk of a mortgage delinquency by about 35 percent over two years.\18\
---------------------------------------------------------------------------
\17\ See PACE Report at 4.
\18\ See id. at 3.
---------------------------------------------------------------------------
Additionally, consumer advocates have expressed concern that some
home improvement contractors involved in the origination of PACE
transactions provide consumers with misleading information about
potential energy savings or promote the most expensive energy
improvements, regardless of their actual energy conservation
benefits.\19\ They have noted that such practices could result in
homeowners receiving a smaller reduction in their utility bills than
anticipated, making PACE financing payments more difficult to afford.
Consumer advocates have also alleged that PACE financing is
disproportionately targeted at older Americans, consumers with limited
English proficiency or lower incomes, and consumers in predominantly
Black or Hispanic neighborhoods.
---------------------------------------------------------------------------
\19\ See Claudia Polsky, Claire Christensen, Kristen Ho, Melanie
Ho & Christina Ismailos, The Darkside of the Sun: How PACE Financing
Has Under-Delivered Green Benefits and Harmed Low Income Homeowners,
Berkeley L., Env't L. Clinic, at 8-13 (Feb. 2021), https://www.law.berkeley.edu/wp-content/uploads/2021/02/ELC_PACE_DARK_SIDE_RPT_2_2021.pdf.
---------------------------------------------------------------------------
These advocates and mortgage-industry stakeholders have also
highlighted that, although a PACE loan technically remains with the
property at sale, most home buyers are unwilling to take on the
remaining payment obligation for a PACE lien, or their mortgage lender
prohibits them from doing so.\20\ Consumer advocates have reported that
PACE consumers are often unaware of these issues when agreeing to the
financing, which causes an unanticipated financial burden when
consumers are required to pay off the PACE loan to complete a home
sale.
---------------------------------------------------------------------------
\20\ See Freddie Mac, Purchase and ``no cash-out'' refinance
Mortgage requirements (Mar. 31, 2022), https://guide.freddiemac.com/app/guide/section/4301.4. As of February 2023, guidelines from both
Fannie Mae and Freddie Mac generally prohibit purchase of mortgages
on properties with outstanding first-lien PACE obligations.
Similarly, the Federal Housing Administration (FHA) updated its
handbook requirements in 2017 to prohibit insurance of mortgage on
properties with outstanding first-lien PACE obligations. See U.S.
Dept. of Hous. & Urb. Dev., Property Assessed Clean Energy (PACE)
(Dec. 7, 2017), https://www.hud.gov/sites/dfiles/OCHCO/documents/17-18ml.pdf.
---------------------------------------------------------------------------
Mortgage industry stakeholders have also asserted in comments to
the proposal and through other communications that PACE financing
introduces risk to the mortgage market, as PACE liens take priority
over pre-existing mortgage liens.\21\
---------------------------------------------------------------------------
\21\ See, e.g., Fed. Hous. Fin. Agency (FHFA), FHFA Statement on
Certain Energy Retrofit Loan Programs (July 6, 2010), https://www.fhfa.gov/news/statement/fhfa-statement-on-certain-energy-retrofit-loan-programs; 85 FR 2736, FHFA Notice and Request for
Input on PACE Financing (Jan. 16, 2020); Joint Letter from Mortgage
Trade Assocs. to FHFA Director Mark Calabria (Mar. 16, 2020),
https://www.housingpolicycouncil.org/_files/ugd/d315af_6cb569a5427f4e26ab4ef4d55038b3f6.pdf.
---------------------------------------------------------------------------
Since 2015, the CFPB has received over 125 complaints related to
PACE financing, primarily from consumers in California and Florida.
Many of the complaints allege fraud, deceptive practices, overly high
costs, or trouble with refinancing the consumer's home. Twenty-eight of
the complaints involve older adults, and five of the complaints involve
consumers with limited English proficiency. Consumer advocates have
suggested that consumers may not be aware of their ability to submit
PACE complaints to the CFPB database or may have had difficulty
categorizing them, which may have resulted in a lower number of
complaints reported. Consumers in California are also able to submit
complaints to their State PACE regulator and submitted 313 such
complaints between 2020 and 2022 alone.\22\
---------------------------------------------------------------------------
\22\ Cal. Dep't of Fin. Prot. & Innovation, Annual Report of
Operation of Finance Lenders, Brokers, and PACE Administrators
Licensed Under the California Financing Law, at 41 (Aug. 2023)
https://dfpi.ca.gov/wp-content/uploads/sites/337/2024/01/2022-Annual-Report-CFL-Aggregated.pdf.
---------------------------------------------------------------------------
In August 2019, Renovate America, Inc. (Renovate), a major PACE
company at the time, reached a $4 million settlement with six counties
and one city in California.\23\ The complaint, filed in State court,
alleged that Renovate misrepresented the PACE program or failed to make
adequate disclosures
[[Page 2437]]
about key aspects of the program, including its government affiliation,
tax deductibility, transferability of ethe obligations to subsequent
property owners, financing costs, and Renovate's contractor
verification policy.\24\ Subsequently, in June 2021, the California
State PACE regulator moved to revoke Renovate's Administrator license,
required to administer a PACE program in the State, after finding that
one of its solicitors repeatedly defrauded homeowners in San Diego
County.\25\ Renovate ultimately consented to the revocation.\26\
---------------------------------------------------------------------------
\23\ See Riverside Cnty. Dist. Att'y, District Attorneys
Announce $4 Million Consumer Protection Settlement With ``PACE''
Program Administrator Renovate America, Inc. (Aug. 9, 2019), https://rivcoda.org/community-info/news-media-archives/district-attorneys-announce-4-million-consumer-protection-settlement; see also State of
California v. Renovate America, Case No. RIC1904068 (Super. Ct.
Riverside Cnty. 2019).
\24\ Id.
\25\ See Cal. Dep't of Fin. Prot. & Innovation, DFPI Moves to
Revoke PACE Administrator's License After Finding Its Solicitor
Defrauded Homeowners (June 4, 2021), https://dfpi.ca.gov/press_release/dfpi-moves-to-revoke-pace-administrators-license-after-finding-its-solicitor-defrauded-homeowners/.
\26\ Cal. Dep't of Fin. Prot. & Innovation, Settlement Agreement
(Sept. 8, 2021), https://dfpi.ca.gov/wp-content/uploads/sites/337/2021/09/Admin.-Action-Renovate-America-Inc.-Settlement-Agreement.pdf?emrc=090ca0.
---------------------------------------------------------------------------
In October 2022, Ygrene Energy Fund Inc. (Ygrene), a major PACE
company, reached a $22 million settlement with the Federal Trade
Commission (FTC) and the State of California over allegations regarding
its conduct in the PACE marketplace.\27\ In a joint complaint, the FTC
and California alleged that Ygrene deceived consumers about the
potential financial impact of its financing and unfairly recorded liens
on consumers' homes without their consent.\28\ The complaint further
alleged that Ygrene and its contractors falsely told consumers that
PACE financing would not interfere with the sale or refinancing of
their homes and used high-pressure sales tactics and even forgery to
enroll consumers into PACE programs.\29\
---------------------------------------------------------------------------
\27\ See Fed. Trade Comm'n, FTC, California Act to Stop Ygrene
Energy Fund from Deceiving Consumers about PACE Financing, Placing
Liens on Homes Without Consumers' Consent (Oct. 28, 2022), https://www.ftc.gov/news-events/news/press-releases/2022/10/ftc-california-act-stop-ygrene-energy-fund-deceiving-consumers-about-pace-financing-placing-liens; see also Complaint for Permanent
Injunction, Monetary Relief, Civil Penalties, and Other Relief, Fed.
Trade Comm'n et al. v. Ygrene Energy Fund Inc., No. 2:22-cv-07864
(C.D. Cal. 2022), https://www.ftc.gov/system/files/ftc_gov/pdf/Complaint%20-%20Dkt.%201%20-%2022-cv-07864.pdf.
\28\ Id.
\29\ Id.
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State Laws and Regulations in States With Active PACE Programs
California
California authorized PACE programs in 2008 to finance projects
related to renewable energy and energy efficiency, and later expanded
the scope to include water efficiency, certain disaster hardening, and
electric vehicle charging infrastructure measures.\30\ Since 2008,
California has passed several laws to add and adjust consumer
protections for PACE programs, with major additions in a series of
amendments that took effect around 2018 (collectively, 2018 California
PACE Reforms). Current California law requires that, before executing a
PACE contract, PACE program administrators must make a determination
that the consumer has a reasonable ability to pay the annual payment
obligations based on the consumer's income, assets, and current debt
obligations.\31\ California law also requires, among other protections,
financial disclosures prior to consummation; \32\ a three-day right to
cancel, which is extended to five days for older adults; \33\ mandatory
confirmation-of-terms calls; \34\ and restrictions on contractor
compensation.\35\ Additionally, California law imposes certain
financial requirements for consumers to be eligible for PACE financing,
including that consumers must be current on their property taxes and
mortgage and generally not have been party to a bankruptcy proceeding
within the previous four years.\36\ There is also a maximum permissible
loan-to-value ratio for PACE financing under California law.\37\
California law exempts government agencies from some of these
requirements.\38\
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\30\ See, e.g., Cal. Sts. & Hwys. Code secs. 5898.12, 5899,
5899.3.
\31\ Cal. Fin. Code secs. 22686 & 22687.
\32\ Cal. Sts. & Hwys. Code sec. 5898.17.
\33\ Cal. Sts. & Hwys. Code secs. 5898.16-.17.
\34\ Cal. Sts. & Hwys. Code sec. 5913.
\35\ Cal. Sts. & Hwys. Code sec. 5923.
\36\ Cal. Fin. Code sec. 22684(a), (d)-(e).
\37\ Cal. Fin. Code sec. 22684(h).
\38\ Cal. Fin. Code sec. 22018(a) (exempting public agencies
from the definition of ``program administrator'' that is subject to
the ability-to-pay requirements set forth under Cal. Fin. Code sec.
22687).
---------------------------------------------------------------------------
As part of the 2018 California PACE Reforms, California
significantly increased the role of what is now called California's
Department of Financial Protection and Innovation (DFPI).\39\ In 2019,
the DFPI began licensing PACE program administrators and subsequently
promulgated rules implementing some of California's statutory PACE
provisions, which became effective in 2021.\40\ DFPI also has certain
examination, investigation, and enforcement authorities over PACE
program administrators, solicitors, and solicitor agents.\41\
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\39\ Cal. AB 1284 (2017-2018), Cal. SB 1087 (2017-2018).
\40\ 10 Cal. Code Regs. sec.1620.01 et seq. California law uses
the term ``program administrator'' to refer to companies that are
referred to here as PACE companies. See Cal. Fin. Code sec. 22018.
\41\ Cal. Fin. Code sec. 22690. California law uses the term
``PACE solicitor'' and ``PACE solicitor agent'' to refer to persons
authorized by program administrators to solicit property owners to
enter into PACE assessment contracts, often home improvement
contractors. See Cal. Fin. Code sec. 22017(a)-(b).
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PACE program administrators must be licensed by the DFPI under the
California law. They must also establish and maintain processes for the
enrollment of PACE solicitors and solicitor agents, including training
and background checks.\42\ PACE program administrators are required to
annually share certain operational data with DFPI.\43\ DFPI compiles
the data in annual reports on PACE lending in California, which provide
aggregated information on PACE loans, PACE program administrators and
solicitors, and consumer complaints.\44\
---------------------------------------------------------------------------
\42\ Cal. Fin. Code secs. 22680-82.
\43\ Cal. Fin. Code sec. 22692.
\44\ See, e.g., Cal. Dep't of Fin. Prot. & Innovation, Annual
Report of Operation of Finance Lenders, Brokers, and PACE
Administrators Licensed Under the California Financing Law (Aug.
2022), https://dfpi.ca.gov/wp-content/uploads/sites/337/2022/08/2021-CFL-Aggregated-Annual-Report.pdf.
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Florida
Florida authorized PACE programs in 2010 to finance projects
related to energy conservation and efficiency improvements, renewable
energy improvements, and wind resistance improvements.\45\ The State
imposed additional consumer protections for PACE transactions, which
took effect July 2024 after the CFPB issued the proposed rule.\46\
Florida law imposes certain financial requirements to be eligible for
PACE financing, including that consumers must be current on their
property taxes and all mortgage debts on the property and have not been
subject to bankruptcy proceedings within the preceding five years.\47\
It also includes a maximum loan-to-value ratio,\48\ requires
disclosures about PACE loans and the terms of the PACE transaction,\49\
and requires that the estimated annual payment amount for all PACE
loans on a property does not exceed 10 percent of the property owner's
annual household income.\50\ Additionally, Florida law requires that
the property owner provide holders or servicers of any existing
mortgages secured by the property with notice of their intent to enter
into a PACE financing agreement
[[Page 2438]]
together with the maximum principal amount to be financed and the
maximum annual assessment necessary to repay that amount.\51\ Florida
law also provides that a property owner may cancel a PACE transaction
agreement within three business days of consummation without incurring
any financial penalty for doing so \52\ and requires a written
disclosure to prospective purchasers of a property subject to a PACE
transaction.\53\ Additionally, Florida law directs counties and
municipalities to maintain processes regulating home improvement
contractors \54\ and third-party program administrators,\55\ regulates
advertising practices surrounding PACE transactions,\56\ and sets forth
circumstances in which PACE financing agreements may be
unenforceable.\57\
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\45\ See Fla. HB 7179 (2010).
\46\ See Fla. SB 770 (2024), codified at Fla. Stat. sec.
163.081.
\47\ Fla. Stat. sec. 163.081(3)(a).
\48\ Id.
\49\ Fla. Stat. sec. 163.081(4).
\50\ Fla. Stat. sec. 163.081(3)(a)(12).
\51\ Fla. Stat. sec. 163.081(5).
\52\ Fla. Stat. sec. 163.081(6).
\53\ Fla. Stat. sec. 163.081(8).
\54\ Fla. Stat. sec. 163.083.
\55\ Fla. Stat. sec. 163.084.
\56\ Fla. Stat. sec. 163.085.
\57\ Fla. Stat. sec. 163.086.
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Missouri
Missouri authorized PACE programs in 2010 to finance projects
involving energy efficiency improvements and renewable energy
improvements.\58\ In 2021, Missouri enacted new legislation imposing
certain consumer protection requirements for PACE transactions. The law
currently requires clean energy development boards (the government
entities offering PACE programs) to provide a disclosure form to
homeowners that shows the financing terms, including the total amount
funded and borrowed, the fixed rate of interest charged, the APR, and a
statement that, if the property owner sells or refinances the property,
the owner may be required by a mortgage lender or a purchaser to pay
off the obligation.\59\ It also requires verbal confirmation of certain
provisions of the contract, imposes specific financial requirements to
execute a PACE contract, and provides for a three-day right to
cancel.\60\ The 2021 legislation also limited the term, amount of
financing, and total indebtedness secured by the property and required
the clean energy development board to review and approve PACE
contracts.\61\ The new requirements became effective January 1,
2022.\62\
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\58\ Mo. HB 1692 (2010), codified at Mo. Rev. Stat. sec.
67.2800(2)(8) (defining projects eligible for financing).
\59\ Mo. HB 697, codified at Mo. Rev. Stat. sec. 67.2818(4).
\60\ Mo. HB 697, codified at Mo. Rev. Stat. sec. 67.2817(2)
(financial requirements to execute an assessment contract);
67.2817(4) (right to cancel); 67.2818(6) (verbal confirmation).
\61\ Mo. HB 697, codified at Mo. Rev. Stat. secs. 67.2817(2),
67.2818(2)-(3).
\62\ Mo. HB 697, codified at Mo. Rev. Stat. sec. 67.2840.
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Self-Regulatory Efforts
In addition to consumer protections mandated by State governments,
in November 2021, the national trade association that advocates for the
PACE financing industry announced voluntary consumer protection policy
principles for PACE programs nationwide.\63\ According to the trade
association, the 22 principles are designed to establish a national
framework for enhanced accountability and transparency within PACE
programs and to offer greater protections for all consumers, as well as
additional protections for low-income homeowners, based on stated
income, and those over the age of 75.\64\ They include provisions
relating to ability-to-pay, financing disclosures, a right to cancel,
and foreclosure-avoidance protections, among others.
---------------------------------------------------------------------------
\63\ See PACENation, PACENation Unveils 22 New Consumer
Protection Policies for Residential PACE Programs Nationwide (Nov.
5, 2021), https://www.pacenation.org/pacenation-unveils-22-consumer-protection-policies-for-residential-pace-programs-nationwide/.
\64\ Id.
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In comments to the proposal, PACE industry stakeholders enumerated
consumer protections that they said the industry has adopted. These
commenters noted the use of certain disclosures by PACE originators, as
well as other activities intended to enhance consumers' understanding
of PACE transactions, such as confirmation-of-terms calls. PACE
industry commenters also described industry underwriting standards,
including loan-to-value limitations, and mandatory confirmation that
the property owner is not in bankruptcy proceedings or delinquent on
property taxes or mortgage payments. Industry commenters further
described industry efforts to oversee contractors, including efforts to
verify contractors' licensing and insurance status, conduct background
checks for contractors, require contractors to certify compliance with
program policies and marketing standards, provide training to
contractors, monitor contractor performance, terminate contractors who
violate program policies, and withhold funds from the contractor for
the project until the project is certified as complete by the homeowner
and contractor. These commenters stated that industry actors closely
monitor delinquency trends and provide consumers with a right to cancel
and other protections following consummation.
B. Summary of the Rulemaking Process
Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018
The Economic Growth, Regulatory Relief, and Consumer Protection Act
(EGRRCPA) was signed into law on May 24, 2018.\65\ EGRRCPA section 307
amended TILA to mandate that the CFPB take regulatory action on PACE
financing, which it defines as ``financing to cover the costs of home
improvements that results in a tax assessment on the real property of
the consumer.'' It requires the CFPB to prescribe regulations that (1)
carry out the purposes of TILA section 129C(a), and (2) apply TILA
section 130 with respect to violations under TILA section 129C(a) with
respect to PACE financing. It also requires that the regulations
account for the unique nature of PACE financing.\66\ TILA section
129C(a) contains TILA's ability-to-repay provisions for residential
mortgage loans, and TILA section 130 contains civil liability
provisions. Thus, section 307 requires the CFPB to apply TILA's
ability-to-repay provisions to PACE financing, and to apply TILA's
civil liability provisions for violations of those ability-to-repay
provisions, all in a way that accounts for the unique nature of PACE
financing. This final rule discusses the implementation of the ability-
to-repay and civil liability requirements further in the section-by-
section analysis of Sec. 1026.43.
---------------------------------------------------------------------------
\65\ Public Law 115-174, 132 Stat. 1296 (2018).
\66\ EGRRCPA section 307, amending TILA section
129C(b)(3)(C)(ii), 15 U.S.C. 1639c(b)(3)(C)(ii). EGRRCPA section 307
also includes amendments authorizing the CFPB to ``collect such
information and data that the CFPB determines is necessary'' in
prescribing the regulations and requiring the CFPB to ``consult with
State and local governments and bond-issuing authorities.''
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Outreach
To learn about PACE transactions and the industry, the CFPB has
engaged with a wide variety of stakeholders since 2015, including
consumer advocates, a range of public and private participants in the
PACE financing industry, mortgage industry stakeholders, and
representatives from energy and environmental groups. The engagement
has included listening sessions, roundtable discussions, question-and-
answer sessions, consultation calls soliciting stakeholder input,
briefings of external stakeholders, panel appearances by CFPB staff,
and written correspondence.
The CFPB's outreach relating to PACE financing is summarized at a
high level
[[Page 2439]]
below.\67\ The outreach has supplemented information on PACE financing
that the CFPB has gleaned from independent research; the comments
responding to the Advance Notice of Proposed Rulemaking and the
proposed rule, discussed below; the data collection described below in
this in part; and information from publicly available sources such as
news reports, research and analysis, and litigation documents. The CFPB
also consulted with the Board and several other Federal agencies, as
addressed in part VI.A.
---------------------------------------------------------------------------
\67\ The CFPB also engaged in extensive outreach with numerous
stakeholders to design and complete the CFPB data collection on PACE
financing that is discussed below.
---------------------------------------------------------------------------
1. Consumer Advocates
The CFPB began corresponding with consumer advocates regarding PACE
financing in 2016. These stakeholders have shared their concerns about
consumer risks in the PACE financing market and stories of PACE
financing resulting in financial harm to consumers.
The CFPB continued the engagement after EGRRCPA section 307 passed,
meeting on numerous occasions with individual consumer advocates and
consumer advocacy groups to discuss a range of topics related to PACE
financing. For example, these stakeholders have shared their
understanding of how the PACE financing industry functions, including
the structure of the financial obligation, the different roles of
government units and private parties, industry trends, and the effects
of State legislation on PACE financing. They have also voiced consumer
protection concerns and shared legal and policy analysis regarding the
implementation of EGRRCPA section 307 and the application of TILA to
PACE transactions.
2. Private PACE Industry Stakeholders
Since 2015, the CFPB has engaged on many occasions with various
private PACE industry stakeholders, including private PACE companies, a
national trade association, private companies that help administer the
assessments (assessment administrators), and at least one bond counsel.
These stakeholders have provided the CFPB a great deal of information
about PACE transactions, industry business practices, market trends,
and the roles of different industry participants.
Additionally, the PACE companies, assessment administrators, and
the national trade association have shared industry trends and their
views on how the industry has been developing in different
jurisdictions. They have also shared their views on some of the
challenges and progress the industry has experienced as the programs
have evolved, including, for example, the causes of fluctuations in
loan volumes, industry efforts to improve the consumer experience,
benefits of PACE financing, and the effects of consumer protection
requirements in particular States. Some of these stakeholders have also
shared their perspectives on EGRRCPA section 307 and this rulemaking.
3. State and Local Governments and Bond-Issuing Authorities
The CFPB has conferred on numerous occasions with State and local
governments and bond-issuing authorities involved in PACE financing to
gather information about PACE financing and this rulemaking, beginning
before EGRRCPA section 307 and accelerating after it took effect given
its mandate for the CFPB to ``consult with State and local governments
and bond-issuing authorities.'' \68\ The CFPB has consulted with
government sponsors of PACE financing programs, agencies involved in
different aspects of the programs, local property tax collectors,
public PACE financing providers, and county and city officials. The
CFPB has engaged with bond-issuing authorities on a number of
occasions, including discussions over the phone and in person, and
through written correspondence. The CFPB has also conferred on a number
of occasions with membership organizations representing municipalities.
---------------------------------------------------------------------------
\68\ 15 U.S.C. 1639c(b)(3)(C)(iii)(II).
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In the course of developing the final rule, CFPB staff also
conducted a series of consultation calls to promote awareness about the
CFPB rulemaking and gather input on topics that the CFPB was
considering addressing in this rulemaking, including, for example,
whether the CFPB should use the same ability-to-repay framework for
PACE financing that currently applies to mortgage credit or a different
framework, what changes should be made to account for the unique nature
of PACE financing, whether to apply any existing qualified mortgage
definitions to PACE financing, how to apply TILA's general civil
liability provisions to violations of the ability-to-repay requirements
for PACE financing, and the implications of this rulemaking for PACE
financing bonds. Before the CFPB issued the proposal, it held a series
of calls with several stakeholder groups, including: (1) State agencies
in the three States that currently offer PACE, (2) California local
government officials, (3) Missouri local government officials, (4)
Florida local government officials, and (5) State and local officials
from states that do not currently offer PACE. CFPB staff held
additional consultation calls with State and local governments and
bond-issuing authorities after the NPRM's comment period closed, to
solicit additional information and perspectives about this rulemaking
and recent market developments.
During these outreach and consultation efforts, public entities
involved in the operation of PACE financing and third parties operating
on their behalf expressed divergent views on PACE financing. For
example, some individuals from local tax collectors' offices and other
government units expressed concern about the risks or challenges that
PACE financing can create for consumers or local taxing authorities. In
part because of these concerns, some government representatives shared
consumer protection recommendations and background information about
how the PACE financing industry operates in particular jurisdictions.
Several localities with active PACE financing programs expressed
consumer protection concerns and informed the CFPB that they would
welcome application of TILA's ability-to-repay provisions to PACE, or
that they have implemented certain consumer protection standards
themselves. A nonprofit organization that administered a PACE financing
program on behalf of a local government informed the CFPB that the
locality ended its PACE financing program, largely due to consumer
protection concerns. One stakeholder from a tax collector's office
asserted that, while there are limits to PACE loan amounts relative to
the market value of the home, standards for obtaining a home's market
value are insufficient. This stakeholder asserted that, as a result,
PACE consumers could owe more than the market value of the property.
This stakeholder also asserted that interest rates and APRs for PACE
transactions are relatively high and do not reflect the fact that they
are secure for investors and carry relatively low administrative costs,
given that PACE transactions are repaid through the property tax
system.
Other local governments (and third parties they work with) shared
views that reflect more positive assessments of the industry. For
example, representatives from one government sponsor of PACE financing
(that later ceased sponsoring new PACE financing
[[Page 2440]]
originations \69\) told the CFPB that the program carries important
consumer benefits, including that it provides a financing option for
home improvement projects that have energy and environmental benefits,
and creates jobs. Local government representatives in certain
jurisdictions expressed enthusiasm about aspects of PACE financing such
as increased solar panel installations and indicated that they think
PACE financing programs generally function well. Some government
sponsors indicated that their PACE financing programs had instituted a
number of practices that were consumer-protective, such as repayment
analysis, low fees, contractor screening, or monitoring and oversight
of private entities involved in the originations. Some government
sponsors expressed concern that Federal regulation could negatively
impact PACE programs, and that the CFPB should not apply TILA's
ability-to-repay provisions or other consumer protections to PACE
financing. Several State and local entities also informed the CFPB that
consumer complaints had declined significantly in recent years.
---------------------------------------------------------------------------
\69\ The CFPB understands that a number of government sponsors,
some of which participated in the CFPB's outreach, have stopped
participating in new originations. See, e.g., Jeff Horseman,
Riverside-based agency to end controversial PACE loans for energy
improvements, The Press-Enterprise (Dec. 12, 2022); Andrew Khouri,
L.A. County ends controversial PACE home improvement loan program,
L.A. Times (May 21, 2020), https://www.latimes.com/homeless-housing/story/2020-05-21/la-fi-pace-home-improvement-loans-la-county.
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A public PACE provider asserted that PACE is an important public
policy tool that provides financing to retrofit properties that are at
risk of natural disaster, in particular wildfires. This stakeholder
asserted that PACE financing helps homeowners maintain homeowners'
insurance, and that its PACE program does not pose significant consumer
risk. It requested that public PACE providers be exempt from the final
rule.
4. Other Stakeholders
The CFPB's outreach has also included other stakeholders with an
interest in PACE financing. For example, several times since 2016, the
CFPB has discussed PACE financing with national and State-level
mortgage industry trade organizations. These stakeholders have provided
updates on, for example, State-level developments in the PACE financing
industry and analysis of Federal policy involving PACE financing. Some
have also shared concerns, in comments to the proposal and through
other channels, about the potential impact of PACE financing on
mortgage industry participants, noting, for example, the priority
position of liens securing PACE transactions relative to non-PACE
mortgage liens, the challenges that non-PACE mortgage industry
stakeholders have in obtaining information about PACE transactions and
attendant risks, and that non-PACE mortgage servicers may need to
collect PACE transactions through an escrow account, which may include
advancing their own funds if the consumer is unable to afford the PACE
financing payment. Some mortgage industry stakeholders have also raised
consumer protection concerns, sharing anecdotal reports of consumer
harm and asserting that, in practice, consumers have often had to repay
the full PACE financing balance before they have been able to sell
properties encumbered with a PACE financing lien. Some suggested that
the CFPB should treat PACE like a non-PACE mortgage or apply TILA more
generally to PACE.
Advance Notice of Proposed Rulemaking in 2019
On March 4, 2019, the CFPB issued an Advance Notice of Proposed
Rulemaking to solicit information relating to residential PACE
financing.\70\ The purpose of the Advance Notice of Proposed Rulemaking
was to gather information to better understand the PACE financing
market and other information to inform a proposed rulemaking under
EGRRCPA section 307.
---------------------------------------------------------------------------
\70\ Advance Notice of Proposed Rulemaking on Residential
Property Assessed Clean Energy Financing, 84 FR 8479 (Mar. 8, 2019).
---------------------------------------------------------------------------
In response to the Advance Notice of Proposed Rulemaking, the CFPB
received over 115 comments, which were submitted by a variety of
entities, including individual consumers, consumer groups, private PACE
industry participants, mortgage stakeholders, energy and environmental
groups, and government entities, among others. A summary of some of the
legal and policy positions reflected in the Advance Notice of Proposed
Rulemaking comments is included in the proposal.\71\
---------------------------------------------------------------------------
\71\ 88 FR 30388, 30392.
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Data Collection and PACE Report
EGRRCPA section 307 authorizes the CFPB to ``collect such
information and data that the CFPB determines is necessary'' to support
the PACE rulemaking required by the section.\72\ In October 2020, the
CFPB requested PACE financing data from all companies providing PACE
financing at that time. The request was voluntary and was intended to
gather information on PACE transaction applications and originations
between July 1, 2014, and December 31, 2019, including basic
underwriting information used for applications, application outcomes,
and loan terms. The CFPB also contracted with one of the three
nationwide consumer reporting agencies to obtain credit record data for
the PACE consumers in the PACE transaction data.
---------------------------------------------------------------------------
\72\ 15 U.S.C. 1639c(b)(3)(C)(iii)(I).
---------------------------------------------------------------------------
In August 2022, the CFPB received from its contractor de-identified
PACE data from the four PACE companies that were active in the PACE
market at the time of submission and matching de-identified credit
record data for the consumers involved in the PACE transactions.\73\
The PACE company data encompassed about 370,000 PACE transaction
applications submitted in California and Florida from 2014 to 2019 and
about 128,000 resulting PACE transaction originations. The CFPB's
contractor was able to provide matching credit data for about 208,000
individual PACE consumers, which included periodic credit snapshots for
each consumer between June 2014 and June 2022. In total, the matched
consumers submitted about 286,000 PACE applications and entered into
approximately 100,000 PACE transactions.\74\
---------------------------------------------------------------------------
\73\ The CFPB received data from FortiFi Financial, Home Run
Financing, Renew Financial, and Ygrene Energy Fund.
\74\ Matched consumers resided in census tracts with smaller
Hispanic populations, higher median income, and lower average
education compared to consumers who were not matched. The PACE
Report verifies that weighting the sample to be more like the full
population of PACE consumers has no meaningful effect on the main
results of the Report. PACE Report, supra note 12, at 11.
---------------------------------------------------------------------------
The CFPB used the acquired data to develop a report that analyzes
the impact of PACE transactions on consumer outcomes, with a particular
focus on mortgage delinquency. In addition to other analyses, the
Report examines consumers who obtained originated PACE transactions and
compares them to those who applied for PACE transactions and were
approved but did not proceed. The report, entitled ``PACE Financing and
Consumer Financial Outcomes'' was published concurrently with the
NPRM.\75\
---------------------------------------------------------------------------
\75\ See PACE Report, supra note 12.
---------------------------------------------------------------------------
Among other findings, the PACE transactions analyzed in the PACE
Report led to an increase in negative credit outcomes, particularly 60-
day mortgage delinquency, with an increase of 2.5 percentage points
over a two-year span following PACE transaction origination.
Additionally, the PACE
[[Page 2441]]
borrowers discussed in the PACE Report resided in census tracts with
higher percentages of Black and Hispanic residents than the average for
their States.\76\ However, the effect of PACE transactions on non-PACE
mortgage delinquency was statistically similar for PACE borrowers in
majority-white census tracts compared to those in census tracts that
were not majority white.\77\ The PACE Report also assesses the impact
of the 2018 California PACE Reforms, discussed in part II.A. The
analysis finds that these laws improved consumer outcomes while
substantially reducing the volume of PACE lending.\78\
---------------------------------------------------------------------------
\76\ Id. at 4.
\77\ Id. at 38-39, Figure 11.
\78\ Id. at 4-5.
---------------------------------------------------------------------------
The CFPB discusses comments that addressed the PACE Report in part
VI.
Notice of Proposed Rulemaking
The CFPB issued a proposed rule on PACE financing on May 1, 2023,
concurrent with the PACE Report described in this part above. The NPRM
was published in the Federal Register on May 11, 2023,\79\ and the
public comment period closed on July 26, 2023.\80\ The CFPB proposed
the following under Regulation Z:
---------------------------------------------------------------------------
\79\ 88 FR 30388.
\80\ The CFPB received several written requests to extend the
comment period. The CFPB believes that interested parties had
sufficient time to consider the CFPB's proposal and prepare their
responses and did not extend the comment period beyond July 26,
2023. Seventy-six days elapsed between the date the NPRM was
published in the Federal Register and the comment deadline, and ten
additional days elapsed between the CFPB's issuance of the NPRM and
its publication in the Federal Register. Additionally, the CFPB has
received a number of ex parte comments after the close of the
comment period. It has added these comments to the rulemaking docket
and considered them in developing this final rule.
---------------------------------------------------------------------------
To clarify an existing exclusion to Regulation Z's
definition of credit that relates to tax liens and tax assessments.
Specifically, the CFPB proposed to clarify that the commentary's
exclusion of tax liens and tax assessments from being ``credit,'' as
defined in Sec. 1026.2(a)(14), applies only to involuntary tax liens
and involuntary tax assessments.
To make a number of adjustments to the requirements for
Loan Estimates and Closing Disclosures under Sec. Sec. 1026.37 and
1026.38 that would apply when those disclosures are provided for PACE
transactions.
To provide new model forms under H-24(H) and H-25(K) of
appendix H for the Loan Estimate and Closing Disclosure, respectively,
specifically designed for PACE transactions.
To exempt PACE transactions from the requirement to
establish escrow accounts for certain higher-priced mortgage loans,
under proposed Sec. 1026.35(b)(2)(i)(E).
To exempt PACE transactions from the requirement to
provide periodic statements, under proposed Sec. 1026.41(e)(7).
To apply the ability-to-repay 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.
To provide that a PACE transaction is not a qualified
mortgage as defined in Sec. 1026.43.
To extend the ability-to-repay requirements and the
liability provisions of TILA section 130 to any ``PACE company,'' as
defined in proposed Sec. 1026.43(b)(14), that is substantially
involved in making the credit decision for a PACE transaction.
To provide clarification regarding how PACE and non-PACE
mortgage creditors should consider pre-existing PACE transactions when
originating new mortgage loans.
The CFPB received over 130 comments on the proposal. A variety of
stakeholders submitted comment, including consumers and consumer
groups, PACE companies, a public PACE provider, government sponsors of
PACE programs, local government entities or their membership
organizations, State agencies, a PACE industry trade association, an
assessment administrator, home improvement contractor stakeholders,
bond counsel, credit union stakeholders, mortgage industry
stakeholders, environmental and energy stakeholders, chambers of
commerce, Members of the U.S. Congress, the U.S. Small Business
Administration Office of Advocacy, and State attorneys general. The
CFPB has considered the comments and is adopting the proposal with
certain adjustments as described in the sections below.
III. Legal Authority
The CFPB is finalizing amendments to Regulation Z pursuant to its
authority under the Consumer Financial Protection Act of 2010 (CFPA)
and other provisions of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act),\81\ EGRRCPA section 307, TILA, and the
Real Estate Settlement Procedures Act of 1974 (RESPA).\82\
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\81\ Public Law 111-203,124 Stat. 1376 (2010).
\82\ 12 U.S.C. 2601 et seq.
---------------------------------------------------------------------------
A. Dodd-Frank Act
Section 1022(b)(1) of the CFPA authorizes the CFPB to prescribe
rules ``as may be necessary or appropriate to enable the CFPB to
administer and carry out the purposes and objectives of the Federal
consumer financial laws, and to prevent evasions thereof.'' \83\ Among
other statutes, TILA, RESPA, and the CFPA are Federal consumer
financial laws.\84\ Accordingly, the CFPB is exercising its authority
under CFPA section 1022(b) to prescribe rules that carry out the
purposes and objectives of TILA, RESPA, and the CFPA and prevent
evasion of those laws.
---------------------------------------------------------------------------
\83\ 12 U.S.C. 5512(b)(1).
\84\ CFPA section 1002(14), 12 U.S.C. 5481(14) (defining
``Federal consumer financial law'' to include the ``enumerated
consumer laws'' and the provisions of CFPA); CFPA section 1002(12),
12 U.S.C. 5481(12) (defining ``enumerated consumer laws'' to include
TILA and RESPA).
---------------------------------------------------------------------------
Section 1405(b) of the Dodd-Frank Act provides that,
notwithstanding any other provision of title XIV of the Dodd-Frank Act,
in order to improve consumer awareness and understanding of
transactions involving residential mortgage loans through the use of
disclosures, the CFPB may exempt from or modify disclosure
requirements, in whole or in part, for any class of residential
mortgage loans if the CFPB determines that such exemption or
modification is in the interest of consumers and in the public
interest.\85\ Section 1401 of the Dodd-Frank Act, which amends TILA
section 103(cc)(5), generally defines a residential mortgage loan as
any consumer credit transaction that is secured by a mortgage on a
dwelling or on residential real property that includes a dwelling,
other than an open-end credit plan or an extension of credit secured by
a consumer's interest in a timeshare plan.\86\ Notably, the authority
granted by section 1405(b) applies to disclosure requirements generally
and is not limited to a specific statute or statutes. Accordingly,
Dodd-Frank Act section 1405(b) is a broad source of authority to exempt
from or modify the disclosure requirements of TILA and RESPA. In
developing this final rule, the CFPB has considered the purposes of
improving consumer awareness and understanding of transactions
involving residential
[[Page 2442]]
mortgage loans through the use of disclosures and the interests of
consumers and the public. The CFPB is finalizing these amendments
pursuant to its authority under Dodd-Frank Act section 1405(b). For the
reasons discussed below and in the 2013 TILA-RESPA Rule, the CFPB
believes the final rule is in the interest of consumers and in the
public interest, consistent with Dodd-Frank Act section 1405(b).
---------------------------------------------------------------------------
\85\ Public Law 111-203, 124 Stat. 1376, 2142 (2010) (codified
at 15 U.S.C. 1601 note).
\86\ Public Law 111-203, 124 Stat. 1376, 2138 (2010) (codified
at 15 U.S.C. 1602(cc)(5)).
---------------------------------------------------------------------------
B. TILA
TILA section 105(a) directs the CFPB to prescribe regulations to
carry out the purposes of TILA and provides that such regulations may
contain additional requirements, classifications, differentiations, or
other provisions and may further provide for such adjustments and
exceptions for all or any class of transactions that the CFPB judges
are necessary or proper to effectuate the purposes of TILA, to prevent
circumvention or evasion thereof, or to facilitate compliance
therewith.\87\ A purpose of TILA is to assure a meaningful disclosure
of credit terms so that the consumer will be able to compare more
readily the various available credit terms and avoid the uninformed use
of credit.\88\ Additionally, a purpose of TILA sections 129B and 129C
is to assure that consumers are offered and receive residential
mortgage loans on terms that reasonably reflect their ability to repay
the loans and that are understandable and not unfair, deceptive, or
abusive.\89\
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\87\ 15 U.S.C. 1604(a).
\88\ 15 U.S.C. 1601(a).
\89\ 15 U.S.C. 1639b(a)(2).
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TILA section 105(b), amended by the CFPA, requires publication of
an integrated disclosure for mortgage loan transactions covering the
disclosures required by TILA and the disclosures required by sections 4
and 5 of RESPA.\90\ The purpose of the integrated disclosure is to
facilitate compliance with the disclosure requirements of TILA and
RESPA and to improve borrower understanding of the transaction. The
CFPB provided additional discussion of this integrated disclosure
mandate in the 2013 TILA-RESPA Rule.\91\
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\90\ Public Law 111-203, 124 Stat. 1376, 2108 (2010) (codified
at 15 U.S.C. 1604(b)).
\91\ 78 FR 79730, 79753-54 (Dec. 31, 2013).
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Section 105(f) of TILA, 15 U.S.C. 1604(f), authorizes the CFPB to
exempt from all or part of TILA any class of transactions if the CFPB
determines after the consideration of certain factors that TILA
coverage does not provide a meaningful benefit to consumers in the form
of useful information or protection.
TILA section 129C(b)(3)(A) directs the CFPB to prescribe
regulations to carry out the purposes of the subsection.\92\ In
addition, TILA section 129C(b)(3)(B)(i) authorizes the CFPB to
prescribe regulations that revise, add to, or subtract from the
criteria that define a qualified mortgage upon a finding that such
regulations are necessary or proper to ensure that responsible,
affordable mortgage credit remains available to consumers in a manner
consistent with the purposes of TILA section 129C; or are necessary and
appropriate to effectuate the purposes of TILA sections 129B and 129C,
to prevent circumvention or evasion thereof, or to facilitate
compliance with such sections.\93\
---------------------------------------------------------------------------
\92\ 15 U.S.C. 1639c(b)(3)(A).
\93\ 15 U.S.C. 1639c(b)(3)(B)(i).
---------------------------------------------------------------------------
In section 307 of the EGRRCPA, codified in TILA section
129C(b)(3)(C), Congress directed the CFPB to conduct a rulemaking to
``prescribe regulations that carry out the purposes of [TILA's ATR
requirements] and apply section 130 [of TILA] with respect to
violations [of the ATR requirements] with respect to [PACE] financing,
which shall account for the unique nature of [PACE] financing.'' \94\
---------------------------------------------------------------------------
\94\ 15 U.S.C. 1639c(b)(3)(C)(ii).
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C. RESPA
RESPA section 4(a), amended by the CFPA, requires publication of an
integrated disclosure for mortgage loan transactions covering the
disclosures required by TILA and the disclosures required by sections 4
and 5 of RESPA.\95\
---------------------------------------------------------------------------
\95\ Public Law 111-203, 124 Stat. 1376, 2103 (2010) (codified
at 12 U.S.C. 2603(a)). See discussion of integrated disclosure
above.
---------------------------------------------------------------------------
Section 19(a) of RESPA authorizes the CFPB to prescribe such rules
and regulations and to make such interpretations and grant such
reasonable exemptions for classes of transactions as may be necessary
to achieve the purposes of RESPA.\96\ One purpose of RESPA is to effect
certain changes in the settlement process for residential real estate
that will result in more effective advance disclosure to home buyers
and sellers of settlement costs.\97\ In addition, in enacting RESPA,
Congress found that consumers are entitled to greater and more timely
information on the nature and costs of the settlement process and to be
protected from unnecessarily high settlement charges caused by certain
abusive practices in some areas of the country.\98\ In developing rules
under RESPA section 19(a), the CFPB has considered the purposes of
RESPA, including to effect certain changes in the settlement process
that will result in more effective advance disclosure of settlement
costs.
---------------------------------------------------------------------------
\96\ 12 U.S.C. 2617(a).
\97\ 12 U.S.C. 2601(b).
\98\ 12 U.S.C. 2601(a). In the past, RESPA section 19(a) has
served as a broad source of authority to prescribe disclosures and
substantive requirements to carry out the purposes of RESPA.
---------------------------------------------------------------------------
IV. Discussion of the Final Rule
A. General Comments on the NPRM
The CFPB received comments addressing several topics other than
those discussed in the section-specific analyses below. These topics
are largely outside the scope of this rulemaking.
Super-Priority Lien Status
Many mortgage industry stakeholders and consumer groups expressed
concerns about the super-priority status held by liens securing PACE
transactions. Several commenters stated that the super-priority status
of PACE liens increases risks for borrowers, mortgage lenders,
communities, and secondary mortgage market participants. A mortgage
industry trade association asserted that PACE transactions violate the
first-lien status of mortgages and create risk for consumers and
communities. One mortgage industry trade association stated that the
super-priority lien status undermines mortgage lenders' underwriting by
increasing the loss severity during foreclosure for the mortgage lender
in a way that was not priced in, limits saleability of mortgages, and
requires mortgage servicers to advance funds to secure the security
interest when consumers go delinquent on property taxes and PACE
obligations. A credit union stated that the super-lien priority
decreases home marketability, and an escrow association stated that
consumers have not understood the priority status of PACE liens.
Some commenters, including a credit union and other mortgage
industry stakeholders, described challenges with identifying the
presence of existing PACE liens. Some commenters, including a community
bankers association, a credit union trade association, and a group of
mortgage industry and consumer group stakeholders, asked the CFPB to
work with State and local governments to find solutions to better
identifying PACE liens or downgrading their priority status.
In contrast to these comments, a PACE company asserted that a PACE
transaction's super-priority lien status
[[Page 2443]]
makes PACE transactions more secure, which allows capital markets to
embrace lower interest rates, with the savings passed on to consumers.
Another PACE company stated that, in California, there is a loss
reserve in place and only two claims have ever been made, showing the
concerns related to whether the lien status would impair the security
of first mortgage loans have not materialized.
Requests for Additional Regulatory Requirements
Several commenters suggested additional regulation of PACE
financing that was not contemplated in the proposed rule. For instance,
a State housing agency association suggested requiring PACE companies
to report PACE transactions to credit bureaus, prohibiting prepayment
penalties on PACE transactions if the first mortgage does not impose
prepayment penalties, regulating the types of fees allowed on PACE
transactions, and imposing conflict-of-interest provisions on PACE
transactions like those found under RESPA. A PACE company recommended
prohibiting payments to home improvement contractors for marketing
services and for work done prior to project completion. This commenter
also suggested the CFPB craft protections against antitrust or
defamation claims for PACE companies, similar to those available to
financial institutions who file Suspicious Activity Reports, so that
they can more effectively share information about problematic home
improvement contractors.
A consumer group suggested the CFPB require independent
verification before PACE-financed work begins (specifically, an energy
audit to verify the need for cost-effective improvements and verifying
the consumer understands related costs and risks) and after work is
completed but before the contractor is paid. Another consumer group
urged the CFPB to prohibit false assertions made on social media
websites.
A consortium of consumer groups stated that the CFPB should
finalize the proposal quickly and should monitor and incorporate
consumer protections into other emerging lending products intended to
be environmentally friendly (i.e., ``green'' lending products, such as
those being implemented under Inflation Reduction Act programs), to
minimize what they characterized as public harm and negative
consequences that resulted from the problematic design and predatory
practices of PACE financing. A few other consumer and environmental
groups echoed the need for collaboration among Federal agencies on
green lending products to share lessons learned from PACE financing and
to ensure these products are fair, safe, affordable, and sustainable
for consumers.
National Environmental Policy Act
Two PACE companies and a PACE industry trade association stated
that the National Environmental Policy Act (NEPA) applies to the CFPB's
PACE financing rulemaking. These commenters asserted that the CFPB
should complete an environmental impact statement under NEPA.
Specifically, commenters expressed concerns that the proposed rule
would have a significant adverse impact on the quality of the human
environment by causing fewer PACE loans to be originated, thereby
reducing the environmental benefits associated with PACE financing,
including benefits related to the reduction of water and energy
consumption.
The CFPB has prepared an environmental assessment and finding of no
significant impact regarding the proposed rule, to be published in the
Federal Register concurrently with this final rule. The environmental
assessment provides the basis for the conclusion that the proposed
rule, which the CFPB is adopting in this final rule with small changes
described below, will not have a significant effect on the human
environment.\99\ In developing the environmental assessment, the CFPB
considered commenters' estimates of the environmental benefits
associated with PACE financing. As discussed in the environmental
assessment, the CFPB found that those estimates likely overstate the
impacts on energy and water consumption that PACE loans provide. It
also found, however, that even assuming that the proposal would
entirely eliminate PACE financing (an outcome the CFPB does not expect
to occur), the proposed rule would not result in significant effects on
the human environment. Based on the finding of no significant impact,
the CFPB determined that an environmental impact statement need not be
prepared as some commenters suggested.
---------------------------------------------------------------------------
\99\ CFPB, Environmental Assessment and Finding of No
Significant Impact (Dec. 17, 2024).
---------------------------------------------------------------------------
B. Section-by-Section Analysis
1026.2 Definitions and Rules of Construction
1026.2(a) Definitions
1026.2(a)(14) Credit
Section 1026.2(a)(14) defines ``credit'' to mean ``the right to
defer payment of debt or to incur debt and defer its payment.'' The
CFPB proposed to clarify that comment 2(a)(14)-1.ii's exclusion of tax
liens and tax assessments from the definition of credit applies only to
involuntary tax liens and involuntary tax assessments, and not to
voluntary ones, such as PACE transactions. The CFPB proposed to change
the comment by adding the word ``involuntary'' to clarify which tax
liens and tax assessments are not considered credit. Without an
exclusion for voluntary tax liens and voluntary tax assessments, the
proposal separately recognized that PACE transactions would meet TILA's
definition of ``credit.'' For the reasons discussed below, the CFPB is
finalizing comment 2(a)(14)-1.ii as proposed, to clarify that
involuntary tax liens, involuntary tax assessments, court judgments,
and court approvals of reaffirmation of debts in bankruptcy are not
considered credit for purposes of the regulation.\100\
---------------------------------------------------------------------------
\100\ The CFPB is also finalizing a conforming change later in
the comment, inserting the word ``involuntary'' before ``tax lien''
in an illustrative example of third-party financing that is credit
for purposes of the regulation notwithstanding the exclusion.
---------------------------------------------------------------------------
Many commenters addressed this part of the proposal. Consumer
groups, mortgage industry stakeholders, and a State agency were
generally supportive of amending the comment, as well as recognizing
PACE transactions as credit. Some of these commenters asserted that
PACE transactions meet the definition of consumer credit under TILA and
Regulation Z and should be treated as such. Several consumer groups
stated that Congress's directive to prescribe rules for PACE financing
under TILA assumes that PACE transactions will be treated as credit
because the CFPB would otherwise have no authority to issue regulations
under TILA, as TILA governs consumer credit. A State agency stated that
PACE transactions are clearly a form of consumer credit, and that the
proposed amendment appears to be the simplest and most efficient means
of allowing PACE transactions to be subject to the requirements of TILA
and Regulation Z. Some mortgage industry stakeholders and consumer
groups stated that, as voluntary home-secured financing, PACE
transactions are mortgages or their functional
[[Page 2444]]
equivalents and should be treated the same under TILA.
A number of consumer groups and mortgage industry stakeholders
stated that applying TILA's mortgage requirements to PACE transactions
would curb abuses and help ensure consumers qualify and understand
repayment obligations. Two consumer groups expressed support for
applying the mortgage requirements under TILA and Regulation Z to PACE
transactions and suggested a number of adjustments to enhance consumer
protections. One credit union trade association stated that it was
critical that consumers with PACE transactions have the same rights and
protections as with other home-secured lending, particularly because
foreclosure related to unpaid municipal levies may involve a faster
process than a civil mortgage foreclosure.
A number of commenters suggested covering PACE transactions as TILA
credit would be important because the structure of PACE transactions
creates risk for consumers or other stakeholders. Some consumer groups
and mortgage industry stakeholders asserted that the role of private
contractors in PACE transactions has spurred predatory practices. A few
commenters indicated that alternatives to PACE financing, such as solar
funds, home equity lines of credit, or second mortgages may be safer
for consumers or carry lower fees or interest rates. One credit union
league asserted various concerns about PACE financing, such as high
interest rates, exploitation and targeting of vulnerable consumers,
risks of losing homes, deceptive marketing practices, and a lack of
disclosures. A few commenters made assertions about possible negative
impacts of PACE financing on certain groups of consumers, including
older Americans, lower-income consumers, consumers with limited English
proficiency, and majority Black or Hispanic communities.
Several commenters, including consumer groups, mortgage industry
stakeholders, and environmental groups, asserted that treating PACE
transactions like mortgages would ensure a level playing field for
market participants. Some mortgage industry and consumer group
stakeholders stated that the proposal would ensure that PACE
transactions receive the same level of scrutiny and safeguards as non-
PACE mortgage products. One consumer group and one title insurance
trade association stated that PACE transactions tend to come with
higher costs, fees, and interest rates than non-PACE mortgage products,
warranting scrutiny for the market. One environmental group commented
that PACE companies effectively act like mortgage bankers without
having to comply with banking or lending regulations.
Many PACE industry stakeholders objected to treating PACE
transactions as credit under TILA. Some commenters stated that PACE
transactions are legally distinguishable from consumer credit. Several
commenters, including PACE companies and a government sponsor, referred
to State law or case law to assert that PACE transactions are not
consumer credit or are property tax assessments. A PACE company stated
that there is no legal difference between voluntary and involuntary tax
assessments, and that voluntariness does not render a tax assessment
consumer credit. This commenter also asserted that the proposal did not
distinguish between voluntary and involuntary court judgments, which,
like tax assessments and tax liens, were excluded from ``credit'' under
existing comment 2(a)(14)-1.ii.
PACE companies, trade associations, and a government sponsor of
PACE programs asserted that covering PACE transactions as consumer
credit under TILA would not be supported by EGRRCPA section 307 or
other TILA provisions. Several commenters stated that treating PACE
transactions as credit would be overreach because, they asserted, it
would exceed Congress's narrow directive in EGRRCPA section 307 by
applying TILA to all voluntary tax assessments and tax liens.
Some commenters stated that the CFPB lacks statutory authority to
regulate PACE transactions as proposed because they are tax assessments
subject to State law and are not credit under TILA. A few commenters
stated that EGRRCPA section 307's mandate was narrow, and that the term
``consumer credit'' cannot be reasonably interpreted to include PACE
transactions. A few commenters asserted that, if Congress had intended
to make definitional changes and subject PACE transactions to further
regulation beyond ability to repay and civil liability, it would have
said so explicitly. A PACE company stated that EGRRCPA section 307
would be superfluous if PACE transactions were TILA credit because they
would already be covered. A few commenters asserted that TILA's
preservation of governmental immunity from certain remedies is evidence
that Congress did not intend TILA to apply generally to PACE
transactions, since TILA liability generally attaches to creditors, and
local governments would be creditors in PACE transactions.
Several commenters took issue with the coverage of government
sponsors of PACE programs. Eight Members of the U.S. Congress stated
that local governments that levy PACE financing as property tax
assessments are not ``creditors.'' Two membership organizations for
local governments asserted that, since PACE government sponsors are
plausibly the ``creditors'' in PACE transactions but are protected from
civil and criminal penalties under TILA, the text of TILA itself
forbids including PACE financing in the definition of credit. Another
government association asserted that, while the public agency is the
entity entering into the financing agreements, issuing bonds secured by
the obligations, and bearing ultimate responsibility for their
administration and enforcement, the public agency should not be treated
as a creditor. One government sponsor asserted that the rule would have
a disproportionate effect on its State and would significantly reduce
PACE originations.
Many local governments and a public PACE provider requested an
exclusion for government-operated PACE programs. One public PACE
provider stated, among other things, that such programs are designed to
achieve public policy objectives, are subject to rigorous underwriting
standards and other robust consumer protections, are not driven by a
profit motive, and have not resulted in claims of abuse or negative
outcomes. One nonprofit commenter asserted that the likelihood of
fraud, deception, and abuse is virtually nil where a government entity
alone administers a PACE program.
Several commenters took issue with TILA coverage on the ground that
PACE transactions run with the underlying property and are not personal
liabilities. One PACE company asserted that, while TILA defines
``credit'' to mean, in part, a ``right granted by a creditor to a
debtor . . . , '' there are no ``debtors'' in PACE transactions--that
``debtors'' are natural persons to whom the credit is extended, whereas
PACE transactions are attached to the property and are not personal
liabilities. Eight Members of the U.S. Congress, several PACE
companies, trade associations, and a local government organization
asserted that PACE transactions are not personal debts but rather tax
assessments that are levied against and run with the land. One PACE
company asserted that PACE transactions are not consumer credit because
their primary purpose is to advance State environmental and economic
policies, whereas TILA and Regulation Z define ``consumer credit'' in
part to mean credit that is primarily
[[Page 2445]]
for personal, family, or household purposes. This commenter also stated
that PACE transactions are attached to the property and are not
personal debts.
PACE companies, government sponsors, local government trade groups,
a PACE industry trade association, an energy industry stakeholder, and
eight Members of U.S. Congress opposed treating PACE transactions as
mortgages under TILA. A PACE company stated that PACE does not meet
TILA's definition of residential mortgage loan, in part because the
lien will arise as a matter of State law pursuant to governments' power
of taxation. A different PACE company stated that PACE transactions are
not residential mortgage loans as defined in TILA. Several commenters,
including PACE companies and a government sponsor, asserted that
EGRRCPA section 307's directive to ``account for the unique nature'' of
PACE transactions in prescribing regulations indicates that Congress
did not intend to treat them as mortgage loans. One PACE company stated
that the distinctions between principal and interest payments and
property tax payments under TILA point to PACE transactions being
distinct from mortgage loans. A PACE industry trade association and a
PACE company, among others, asserted several differences between PACE
transactions and mortgages, including that PACE transactions do not
accelerate, are nonrecourse, and have longer foreclosure timelines. One
PACE company stated that TILA's requirements are designed for higher
dollar amount mortgages. The PACE company stated that PACE transactions
are functionally and practically distinguishable from mortgages, and
that they are significantly smaller than mortgages and therefore less
risky for consumers. An environmental group and a PACE industry trade
association stated that PACE assessments have structural protections
that mortgages do not, including that consumers have years (versus
months) for consumers to come current on their property taxes before
local governments can initiate a foreclosure or tax sale.
Numerous commenters, including eight Members of the U.S. Congress,
home improvement contractors, and an environmental group, stated that
treating PACE financing like a mortgage loan would disregard the unique
nature of PACE transactions. The eight Members of the U.S. Congress
characterized PACE transactions as land-secured municipal finance, and
other commenters, including a PACE company, a government sponsor, and
another industry stakeholder, characterized them as property tax
assessments imposed by government entities to advance important public
policy purposes as mandated by State law. Some commenters stated that
State and local governments have authorized similar transactions for
some time, and that such transactions have only been authorized for
projects that advance public purposes dictated by State and local
governments.
Numerous commenters, including PACE companies, government sponsors,
membership organizations for local governments, home improvement
contractors, energy stakeholders, and others, expressed a wide variety
of concerns about PACE transactions being subject broadly to TILA. They
stated, for example, that broad TILA coverage would (1) exceed the
mandate in EGRRCPA section 307, which required only ability-to-repay
and civil liability regulations; (2) introduce substantial burden that
would be unwarranted given the industry's progress on consumer
protections in recent years; (3) deter industry actors from
participating and render the programs nonviable or reduce PACE
originations, which they stated would reduce access to credit, push
consumers into more expensive forms of financing, or limit revenue
options for State and local governments.
Some commenters asserted that broad TILA coverage would be
unwarranted. Some stated, for example, that the CFPB lacked
sufficiently reliable, recent data or anecdotes to justify broad
application of TILA to PACE transactions. Several commenters stated
that data sources, including the data discussed in the PACE Report,
reports issued by the California Department of Financial Protection and
Innovation (California DFPI), and analysis from private bond rating
agencies, for example, do not support the conclusion that PACE
transactions are particularly harmful. Some commenters asserted that
available data in fact demonstrates, for example, that PACE financing
correlates with a negligible impact on credit outcomes; that PACE
financing has relatively low delinquency rates, sometimes lower than
general aggregate property taxes and mortgages; or that foreclosure
rates for homes with a PACE lien are quite low. A PACE company asserted
that only two claims have been made on the California Alternative
Energy and Advanced Transportation Financing Authority (CAEATFA) loan
loss reserve, which the commenter interpreted to mean that mortgage
industry concerns relating to the priority status of PACE liens are
overblown.
Some commenters, including PACE companies and home improvement
contractors, pointed to specific TILA requirements that they asserted
would pose particular challenges if applied to PACE transactions. For
example, a PACE company and a home improvement contractor stated that
TILA's disclosure and appraisal requirements do not make sense or are
overly costly for PACE transactions compared to other mortgages, in
part because the time to close on a non-PACE mortgage is longer and the
transaction is for a much larger dollar amount. PACE companies and home
improvement contractors asserted that loan originator requirements
would impose undue costs and could cause home improvement contractors
to stop offering PACE financing to consumers, either by choice or
because they could not satisfy applicable requirements under State law.
A PACE company also stated that Regulation Z requirements as to the
treatment of credit balances would inhibit prepayment of property
taxes.
Numerous commenters opposed PACE transactions being subject to the
higher-priced mortgage loan appraisal requirement, including public and
private industry stakeholders, home improvement contractors, and energy
groups. A PACE company, an energy industry stakeholder, and home
improvement contractor firms asserted that the higher-priced mortgage
loan appraisal requirement would increase cost or delay and deter home
improvement contractor participation in PACE programs. The PACE company
stated that the higher-priced mortgage loan appraisal requirement and
TILA's high-cost mortgage protections \101\ would effectively cap the
rates and fees for PACE transactions, which could make PACE financing
economically nonviable. One home improvement contractor firm stated
that the cost of an appraisal, estimated to be $300-$500, is
unnecessary because the current valuation process used by industry
stakeholders is more conservative than receiving an appraisal. Two PACE
companies and an industry trade association recommended permitting the
use of automated valuation models (AVMs) instead of appraisals--they
asserted that AVMs are effective and more efficient than appraisals and
already permitted under California law.
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\101\ See the discussion of Sec. Sec. 1026.32 and 1026.34 for a
full discussion of comments pertaining to the application of TILA's
high-cost mortgage protections.
---------------------------------------------------------------------------
Some commenters stated that applying TILA to PACE transactions
[[Page 2446]]
would delay PACE originations. Comments about delay in the context of
specific TILA requirements, such as the TILA-RESPA integrated
disclosure requirements for which there is a mandatory waiting period
between disclosure and consummation, are discussed below. One home
improvement contractor asserted that a delay would result in financial
hardship for contractors who do not get paid until the consumer signs
off on the project. Another commenter stated that this delay threatens
the point-of-sale nature of PACE transactions, which would be
detrimental because PACE transactions allow for emergency repairs and
upgrades to help consumers obtain homeowners insurance.
One PACE company asserted that TILA's right of rescission would not
benefit consumers and would be confusing for consumers and burdensome
for States. The commenter stated that PACE transactions are already
subject to a right to cancel under State law and industry practice,
including a five-day right for senior citizens under California law.
A number of commenters, including an assessment administrator, PACE
companies, government sponsors, bond counsel, a trade association for
special districts, and a public PACE provider stated that the proposal
would extend TILA coverage to many assessment financing transactions
that are not commonly known as PACE. These commenters stated that this
coverage would create concern and uncertainty for non-PACE financing.
Some of these commenters asserted that coverage of non-PACE
transactions would exceed the congressional mandate provided in EGRRCPA
section 307 and impede State and local governments' ability to use
their taxing and bonding authorities as they see fit. A public PACE
provider recommended covering voluntary contractual assessments,
instead of simply voluntary assessments, to avoid covering obligations
arising from what the commenter referred to as traditional voluntary
assessment districts.
Many commenters, including PACE companies, a public PACE provider,
home improvement contractors, eight Members of the U.S. Congress, an
assessment administrator, an industry trade association, bond counsel,
and a group of State attorneys general, stated that PACE transactions
already have sufficient consumer protections in place. Some of these
commenters stated that PACE transactions are already sufficiently
regulated at the State and local levels. One trade association
representing special districts stated that State and local regulations
strike an effective balance of consumer protection and enabling PACE
financing to achieve its objectives. Many commenters stated that PACE
companies have instituted a series of additional consumer protections
as well, including verifying project completion before payment, various
consumer communications, and oversight of home improvement contractors.
One environmental group stated that PACE programs are accountable to
local government oversight.
PACE industry stakeholders also stated that the rate of consumer
complaints involving PACE transactions has been low. A PACE company and
an industry trade association asserted that approximately one in 1,000
PACE loans have prompted consumer complaints across several years. A
different trade association stated that a California DFPI report on
PACE showed only 69 complaints, and that all but two were resolved. Two
PACE companies stated that the number of complaints has been trending
down, suggesting that industry reforms have been effective at
addressing the consumer protection issues from prior years.
Many commenters stated that the proposal was premised on outdated
concerns, and that the CFPB should have relied more heavily on more
recent trends and information. Some commenters, including PACE
companies, a State agency, and a government sponsor, stated that
evidence, including evidence from the PACE Report and California DFPI
reports, for example, demonstrates that consumer outcomes improved
after California's and Missouri's consumer-protection legislation took
effect. Citing to data from CAEATFA and the Institutional Investor
Journal of Structured Finance, one PACE company asserted that PACE
financing does not prevent subsequent home sales. This commenter also
stated that PACE delinquency rates are improving, and that PACE
customers are usually able to catch up on delinquent tax payments,
noting that 461 PACE delinquencies were reflected in a 2021 annual
report, down from 889 delinquencies in the previous year's report.
Eight Members of the U.S. Congress stated that the delinquency rate in
Florida is lower than in California after its 2018 California PACE
Reforms.
A number of these commenters acknowledged that, before States and
private industry stakeholders instituted consumer protection measures,
there were concerns associated with PACE financing. Several commenters
acknowledged that malfeasance by some home improvement contractors
created risk and harm for consumers. One PACE company and a government
sponsor stated that home improvement contractor malfeasance included,
for example, misrepresentation, forging signatures on the loan
contracts or completion certificates, creating false business records
or contact information, and simply disappearing after the proceeds were
disbursed. One State regulator stated that around 45 percent of
claimants under a State-established financial restitution program for
consumer fraud in residential solar purchases from licensed contractors
were PACE customers, and that most of the relevant contracts were
executed before the 2018 California PACE Reforms took effect.
Several consumers who reported receiving a PACE transaction
described various protections and benefits that they received
associated with the loan. They asserted, for example, that the PACE
transactions provided financing for home improvements on a short
timeline and lowered their homeowner's insurance premiums. One home
improvement contractor estimated that 90 percent of homeowners that the
company has helped secure a PACE loan have benefited from the program.
Several commenters asserted positive impacts and benefits of PACE
transactions, which they asserted the proposed rule would diminish.
Examples included (1) increased home values, (2) increased access to
homeowner's insurance, (3) better access to credit for some consumers,
(4) job creation, (5) environmental benefits, (6) lower utility bills,
and (7) positive impacts for small businesses. One environmental group
commented that PACE transactions are unique because they provide
affordable, equitable, fixed-rate financing for homeowners to achieve
public policy goals.
Some commenters stated that PACE programs are uniquely designed to
help the environment and communities by facilitating green and
disaster-resilient homes. One public PACE provider, in discussing a
recent history of natural disasters, characterized PACE financing as a
critical public policy and public safety tool. One PACE company stated
that local governments can tailor their PACE programs to serve the
individual community needs.
Several commenters also stated that PACE transactions represent a
better alternative to other financing options. An individual commenter
stated that PACE financing provides low-cost private capital funding to
consumers, and that given current high interest rates on credit cards,
a reduction in the availability of PACE financing would be
[[Page 2447]]
troubling for their State. An environmental group stated that the
proposal would reduce PACE funding access, which would push homeowners
into more expensive, less equitable financing options that do not vet
or monitor contractors or contain anti-consumer clauses like variable
rates or prepayment penalties.
PACE industry stakeholders also identified certain elements of the
transactions that the commenters asserted make PACE transactions more
affordable, understandable, or secure. These included assertions that
PACE transactions are nonrecourse and do not accelerate upon default,
and that the total loan amount correlates to the property value and a
loan term that cannot exceed the useful life of the home improvement
that is financed with the PACE loan. Commenters asserted that PACE
transactions carry a relatively low fixed interest rate, require no
downpayment, have no prepayment penalty, and fully amortize. Commenters
noted that home improvement contractors typically receive no payment
until the project is complete, and that PACE transactions can help
lower insurance premiums for homes that have been improved with a
completed PACE financed project. An industry trade association for the
PACE industry asserted that PACE financing is less risky than home
equity lines of credit or a second mortgage, which the commenter said
can strip equity without a corresponding home improvement project that
would increase property value.
At least three commenters expressed concern that the proposed rule,
if finalized, would interfere with State consumer protection laws that
apply to PACE transactions. A PACE company, a government sponsor, and a
trade association asserted that the proposed rule would complicate or
conflict with existing State laws, or interfere with States' ability to
adjust their laws to address concerns over time. One commenter
suggested this could possibly result in preemption of State laws.
A number of commenters, including State attorneys general, PACE
companies, and bond counsel, stated that regulating PACE transactions
in this rulemaking would be unconstitutional under principles of
federalism, sovereign immunity, and commandeering. Several commenters
asserted that the CFPB's proposal would encroach on States' rights to
use local taxing and bonding authorities as they see fit.
Numerous commenters asserted that the proposal could have an impact
on access to credit for home improvements to improve energy efficiency
of homes or to strengthen homes' resilience to withstand natural
disasters. A bank that provides PACE funding stated that PACE financing
provides access to capital to many borrowers who would otherwise be
unable to pay for energy efficiency, renewable energy, or resilience
home improvements. Members of the U.S. Congress stated that PACE
transactions provide low-to-moderate income families with access to
affordable financing for retrofits and energy efficient home
improvements.
Numerous commenters, including but not limited to eight Members of
the U.S. Congress, PACE companies, and a government association, stated
that PACE financing helps consumers obtain, maintain, or reduce the
cost of homeowner's insurance. A home improvement contractor asserted
that the homeowners that use PACE financing are the most vulnerable to
high energy bills and/or catastrophic damage to their homes during a
strong storm or hurricane. One environmental group asserted that
California protections caused reduced PACE originations at a time when
there are not enough financing opportunities to meet what they cast as
overwhelming needs.
For the reasons set forth herein, the CFPB is finalizing its
proposed amendment to comment 2(a)(14)-1.ii. As finalized, amended
comment 2(a)(14)-1.ii states that involuntary tax liens, involuntary
tax assessments, court judgments, and court approvals of reaffirmation
of debts in bankruptcy are not considered credit for purposes of the
regulation. By adding the word ``involuntary'' in several places to
modify the tax assessments and tax liens excluded under comment
2(a)(14)-1.ii, the CFPB clarifies that the comment does not exclude tax
liens and tax assessments that arise from voluntary contractual
agreements, such as PACE transactions. Thus, tax liens and tax
assessments that are voluntary will be credit subject generally to TILA
if they meet the definition of credit under TILA and Regulation Z and
are not otherwise excluded.\102\
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\102\ Under the finalized amendment, tax liens and tax
assessments that are not voluntary for the consumer would continue
to be excluded.
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The amendment brings the exclusion in comment 2(a)(14)-1.ii in line
with the plain text definition of credit in TILA. TILA defines
``credit'' to mean the ``right granted by a creditor to a debtor to
defer payment of debt or to incur debt and defer its payment,'' and
Regulation Z defines ``credit'' as ``the right to defer payment of debt
or to incur debt and defer its payment.'' \103\
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\103\ 15 U.S.C. 1602(f); 12 CFR 1026.2(a)(14).
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PACE transactions easily fit these definitions--the agreements
provide for consumers to receive funding for home improvement projects
and repay those funds over time in installments.\104\ Consumers
voluntarily incur these financial obligations and are signatories to
the financing agreements. In brief, consumers choose to take out the
PACE debt obligation and must repay it over time.\105\
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\104\ Treating PACE transactions as TILA credit is consistent
with the FTC's assertion of claims against a PACE company under the
CFPB's Regulation N, 12 CFR part 1014, which the parties settled
pursuant to a proposed court order. See Stipulation as to Entry of
Order for Permanent Injunction, Monetary Judgement, and Other Relief
(Oct. 28, 2022), https://www.ftc.gov/system/files/ftc_gov/pdf/Stipulation%20-%20Dkt.%202%20-%2022-cv-07864.pdf; see also part II.A
(describing the settlement). Regulation N, also known as the
Mortgage Acts and Practices--Advertising Rule, implements section
626 of the Omnibus Appropriations Act, 2009, as amended. 12 U.S.C.
5538. Regulation N applies to the advertising, marketing, and sale
of a ``mortgage credit product,'' defined as ``any form of credit
that is secured by real property or a dwelling and that is offered
or extended to a consumer primarily for personal, family, or
household purposes.'' 12 CFR 1014.2. Regulation N defines ``credit''
identically to Regulation Z but does not include any commentary
analogous to comment 2(a)(14)-1.ii to Regulation Z.
\105\ See also, 89 FR 68086, 68087 (Aug. 23, 2024); 89 FR 61358,
61360 (July 31, 2024).
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That PACE transactions are repaid alongside property tax payments,
do not accelerate, are nonrecourse, or can remain with the property
after the consumer sells the home does not change the fundamental
nature of the transaction. Nor do other reasons commenters asserted for
why PACE transactions should not be treated as TILA credit--including
that PACE financing is authorized for important public policy purposes
under State law, may have characteristics that differ from other types
of mortgage obligations, or has produced benefits for industry
participants and communities. That States may also have laws in place
for PACE financing is similarly immaterial.\106\
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\106\ States have rules in place governing transactions that may
also be subject to TILA, including, for example, door-to-door sales
(see, e.g., Idaho Admin. Code r. 04.02.01.160; Ohio Admin. Code
109:4-3-11; Utah Admin. Code r. R152-11-9; Wis. Admin. Code ATCP
Sec. 127.62) and home improvement contractor work (see, e.g., Haw.
Rev. Stat. secs. 444-1 to 444-36; Haw. Code R. secs. 16-77-1 to 16-
77-117; La. Stat. secs. 37:2150 to 37:2764; N.J. Stat. secs. 17:16C-
62 to 17:16C-94; N.J. Stat. secs. 17:16C-95 to 17:16C-103; N.J.
Stat. sec. 56:8-151; Wash. Rev. Code secs. 19.186.005 to
19.186.060). In response to commenters' concerns that the proposed
rule, if finalized, would interfere with State consumer-protection
laws that apply to PACE transactions, the CFPB notes that TILA
preempts State disclosure laws only if they are ``inconsistent''
with it. TILA section 11(a), 15 U.S.C. 1610(a); 12 CFR
1026.28(a)(1). Additionally, any State may apply to the CFPB to
exempt a class of transactions within the State from certain TILA
and Regulation Z provisions if the State's law is substantially
similar to the Federal law (or, for credit billing provisions,
affords the consumer greater protection than the Federal law) and
there is adequate provision for enforcement. 15 U.S.C. 1633; 12 CFR
1026.29(a).
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[[Page 2448]]
Covering PACE transactions as credit under TILA notwithstanding
these characteristics is consistent with the treatment of other covered
credit transactions. For example, TILA explicitly treats other
nonrecourse obligations as consumer credit,\107\ and many mortgages are
effectively nonrecourse under State anti-deficiency statutes.\108\
Other forms of TILA-covered financing may also advance important public
policy purposes under State law. To the extent there are unique aspects
of PACE transactions that warrant adjustments, as mandated by EGRRCPA,
the CFPB is codifying amendments or exemptions to that end, as
described below.\109\ The amendment to comment 2(a)(14)-1.ii does not
specifically address the coverage or characteristics of PACE
transactions; it merely removes ambiguity that the existing regulatory
comment may have created, and that is not reflected in the statute's
definition of ``credit.'' Indeed, the original text of comment
2(a)(14)-1.ii was not intended to impinge on the statutory coverage of
voluntary transactions, such as PACE. The Board of Governors of the
Federal Reserve System (Board) issued the comment in 1981 when it
officially ``adopted, in substance'' existing staff opinion letters
regarding Regulation Z.\110\ In preamble and in several such letters
preceding issuance of the 1981 official staff interpretation, the Board
was clear that in addressing only whether certain involuntary tax and
assessment obligations were credit under TILA and Regulation Z. In one
letter, the Board stated that the definition of ``credit''
``necessarily assumes the right to avoid incurring debt. That is, the
debt must arise from a contractual relationship, voluntarily entered
into, between the debtor and creditor.'' \111\ Because ``such a
relationship [did] not exist in the delinquent tax arrangement case,''
the Board found that TILA and Regulation Z ``would not govern the
transaction.'' \112\
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\107\ See e.g., 12 CFR 1026.33 (requirements applicable to
nonrecourse reverse mortgages).
\108\ See generally Alaska Stat. sec. 34.20.090; Ariz. Rev.
Stat. secs. 33-814(G), 33-729(A); Cal. Civ. Proc. Code secs. 580a-
580d; Haw. Rev. Stat. sec. 667-38; Minn. Stat. sec. 582.30; Mont.
Code secs. 71-1-232, 71-1-317; Nev. Rev. Stat. secs. 40.455, 40.458,
40.459; N.C. Gen. Stat. secs. 45-21.36, 45-21.38, 45-21.38A; N.D.
Cent. Code sec. 32-19-03; Okla. Stat. tit. 12, secs. 686, 765, 773;
Okla. Stat. tit. 46, sec. 43; Or. Rev. Stat. sec. 86.797(2); Wash.
Rev. Code secs. 61.24.100.
\109\ The considerations discussed in this section as to why
PACE transactions should not be subject to TILA also generally apply
with respect to other voluntary transactions that involve an
assessment on the property and are repaid through the property tax
system, even when they are not commonly known as PACE transactions.
\110\ See 46 FR 50288, 50288, 50292 (Oct. 9, 1981).
\111\ Fed. Rsrv. Bd., Public Information Letter No. 166 (1969).
\112\ Id.
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Other staff opinion letters contained similar analyses,\113\ and
the Board reiterated this reasoning in final rule preamble shortly
before issuing the 1981 official staff interpretation, again focusing
on the involuntary nature of the obligations as the reason they were
not credit.\114\ The Board explained:
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\113\ See Fed. Rsrv. Bd., Public Information Letter No. 153
(1969) (finding that sewer assessment installment payments did not
arise ``from a contractual relationship voluntarily entered into,
between debtor and creditor'' and thus, that TILA and Regulation Z
would not apply); Fed. Rsrv. Bd., Public Information Letter No. 40
(1969) (``[T]he term `credit', for the purposes of Truth-in-Lending,
assumes a contractual relationship, voluntarily entered, between
creditor and debtor. Since such a relationship [did] not exist in
the case of tax assessments by the Sewer District (and, similarly in
the case of ad valorem taxes imposed by a city), . . . such
assessments (and city taxes) would not fall within the coverage of
[TILA] or Regulation Z.'').
\114\ 46 FR 20848, 20851 (Apr. 7, 1981).
Certain transactions do not involve the voluntary incurring of
debt; others do not involve the right to defer a debt. Tax liens,
tax assessments and court judgments (including reaffirmations of a
debt discharged in bankruptcy, if approved by a court) fall into
this category and are therefore not covered by the regulation.\115\
---------------------------------------------------------------------------
\115\ Id.
Moreover, in this preamble and in the 1981 official staff
interpretation, the Board specifically juxtaposed the excluded
obligations with voluntary ones, stating that, while the obligations it
was excluding are not credit, ``third-party financing of such
obligations (for example, obtaining a bank loan to pay off a tax lien)
would constitute credit for Truth in Lending purposes.'' \116\ There is
no indication that, in issuing the comment excluding tax liens and tax
assessments, the Board had considered any tax lien or tax assessment
that had originally arisen from a voluntary contractual agreement.\117\
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\116\ Id.; see also 46 FR 50288, 50292 (Oct. 9, 1981) (adopting
the relevant comment with the same language). In 2011, the authority
to interpret TILA and implement Regulation Z transferred to the
CFPB, which republished the 1981 Board interpretation as an official
CFPB interpretation in comment 2(a)(14)-1.ii with no substantive
changes.
\117\ With regard to the comment noting that the proposal did
not distinguish between voluntary and involuntary court judgments,
which are also discussed in comment 2(a)(14)-1.ii, those
transactions are distinct from PACE transactions and are outside the
scope of this rulemaking.
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Recognizing PACE financing as TILA credit is consistent not only
with TILA's definition of ``credit,'' but with the goals of EGRRCPA
section 307. By directing the CFPB to prescribe certain regulations for
PACE financing under TILA, in EGRRCPA section 307, Congress evinced its
intent for PACE transactions to be covered as TILA credit, in line with
the text of the statute. To the extent there has been uncertainty as to
whether PACE financing is credit under TILA, EGRRCPA section 307's
explicit choice to address PACE financing using TILA resolves the
question.
More generally, Congress enacted TILA in part to enable consumers
``to compare more readily the various credit terms available'' to them,
and to ``avoid the uninformed use of credit.'' \118\ Many commenters
noted that PACE financing can be used in place of other forms of
consumer credit (including home equity lines of credit, personal loans,
credit cards, and mortgage loans) but there was no consensus on which
product was best for the consumer. Ensuring that consumers can compare
these alternatives promotes competition and falls squarely within the
congressional intent and purpose of TILA. Commenters concerned about
coverage of PACE transactions under TILA provided no compelling reason
why consumers should not receive the same disclosures and protections
when entering into a PACE transaction as when entering into any other
financing transaction that could result in the loss of their home.
Additionally, clarifying that voluntary tax liens and tax assessments
may still qualify as TILA credit is necessary to prevent circumvention
or evasion of TILA's purposes, including as to PACE transactions.
---------------------------------------------------------------------------
\118\ TILA section 102(a), 15 U.S.C. 1601(a).
---------------------------------------------------------------------------
Regarding comments opposing TILA coverage because PACE transactions
attach to the property, the CFPB notes that PACE transactions are
offered or extended to consumers. Unlike involuntary tax assessments
and liens,\119\ which are imposed upon real property as a function of
ownership and without the owner's specific consent, PACE transactions
cannot be completed without a natural person (the homeowner) signing a
voluntary
[[Page 2449]]
financing agreement secured by their home; these transactions, like
other mortgage transactions, are always offered or extended to
consumers and are secured by residential real property that they
personally own.\120\
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\119\ In response to the suggestion to carve out voluntary
contractual assessments from the credit exclusion, the CFPB
concludes that adding the word ``involuntary'' into comment
2(a)(14)-1.ii appropriately distinguishes between transactions that
the consumer chooses to enter into and transactions that are not
voluntary for the consumer.
\120\ See 12 CFR 1026.1(c)(1)(i) (stating one of the four
conditions of Regulation Z coverage is when ``[t]he credit is
offered or extended to consumer''); see also 12 CFR 1026.2(a)(12)
(defining ``consumer credit'' as that which is ``offered or extended
to a consumer primarily for personal, family, or household
purposes''); see also Fla. Stat. sec. 163.081(2) (``The owner of
record of the residential property within the jurisdiction of an
authorized program may apply to the authorized program administrator
to finance a qualifying improvement. The program administrator may
only enter into a financing agreement with the property owner.'');
Cal. Sts. & Hwys. Code sec. 5898.20 (authorizing the creation of
PACE programs whereby ``public agency officials and property owners
may enter into voluntary contractual assessments for public
improvements and to make financing arrangements'').
---------------------------------------------------------------------------
Moreover, consumers who agree to PACE transactions are functionally
responsible for ensuring their repayment. PACE transactions are either
repaid, with interest, alongside regular property tax payments, or, if
those payments are not made, at a tax sale or foreclosure. Further, as
several mortgage industry stakeholders noted, before a PACE borrower
can refinance a home or sell it, they typically must pay off the
remaining balance on the PACE transaction or reduce the sales price to
account for the existing lien.\121\ In this way, transferring a home
with an outstanding PACE transaction is no different than transferring
a property subject to any other outstanding lien or mortgage.
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\121\ Most home buyers are unwilling to take on the remaining
payment obligation for a PACE lien, or their mortgage lender
prohibits them from doing so. Guidelines from both Fannie Mae and
Freddie Mac generally prohibit purchase of mortgages on properties
with outstanding first-lien PACE obligations. See Fannie Mae,
Property Assessed Clean Energy Loans (Dec. 16, 2020), https://selling-guide.fanniemae.com/sel/b5-3.4-01/property-assessed-clean-energy-loans and Freddie Mac, Refinance of Mortgages secured by
properties subject to an energy retrofit loan (Sept. 4, 2024),
https://guide.freddiemac.com/app/guide/section/4301.8. Similarly,
the FHA updated its handbook requirements in 2017 to prohibit
insurance of mortgage on properties with outstanding first-lien PACE
obligations, see U.S. Dept. of Hous. & Urb. Dev., Property Assessed
Clean Energy (PACE) (Dec. 7, 2017), https://www.hud.gov/sites/dfiles/OCHCO/documents/17-18ml.pdf.
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Because PACE transactions are credit secured by residential real
property, removing the exclusion in comment 2(a)(14)-1.ii as to
voluntary tax assessments and tax liens ensures that PACE loans are
subject to TILA's mortgage requirements. For example, various
disclosure and other requirements will apply to the entity that is the
``creditor'' as defined in Sec. 1026.2(a)(17), which the CFPB
understands is typically the government sponsor in a PACE
transaction.\122\ Other requirements will apply to any entity that
operates as a ``loan originator'' for a PACE transaction, which could
include a PACE company or home improvement contractor depending on the
roles those entities play in a particular transaction.\123\ Thus, the
clarification is necessary to effectuate the purposes of the statute,
such as ensuring the meaningful disclosure of credit terms to enable
the consumer to comparison shop.\124\ Ensuring that voluntary consumer
transactions such as PACE are subject to the same protections as other
credit products with similar characteristics strengthens competition
among financial institutions and other firms engaged in the extension
of consumer credit.\125\
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\122\ 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 CFPB's understanding,
consistent with comments in response to the proposed rule and other
research, is that these characteristics apply to government sponsors
of PACE transactions in the PACE programs that have been active.
\123\ Section 1026.36(a)(1) generally defines a ``loan
originator'' as a person who, in expectation of direct or indirect
compensation or other monetary gain or for direct or indirect
compensation or other monetary gain, performs any of the following
activities: takes an application, offers, arranges, assists a
consumer in obtaining or applying to obtain, negotiates, or
otherwise obtains or makes an extension of consumer credit for
another person; or through advertising or other means of
communication represents to the public that such person can or will
perform any of these activities. See the section-by-section analysis
of Sec. 1026.41 for discussion of servicing provisions in
Regulation Z.
\124\ See 15 U.S.C. 1601(a).
\125\ Id.
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Regarding comments raising concerns about the costs or operational
challenges that the higher-priced mortgage loan appraisal rule could
introduce, the CFPB notes that TILA section 129H(b)(4) provides the
CFPB and certain other agencies with joint rulemaking and exemption
authority with respect to the higher-priced mortgage loan appraisal
rule.\126\ As such, any future rulemaking relating to an higher-priced
mortgage loan appraisal rule exemption would need to be considered and
issued jointly by the CFPB, Board, FDIC, OCC, NCUA, and FHFA; the
agencies would need to determine that ``the exemption is in the public
interest and promotes the safety and soundness of creditors.''
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\126\ 15 U.S.C. 1639h(b)(4). Specifically, the agencies with
joint rulemaking and exemption authority for the higher-priced
mortgage loan rule are the CFPB, the Board of Governors of the
Federal Reserve System (Board), the Federal Deposit Insurance
Corporation (FDIC), the Office of the Comptroller of the Currency
(OCC), the National Credit Union Association (NCUA), and the Federal
Housing Finance Agency (FHFA). See TILA section 129H(b)(4)(A), 15
U.S.C. 1639h(b)(4)(A).
---------------------------------------------------------------------------
Regarding concerns that TILA coverage would delay PACE
originations, other products that meet the statutory definition of
credit, including home equity lines of credit, personal loans, credit
cards, or second mortgages, may also be used for home improvement
projects and emergency repairs. As discussed below, work on a home
improvement project frequently does not and cannot start
immediately,\127\ and to the extent there is urgency to originate a
PACE transaction, there are regulatory mechanisms to permit consumers
to modify or waive the mandatory waiting periods and receive the PACE
loan early, including the bona fide personal financial emergency
exception to the TRID waiting periods.\128\ Moreover, many commenters
pointed to the point-of-sale business practice common to PACE financing
as contributing to increased consumer risk. TILA coverage of PACE
transactions will thus help consumers compare the various available
credit terms and ensure competition among the various financial
institutions and other firms engaged in the extension of consumer
credit.\129\
---------------------------------------------------------------------------
\127\ See part VI.D.
\128\ See 12 CFR 1026.19(e)(1)(v) and (f)(1)(iv).
\129\ See 15 U.S.C. 1601(a).
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The CFPB declines to adopt other exemptions recommended by
commenters, including with regard to PACE programs administered by
governments without the assistance of private PACE companies,
government units as ``creditors'' under TILA with respect to PACE
transactions, or PACE transactions secured by subordinate liens.
Although some of these factors could lower risks for consumers, they do
not affect whether a PACE transaction is credit under TILA. PACE
consumers in these circumstances will benefit from TILA protections in
the ways Congress intended when codifying TILA's protections.
Recent efforts by States and PACE industry stakeholders to enhance
consumer protections do not make TILA requirements less meaningful for
PACE consumers. Further, as the PACE industry continues to grow, some
States may not impose consumer protection requirements similar to those
under TILA, and new private participants may enter the industry that do
not share the same commitment to consumer protections as current
industry stakeholders have shown in recent years. For example, as some
commenters asserted, while PACE borrowers may have more time to come
[[Page 2450]]
current on late payments than on a traditional home mortgage, these
protections are highly variable from State to State, and the ultimate
result may be the same--the loss of one's home due to default. The PACE
Report demonstrates--and a number of industry stakeholders acknowledged
in comments--that, in previous years, PACE financing created
significant risk for consumers. Nonetheless, TILA applies regardless of
the current level of risk in any specific credit market.
In response to comments asserting the rule unconstitutionally
restricts States' tax powers, the CFPB notes that PACE transactions are
voluntary financing agreements between homeowners and creditors that do
not implicate or restrict States' sovereign taxation authority.
Moreover, Federal limits on State taxation are authorized under the
Commerce Clause, and treating PACE transactions as TILA credit does not
violate commandeering or related federalism principles. Congress
expressly directed the application of ability-to-repay rules and civil
liability provisions to PACE transactions in EGRRCPA section 307.
Rather than directing States to enact, administer, or enforce a Federal
program, the rule implements Congress's mandate in EGRRCPA section 307
to ensure that States choosing to extend PACE credit to consumers
comply with applicable Federal requirements.
The CFPB finalizes the amendment to comment 2(a)(14)-1.ii pursuant
to its authority under TILA section 105(a) and consistent with EGRRCPA
section 307. The amendment is necessary and proper to carry out TILA's
purposes and prevent circumvention or evasion thereof, including the
purposes of assuring the meaningful disclosure of credit terms and
avoiding the uninformed use of credit. Additionally, EGRRCPA section
307 directs the CFPB to prescribe certain regulations for PACE
financing under TILA, which governs credit transactions. The amendment
to comment 2(a)(14)-1.ii is necessary to remove any ambiguity that the
original comment created as to PACE transactions and to carry out
congressional intent, both as to TILA and EGRRCPA.
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) amended TILA
in 1994 to address abusive practices in refinancing and home-equity
mortgage loans with high interest rates or high fees.\130\ The
provisions of HOEPA are implemented in Regulation Z in Sec. Sec.
1026.32 and 1026.34.\131\
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\130\ Public Law 103-325, 108 Stat. 2160.
\131\ 12 CFR part 1026.
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The CFPB did not propose any changes to these provisions and is not
amending them in this final rule. Sections 1026.32 and 1026.34 will
apply to PACE transactions that are high-cost mortgages under Sec.
1026.32(a)(1) in the same way as other high-cost mortgages.\132\ The
CFPB requested comment on whether any clarification was required with
respect to how HOEPA's provisions, as implemented in Regulation Z,
apply to PACE transactions that may qualify as high-cost mortgages.
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\132\ 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 CFPB 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.
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Several commenters supported requiring HOEPA compliance for PACE
loans. A credit union trade association asserted that HOEPA should
apply, to ensure that consumers with PACE loans receive the same
protections as those with other mortgage loans. In response to the
CFPB's specific request for comment on the treatment of late fees,
consumer group commenters opposed distinguishing late fees that apply
under property tax law from those that are imposed by the PACE
contract. They recommended specifying that there is no distinction.
They asserted that such a distinction would contravene the intent of
HOEPA--to protect vulnerable consumers who receive relatively expensive
mortgage loans--because property tax late penalties can be significant
and must be paid on top of interest required by the PACE financing
agreement.
A State agency similarly stated that HOEPA's late fee limitations
should not be relaxed for PACE loans. This commenter pointed to the
HOEPA provision concerning late payment charges at Sec.
1026.34(a)(8)(iv), which the commenter characterized as punitive for
consumers who are more likely to default. The commenter also stated
that PACE lenders should not be permitted to increase interest rates
after default; it asserted that doing so could force borrowers who are
having difficulty into foreclosure or inescapable debt.
A PACE company, an industry trade association, and a PACE
government sponsor asserted that requiring HOEPA compliance would
inhibit PACE originations. A PACE company stated that HOEPA application
would make PACE lending cost-prohibitive or economically nonviable.
Several asserted that HOEPA would increase compliance costs. A PACE
industry trade association and a government sponsor asserted that PACE
programs are already costly to administer due to certain consumer
protections or consumer benefits, and that the CFPB failed to consider
these factors in proposing to subject PACE transactions to HOEPA's
requirements.
A PACE company and a government sponsor asserted that requiring
HOEPA compliance would effectively cap the price of PACE loans. A PACE
company and an industry trade association opposed HOEPA application
because PACE transactions are smaller and generate less revenue than
many other high-cost mortgage loans. The trade association stated that
lower revenue and higher origination costs make it more difficult to
originate PACE loans and come in under the high-cost thresholds. One
PACE company asserted that, if the CFPB does not exempt PACE loans, it
should raise the applicable HOEPA thresholds for PACE transactions.
Some PACE industry commenters addressed high-cost requirements in
combination with higher-priced mortgage loan requirements, generally
opposing both sets of requirements.
One PACE company commented that two high-cost requirements in
Regulation Z would make compliance difficult or impossible: the
prohibition on loan proceeds being paid to home improvement contractors
under Sec. 1026.34(a)(1), and housing counseling certification
requirements under Sec. 1026.34(a)(5).
Having considered the comments, the CFPB has determined not to
adjust the HOEPA requirements for PACE loans. As described in the
discussion of Sec. 1026.2(a)(14), the CFPB is amending commentary to
Regulation Z to clarify that voluntary transactions such as PACE are
credit under TILA notwithstanding their integration into the property
tax system. Consumers receiving high-cost PACE loans should receive
HOEPA protections just as consumers receiving other high-cost mortgage
loans do.
For example, the additional disclosures and credit counseling
[[Page 2451]]
requirements will ensure consumers are provided information to inform
their credit decisions,\133\ and restrictions on certain riskier loan
features will enhance the safety of the loans.\134\ Additionally, the
limitations on fees that can be charged for payoff statements may make
it easier for consumers who receive high-cost PACE loans to access loan
information at minimal cost, which could be useful in light of the
final rule's exemption of PACE loans from the periodic statement
requirement under Sec. 1026.41.\135\
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\133\ See 12 CFR 1026.32(c) (disclosure requirements); 34(a)(5)
(pre-loan counseling requirements).
\134\ See 12 CFR 1026.32(d).
\135\ See 12 CFR 1026.34(a)(9).
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More generally, weakening the HOEPA requirements for PACE loans
would be inconsistent with the governing statute. Under TILA section
129(p), the CFPB may exempt specific mortgage products or categories of
mortgages from certain HOEPA prohibitions if the CFPB finds that the
exemption (1) is in the interest of the borrowing public, and (2) will
apply only to products that maintain and strengthen homeownership and
equity protection.\136\
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\136\ 15 U.S.C. 1639(p).
---------------------------------------------------------------------------
Limiting HOEPA application would neither be in the interest of the
borrowing public nor maintain and strengthen homeownership and equity
protection. As described in part II.A, the super-priority status of
liens securing PACE loans means that the parties involved in
originating PACE loans have limited incentive to ensure consumer
understanding and affordability. This leaves consumers at risk.
The findings in the PACE Report bear out these concerns. The PACE
Report finds that more than 70 percent of PACE borrowers had pre-
existing non-PACE mortgages, and PACE industry commenters suggested
that the true figure is closer to 90 percent. The PACE Report finds
that PACE lending increased mortgage delinquency rates by 2.5
percentage points over a two-year period--getting a PACE loan increased
the risk of mortgage delinquency by about 35 percent.\137\ The PACE
Report further finds that the probability of delinquency on a pre-
existing mortgage loan was substantially higher for PACE consumers with
low credit scores--consumers in the sub-prime credit score group
experienced an increase in mortgage delinquency almost two and a half
times the average effect.\138\
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\137\ See PACE Report, supra note 12, at 4, 26-27.
\138\ See id. at 36-37.
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The CFPB also notes that the exemption authority in TILA section
129(p) does not apply to certain HOEPA requirements.
The CFPB acknowledges, as industry commenters have noted, that
lending practices and State law have evolved since the origination of
the PACE loans reflected in the PACE Report, that consumers may choose
to select PACE financing despite the higher costs relative to other
forms of financing, and that PACE financing may help some consumers
access credit or may advance public policy purposes. These
considerations do not provide a basis for limiting HOEPA protections.
Although some commenters asserted that the application of HOEPA
protections would inhibit PACE lending or make it infeasible, the CFPB
estimated that nearly two-thirds of PACE loans studied in the PACE
Report would not have exceeded HOEPA thresholds (including nearly 90
percent of PACE loans in Florida).\139\
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\139\ See id. at 15-16.
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One PACE company asserted that HOEPA application would prevent
payment of home improvement contractors with funds from the PACE loan.
However, Regulation Z specifically allows for payment of home
improvement contracts with loan proceeds in certain circumstances.\140\
Although one commenter expressed concern that HUD has not approved
housing counseling for PACE loans, in general HUD does not approve
housing counseling for particular types of mortgage loans. Current
housing counseling requirements include counseling on topics such as
financial literacy and budget planning, which are applicable
irrespective of the loan product.\141\
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\140\ Section 1026.34(a)(1) prohibits payment to a contractor
under a home improvement contract from the proceeds of a high-cost
mortgage, other than (1) by an instrument payable to the consumer or
jointly to the consumer and the contractor, or (2) at the election
of the consumer, through a third-party escrow agent in accordance
with terms established in a written agreement signed by the
consumer, the creditor, and the contractor prior to the
disbursement.
\141\ Dep't of Hous. & Urb. Dev., Housing Counseling Program
Handbook (7610.1) (Apr. 2024), https://www.hud.gov/program_offices/administration/hudclips/handbooks/hsgh/7610.1.
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1026.35 Escrow Accounts
1026.35(b) Exemptions
1026.35(b)(2)(i)
1026.35(b)(2)(i)(E)
TILA section 129D generally requires creditors to establish escrow
accounts for certain higher-priced mortgage loans.\142\ Regulation Z
implements this requirement in Sec. 1026.35(a) and (b). The CFPB
proposed to exempt PACE transactions from this higher-priced mortgage
loan escrow requirement. For the reasons discussed in this section, the
CFPB is finalizing the proposed exemption.
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\142\ 15 U.S.C. 1639d.
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Regulation Z defines a higher-priced mortgage loan as a closed-end
consumer credit transaction secured by the consumer's principal
dwelling with an APR exceeding the average prime offer rate (APOR)
\143\ for a comparable transaction by a certain number of percentage
points.\144\ With certain exemptions, Regulation Z Sec. 1026.35(b)
prohibits creditors from extending higher-priced mortgage loans secured
by first liens on consumers' principal dwellings unless an escrow
account is established before consummation for payment of property
taxes, among other charges (higher-priced mortgage loan escrow
requirement).
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\143\ 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.
\144\ 12 CFR 1026.35(a)(1) defines higher-priced mortgage loan
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 CFPB received comments on the proposed exemption from the
higher-priced mortgage loan escrow requirement from consumer groups and
public and private PACE industry stakeholders, none of which advocated
for retaining the requirement for PACE transactions. A PACE company
suggested increasing applicable thresholds to avoid higher-priced
mortgage loan requirements generally, since PACE originators would have
to do the same amount of work as non-PACE mortgage originators but
receive only a fraction of the revenue. An industry trade association
made a similar point, stating that the revenue from fees and interest
from PACE loans is significantly smaller than that of non-PACE mortgage
loans and that the higher-priced mortgage loan requirements would be
unduly costly for PACE loans.
The CFPB concludes that requiring escrow accounts for PACE
transactions that would be subject to the higher-priced mortgage loan
escrow requirement would provide little or no benefit to consumers and
would introduce unnecessary challenges and costs associated with
implementation and compliance.
[[Page 2452]]
Many PACE borrowers already have escrow accounts through their pre-
existing mortgage loan.\145\ For these consumers, PACE payments are
already incorporated into the mortgage escrow accounts as part of the
property tax payment. The CFPB has determined that TILA's higher-priced
mortgage loan escrow requirements are not warranted for PACE borrowers
who do not have an escrow account with a pre-existing mortgage loan.
---------------------------------------------------------------------------
\145\ The PACE Report estimated that nearly three-fourths of
PACE borrowers had a mortgage loan at the time the PACE loan was
consummated. See PACE Report, supra note 12, at 12. Several PACE
industry commenters stated that the figure is closer to 90 percent.
---------------------------------------------------------------------------
If PACE transactions had escrow accounts, those escrow accounts
would be governed by rules in Regulation X.\146\ The rules include a
variety of requirements governing, for example, escrow account
analyses, escrow account statements, and the treatment of surpluses,
shortages, and deficiencies in escrow accounts.\147\ Although these
protections serve important consumer protection purposes with respect
to the administration of escrow accounts for non-PACE mortgages, the
consumer benefit for PACE loans is significantly reduced. Therefore,
the CFPB has determined that requiring compliance would not be
warranted for PACE loans given the lack of consumer benefit.\148\
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\146\ See generally Regulation X, 12 CFR 1024.17.
\147\ Id.
\148\ Commenters to the 2008 higher-priced mortgage loan escrows
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).
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Further, certain escrow account disclosures required under
Regulation X \149\ and Regulation Z \150\ could be confusing in the
context of PACE transactions. 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 for the PACE loan as
part of the property tax payment. Additionally, the escrow account
disclosures, if required for PACE transactions, might create
uncertainty about whether the PACE transaction affects the consumer's
pre-existing mortgage escrow account, when applicable.
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\149\ See 12 CFR 1024.17(g)-(j).
\150\ See 12 CFR 1026.37, .38.
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To the extent consumers lack information about their overall
payment obligations, and to the extent this could lead to them
receiving unaffordable PACE loans, such concerns are better addressed
through other TILA provisions, including the TILA-RESPA integrated
disclosures and ability-to-repay requirements that are tailored to PACE
as discussed further below.\151\ While an escrow account can help
spread out payments and thereby reduce the risk of payment shock or
default, the CFPB at this time concludes that the cost and complexity
of doing so for the share of PACE borrowers without an existing escrow
account outweigh the potential consumer benefits.
---------------------------------------------------------------------------
\151\ See section-by-section analyses of Sec. Sec. 1026.37,
1026.38, and 106.43, infra.
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The CFPB is adopting this exemption pursuant to TILA sections
105(a) and 105(f). Exempting PACE transactions from the requirements of
TILA section 125D is necessary or proper to effectuate the purposes of
TILA. Having considered the factors enumerated in TILA section 105(f),
the CFPB has determined that the requirements of TILA section 125D
would not provide a meaningful benefit to consumers in the form of
useful information or protection. In particular, the requirements of
TILA section 125D would significantly complicate, hinder, and make more
expensive the credit process for PACE transactions, and 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 CFPB to integrate the mortgage loan
disclosures required under TILA and RESPA sections 4 and 5, and to
publish model disclosure forms to facilitate compliance.\152\ The CFPB
issued regulatory requirements and model forms to satisfy these
statutory obligations in 2013 (2013 TILA-RESPA Rule).\153\ 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.\154\
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\152\ CFPA sections 1098 & 1100A, codified at 12 U.S.C. 2603(a)
& 15 U.S.C. 1604(b), respectively.
\153\ 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/.
\154\ See Sec. 1026.19(e)(1) and (f)(1).
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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. The Closing
Disclosure is a final disclosure reflecting the actual terms of the
transaction.
As the CFPB explained in the 2013 TILA-RESPA Rule, the TILA-RESPA
integrated disclosure forms are designed to make it easier for
consumers to locate key cost information to help consumers decide
whether they can afford the loan.\155\ The forms also provide
information to compare different loan offers.\156\ The benefits of
these forms are important for PACE borrowers just as they are for other
mortgage borrowers.
---------------------------------------------------------------------------
\155\ 78 FR 79730, 80225 (Dec. 31, 2013).
\156\ Id.
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The CFPB has determined that certain elements of the current TILA-
RESPA integrated disclosures should be adapted so that the forms more
effectively disclose information about PACE transactions. After
proposing amendments and considering comments, the CFPB is finalizing
the modifications to the Loan Estimate and Closing Disclosure described
below. Where this final rule does not provide a PACE-specific version
of a particular provision, the existing requirements in Sec. Sec.
1026.37 and 1026.38 will apply. As with other mortgage transactions,
elements of the forms that are not applicable for PACE transactions may
generally be left blank.\157\
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\157\ See comments 37-1 & 38-1.
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Requiring the Disclosures for PACE Transactions
Many commenters supported implementation of the CFPB's proposed
Loan Estimate and Closing Disclosure for PACE transactions, including
consumer groups, mortgage industry trade associations, a credit union
league, and a banking trade association. Several consumer groups and
credit union leagues stated that TILA-RESPA integrated disclosure forms
would provide consumers with detailed information about PACE
transactions, which would improve transparency and consumers' ability
to comparison shop. Several mortgage industry trade associations and
consumer groups stated that TILA-RESPA integrated disclosure forms
would improve the process through which PACE is marketed to consumers.
Commenters raised a number of issues with the information that
consumers currently receive during the marketing and origination
process. For example, some stated that PACE transactions are often
marketed through door-to-door solicitations and are sometimes
accompanied by insufficient disclosures. Several mortgage industry
trade associations and consumer groups stated that some PACE
solicitations
[[Page 2453]]
include pressure to sign up and misrepresentations of various features
of the PACE loan, including projected energy savings.
Some commenters suggested that these problems can contribute to
consumers' inability to afford a PACE loan. One consumer group
indicated that inadequate disclosures and the lack of standardized TILA
disclosure forms often lead to unexpected and unaffordable tax payment
spikes, which may cause delinquency and late fees. Many commenters
stated that requiring a Loan Estimate and Closing Disclosure for PACE
transactions would alleviate these problems and improve consumers'
experience during PACE originations.
One government sponsor of PACE programs and one PACE company
expressed concern regarding the cost of implementing the TILA-RESPA
integrated disclosures, particularly because the Loan Estimate and
Closing Disclosure have what the commenters stated are duplicative
fields, and because the forms contain fields that are irrelevant for
PACE transactions. The government sponsor and PACE company also
asserted that requiring the TILA-RESPA integrated disclosures would be
ill-advised because the CFPB did not test the proposed modifications.
PACE companies and one PACE industry trade association asserted that
the current PACE disclosure regime, which includes among other things
disclosures and calls with the consumer to confirm their understanding
of the transaction, is sufficient. Commenters also stated that TILA-
RESPA integrated disclosures are better suited to non-PACE mortgage
transactions, which are larger than PACE transactions. One PACE company
asserted that implementing TILA-RESPA integrated disclosure forms would
be burdensome for financing transactions involving home improvement
projects, which often involve change orders, because re-disclosure
would be required for every change.
In this final rule, the CFPB is requiring TILA-RESPA integrated
disclosures for PACE loans, with modifications from the proposal as
described below. The CFPB is also finalizing model forms in appendix H-
24(H) (Loan Estimate) and appendix H-25(K) (Closing Disclosure) and
Spanish-language versions in appendix H-28(K) (Loan Estimate) and
appendix H-28(L) (Closing Disclosure).
The CFPB reiterates that the Loan Estimate and Closing Disclosure
provide uniform mortgage disclosures that help consumers readily
compare financing options, across financing products. Disclosures
provided under State law or voluntarily by PACE companies, while
potentially useful for consumers, would not be a substitute. Further,
with respect to concerns that certain fields on the TILA-RESPA
integrated disclosures would not pertain to PACE transactions, as with
other mortgage transactions, fields that are irrelevant to particular
PACE transactions may generally be left blank. With respect to the
comment that the forms were not tested by the CFPB, the CFPB notes
that, while the PACE-specific modifications were not tested, the
current TILA-RESPA integrated disclosure forms, on which the PACE forms
were based, were tested by the CFPB.
With respect to the comment that TILA-RESPA integrated disclosure
forms are particularly burdensome for PACE home improvement projects
because change orders would require re-disclosure, the CFPB notes that
many non-PACE home improvement loans, including those with change
orders, use the TILA-RESPA integrated disclosure forms. Also, a revised
Loan Estimate is not required for changes in the amounts of estimated
charges for third-party services not required by the creditor; rather,
that original estimated charge is in good faith under the rule so long
as it was based on the best information reasonably available to the
creditor at the time the disclosure was provided. Further, the TILA-
RESPA integrated disclosure requirements apply to disclosures made
before or at consummation. The rule only requires re-disclosure post-
consummation in limited instances, primarily if an event in connection
with the settlement occurs during the 30-calendar-day period after
consummation and that event causes the Closing Disclosure to become
inaccurate and results in a change to an amount paid by the consumer
from what was previously disclosed.\158\
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\158\ See 12 CFR 1026.19(f)(2)(iii).
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The CFPB is implementing the disclosure requirements described in
the section-by-section analyses of 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 CFPB has determined that the
implementation would be necessary and proper to carry out the purposes
of TILA and RESPA. The provisions that 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 changes are intended to make the Loan Estimate and Closing
Disclosure more effective and understandable for PACE borrowers, and to
facilitate compliance given the common features of PACE transactions.
The CFPB has determined that the provisions that implement the
disclosure requirements under RESPA section 19(a), including
interpretations discussed in the applicable section-by-section
analysis, further the purposes of RESPA and are consistent with the
CFPB's authority under RESPA section 19(a).
For the reasons discussed in the respective section-by-section
analyses, the CFPB is finalizing 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 CFPB has
determined that the exemptions are 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 CFPB's determination, after
considering the factors in TILA section 105(f)(2), is that the
disclosures exempted under this final rule would not provide meaningful
benefit to consumers in the form of useful information or protection.
In the CFPB's analysis, the exempted disclosure requirements would
significantly complicate, hinder, or make more expensive credit for
PACE transactions, and the exemptions do not undermine the goal of
consumer protection. Where doing so would help assure the meaningful
disclosure of credit terms and avoid the uninformed use of credit, the
final rule replaces the exempted disclosures with disclosures that
serve similar purposes to the existing disclosures, but that better fit
the context of PACE transactions.
Specific Recommendations for Changes to Existing Forms
Some commenters asserted that certain aspects of the existing Loan
Estimates or Closing Disclosures could be confusing to consumers under
the proposal. For example, a PACE company suggested that disclosure of
loan purpose, required under Sec. 1026.37(a)(9) for the Loan Estimate
and Sec. 1026.38(a)(5)(ii) for the Closing Disclosure, could be
confusing to consumers. Consumer groups and a PACE company made similar
assertions about the loan type, required under Sec. 1026.37(a)(11) for
the Loan Estimate and Sec. 1026.38(a)(5)(iv) for the Closing
[[Page 2454]]
Disclosure. A PACE company stated that the information required under
Sec. 1026.37(g)(3) pertaining to escrow costs should be removed,
consistent with other aspects of the proposed form as explained below,
in part to avoid consumer confusion. Two consumer groups made a similar
point about the similar disclosure on the Closing Disclosure as
discussed under Sec. 1026.38(u) below.
The CFPB did not propose to amend these requirements and is not
making changes in the final rule. The existing provisions are not
likely to cause confusion. Additionally, with respect to the loan type
and loan purpose disclosures, referring to PACE loans in a disclosure
using mortgage terminology, such as disclosing the loan purpose as a
``home equity loan,'' will not likely cause consumer confusion and
instead will help reinforce that PACE loans are mortgages. The CFPB
also expects that consumers are less likely to be confused by the
escrow-related fields under Sec. Sec. 1026.37(g)(3) and 1026.38(g)(3)
than fields referencing escrow payments elsewhere on the form because
of their content and location on the form. To the extent that
Sec. Sec. 1026.37(g)(3) or 1026.38(g)(3) do not apply to a particular
transaction, creditors may leave the fields blank.
The CFPB likewise is not adopting recommendations to remove
references to PACE transactions as ``loans'' or to limit the length of
the TILA-RESPA integrated disclosure forms, as PACE industry
stakeholders suggested. The term ``loan'' accurately describes PACE
transactions, so its use helps avoid the uninformed use of credit. And
changing the length requirements for PACE forms would make them
dissimilar to those used in non-PACE transactions, which would
frustrate the purposes of TILA to assure meaningful disclosure of
credit terms to enable consumers to compare more readily the various
credit terms available and avoid the uninformed use of credit.
Waiting Period
The CFPB is not amending the timing requirements for the Loan
Estimate and Closing Disclosure for PACE transactions. The CFPB
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.\159\ The CFPB 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.\160\ As explained in the 2013
TILA-RESPA Rule, it is important for consumers to have a meaningful
opportunity to shop for a mortgage loan, compare the different
financing options available, and negotiate for favorable terms, and the
waiting period should only be waived in the most stringent of
circumstances.\161\
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\159\ 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).
\160\ 78 FR 79730, 79847 (Dec. 31, 2013).
\161\ Id. at 79806-07.
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Numerous consumer groups and mortgage industry trade associations
expressed support for adopting the TILA-RESPA integrated disclosure
timing requirements for PACE transactions. These commenters stated that
the waiting periods will provide consumers time to review detailed
information and make informed financial decisions. These commenters
asserted that consumers often feel rushed through the origination
process for PACE transactions because they are faced with door-to-door
solicitations from contractors who pressure them to sign up quickly and
do not provide adequate time to review applicable information. Several
consumer groups stated that the mandatory waiting periods are necessary
for consumers to consider the impact of the loan on future
transactions. For example, these groups indicated that PACE
transactions may affect a consumer's ability to refinance or sell their
home in the future.
Several home improvement contractors and one PACE trade association
opposed imposing TILA-RESPA integrated disclosure timing requirements
on PACE transactions. These commenters stated that the mandatory
waiting periods would have adverse effects for PACE businesses as well
as consumers. Specifically, these commenters asserted that PACE-related
home improvements are often for emergency situations, and that the
TILA-RESPA timing requirements would prevent PACE companies from
starting work quickly, which would cause harm to consumers. Some
commenters expressed concern that the mandatory waiting periods would
impede PACE companies' ability to attract customers, particularly
because they would impede the point-of-sale financing model that PACE
customers prefer.
Two PACE providers asserted that the mandatory waiting period
should not apply to PACE loans because the mandatory timelines were
created for non-PACE mortgages, many of which are larger transactions
than PACE loans. One PACE company stated that waiting periods are not
required for most financing transactions, including auto loans, which
are usually costlier than PACE transactions. One PACE company stated
that Regulation Z provides an exception to the timing requirements for
loans secured by a timeshare interest, and that the regulation should
similarly make exceptions for PACE loans because of similarities
between the two types of obligations.
One home improvement contractor and one PACE company commented
that, because California law already provides a right to cancel for
PACE transactions, the TILA-RESPA integrated disclosure waiting period
is unnecessary. One PACE company stated that the waiting period is
unnecessary because the FTC's Cooling-Off Rule gives consumers three
days to cancel certain sales, including sales made at consumer's homes.
As with the substantive disclosures, the waiting periods associated
with the TILA-RESPA integrated disclosures will be important for 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.\162\ As explained in
part II.A, PACE loans are highly secure for investors even when
consumers cannot afford to pay. This structure can affect incentives of
originators, making it important for PACE consumers to have enough time
to consider the uniform disclosures. Point-of-sale originations have
long been a source of concern--many States require a cooling-off period
before home improvement loans based on point-of-sale originations, and
this precise concern was at the root of many of HOEPA's original
purposes.\163\
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\162\ See part II.A, supra.
\163\ See To Protect Home Ownership and Equity through Enhanced
Disclosure of the Risks Associated with Certain Mortgages: Hearings
on The Home Ownership and Equity Protection Act of 1993, Hearing on
S. 924 before the S. Comm. on Banking, Fin. & Urb. Affs., 103d Cong.
(1993); The Home Equity Protection Act of 1993, Hearings on H.R.
3153 before the Subcomm. on Consumer Credit & Ins. of the H. Comm.
on Banking, Fin. & Urb. Affairs, 103d Cong. (1994); Reverse
Redlining; Problems in Home Equity Lending, Hearings before the S.
Comm. on Banking, Hous., & Urb. Affs., 103d Cong. (1993) (describing
potential targeting of a widowed immigrant consumer by point-of-sale
loan originators who ``came door to door trying to sell home
improvements at an inflated price, on very severe credit terms'');
see, e.g., Home Solicitation Sales Act of 1971, Cal. Civ. Code secs.
1689.5-1689.13 (allows the buyer in almost any consumer transaction
involving $25 or more, which takes place in the buyer's home or away
from the seller's place of business, to cancel the transaction
within three business days after signing the contract).
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[[Page 2455]]
The CFPB notes that Regulation Z allows consumers to modify or
waive applicable waiting periods if the consumer has a bona fide
personal financial emergency.\164\ Some commenters stated that
consumers may face emergency situations necessitating swifter
originations--to the extent the emergency is a bona fide personal
financial emergency, Regulation Z already provides an exception.
---------------------------------------------------------------------------
\164\ 12 CFR 1026.19(e)(1)(v), (f)(1)(iv).
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With respect to the comment that the mandatory waiting periods are
not appropriate for PACE loans because PACE loans are smaller than
other mortgage loans, the CFPB notes that neither TILA nor Regulation Z
impose different waiting periods for mortgage loans under a certain
size. Indeed, the waiting periods under the current rule apply to home
equity loans of a similar size to PACE transactions, many of which may
not have the same structural risks as PACE transactions.
As to the comment that waiting periods are not required for other
types of transactions, such as auto loans, the CFPB notes that, unlike
mortgage loans subject to the waiting period, auto lending is not
secured by the consumer's real property. TILA explicitly requires
waiting periods for credit secured by a dwelling.\165\ Congress
specifically intended for transactions subject to the TILA-RESPA
integrated disclosure rule to be subject to certain waiting periods.
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\165\ 15 U.S.C. 1638(b)(2)(A).
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Regarding the comment that the CFPB should provide for exceptions
to the timing requirements for PACE loans because Regulation Z already
does so for timeshare loans, the CFPB notes that PACE loans have
structural risks as described above that waiting periods would directly
address. Also, timeshare loans are secured only by the consumer's
fractional interest in a timeshare unit, so the financial stakes, while
significant, are somewhat lower. The CFPB also notes that TILA section
128(b)(2)(G)(i)(1) specifically excludes timeshare plans from the
statutory TILA-RESPA waiting period requirements but provides no
similar exclusion for other types of credit secured by a dwelling.\166\
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\166\ See 15 U.S.C. 1638(b)(2)(G)(i)(1) (referring to ``a plan
described in'' 11 U.S.C. 101(53D)).
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In response to the comments that the TILA-RESPA waiting period is
unnecessary because State law or the FTC's Cooling-Off Rule already
provides a right to cancel PACE loans, the CFPB notes that the waiting
period applies to other home equity loans that involve door-to-door
solicitation, and there is no reason to exempt PACE home improvement
contractors in particular. Also, a waiting period and a right to cancel
provide different consumer protections. The TILA-RESPA waiting period
ensures that consumers have time to understand the obligation and shop
before signing up, whereas rights to cancel or rescission rights apply
after consummation. Additionally, the final rule will provide a
nationwide baseline waiting period for PACE transactions under
Regulation Z.
Section 1026.37 Content of Disclosures for Certain Mortgage
Transactions (Loan Estimate)
1026.37(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) sets 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. The CFPB is
finalizing Sec. 1026.37(p) largely as proposed.
1026.37(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, Sec. 1026.37(c)(2) requires the itemization
of each separate periodic payment or range of payments disclosed on the
periodic payments table. The CFPB is finalizing changes to certain of
these requirements under Sec. 1026.37(p)(1)(i) and (ii) as explained
below.
1026.37(p)(1)(i) Other Fees and Amounts
Section 1026.37(c)(2)(ii) requires the disclosure of the maximum
amount payable for mortgage insurance premiums corresponding to the
principal and interest payment disclosed on the projected payments
table, labeled ``Mortgage Insurance.''
Two consumer groups, a PACE company, and a government sponsor of
PACE programs suggested that the field for ``Mortgage Insurance'' that
currently appears in the projected payments table does not fit because
PACE transactions do not carry mortgage insurance. The consumer groups
also suggested adding a field titled ``Annual Administrative Fee'' to
capture a fee that consumers must often pay that would not be
considered part of their principal or interest payment.
The CFPB is adding Sec. 1026.37(p)(1)(i) to ensure the projected
payments table accurately discloses payment information relevant to the
PACE transaction. Section 1026.37(p)(1)(i) removes the mortgage
insurance field from the projected payments table for PACE transactions
because that field is not applicable to PACE transactions as some
commenters asserted--the CFPB is unaware of any PACE transactions that
carry mortgage insurance. In place of the mortgage insurance field,
Sec. 1026.37(p)(1)(i) requires the disclosure of ``Fees and Other
Amounts,'' which includes the maximum amount payable for any fees or
other amounts corresponding to the periodic payment for the PACE
transaction that are not disclosed as part of the principal and
interest disclosure under Sec. 1026.37(c)(2)(i). Section
1026.37(p)(1)(i) requires that the amount disclosed under the ``Fees
and Other Amounts'' field be included in the calculation of the total
periodic payment under Sec. 1026.37(c)(2)(iv) in place of the amount
disclosed for mortgage insurance under Sec. 1026.37(c)(2)(ii).
1026.37(p)(1)(ii) Escrow
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. The CFPB
proposed to exempt PACE transactions from the escrow account payment
disclosure requirements under Sec. 1026.37(c)(2)(iii).
As discussed in the analysis of Sec. 1026.35(b)(2)(i)(E), the CFPB
is unaware of any PACE transactions that
[[Page 2456]]
carry their own escrow accounts. Thus, absent an exemption, the escrow
account payment field under Sec. 1026.37(c)(2)(iii) would have
generally been disclosed as ``0'' if this field were included on the
Loan Estimate associated with any PACE transaction.\167\ This entry
would likely 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 would likely create doubt for the
consumer about whether the PACE transaction will be repaid through the
existing escrow account. The exemption in this final rule will mitigate
this risk.
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\167\ See existing comment 37(c)(2)(iii)-1.
---------------------------------------------------------------------------
The CFPB did not receive any comments and is finalizing proposed
Sec. 1026.37(p)(1), renumbered as Sec. 1026.37(p)(1)(ii), to
accommodate the addition of Sec. 1026.37(p)(1)(i), as described above.
1026.37(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 \168\ 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.\169\ Section
1026.37(c)(4)(iii) through (vi) requires various statements about this
disclosure. Under Sec. 1026.37(p)(2)(i) and (ii), the CFPB proposed to
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.
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\168\ As noted in the section-by-section analysis of 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.''
\169\ 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 Sec. 1026.37(p)(7)(i) for discussion of the
applicable unit-period for PACE transactions.
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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.\170\ The CFPB proposed Sec.
1026.37(p)(2)(i) to provide specificity as to the PACE payment. The
CFPB proposed to 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 CFPB proposed to require
the statement about the PACE loan payment to be labeled ``PACE
Payment,'' and the statement about the other property taxes ``Property
Taxes (not including PACE loan).'' The proposed changes were intended
to help consumers understand that the PACE transaction will increase
the consumer's property tax payment.
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\170\ 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 CFPB 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
CFPB is also clarifying in this final rule 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.
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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.
The CFPB proposed under Sec. 1026.37(p)(2)(i) to eliminate this
requirement for PACE transactions. The CFPB reasoned in the proposal
that omitting this information would avoid potential consumer confusion
for similar reasons as explained in the discussion of proposed Sec.
1026.37(p)(1).
The CFPB also proposed 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. The CFPB proposed to 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 proposed
disclosures were intended to 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.
One credit union league supported requiring the disclosure of PACE
loans separately from other property tax obligations among the
disclosure of estimated taxes, insurance, and assessments under
proposed Sec. 1026.37(p)(2)(i). The commenter stated that homeowners
would benefit from this requirement and, more generally, from
clarification of the implications of the PACE transaction on property
taxes.
Two consumer groups also suggested adjusting the qualitative
disclosures proposed under Sec. 1026.37(p)(2)(ii). They recommended
including a statement that the PACE loan would increase the consumer's
monthly escrow payment by a certain specific amount, as well as a
prompt for the consumer to notify their mortgage servicer of the change
and request a short-year escrow account analysis so that the escrow
amount can be adjusted to account for the change.
The CFPB is finalizing the proposed changes to Sec.
1026.37(p)(2)(i) and (ii) with modifications. As finalized, section
Sec. 1026.37(p)(i) contains a small change for precision. Section
1026.37(p)(2)(ii) requires, in addition to the proposed disclosure, a
statement that, if the consumer has a pre-existing mortgage with an
escrow account, the PACE loan will increase the consumer's escrow
payment. The CFPB agrees with consumer group commenters that an
explicit disclosure of the impact of the PACE loan on the consumer's
escrow payment will be useful for consumers. However, the
recommendation to include a prompt for the consumer to notify their
mortgage servicer of the change and to request an escrow
[[Page 2457]]
account analysis could be confusing or too technical to be useful for
some consumers.
1026.37(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.'' \171\ In
general, a creditor must disclose: (1) the name and NMLSR ID,\172\
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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\171\ Section 1026.37(k) also integrates the disclosure of
certain information required under appendix C to Regulation X.
\172\ Under Sec. 1026.37(k)(1), the NMLS ID refers to the
Nationwide Mortgage Licensing System and Registry identification
number.
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The CFPB proposed to additionally require similar disclosures for
PACE companies if such information was not disclosed under the
requirements described above. Specifically, under Sec. 1026.37(p)(3),
the CFPB proposed to 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,'' a term defined
under Sec. 1026.37(b)(14)). The CFPB proposed, similar to Sec.
1026.37(k)(1) through (3)'s existing requirements with respect to
creditors, mortgage brokers, and loan officers, 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. The CFPB proposed commentary to clarify that these disclosures
would not be required under the proposal if the PACE company's contact
information was otherwise disclosed pursuant to Sec. 1026.37(k)(1)
through (3). As proposed in comment 37(p)(3)-1, 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.
Two consumer groups recommended mandating disclosure of the contact
information and State license number for the home improvement
contractor involved in the PACE transaction, stating that it would help
consumers spot potential fraud by the home improvement company,
especially if the PACE company lists a home improvement company that is
different from the home improvement company with which the consumer has
been dealing.
Two consumer groups, a State agency, and one credit union league
agreed with the CFPB's proposed addition of a ``PACE Company'' field
for disclosure of license and contact information for the PACE company.
These consumer groups and a PACE government sponsor also addressed the
proposal to include PACE companies under the ``Mortgage Broker''
heading when applicable. Some consumer groups asserted that PACE
companies are not perceived as mortgage brokers and engage in many
activities that go beyond the services of a mortgage broker. To avoid
consumer confusion, the consumer groups suggested requiring the company
to fill in the ``PACE Company'' fields in all cases, as well as
``Mortgage Broker'' fields if the company also serves as a mortgage
broker. The government sponsor suggested that the Loan Estimate make
reference to PACE Company instead of mortgage broker because in
practice, the two serve different functions.
The CFPB is finalizing proposed Sec. 1026.37(p)(3) with an
adjustment. The CFPB agrees with commenters that the PACE Company's
contact information should be disclosed under the PACE Company field
for each PACE transaction and is finalizing this requirement,
regardless of whether such information is also disclosed under the
mortgage broker field. This approach will help provide clarity for
consumers. To accommodate this change, the CFPB is not finalizing
proposed comment 37(p)(3)-1.
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 as to whether these
parties are appropriately licensed.\173\ Having this information may
also help consumers assess the risks associated with services and
service providers associated with the transaction, which in turn serves
the purposes of TILA, RESPA, and the CFPA.\174\ Similar considerations
apply to the disclosure of the PACE company.
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\173\ 78 FR 79730, 79975-76 (Dec. 31, 2013).
\174\ See id.
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The CFPB declines the suggestion to include fields for the home
improvement contractor's information. Some home equity loans used to
finance home improvement projects are marketed by contractors, similar
to PACE transactions. Home improvement contractor contact information
is not required for those non-PACE home equity loans, and this final
rule will maintain consistency with respect to PACE transactions.
1026.37(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.
The CFPB proposed to 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 CFPB
proposed for the statement to 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.
The CFPB proposed to require the creditor to label this disclosure
``Selling the Property'' and use the term ``PACE loan'' in the
disclosure. The intent was to further the purposes of TILA by providing
useful information about key risks of PACE loans, thus avoiding the
uninformed use of credit.
[[Page 2458]]
A number of mortgage industry trade associations, a credit union
trade association, and consumer groups supported the proposed
disclosure. Some stated that it would convey useful information or
counter misinformation about whether PACE loans can be assumed.
Consumer groups and a mortgage trade association suggested also
requiring information pertaining to the PACE loan's potential effect on
a consumer's ability to refinance their non-PACE mortgage. For example,
a mortgage trade association suggested adding language notifying the
consumer that they may not be able to sell the home if they do not have
enough equity after paying off various loans, including the PACE loan.
Consumer groups and a mortgage trade association suggested adding a
disclosure that the PACE loan may negatively affect the consumer's
ability to refinance a pre-existing non-PACE mortgage.
After reviewing the comments, the CFPB is finalizing the disclosure
as proposed. Although additional information pertaining to the effect
of a PACE loan on a consumer's ability to refinance their non-PACE
mortgage or sell their home could be helpful to consumers, the CFPB
concludes that such information is not necessary given the new
disclosure requiring 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 as a condition of the sale.
1026.37(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. 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 CFPB 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 CFPB proposed 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). The CFPB proposed to require creditors to include
one or more statements relating to late charges, as applicable. First,
under Sec. 1026.37(p)(5)(i), the CFPB proposed 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.'' The CFPB
proposed to clarify under comment 37(p)(5)-1 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
CFPB 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 late charges, the disclosure would not
have been required under the proposal.
Second, under Sec. 1026.37(p)(5)(ii), the CFPB proposed to
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. The CFPB
proposed these requirements to provide flexibility for the creditor
while ensuring that the Loan Estimate contains useful information about
charges that may result from a property tax delinquency.
A credit union trade association suggested in a comment that the
CFPB also require a disclosure of the risk of foreclosure or tax sale.
Two consumer groups expressed support for proposed Sec.
1026.37(p)(5)(i) but recommended against finalizing Sec.
1026.37(p)(5)(ii). They asserted that creditors should be required to
provide specific information about the potential charges and penalties
for untimely payment, as the fees and penalties for late property tax
payments are clearly established and well-known to PACE creditors and
the information would improve consumer understanding before
consummation.
The CFPB is finalizing Sec. 1026.37(p)(5) and associated
commentary as proposed. The additional disclosures recommended by
commenters may be difficult for PACE providers to disclose in a manner
that is useful to consumers and may be unknowable at the time of
disclosure in certain circumstances, including in jurisdictions where
charges associated with late payment that are not specific to the PACE
transactions may not be known at the time of the disclosure.
1026.37(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 CFPB is aware.
Thus, the CFPB proposed to implement RESPA section 6(a) for PACE
transactions by requiring a servicing-related disclosure that would be
more valuable for PACE borrowers.
The CFPB proposed to 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. The
CFPB proposed to 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. The CFPB proposed to preserve the
label ``Servicing'' for the disclosure.
Two consumer groups stated that PACE loans are not subject to
transfer of servicing rights. These groups and one mortgage trade
association suggested that the CFPB add more language to the disclosure
about how consumers may make their PACE payments through a mortgage
escrow account or directly to the tax authority. The mortgage trade
association also suggested requiring disclosure of other potential
legal and contractual implications, including the possibility of
technical default on a pre-existing mortgage loan as a consequence of
the PACE loan, or consequences of failing to pay the PACE loan in a
timely fashion.
After considering the comments, the CFPB is finalizing Sec.
1026.37(p)(6) as proposed, with one change--the phrase ``mortgage
escrow account'' will be changed to ``mortgage with an escrow account''
for readability and clarity.
[[Page 2459]]
Requiring the disclosure in Sec. 1026.37(p)(6) will promote the
informed use of credit. The additional disclosures that commenters
recommended are too attenuated from the central purpose of the
disclosure in Sec. 1026.37(p)(6), which is to convey information about
the servicing of the PACE loan. Certain suggestions would also be too
vague or technical to be useful for consumers.
1026.37(p)(7) Exceptions
1026.37(p)(7)(i) Unit-Period
Because PACE transaction payments are repaid with the property
taxes once or twice a year, the applicable unit-period disclosed on the
Loan Estimate would typically be annual or semi-annual. The CFPB
proposed for the model form for PACE under proposed appendix H-24(H) to
use ``annual'' in the tables disclosing loan terms and projected
payments. The CFPB proposed under Sec. 1026.37(p)(7)(i) 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. This is 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.\175\
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\175\ 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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Two consumer groups supported the CFPB's proposal. The CFPB did not
receive any other comments regarding this part of the proposal. The
CFPB is finalizing Sec. 1026.37(p)(7)(i) as proposed.
1026.37(p)(7)(ii) PACE Nomenclature
The CFPB 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 usefulness for consumers, the CFPB proposed Sec.
1026.37(p)(7)(ii) to 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. The CFPB proposed comment 37(p)(7)(ii)-1 to 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.
The CFPB received comments from two consumer groups supporting the
proposal but suggesting that the CFPB clarify in regulatory text or
commentary that the nomenclature change is only available if it will be
used consistently throughout the marketing materials and financing
documents, and that the creditor must otherwise use the phrase ``PACE
loan.'' One mortgage industry trade association suggested requiring
that the creditor add ``(a covered PACE-type financing program)'' after
the branded name.
The CFPB is finalizing Sec. 1026.37(p)(7)(ii) as proposed and
comment 37(p)(7)(ii)-1 with one change from the proposal. In addition
to providing an example of how a creditor may substitute the name of a
specific PACE financing program that is recognizable to the consumer,
the comment as finalized clarifies that the name of a specific PACE
financing program will not be recognizable to the consumer unless it is
used consistently in financing documents for the PACE transaction and
any marketing materials provided to the consumer. This will increase
the likelihood that the Loan Estimate identifies the name of a specific
PACE financing program that is recognizable to the consumer.
Section 1026.38 Content of Disclosures for Certain Mortgage
Transactions (Closing Disclosure)
1026.38(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) set forth modifications to the
Closing Disclosure requirements under Sec. 1026.38 for ``PACE
transactions,'' as defined under Sec. 1026.43(b)(15), to account for
the unique nature of PACE. The CFPB is finalizing Sec. 1026.38(u)
largely as proposed.
1026.38(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,\176\ under
the heading ``Transaction Information.'' \177\ The CFPB proposed Sec.
1026.38(u)(1) to additionally require the Closing Disclosure for a PACE
transaction to include the name of any PACE company involved in the
transaction, labeled ``PACE Company.'' Proposed Sec. 1026.38(u)(1)
referred 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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\176\ 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 discussion of Sec.
1026.2(a)(14), government sponsors are typically the creditors for
PACE transactions.
\177\ Section 1026.38(a)(4) also integrates the disclosure of
certain information required under appendix A to Regulation X.
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Two consumer groups supported requiring the PACE company's
identifying information under ``Transaction Information.''
The CFPB is finalizing Sec. 1026.38(u)(1) as proposed. As the CFPB
explained in the 2013 TILA-RESPA Rule, disclosing the identifying
information for the borrower, seller, and lender promotes the informed
use of credit.\178\ Disclosing the PACE company's identifying
information will do the same.\179\
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\178\ 78 FR 79730, 80002-03 (Dec. 31, 2013).
\179\ See part II.A for discussion of the central role PACE
companies often play in PACE transactions.
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1026.38(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),\180\ 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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\180\ 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 CFPB is finalizing changes to these disclosure
requirements for PACE transactions as described in the section-by-
section analysis of Sec. 1026.37(p)(1) and (2).
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Under Sec. 1026.38(u)(2), the CFPB proposed changes to the
projected payments table for the Closing Disclosure in a PACE
transaction to mirror the changes to the projected payments table on
the Loan Estimate under Sec. 1026.37(p)(1) and (2). The CFPB proposed
these changes for the same
[[Page 2460]]
reasons as set forth in the discussion of Sec. 1026.37(p)(1) and (2)
above.
For the reasons set forth in the discussion of Sec. 1026.37(p)(1)
and (2), the CFPB is adopting Sec. 1026.38(u)(2) as proposed, to state
that the creditor shall disclose the projected payments information
required by Sec. 1026.38(c)(1) as modified by Sec. 1026.37(p)(1) and
(2). The final rule also removes from the Closing Disclosure projected
payments table a reference to escrow-related information located
elsewhere on the form. The CFPB is exempting the escrow-related
information under Sec. 1026.38(u)(6).
1026.38(u)(3) Assumption
For the reasons discussed in the section-by-section analysis of
proposed Sec. 1026.37(p)(4), proposed Sec. 1026.38(u)(3) would have
implemented TILA section 128(a)(13) for PACE transactions by requiring
the creditor to use the subheading ``Selling the Property,'' instead of
``Assumption,'' and to disclose the information required by Sec.
1026.37(p)(4) in place of the information required under Sec.
1026.38(l)(1).
Comments received related to the assumption disclosure are
discussed in the section-by-section analysis of Sec. 1026.37(p)(4).
The CFPB is adopting Sec. 1026.38(u)(3) as proposed for the reasons
discussed under Sec. 1026.37(p)(4).
1026.38(u)(4) Late Payment
The CFPB proposed that the ``Late Payment'' disclosure on the
Closing Disclosure for PACE transactions only include late payment
charges specific to the PACE transaction and not charges imposed by the
State or locality for late payment of taxes. This proposed change
parallels the changes to the Loan Estimate, described in the section-
by-section analysis of Sec. 1026.37(p)(5).
Comments received related to the Late Payment disclosure are
discussed in the section-by-section analysis of Sec. 1026.37(p)(5).
The CFPB is adopting Sec. 1026.38(u)(4) as proposed for the reasons
discussed under Sec. 1026.37(p)(5).
1026.38(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. 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.
The CFPB proposed to require under Sec. 1026.38(u)(5) 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. The CFPB is finalizing Sec. 1026.38(u)(5) as proposed to
avoid potential inaccuracies that might arise under existing
requirements and provide the consumer with useful information as it
relates to a PACE transaction.
Two consumer groups stated that the disclosure should provide more
information than proposed, such as a statement that consumers will need
to make adjustments to their budgets to pay the increased property
payment and a statement indicating whether State or local law prohibits
partial payments for tax payments.
The CFPB is not adopting this recommendation. PACE consumers are
best served with a statement directing the consumer to contact the
mortgage servicer or tax collector for the partial payment policy
pertaining to their particular circumstance. Certain of the commenters'
recommended additions are not closely related to information about
partial payments, and other suggested disclosures could be misleading
or not useful for PACE consumers.
1026.38(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 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, the CFPB proposed Sec.
1026.38(u)(6) to exempt creditors in PACE transactions from the
requirement to disclose on the Closing Disclosure the information
otherwise required under Sec. 1026.38(l)(7).
Two consumer groups supported specifically addressing to the
proposed exemption of the Escrow Account disclosure under Sec.
1026.38(u)(6). The CFPB is finalizing Sec. 1026.38(u)(6) as proposed.
1026.38(u)(7) Liability After Foreclosure or Tax Sale
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, the CFPB
proposed under Sec. 1026.38(u)(7) to provide that the creditor shall
not disclose the liability-after-foreclosure disclosure described in
Sec. 1026.38(p)(3).\181\ The CFPB proposed
[[Page 2461]]
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. The CFPB
proposed to require the subheading ``Liability after Foreclosure or Tax
Sale.'' This proposed information was intended to 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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\181\ 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 CFPB understands that this disclosure is
unlikely to be required on a Loan Estimate for a PACE loan.
Therefore, the final rule does not address such language on the Loan
Estimate.
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Two consumer groups supported the proposal to require the
disclosure only if the consumer may be responsible for deficiency under
State law but noted that tax foreclosure is not likely to result in a
deficiency even if State law permits the liability.
The CFPB finalizes proposed Sec. 1026.38(u)(7) with modifications.
As finalized, Sec. 1026.38(u)(7) requires that, if the consumer may be
responsible for any deficiency after foreclosure or tax sale under
applicable State law, the creditor shall disclose a brief statement
that, if the property is sold through foreclosure or tax sale and the
sale does not cover the amount owed on the PACE obligation, the
consumer may be liable for some portion of the unpaid balance under
State law, and a statement that the consumer may want to consult an
attorney for additional information. This information will be disclosed
under the subheading ``Liability after Foreclosure or Tax Sale.'' The
CFPB is not finalizing the proposed requirement for the creditor to
disclose a description of any applicable protections provided under
State anti-deficiency laws. Consumers will be better served with a
statement to consult an attorney to understand any applicable State
protections rather than relying on a description from the creditor.
1026.38(u)(8) Contact Information
TILA section 128(a)(1) is currently implemented in part by Sec.
1026.38(r), which generally requires certain information to be
disclosed in a separate table, under the heading ``Contact
Information.'' \182\ 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. The CFPB proposed Sec. 1026.38(u)(8) to 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 Sec. 1026.37(p)(3), 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); the CFPB
proposed under Sec. 1026.38(u)(8) not to require the disclosure of the
PACE company a second time. As explained in the section-by-section
analysis of Sec. 1026.43(b)(14), given the important role that PACE
companies play in PACE transactions, disclosing their contact
information will be useful to consumers and will facilitate the
informed use of credit.
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\182\ Section 1026.38(r) also integrates the disclosure of
certain information required under appendix A and appendix C to
Regulation X.
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Comments received relating to the substance of proposed Sec.
1026.38(u)(8) are discussed in the section-by-section analysis of Sec.
1026.37(p)(3). As discussed under Sec. 1026.37(p)(3), the CFPB agrees
with commenters that the PACE company's contact information should be
disclosed under the PACE Company field on the Closing Disclosure for
each PACE transaction and is finalizing this requirement.
1026.38(u)(9) Exceptions
1026.38(u)(i) Unit-Period
To permit creditors the flexibility to disclose the correct unit-
period for each PACE transaction, the CFPB proposed under Sec.
1026.38(u)(9)(i) 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 as semi-annual payments. The
Closing Disclosure changes in proposed Sec. 1026.38(u)(9)(i) would
have paralleled the Loan Estimate changes in proposed Sec.
1026.37(p)(7)(i), and the CFPB proposed Sec. 1026.38(u)(9)(i) for the
same reasons stated in the section-by-section analysis of Sec.
1026.37(p)(7)(i). Proposed Sec. 1026.38(u)(9)(i) was 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.'' \183\
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\183\ 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.
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Comments received related to unit-period are discussed in the
section-by-section analysis of Sec. 1026.37(p)(7)(i). The CFPB is
finalizing Sec. 1026.38(u)(9)(i) as proposed for the reasons discussed
under Sec. 1026.37(p)(7)(i).
1026.38(u)(9)(ii) PACE Nomenclature
The CFPB is finalizing Sec. 1026.38(u)(9)(ii)(A) and (B) relating
to certain terms used on the Closing Disclosure for PACE transactions.
The CFPB proposed Sec. 1026.38(u)(9)(ii) to 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. The CFPB proposed in comment
38(u)(9)(ii)-1 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. Comments received related to proposed Sec.
1026.38(u)(9)(ii) are discussed in the section-by-section analysis of
Sec. 1026.37(p)(7)(ii). The CFPB is finalizing the proposal,
renumbered as Sec. 1026.38(u)(9)(ii)(A) and comment 38(u)(9)(ii)(A)-1,
subject to the modification discussed in the section-by-section
analysis of Sec. 1026.37(p)(7)(ii). As modified, comment
38(u)(9)(ii)(A)-1 clarifies that the name of a specific PACE financing
program will not be recognizable to the consumer unless it is used
consistently in financing documents for the PACE transaction and any
marketing materials provided to the consumer.
The CFPB is also adding Sec. 1026.38(u)(9)(ii)(B), which requires
creditors of PACE transactions to use the term ``PACE contract
documents'' on the Closing Disclosure to refer to the appropriate loan
document and security instrument required to be disclosed under Sec.
1026.38(p)(2). This terminology will improve the precision of this
disclosure for PACE transactions, as suggested in comments.
1026.41 Periodic Statements
1026.41(e) Exemptions
1026.41(e)(7) PACE Transactions
TILA section 128(f) generally requires periodic statements for
residential mortgage loans.\184\ 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, past payment breakdown,
[[Page 2462]]
transaction activity, contact information, and delinquency
information.\185\ The CFPB proposed to exempt PACE transactions from
this periodic statement requirement. After considering the comments,
the CFPB is finalizing the proposed exemption for the reasons discussed
in this section.
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\184\ 15 U.S.C. 1638(f).
\185\ For purposes of Sec. 1026.41, the term ``servicer''
includes the creditor, assignee, or servicer of the loan, as
applicable. 12 CFR 1026.41(a)(2).
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Several commenters addressed the proposed exemption. A government
sponsor of PACE programs expressed support for the exemption. A State
agency did not object to the exemption, noting that many consumers with
PACE loans would already have mortgages, and that PACE transactions
would often be for relatively small dollar amounts.
Two consumer groups and a credit union trade association opposed
exempting PACE transactions from the periodic statement requirement in
Sec. 1026.41. These commenters recommended requiring simplified
periodic statement disclosures that would provide consumers with
information that would enable them to track loan performance, verify
correct payment application, and monitor whether the loans incur
improper fees. The consumer groups stated that consumers currently lack
such information. They stated that simplified periodic statements would
not be confusing for consumers despite the intermingling of PACE
payments and property tax payments, and that any possible confusion
could be addressed through explanatory text on the statements. Consumer
group commenters also stated that providing periodic statements would
not create undue burden, as local tax collectors and authorities
already provide payment reports and other information to PACE creditors
or their contractors that could be used to prepare an annual statement.
The consumer groups and credit union trade association also
recommended adjusting the Regulation Z timing requirements for their
suggested simplified PACE periodic statements. The credit union trade
association suggested requiring such statements either annually or tied
to particular intervals in the loan term. The consumer groups suggested
requiring an annual statement.
Providing simplified information on periodic statements and
including explanatory text as some commenters suggested could help
mitigate to some degree the risk of consumer confusion as to the
content of the forms but would not address risks associated with
receiving two sets of disclosures. Were periodic statement requirements
applied to PACE transactions, consumers would receive two separate
notices about overlapping but different obligations, likely provided by
different parties, both containing information about the PACE loan: The
local taxing authority would provide a property tax bill, and
Regulation Z would require the creditor, servicer, or assignee to
provide periodic statements.\186\ This risks consumer confusion--for
example, about whether fields in the periodic statement include details
of the PACE financing, property taxes, or both, or why the figures in
the periodic statement do not align with those in their property tax
statements. This could also cause consumers to ignore information from
the separate disclosures given that some of the content would have
similar subject matter.
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\186\ See 12 CFR 1026.41(a)(2).
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Adjusting the timing requirements for provision of periodic
statements for PACE loans, as some commenters suggested, would not
adequately resolve these concerns. The CFPB acknowledges, as some
commenters asserted, that, in certain circumstances, the parties who
would be responsible for providing periodic statements may already have
access to some of the information needed to fill out the periodic
statements, including information about loan performance and
delinquency. However, even in such circumstances, that responsible
parties have such access would not resolve the other concerns
supporting the exemption from TILA and Regulation Z's periodic
statement requirement at Sec. 1026.41 or mean that a periodic
statement requirement would not impose a meaningful burden.
Even with the exemption in Sec. 1026.41(e)(7), consumers will
still have access to some of the information commenters recommended
requiring in a simplified periodic statement. For example, consumers
will receive information regarding payments and delinquency from their
property tax collectors and mortgage servicers if the consumers have a
mortgage with an escrow account, as well as other entities such as
third-party assessment administrators. Consumers will also be able to
obtain information about the PACE loan by requesting payoff statements
pursuant to Sec. 1026.36(c)(3). Although the CFPB recognizes, as
consumer group commenters noted, that these sources of information do
not contain as much information as periodic statements and some will
not be provided on a regular cadence, they do provide at least some
information to help the consumer track the PACE loan. The CFPB will
continue to monitor the market for consumer harm.
In addition to proposing an exemption from the periodic statement
requirement under Sec. 1026.41, the CFPB requested comment on whether
the final rule should address any other mortgage servicing requirements
in Regulation Z or Regulation X. A trade association for State housing
agencies requested that the CFPB ensure that having a PACE loan does
not prohibit a consumer with a federally backed mortgage loan from
having access to the same loss mitigation options available to
consumers without PACE loans. Regulation X, 12 CFR 1024.41, generally
sets forth requirements governing the loss mitigation application
process. The owner or assignee of the borrower's mortgage loan
determines the availability of, or eligibility requirements for, loss
mitigation options such as loan modifications, short sales, or deeds-
in-lieu of foreclosure.\187\ The CFPB is not adjusting that framework
in this final rule. The final rule is also not addressing any servicing
requirements that apply only to ``servicers'' as defined in Regulation
X, as there does not appear to be a ``servicer'' in typical PACE
transactions.\188\
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\187\ See generally Regulation X, 12 CFR 1024.41 (setting forth
loss mitigation procedures); see also comment 41(c)(1)-2 (explaining
that the regulatory term ``loss mitigation options available to a
borrower'' refers to ``those options offered by an owner or assignee
of the borrower's mortgage loan'').
\188\ See PACE NPRM, 88 FR 30388, 30405 (explaining that there
does not appear to be a ``servicer'' as defined in Regulation X in
PACE transactions where the local government taxing authority--a
governmental entity--receives the consumer's regular PACE payments
as part of the consumer's larger property tax payment).
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The CFPB finalizes the exemption of PACE transactions from the
periodic statement requirement under Sec. 1026.41(e)(7) using its
authority under TILA section 105(a) and (f) and Dodd-Frank Act section
1405(b). The CFPB concludes that this exemption is necessary and proper
under TILA section 105(a), for the reasons stated above, to effectuate
TILA's purposes and to facilitate compliance with its requirements.
Furthermore, the CFPB 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). This conclusion would be true
regardless of the loan amount, borrower status (including related
financial arrangements, financial sophistication,
[[Page 2463]]
and the importance to the borrower of the loan), or whether the loan is
secured by the consumer's principal residence. Consequently, the
exemption will further the consumer protection objectives of the
statute, and help to avoid complicating, hindering, or making more
expensive the credit process. It 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
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. As discussed below, the CFPB proposed
and is finalizing a number of amendments to Sec. 1026.43 and its
commentary to apply the ability-to-repay requirements to PACE
transactions with certain PACE-specific adjustments. The comments the
CFPB received are discussed below. The CFPB is finalizing the
amendments to Sec. 1026.43 as proposed.
1026.43(b) Definitions
Section 1026.43(b) sets forth certain definitions for purposes of
Sec. 1026.43. The CFPB is finalizing as proposed new definitions for
the terms PACE company and PACE transaction in Sec. 1026.43(b)(14) and
(b)(15) \189\ and an amendment to the commentary to Sec. 1026.43(b)(8)
regarding the definition of mortgage-related obligations.
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\189\ Rather than add these definitions into Sec. 1026.43(b)
where they would fall alphabetically in the paragraph, the final
rule maintains the numbering for these definitions from the
proposal.
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1026.43(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 CFPB
proposed to amend comment 43(b)(8)-2 to explicitly state that any
payments for pre-existing PACE transactions are considered property
taxes for purposes of Sec. 1026.43(b)(8). The CFPB is finalizing as
proposed the amendment to comment 43(b)(8)-2. This amendment clarifies
that a creditor must consider payments for pre-existing PACE
transactions as mortgage-related obligations when determining the
consumer's repayment ability.
Two consumer groups supported the proposed amendment to comment
43(b)(8)-2, stating that it would eliminate doubt as to whether
payments on pre-existing PACE transactions should be included in a
creditor's ability-to-repay determination under Sec. 1026.43(c). The
commenters suggested clarifying in comment 43(b)(8)-2 that a creditor
that knows or has reason to know that a consumer has an existing PACE
transaction does not comply with the requirement to consider the
consumer's monthly payment for mortgage-related obligations under Sec.
1026.43(c)(2)(v) by relying on information provided by a governmental
organization if the information provided does not reflect the PACE
transaction. The commenters stated that such a change would remind
creditors of the need to diligently search for existing PACE loans on
the property when conducting an ability-to-repay determination under
Sec. 1026.43(c).
The CFPB declines to make the suggested changes to comment
43(b)(8)-2. As discussed below, the CFPB is clarifying in comment
43(c)(3)-5 that 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. Further, existing
commentary to the definition of mortgage-related obligations contains a
cross-reference to creditors' obligations to take into account any
mortgage-related obligations under Sec. 1026.43(c)(2)(v) for purposes
of determining a consumer's ability to repay.\190\
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\190\ See comment 43(b)(8)-1 (referencing the commentary to
Sec. 1026.43(c)(2)(v)).
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1026.43(b)(14) PACE Company
The CFPB proposed to add a definition of ``PACE company'' in Sec.
1026.43(b)(14) to provide clarity and for ease of reference. The CFPB
is adopting Sec. 1026.43(b)(14) and comment 43(b)(14)-1 as proposed.
Section 1026.43(b)(14) provides 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. Comment 43(b)(14)-1 provides that 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.
The PACE company definition applies to the private companies
involved in running the PACE programs. As discussed in part II.A, most
local governments that engage in PACE financing rely on private
companies to administer PACE programs through, for example, marketing
PACE financing to consumers, administering originations, making
decisions about whether to extend the loan, and enlisting home
improvement contractors to help facilitate the originations and
implement the home improvement projects.
Various commenters, including consumer groups and trade
associations, supported the adoption of the proposed definition of PACE
company. In general, they expressed that the proposed definition
adequately captures the entities involved in administering a PACE
financing program.
One consumer group suggested that the CFPB should expand the
definition to include contractors, subcontractors, and others acting on
behalf of the PACE provider or contractors acting as agents of the PACE
company. They stated that this would improve enforcement and help avoid
evasion of TILA, as it would make the PACE companies accountable for
the contractors or subcontractors. A State agency suggested that the
CFPB amend the proposed definition of PACE company to include natural
persons in the business of solicitation for sales or services
associated with or reasonably contemplated to be financed by PACE
loans.
A government sponsor of PACE financing stated that the CFPB should
clarify the term ``government unit'' contained in the definition of a
PACE company. The commenter stated that, under the proposed definition,
it would not be clear whether certain State entities involved in PACE
programs would be considered a government unit excluded from being a
PACE company.
Two consumer groups supporting the proposal suggested that the CFPB
include additional examples of what it means to administer a PACE
program, such as, for example, accepting and processing loan
applications and processing and finalizing the issuance of
[[Page 2464]]
contractual assessments. They stated that doing so would help prevent
possible evasion efforts that could occur if the rule lacks sufficient
specificity as to what it means to administer a PACE program.
The CFPB concludes that the proposed definition of ``PACE company''
effectively describes the intended entities and accounts for the unique
nature of PACE financing. The CFPB is not adopting commenters'
recommendations to expand the proposed definition to include natural
persons or entities acting as agents of the PACE company. As described
in Sec. 1026.43(i), PACE companies that are substantially involved in
making a credit decision will be subject to the ability-to-repay
requirements and civil liability for violations thereof. The CFPB
understands that home improvement contractors in the PACE context
perform generally the same functions as in other forms of home
improvement loans associated with door-to-door sales. The CFPB
therefore declines to create a separate liability provision for home
improvement contractors in the PACE context. The CFPB notes that the
term ``government unit'' is already used in TILA and Regulation Z,
including as part of the definition of person.\191\ The CFPB declines
to define the term ``government unit'' in this rulemaking. The CFPB
also declines to add to comment 43(b)(14)-1 examples suggested by some
commenters because such indicia would expand the definition to cover
entities not substantially involved in making the credit decision.
Parties who merely accept applications, for example, do not administer
these programs in a way that would warrant coverage or liability for
the ability-to-repay requirements described in Sec. 1026.43.
---------------------------------------------------------------------------
\191\ See, e.g., 12 CFR 1026.2(a)(22).
---------------------------------------------------------------------------
1026.43(b)(15) PACE Transaction
The CFPB proposed to add a definition for the term ``PACE
transaction'' to Regulation Z that uses the language of the EGRRCPA
section 307 definition of PACE financing.\192\ The CFPB is adopting as
proposed the definition of ``PACE transaction'' in Sec.
1026.43(b)(15). Section 1026.43(b)(15) provides 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. This term is
used in adjustments or exemptions the CFPB is finalizing in Sec. Sec.
1026.35, 1026.37, 1026.38, 1026.41, and 1026.43 as well as appendix H
to part 1026.
---------------------------------------------------------------------------
\192\ See 15 U.S.C. 1639c(b)(3)(C)(i).
---------------------------------------------------------------------------
Various commenters, including consumer groups, trade associations,
and State agencies, supported the adoption of the proposed definition
of PACE transaction. These commenters said the proposed definition was
clear and accurately captured the nature of PACE transactions.
Several other commenters addressed what the definition should
cover. For example, a PACE government sponsor suggested that the
definition should include financing to cover the costs of qualifying
improvements that result in a tax assessment on the real property
improved by the consumer, stating that PACE improvements may include
projects other than those customarily thought of as home improvements,
including installation of generators, heat pumps, and solar arrays.
Similarly, two consumer groups stated that the PACE transaction
definition should also cover qualifying improvements under State law
and local governmental authority resulting in a tax assessment on the
real property of the consumer. They noted that some States have
expanded PACE programs to include qualifying work extending beyond the
structure of a building, such as certain fire hardening measures or the
building of a sea wall. In addition, a PACE company suggested that the
CFPB limit the definition of PACE transaction to cover only financing
secured by a lien that takes priority over a pre-existing first-lien
mortgage on the subject property and exclude from coverage PACE
transactions secured by subordinate liens.
The CFPB finalizes the definition of PACE transaction as proposed,
which uses the language of the EGRRCPA section 307 definition of PACE
financing. The definition covers financing for improvements to
residential property, including improvements to the land on which the
structure sits. This definition of PACE transaction also accords with
other CFPB regulations governing the home mortgage market.\193\
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\193\ See, e.g., 12 CFR 1003 comment 2(i)-2 (commentary to
Regulation C definition of ``home improvement loan'' stating that
such loans ``include improvements both to a dwelling and to the real
property on which the dwelling is located . . . .'').
---------------------------------------------------------------------------
The CFPB declines to carve out transactions secured by subordinate
liens, as suggested by one commenter. EGRRCPA section 307 directs the
CFPB to prescribe regulations for ``PACE financing,'' defined as
voluntary financing to cover the costs of home improvements that
results in a tax assessment on the real property of the consumer; it
does not distinguish among transactions based on lien status.
1026.43(c) Repayment Ability
The existing ability-to-repay 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. For the reasons explained in the proposal, the CFPB proposed
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). As discussed below, the
CFPB concludes that the existing ability-to-repay framework set out in
Sec. 1026.43(c) effectively carries out the purposes of TILA's
ability-to-repay provisions and is generally appropriate for PACE
transactions, with adjustments to the commentary to Sec. 1026.43(c)
and the addition of Sec. 1026.43(i).\194\ For the reasons discussed
below, the CFPB is finalizing the amendments to the commentary to Sec.
1026.43(c) and new Sec. 1026.43(i) as proposed.
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\194\ See 15 U.S.C. 1639c(b)(3)(C)(ii) (directing the CFPB to
prescribe regulations that carry out the purposes of TILA's ability-
to-repay provisions for residential mortgage loans with respect to
PACE transactions).
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Many commenters, including consumer groups, banking and credit
union trade groups, and a State agency, supported the application of
the existing ability-to-repay framework to PACE transactions. These
commenters discussed the protections that the ability-to-repay
framework would afford to consumers in light of the structure and risks
of PACE financing, as well as the past perceived abuses in the PACE
industry. For example, a consumer group asserted that requiring a
creditor to conduct an ability-to-repay determination for a PACE
transaction would protect borrowers from potential predatory lending
practices that could heighten foreclosure risk. A different consumer
group stated that home equity lending is not a strong indicator of a
consumer's ability to pay, and that the ability-to-repay requirements
can better align project costs with the consumer's household finances.
Consumer groups also asserted that TILA's ability-to-repay
[[Page 2465]]
requirements would increase access to more sustainable financing.
One mortgage industry trade association stated that adopting
ability-to-repay requirements for PACE lending would be consistent with
the treatment of other mortgage financing. A credit union trade
association suggested that the ability-to-repay requirements would help
reduce risk to consumers and the financial system that may follow from
expedited originations. One State agency encouraged the CFPB to apply
ability-to-repay requirements to PACE transactions, so long as such
requirements are not inconsistent with requirements under California's
ability-to-pay regime for PACE transactions.\195\
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\195\ See 10 Cal. Code Regs sec. 1620.01 et seq.
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Several commenters supporting the proposal to adopt TILA's ability-
to-repay framework for PACE loans specifically addressed verification
requirements. Consumer groups favored the application of income
verification requirements in TILA to PACE transactions. Two stated that
weakening these verification requirements or other ability-to-repay
requirements would ignore both evidence and the CFPB's own data
suggesting abuses.
Many PACE companies and PACE industry stakeholders, as well as a
home improvement contractor, opposed the proposed application of TILA's
ability-to-repay standards to PACE transactions. Several of these
commenters, including two PACE companies and a home improvement
contractor, pointed to the success of State laws in Florida and
California in regulating industry practices. These commenters stated
that, even if the CFPB imposes Federal ability-to-repay standards to
PACE transactions, it should exempt transactions that are subject to a
State-level ability-to-repay regime. A government sponsor of PACE
programs asserted that the proposed ability-to-repay requirements would
likely decrease PACE lending by as much as 50 percent.
Multiple PACE companies and a PACE industry trade association
asserted that the proposal did not adequately account for the unique
nature of PACE financing. Several PACE companies asserted that the
proposed requirements would not be appropriate given current industry
practices and low delinquency rates on PACE loans. For example, one
PACE company stated that employment verification was unnecessary given
its current underwriting practices, which include verifying that
applicants have managed their mortgage and property tax payments. One
PACE company stated that the proposed ability-to-repay rules were
modeled on stringent requirements applicable to purchase-money mortgage
loans that are significantly larger than PACE loans. Another PACE
company suggested tailoring the ability-to-repay requirements to make
them less stringent in light of the fact that PACE loans are smaller
and have smaller margins than other mortgage debt.
PACE companies also recommended that the CFPB account for a variety
of other factors in finalizing ability-to-repay requirements, including
concerns about economic costs to homeowners and the environment, the
need for access to credit for consumers in need of swift financing, and
characteristics of PACE transactions including that they are
nonrecourse, no-acceleration, and have fixed interest rates.
Commenters diverged on the question of whether a creditor
undertaking an ability-to-repay determination for a PACE transaction
should be permitted to consider potential energy savings that would
result from the home improvements financed by the PACE loan. A
government sponsor suggested that the CFPB should permit, but not
require, the consideration of potential energy savings in an ability-
to-repay determination. A number of consumer groups as well as
mortgage-industry trade associations encouraged the CFPB not to permit
a creditor to consider potential energy savings, asserting that such
savings are speculative and may not ultimately materialize.
After considering the comments received, the CFPB is finalizing the
proposal to apply existing Sec. 1026.43(c) to PACE transactions. It is
also finalizing as proposed the adjustments to the commentary to Sec.
1026.43(c) and new Sec. 1026.43(i), as described in more detail below.
These aspects of the final rule implement the directive of EGRRCPA
section 307 that the CFPB prescribe regulations that carry out the
purposes of TILA section 129C(a) for residential mortgage loans with
respect to PACE transactions. As explained in the proposal, the
existing ability-to-repay framework will provide 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. This final
rule adopts the existing statutory and regulatory regime governing
residential mortgage loans, with adjustments to account for the unique
nature of PACE financing.
The CFPB declines to exempt PACE transactions that are covered by
State laws requiring an assessment of consumers' repayment ability as
some commenters suggested. A uniform Federal standard is necessary to
implement EGRRCPA section 307, which specifically directed the CFPB to
prescribe regulations to carry out the purposes of TILA's ability-to-
repay requirements for PACE loans. Although some States currently have
protections in place that may resemble TILA's ability-to-repay rules in
some ways, not all States with PACE-enabling legislation have such
requirements, and no State requirements fully reflect the Federal
requirements as implemented by this final rule. This rule will ensure
that consumers have as a baseline the protections of TILA's ability-to-
repay requirements. This is consistent with TILA's treatment of other
closed-end mortgage credit and the mandate of EGRRCPA section 307. As
discussed in part VI.D below, the CFPB acknowledges that this final
rule may affect PACE origination rates.
For similar reasons, the CFPB also declines to rely upon voluntary
industry reforms or current underwriting practices in place of TILA's
ability-to-repay requirements. Although commenters have indicated that
industry stakeholders have made significant strides in improving
consumer protections in recent years, new entrants may not share the
same commitment to consumer protections and industry practices may
change over time. Voluntary practices do not ensure the uniform
applicability of Federal consumer protections inherent in TILA's
ability-to-repay requirements. Moreover, the congressional mandate in
EGRRCPA section 307 instructs the CFPB to carry out the purposes of
TILA's ability-to-repay requirements with respect to PACE financing.
Further, the CFPB determines that TILA's ability-to-repay regime is
appropriate for PACE loans notwithstanding certain characteristics of
PACE financing or PACE programs discussed by commenters. Section
1026.43(a) applies broadly to consumer credit transactions secured by a
dwelling.\196\ As with other mortgage lending, the importance of
assessing a consumer's ability to afford a PACE loan does not depend on
whether the loan is a purchase-money mortgage or home improvement loan,
the loan amount, or whether the interest rate is fixed or
[[Page 2466]]
adjustable. These and other characteristics of PACE transactions cited
by PACE companies are shared by other types of mortgages subject to
TILA's ability-to-repay regime; they are not unique to PACE
transactions. Applying ability-to-repay requirements to PACE loans will
substantially benefit consumers given the structural risks deriving
from the priority lien securing the loans, as described above.
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\196\ 12 CFR 1026.43(a). As provided in 12 CFR 1026.43(a)(1)-
(3), certain residential mortgage loans are exempted from the
ability-to-repay requirements.
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Further, commenters' assertions regarding PACE companies'
incentives and desire to be paid on schedule by the PACE consumer are
not inconsistent with the requirements of Sec. 1026.43 or unique to
PACE creditors or companies. As required by the EGRRCPA, the CFPB has
accounted for the unique characteristics of PACE transactions in other
portions of this final rule, including, for example, the requirement in
Sec. 1026.43(i)(1) that the ability-to-repay determination for PACE
transactions account for certain increases to escrow account payments
on the consumer's other mortgage loan that are caused by the PACE
transaction.
The CFPB also concludes that permitting the consideration of
potential energy savings would not be consistent with the purposes of
TILA section 129C. The CFPB agrees with commenters' observations that
potential energy savings are too uncertain to reliably inform an
ability-to-repay determination. Commenters supporting the consideration
of potential energy savings did not provide specific recommendations to
address this uncertainty, such as, for example, how to account for
potential variability in consumer usage patterns, external energy
prices, and technological developments.
1026.43(c)(2) Basis for Determination
1026.43(c)(2)(iv)
Section 1026.43(c)(2) sets forth factors creditors must consider
when making the ability-to-repay 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
CFPB proposed to add new comment 43(c)(2)(iv)-4 to provide additional
guidance to creditors originating PACE transactions. For the reasons
described in the proposal and as discussed below, the CFPB is adopting
as proposed comment 43(c)(2)(iv)-4.
Comment 43(c)(2)(iv)-4 provides 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.
Comment 43(c)(2)(iv)-4 helps address concerns about the prevalence
of ``loan splitting'' and ``loan stacking'' in the PACE industry that
were raised by consumer groups and other stakeholders in comments to
the Advance Notice of Proposed Rulemaking. As described in those
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 CFPB's statistical
analysis indicates that a little more than 13 percent of PACE borrowers
between 2014 and 2019 received multiple PACE loans, with many of these
transactions originated simultaneously or within a few months of each
other, which could be indicative of loan splitting or stacking.\197\
About one-fourth of PACE borrowers with multiple PACE loans consummated
multiple loans in the same month, and about three-quarters of PACE
borrowers with multiple PACE loans consummated more than one loan
within the same 6-month period.\198\ In some cases, the creditor
originating the second or successive PACE loan might not be aware of
previous loans, due to delays in recording.
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\197\ See PACE Report, supra note 12, at 12, 24.
\198\ See id. at 24.
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No commenters opposed the adoption of proposed comment
43(c)(2)(iv)-4. Several commenters, including several consumer groups
and a State agency, supported the adoption of proposed comment
43(c)(2)(iv)-4. These commenters indicated that the comment could
provide an effective means of addressing the prevalence of loan
splitting and loan stacking in the PACE industry.
Several consumer groups supporting the proposed comment recommended
further amendments. Two consumer groups recommended that the CFPB
clarify further that a PACE company is obligated to search for other
PACE loans on a property if the PACE company knows or has reason to
know that a home improvement contractor has been involved in loan
splitting or loan stacking, or if the relevant home improvement
contract shows that the total cost of a PACE transaction exceeds the
program's loan-to-value limit. These commenters also stated that the
CFPB should amend the definition of ``simultaneous loan'' in existing
Sec. 1026.43(b)(12) to include simultaneous unsecured loans that the
PACE company has made or will make at or before consummation of the
PACE transaction. These commenters reasoned that this amendment would
be appropriate because many PACE companies market unsecured home
improvement loans in tandem with PACE loans. Several other consumer
groups stated that the CFPB should require additional due diligence
beyond that in proposed comment 43(c)(2)(iv)-4 to ensure there are no
other PACE liens associated with a property and included a credit check
as one example.
The CFPB declines to adopt these recommended changes. Finalizing
comment 43(c)(2)(iv)-4 as proposed, in concert with existing comment
43(c)(2)(iv)-2, which elaborates on the circumstances in which a
creditor knows or has reason to know of simultaneous loans, protects
against the practices of loan splitting and loan stacking. Comment
43(c)(2)(iv)-2 helps clarify, for example, that a creditor may comply
with the requirements of Sec. 1026.43(c)(2)(iv) by ``follow[ing]
policies and procedures that are designed to determine whether at or
before consummation the same consumer has applied for another credit
transaction secured by the same dwelling.'' The CFPB also declines to
adopt commenters' suggestion to expand the definition of simultaneous
loan to include simultaneous unsecured loans \199\ and notes that Sec.
1026.43(c)(2)(vi) requires consideration of a consumer's current debt
obligations, to include unsecured loan products.
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\199\ Section 1026.43(c)(2)(iv) refers to a ``simultaneous
loan,'' and Sec. 1026.43(b)(12) defines simultaneous loan as
``another covered transaction or home equity line of credit subject
to Sec. 1026.40 that will be secured by the same dwelling and made
to the same consumer at or before consummation of the covered
transaction or, if to be made after consummation, will cover closing
costs of the first covered transaction.''
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1026.43(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
CFPB proposed to amend comment 43(c)(3)-5 to clarify how this
[[Page 2467]]
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. The CFPB proposed to amend
comment 43(c)(3)-5 to clarify that 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. For
example, if a consumer informs the creditor of an existing PACE
transaction during the application process, the creditor does not
comply with Sec. 1026.43(c)(2)(v) 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.
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\200\ As discussed above, the CFPB is finalizing its proposal 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
the section-by-section analysis of Sec. 1026.43(b)(8), supra.
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The CFPB received limited comments on this aspect of the proposal.
Commenters who addressed the proposed amendment to comment 43(c)(3)-5,
including a few consumer groups and a State agency, were supportive of
the proposed amendment. The CFPB finalizes as proposed the amendment to
comment 43(c)(3)-5.
1026.43(i) PACE Transactions
1026.43(i)(1)
Many consumers who obtain PACE transactions have pre-existing
mortgages that require the payment of property taxes through an escrow
account.\201\ 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. 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, and more than a quarter of PACE borrowers'
property tax payments likely increased by double or more.\202\ This
increase is relevant to the consumer's ability to repay the PACE
transaction. The CFPB proposed 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). For the
reasons described below, the CFPB is finalizing Sec. 1026.43(i)(1) as
proposed.
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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 PACE Report, supra note 12, at 13.
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Section 1026.43(i)(1) requires the ability-to-repay determination
for PACE loans to consider, in addition to the factors in Sec.
1026.43(c)(2)(i) through (viii), any monthly payments that the creditor
knows or has reason to know the consumer will have to pay into an
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)(viii).
Section 1026.43(i)(1)(i) and (ii) provides additional detail on the
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,\203\ and as explained in the proposal, the CFPB understands
that servicers frequently charge the full allowable amount of this
cushion. Accordingly, Sec. 1026.43(i)(1)(i) provides 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 Regulation X, Sec.
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.
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\203\ 12 CFR 1024.17(c)(1).
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Section 1026.43(i)(1)(ii) addresses the payment spike that can
result from a delay in incorporating the PACE transaction into the
consumer's escrow payments. PACE transactions are distinct from non-
PACE mortgage loans in many respects, including the timing of when the
first PACE payment is due and their annual or semi-annual repayment
schedule. Consumers who are required to make their PACE payments
through their existing escrow account 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.\204\ The CFPB
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. Accordingly, Sec. 1026.43(i)(1)(ii) requires 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.
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\204\ A servicer must conduct an escrow account analysis every
12 months but may, and in some cases must, do so more frequently.
See generally 12 CFR 1024.17(c)(3) (discussing annual escrow account
analyses).
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Numerous commenters, including consumer groups, a State agency, and
a mortgage-industry trade association, supported the adoption of
proposed Sec. 1026.43(i)(1). These commenters discussed the
possibility of large escrow payment increases resulting from PACE
transactions and the associated lack of transparency for consumers
seeking to understand the effect of a PACE transaction on their future
payments. For example, consumer groups stated that the annual escrow
analysis is often conducted before the upcoming year's tax bills are
issued, meaning that the escrow payment calculation does not reflect
the actual amount owed. They expressed that, if there is a large,
unanticipated increase in the property tax bill, such as from the
addition of a PACE loan, the servicer will advance
[[Page 2468]]
the full amount owed and the escrow account will carry a deficiency
forward. These commenters stated that, at the next annual escrow
account analysis, the servicer will calculate the new escrow payment by
adding to the base payment a reserve cushion of up to one-sixth (\1/6\)
of the annual property charges, an amount sufficient to cover the prior
year's PACE payment, and an amount to cover the upcoming year's PACE
payment that was not accounted for in the prior year's escrow analysis.
They asserted that the resulting adjustment to the escrow account
causes consumers to experience a sharp increase in their escrow payment
many months--or even over a year--after the PACE transaction was
originated.
These consumer groups stated that the way PACE programs currently
address the interaction between PACE transactions and escrow accounts
is inadequate to address this predictable payment spike. They expressed
that, for example, PACE companies do not provide consumers information
on the estimated effect of the PACE transaction on their existing
escrow account or help PACE consumers communicate with their mortgage
servicer regarding their escrow account. They stated further that
consumer advocates have found in many cases that PACE borrowers
experience severe payment shocks when a mortgage servicer ultimately
incorporates a PACE loan into a consumer's escrow account.
Consumer groups supporting the proposal recommended that the CFPB
require consideration of the borrower's most recent escrow account
statement and the expected timing of the first tax bill following the
consummation of the PACE transaction. These commenters also suggested
that the CFPB amend Sec. 1026.43(c)(5)(ii) to include PACE
transactions. Section 1026.43(c)(5)(ii) sets forth special rules for
the calculation of the monthly payment for loans with a balloon
payment, interest-only loans, and negative amortization loans,\205\ and
the commenters suggested that the CFPB provide for similar treatment
for PACE transactions.
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\205\ See 12 CFR 1026.43(c)(5)(ii).
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Several commenters, including mortgage-industry trade associations,
consumer groups, and a PACE company, stated that the CFPB should
require notification to a consumer's pre-existing mortgage servicer
when a PACE transaction is originated, to protect consumers with
mortgage escrows from payment spikes. Two consumer groups expressed
that this approach would be beneficial because the mortgage servicer is
more likely than the consumer to have the necessary information and
understanding of escrow mechanics to anticipate escrow shocks.
Mortgage-industry trade associations stated that such notification
would promptly educate consumers on the true consequences of the PACE
transaction and promote servicers' awareness of a potential priority
lien. One PACE company stated that the CFPB should require mortgage
servicers to timely update escrow account payments following the PACE
transaction origination.
Several PACE industry stakeholders opposed the adoption of proposed
Sec. 1026.43(i)(1). Two PACE companies asserted that evidence of
escrow payment spikes is limited, and that, where payment shocks do
occur, the cause is untimely escrow account analyses by mortgage
servicers. One PACE company stated that escrow spikes cannot be
foreseeable to a PACE company because it might not be able to ascertain
when the consumer's mortgage servicer will conduct its next analysis.
This commenter recommended that the CFPB substitute a servicer
notification requirement in place of proposed Sec. 1026.43(i)(1)(ii)
because it stated that a notification requirement is adequate to
alleviate escrow payment spikes. Another PACE company stated that, in
California, existing PACE contracts direct the consumer to inform their
servicer of their annual PACE payment and that Florida law requires
consumers to notify their mortgage servicer of the consumer's intent to
enter into a financing agreement along with the maximum principal
amount to be financed.
Having considered the comments received, the CFPB is finalizing
Sec. 1026.43(i)(1) as proposed. Requiring PACE creditors to consider
foreseeable changes to escrow payments caused by the repayment of the
PACE loan is entirely consistent with the statutory mandate. If, as
some commenters to the proposal noted, the servicer analyzes the escrow
account before property tax bills are issued, the servicer will advance
the full property tax amount, including the amount owed on the PACE
transaction. The escrow account is then likely to carry a negative
balance (a deficiency) due to the prior year's PACE payment. As part of
the next escrow account analysis, the servicer will add the upcoming
year's PACE payment that was not accounted for in the prior year's
escrow analysis to the anticipated disbursements, which will likely
cause the anticipated escrow account balance to fall short of the
target required by the servicer to pay all escrow disbursements for the
coming year (an escrow shortage). The servicer may then require the
borrower to pay additional monthly deposits to the account to eliminate
the deficiency, the shortage, or both, and adjust the reserve cushion
to account for the PACE loan, causing the required escrow payment to
increase. While 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.
The CFPB acknowledges one PACE company's concern that creditors may
not know the exact timing of when the servicer will conduct its next
escrow account analysis, which could impact the amount of any escrow
spike. However, PACE creditors can comply with Sec. 1026.43(i)(1)
using information that is available to them at the time of the ability-
to-repay determination. Additionally, PACE creditors have the option to
meet the requirement in Sec. 1026.43(i)(1)(ii) regarding expected
escrow shortages or deficiencies by promptly notifying the servicer
about the new PACE transaction. Where a creditor provides prompt
notification to the servicer, the CFPB concludes that it is 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 for the purposes of Sec.
1026.43(i)(1)(ii). More generally, while Sec. 1026.43(i)(1)(ii) does
require creditors to take into account the possibility of an escrow
shortage, it does not require creditors to accurately predict the exact
amount of a shortage or deficiency on the monthly payment that the
consumer will be required to pay into the consumer's escrow account.
With regard to commenters' suggestion to amend Sec.
1026.43(c)(5)(ii) to include PACE transactions, the CFPB concludes that
Sec. 1026.43(i)(1) is sufficient to address the risks of increased
escrow payments. The CFPB also declines to require creditors to
consider the consumer's most recent escrow account statement and the
expected timing of the first tax bill following the consummation of the
PACE transaction. PACE creditors have 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. In exercising that
flexibility, the CFPB expects that many creditors will find it helpful
to review the consumer's most recent escrow account statement and the
expected timing of the first tax
[[Page 2469]]
bill following consummation. The CFPB is not finalizing any servicer
notification requirements, but PACE creditors voluntarily may notify a
consumer's servicer of the PACE transaction and doing so could aid
creditors in ensuring affordability and making the ability-to-repay
determination, as discussed above.
1026.43(i)(2)
EGRRCPA section 307 requires the CFPB to prescribe regulations that
carry out the purposes of TILA section 129C(a) with respect to PACE
transactions. The CFPB proposed in Sec. 1026.43(i)(2) to apply the
Regulation Z ability-to-repay framework to PACE transactions without
providing for a qualified mortgage presumption of compliance for PACE
transactions. For the reasons provided below, the CFPB is finalizing
Sec. 1026.43(i)(2) as proposed. Section 1026.43(i)(2) provides that,
notwithstanding Sec. 1026.43(e)(2), (e)(5), (e)(7), or (f), a PACE
transaction is not a qualified mortgage as defined in Sec. 1026.43.
This provision excludes PACE transactions from eligibility for each of
these qualified mortgage categories in Sec. 1026.43, General Qualified
Mortgage, Small Creditor Qualified Mortgage, Seasoned Qualified
Mortgage, and Balloon-Payment Qualified Mortgage.\206\ The CFPB
concludes that it would be inappropriate to provide PACE transactions
eligibility for a presumption of compliance with the ability-to-repay
requirements, particularly given the risk that PACE loans are not
affordable and the lack of creditor incentives to consider repayment
ability in this market.
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\206\ The CFPB also appreciates that, as a consequence of this
final rule, PACE transactions will not be permitted to include
prepayment penalties. 15 U.S.C. 1639c(c); 12 CFR 1026.43(g). The
CFPB understands that, in general, PACE transactions currently do
not include these penalties.
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A purpose of the qualified mortgage provisions in 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.\207\ TILA section 129C(b)(3)(B)(i) authorizes the CFPB to
prescribe regulations that revise, add to, or subtract from the
criteria that define a qualified mortgage upon a finding that such
regulations are necessary or proper to ensure that responsible,
affordable mortgage credit remains available to consumers in a manner
consistent with the purposes of TILA section 129C; or are necessary and
appropriate to effectuate the purposes of TILA sections 129B and 129C,
to prevent circumvention or evasion thereof, or to facilitate
compliance with such sections.\208\
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\207\ 15 U.S.C. 1639b(a)(2).
\208\ 15 U.S.C. 1639c(b)(3)(B)(i).
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The CFPB finds that the nature of PACE transactions raises serious
risks that make it unreasonable to presume creditor compliance with the
ability-to-repay requirements. First, certain aspects of PACE financing
can result in unaffordable payments that can lead to delinquency, late
fees, tax defaults, and foreclosure actions. Second, creditors
originating PACE transactions bear minimal risk of loss related to the
transaction due to PACE's structure and lien position and therefore
have reduced incentives to assure that the mortgages made are
affordable, as required by the statute. Further, the pricing model and
risk structure associated with PACE transactions may make any price-
based criterion--including the pricing thresholds set forth for the
General Qualified Mortgage category in Sec. 1026.43(e)(2)(vi) and any
PACE-specific thresholds the CFPB might develop--an inappropriate
measure of a consumer's repayment ability at consummation.
A variety of commenters, including several consumer groups, a State
agency, and mortgage industry stakeholders, expressed support for the
CFPB's proposal to exclude PACE transactions from qualified mortgage
eligibility. Some of these commenters asserted that no qualified
mortgage eligibility would be appropriate because PACE lending carries
certain risks for consumers. A State agency stated that the risks of
PACE lending are not yet fully understood. One mortgage industry
stakeholder stated that mortgage market safeguards are absent in the
PACE industry.
Multiple PACE companies opposed the CFPB's proposal and articulated
several reasons why PACE transactions should be eligible for qualified
mortgage status. As discussed in more detail in the section-by-section
analysis of Sec. 1026.2(a)(14), these commenters challenged the CFPB's
reliance on the PACE Report and stated that State legislation and
industry-led reforms have improved outcomes for PACE consumers. One
PACE company stated that the CFPB should reconsider the exclusion of
PACE transactions from qualified mortgage status because local
governmental entities oversee the PACE industry and could address
consumer protection concerns through their revocation processes.
A few PACE companies disagreed with the CFPB's determination that
PACE creditors may lack incentive to ensure repayment ability. One PACE
company stated that ensuring low delinquency and default rates among
properties with PACE loans is important for bond ratings. Another
asserted that it is most cost effective to be repaid on schedule by
PACE consumers rather than collecting payments through other means.
This commenter also expressed that, if PACE consumers are not regularly
repaying their PACE loans, PACE companies could suffer reputational
risks and other negative effects in the secondary market.
PACE companies also asserted that the exclusion of PACE
transactions from qualified mortgage status would have an adverse
impact on the availability of PACE credit and could lead consumers to
rely on less regulated and more expensive products. These commenters
stated that the CFPB failed to adequately weigh access-to-credit
concerns in conducting its evaluation of the proposal's costs and
benefits. One PACE company asserted that the proposal's exclusion of
PACE transactions from qualified mortgage status runs contrary to the
purposes of TILA 129C because it threatens to constrict the
availability of PACE credit. It added that regulatory safe harbors such
as the application of qualified mortgage status may facilitate industry
compliance and help to minimize litigation associated with uncertain
compliance obligations. This commenter asserted that the CFPB's
proposal would impose an ability-to-repay regime that would be more
onerous than that applicable to mortgage loans, which it stated are
typically significantly larger than PACE transactions.
One PACE company recommended that, in lieu of excluding PACE loans
from qualified mortgage eligibility, the CFPB could provide a qualified
mortgage status for PACE transactions that would impose other
guardrails for these loans. This commenter pointed to protections put
into place for Government-Sponsored Enterprise Patch Qualified Mortgage
loans \209\ and
[[Page 2470]]
suggested that a qualified mortgage for PACE could include certain
property-based underwriting requirements, such as no existing liens on
the property and no recent property tax delinquencies, in addition to
prohibiting certain loan characteristics, such as negative
amortization, balloon payments, or prepayment penalties. One PACE
company disagreed with the CFPB's proposed rationale for not making
PACE loans eligible for the Small Creditor Qualified Mortgage category.
This commenter asserted that the role cities and counties play in
authorizing PACE programs with PACE companies serves to increase PACE
companies' community focus. It stated further that local governments
expect PACE companies to focus on the communities they serve and that
they work together to provide timely services to constituents.
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\209\ See generally 78 FR 6408 (Jan. 30, 2013). In the January
2013 Final Rule, the CFPB established a temporary category of
qualified mortgage loans consisting of mortgages that (1) comply
with the same loan-feature prohibitions and points-and-fees limits
as General Qualified Mortgage loans and (2) are eligible to be
purchased or guaranteed by Fannie Mae or Freddie Mac while under the
conservatorship of the FHFA. The provision that created this loan
category is commonly known as the GSE Patch. Unlike for General
Qualified Mortgage loans, the January 2013 Final Rule did not
prescribe a DTI limit for Temporary GSE Qualified Mortgage loans.
The Temporary GSE Qualified Mortgage loan definition has expired.
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Finally, one PACE company asserted that Congress evinced no intent
to single out PACE transactions as categorically ineligible for
qualified mortgage status in the EGRRCPA. This commenter stated that,
while EGRRCPA section 307 does not mention TILA section 129C(b)--it
requires ability-to-repay regulations under TILA section 129C(a),
whereas 129C(b) is the subsection providing for qualified mortgage--
EGRRCPA section 307 itself is an insert into subsection 129C(b). The
commenter stated further that TILA subsection 129C(b) describes a way
to comply with TILA subsection 129C(a) and that TILA elsewhere refers
only to 129C(a) in cases where subsection 129C(b) is relevant.
After considering the comments received, the CFPB is finalizing
Sec. 1026.43(i)(2) as proposed. The CFPB determines that it is
inappropriate to provide PACE transactions eligibility for a
presumption of compliance with the ability-to-repay requirements for
the reasons discussed below. As the CFPB explained in the proposal,
certain aspects of PACE financing create 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 of payments,
due simultaneously with large property tax payments, may render PACE
loans unaffordable.
Available data that show the broader effect that PACE loans have on
consumers' finances highlight affordability risks inherent in PACE
financing. The PACE Report finds clear evidence that PACE transactions
increase non-PACE mortgage delinquency rates.\210\ For consumers with a
pre-existing non-PACE mortgage, getting a PACE loan increased the
probability of a 60-day delinquency on their non-PACE mortgage by 2.5
percentage points over a two-year period as compared to consumers who
applied and were approved for, but did not obtain, a PACE loan.\211\
For comparison, the average two-year non-PACE mortgage delinquency rate
for originated borrowers was 7.1 percent prior to obtaining their PACE
loan.\212\ This means that for the average consumer with a pre-existing
non-PACE mortgage who obtains a PACE loan, their probability of
delinquency on their non-PACE mortgage increases 35 percent relative to
a scenario in which the consumer does not obtain PACE financing.\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
acknowledges, as industry commenters have noted, that lending practices
and State law have evolved since the origination of the PACE loans
reflected in the PACE Report. In spite of these improvements, however,
the structural risks of PACE loans remain, and future industry
participants may not have the same commitment to consumer protections
as those that have made the recent improvements. Also, PACE programs
could expand to new States that may not have consumer protection laws
for PACE loans. Further, the local government oversight and the
revocation process cited by one commenter do not alleviate the inherent
affordability risks associated with PACE transactions or affect the
CFPB's statutory obligations to assure that mortgage lending is both
responsible and affordable.
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\210\ A large majority of PACE consumers 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.
\211\ Id. at 26-27. As in the CFPB's analysis in its 2020 final
rule (General Qualified Mortgage 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.
\212\ Id. at 27.
\213\ Id.
\214\ Id. at 36-37.
\215\ Id. at 33.
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The lien status of PACE loans also heightens the risk of negative
outcomes for consumers and weakens incentives for PACE creditors and
PACE companies to ensure that consumers have the ability to repay. As
noted, under most PACE-enabling statutes, the liens securing PACE loans
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.\216\ In the event of foreclosure, any amount
owed on the PACE loan 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 VI.A, 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
that, for the more than 70 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.\217\ 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.
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\216\ See, e.g., Cal. Sts. & Hwys. Code sec. 5898.30; Fla. Stat.
sec. 163.081(7).
\217\ PACE Report, supra note 12, at 18.
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Although certain market pressures may provide some incentive to
ensure low delinquency and default rates as PACE companies asserted--
including pressures from the secondary market for PACE securities--the
structure of PACE transactions significantly limits creditors' economic
incentives to determine repayment ability and raises
[[Page 2471]]
risks of consumer harm. A qualified mortgage category with the
guardrails for PACE loans suggested by one commenter would not address
these risks inherent to the structure of PACE. TILA specifically
excludes from the qualified mortgage definition loans with certain
risky features and lending practices that are well known to present
significant risks to consumers, including loans with negative
amortization or interest-only features and (for the most part) balloon
loans.\218\ PACE transactions likewise have features that create
significant risks to consumers; the CFPB finds that a presumption of
compliance for PACE financing is not warranted.
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\218\ In the January 2013 Final Rule, the CFPB observed that the
clear intent of Congress was to ensure that loans with qualified
mortgage 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's
apparent intent to provide incentives to creditors to make qualified
mortgages, since they have less risky features and terms'').
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The CFPB also concludes that the rationales for the existing
qualified mortgage categories do not apply for PACE transactions. In
its 2020 final rule (General Qualified Mortgage Final Rule),\219\ the
CFPB 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 loans 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 CFPB having APRs between 8.2
and 9 percent.\222\ For reference, the average prime offer rate for
primary mortgage loans was around 3.5 percent during the timeframe
covered by the PACE Report, varying somewhat over time and by loan
term.\223\ The CFPB's available data indicate that pricing of PACE
loans is primarily correlated with State and property type and does not
appear to be an indicator of a consumer's ability to repay. The PACE
Report confirms that PACE loans are generally not 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\
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\219\ 85 FR 86308 (Dec. 29, 2020).
\220\ Id. at 86361.
\221\ See generally part VI.A.
\222\ PACE Report, supra note 12, at table 2.
\223\ Id. at 13.
\224\ Id. at 22-23.
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Further, while the CFPB'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
Qualified Mortgage 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 CFPB's research, PACE transactions
with rate spreads above 3.5 percentage points and between 2.25 and 3.49
percentage points increase delinquency rates on a consumer's non-PACE
mortgage by an estimated 2.8 and a 1.4 percentage points, respectively,
and PACE transactions with rate spreads below 2.25 percentage points
have almost zero effect on non-PACE mortgage delinquency.\226\
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\225\ Pursuant to the General Qualified Mortgage Final Rule, a
loan generally meets the General Qualified Mortgage 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 Qualified Mortgages, 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.
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Nonetheless, the CFPB concludes that this limited data would not be
sufficient to provide a basis for applying the current General
Qualified Mortgage pricing thresholds to PACE transactions even if a
qualified mortgage were not otherwise inappropriate for the reasons
discussed above. As discussed in the PACE Report, it is not clear what
drives variation in the pricing of PACE loans, but it does not appear
to be a function of traditional measures of credit risk.\227\ Rather,
in this context it is more plausible that the larger rate spreads
contributed to the increased credit risk. As a result, even though the
PACE Report finds that PACE transactions with low rate spreads had
relatively better delinquency outcomes on the associated mortgages, the
CFPB concludes that it is not reasonable to presume that a creditor
that offers a PACE transaction with a low APR and meets the other
factors required for a General Qualified Mortgage has made a reasonable
and good faith determination of the individual consumer's ability to
repay.\228\
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\227\ Id. at 23.
\228\ The CFPB is also skeptical that defining a category of
qualified mortgages for PACE transactions based on a specific DTI
threshold would be suitable for PACE. Additionally, given the risk
factors described above, the statutory requirements for qualified
mortgage may not be satisfied by defining a category of qualified
mortgages for low-DTI PACE transactions. Moreover, the CFPB's
available evidence does not demonstrate a correlation between a PACE
consumer's DTI and non-PACE mortgage outcomes. The CFPB 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 Qualified Mortgage Final Rule, a
criterion for the General Qualified Mortgage category. Id. at 48-49.
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 CFPB doubts that a presumption of compliance would
be appropriate given the unique characteristics of PACE transactions
discussed above.
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The Small Creditor Qualified Mortgage category in Sec.
1026.43(e)(5) extends qualified mortgage status to covered transactions
that are originated by creditors that meet certain size criteria and
that satisfy certain other requirements. The CFPB created the Small
Creditor Qualified Mortgage 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 qualified
mortgage status to loans that meet the criteria in Sec. 1026.43(e)(5),
including that the creditor consider and verify the consumer's DTI or
residual income.\229\
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\229\ 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.'').
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The CFPB 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.
Although local governments authorize PACE programs and may work closely
with PACE companies in their communities, 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 Qualified
Mortgage. In contrast to the CFPB's findings with respect to many small
creditors, the CFPB is not persuaded that PACE
[[Page 2472]]
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.\230\
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
likely these entities will be repaid even in the event of foreclosure
or other borrower distress.
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\230\ See 80 FR 59947 (Oct. 2, 2015).
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Similarly, the reasoning for the Seasoned Qualified Mortgage loan
category set out in Sec. 1026.43(e)(7) would not apply to PACE
transactions. In 2020, the CFPB created the Seasoned Qualified Mortgage
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, and as noted above, 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 a creditor's good faith and reasonable determination of a
borrower's ability to repay at consummation. Given this, the CFPB
determines that it is not appropriate to extend the presumption of
compliance to these circumstances.
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 ability-to-repay 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 is not sufficiently probative of the
creditor's compliance with the ability-to-repay requirements at
consummation for PACE transactions to create a presumption of
compliance.
Similar concerns apply to the Balloon-Payment Qualified Mortgage
category in Sec. 1026.43(f). Section 1026.43(f) permits balloon-
payment loans originated by small creditors that operate in rural or
underserved areas to qualify for qualified mortgage status, even though
balloon-payment loans are generally not eligible for General Qualified
Mortgage status. In addition to the general reasons discussed above for
not having a qualified mortgage definition for PACE, the same specific
concerns noted above with respect to the Small Creditor Qualified
Mortgage--namely, that the involvement of nationwide PACE companies
limits the applicability of any special features of small creditors
relevant to the Small Creditor Qualified Mortgage--are equally
applicable to the Balloon-Payment Qualified Mortgage criteria.
Moreover, the CFPB is not currently aware of PACE financing with
balloon payments.
This determination is consistent with EGRRCPA section 307. EGRRCPA
section 307 makes no mention of PACE loans qualifying for a presumption
of compliance with the ability-to-repay requirements it directed the
CFPB 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 may make 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 (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 qualified mortgages) or
otherwise indicate that the CFPB's adoption of ability-to-repay
requirements specific to PACE loans should make further allowance for
any presumption of compliance with those requirements. Instead, by
requiring that the CFPB ``account for the unique nature'' of PACE
financing, the CFPB understands that Congress concluded that elements
of the existing ability-to-repay regime for residential mortgage
loans--including the qualified mortgage provisions--may not be
appropriate in the case of PACE financing.
This determination is also consistent with the relevant statutory
authority under TILA sections 129C(b)(3)(C)(ii), 129C(b)(3)(B)(i), and
105(a). TILA section 129C(b)(3)(A) directs the CFPB to prescribe
regulations to carry out the purposes of section 129C and TILA section
129C(b)(3)(B)(i) in turn authorizes the CFPB to prescribe regulations
that revise, add to, or subtract from the criteria that define a
qualified mortgage upon a finding that such regulations are necessary
or proper to ensure that responsible, affordable mortgage credit
remains available to consumers in a manner consistent with the purposes
of this section, are 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 CFPB 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 ability-to-repay and
qualified mortgage provisions and the unique nature of PACE financing,
the CFPB concludes that there is ample reason not to extend a
presumption of compliance with the ability-to-repay requirements to
PACE transactions.
The CFPB recognizes that Sec. 1026.43(i)(2) may impact the
availability of PACE credit. The CFPB finds that any credit access
impacts must be justified against the consumer protection risks of
extending qualified mortgage status to PACE transactions. TILA section
129C authorizes the CFPB to modify the qualified mortgage criteria
where necessary to ensure the availability of responsible, affordable
mortgage credit.\231\ The above analysis and the PACE Report call into
question the extent to which the availability of PACE transactions
increases the supply of such credit.
---------------------------------------------------------------------------
\231\ 15 U.S.C. 1639c(b)(3)(B)(i).
---------------------------------------------------------------------------
1026.43(i)(3)
EGRRCPA section 307 requires the CFPB to ``prescribe regulations
that carry out the purposes of [TILA's ATR
[[Page 2473]]
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 ability-to-repay requirement. The CFPB
proposed Sec. 1026.43(i)(3) to 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. The CFPB is finalizing
Sec. 1026.43(i)(3) as proposed. Section 1026.43(i)(3) clarifies that a
PACE company is ``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. Section 1026.43(i)(3) also applies TILA section 130 \232\ to
covered PACE companies that fail to comply with Sec. 1026.43.
---------------------------------------------------------------------------
\232\ 15 U.S.C. 1640.
---------------------------------------------------------------------------
Several consumer groups supported extending ability-to-repay
requirements to PACE companies in addition to PACE creditors. Two
stated that defining ``creditor'' to include PACE companies for
purposes of Sec. 1026.43 would implement EGRRCPA section 307's mandate
to consider the unique characteristics of PACE. One consumer group, as
discussed under Sec. 1026.43(b)(14), supported including home
improvement contractors or subcontractors under the definition of
``PACE company'' to expand the parties who would be subject to the
ability-to-repay requirements.
A number of consumer groups, a mortgage-industry trade association,
a State agency, and an individual commenter also supported applying
TILA civil liability for violations of the PACE ability-to-repay rules.
They stated, for example, that the civil liability provisions could
deter predatory behavior, mitigate unaffordable PACE lending, reduce
default and foreclosure risk for borrowers, and afford consumers
remedies in the face of TILA violations.
Certain of these consumer groups, as well as a State agency,
specifically supported making PACE companies subject to civil liability
under TILA. Two consumer groups stated that defining ``creditor'' to
include PACE companies for purposes of TILA section 130 would carry out
the mandate in EGRRCPA section 307 to consider the unique
characteristics of PACE. They also asserted that such coverage would be
appropriate because PACE government sponsors delegate origination and
underwriting processes to PACE companies, and that PACE consumers
perceive the PACE companies as creditors. They also stated that PACE
companies assert defenses in litigation that ordinarily apply only to
government entities, on the theory that the association with a
government sponsor cloaks the PACE company with the same defenses and
insulates them from liability. They and other consumer groups stated
that applying the ability-to-repay and civil liability requirements to
PACE companies would ensure that State assessment laws do not preclude
consumers from obtaining relief for TILA violations.
Several consumer group commenters suggested extending ability-to-
repay or civil liability requirements further, to include home
improvement contractors who sell PACE financing in the course of
selling their home improvement products and help originate the loans.
Several PACE companies opposed the application of TILA section 130
to PACE companies for violations of Sec. 1026.43. One PACE company
asserted that the CFPB lacks authority to subject PACE companies to
ability-to-repay requirements or civil liability under TILA. It stated
that the fact that government creditors are insulated from liability
authority under TILA section 113(b) means that Congress did not intend
liability under TILA section 130 to extend to PACE companies.\233\
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\233\ TILA section 113(b) provides that ``[n]o civil or criminal
penalty provided under this subsection for any violation thereof may
be imposed upon . . . any State or political subdivision thereof, or
any agency of any State or political subdivision.''
---------------------------------------------------------------------------
As discussed in the analysis of Sec. 1026.2(a)(14) above, a number
of commenters opposed covering government entities as creditors under
TILA or treating PACE loans as TILA credit. One PACE company stated in
support of this position that it would be incongruous to apply the
proposed TILA requirements to local government entities acting as PACE
creditors along with the protections afforded to them under section
TILA section 113(b). A government sponsor of PACE programs raised
sovereign immunity objections to the application of TILA liability. It
also asserted that PACE companies may opt to leave the PACE market if
subject to civil liability under TILA.
The CFPB is finalizing Sec. 1026.43(i)(3) as proposed. PACE
companies play an extensive role in PACE financing programs, as
described in part II.A. In exchange, PACE companies typically receive
part of the profit from PACE financing. Given the role that PACE
companies play in PACE financing, the incentive structure of PACE
lending, and the fact that PACE companies will often be the parties
implementing any ability-to-repay requirements, the CFPB concludes that
application of Sec. 1026.43 to PACE companies that are substantially
involved in making the credit decision, in addition to creditors, is
appropriate and consistent with the Congressional mandate in EGRRCPA
section 307 to implement regulations that carry out the purposes of
TILA's ability-to-repay provisions. A PACE company that makes the
credit decision, makes a recommendation as to whether to extend credit,
or applies criteria used in making the credit decision is
``substantially involved'' in making the credit decision. A PACE
company is not substantially involved in making the credit decision for
purposes of Sec. 1026.43(i)(3) if it merely solicits applications,
collects application information, or performs administrative tasks.
Applying section 130 to covered PACE companies will 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.
The application of TILA section 130 to covered PACE companies will
also enhance consumers' ability to obtain remedies for violation of the
ability-to-repay rules. TILA section 113(b) \234\ 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 protections. Therefore, without
application of section 130 to PACE companies, PACE consumers could be
limited in their ability to obtain remedies for violations of the
ability-to-repay requirements, frustrating the purposes of TILA and
EGRRCPA section 307 by potentially allowing for circumvention or
evasion of the ability-to-repay requirements. Moreover, Congress
specifically directed the CFPB to apply section 130's liability
provisions to PACE.
---------------------------------------------------------------------------
\234\ 15 U.S.C. 1612(b).
---------------------------------------------------------------------------
The CFPB declines to extend liability under TILA to home
improvement contractors who sell PACE financing to the consumer or
assist in the origination process if they are not PACE companies
substantially involved in making the credit decision or otherwise
liable under TILA. Finalizing Sec. 1026.43(i)(3) as proposed provides
adequate protections and remedies for consumers in the PACE
marketplace. Additionally, the CFPB understands that home
[[Page 2474]]
improvement contractors are not currently substantially involved in
credit decisions for PACE transactions. The CFPB is only extending
liability to parties who are PACE companies as defined in Sec.
1026.43(b)(14) that are substantially involved in making the credit
decision for a PACE transaction.
Regarding a government sponsor's comment that Sec. 1026.43(i)(3)
could result in PACE companies exiting the market, while the CFPB
acknowledges that some PACE companies may decide to exit the industry
rather than be liable for the obligation to make good-faith
determinations of consumers' ability to repay their PACE loans, EGRRCPA
section 307 mandates the extension of liability in circumstances where
PACE loans are made without consideration of ability to repay.
The CFPB uses 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.
Appendix H--Closed-End Model Forms and Clauses
The CFPB is finalizing forms H-24(H), H-25(K), H-28(K), and H-28(L)
to appendix H to Regulation Z. Forms H-24(H) and H-25(K) 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. Forms H-24(H) and H-25(K) 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 Closing Disclosure--Modification to Closing
Disclosure for Transaction Not Involving Seller.
The CFPB stated in the proposal that it planned to publish
translations of forms H-24(H) and H-25(K) if it finalized the proposed
additions to appendix H. As discussed above, consumer advocates have
expressed concerns that the PACE market lacks adequate consumer
protections, including concerns that PACE financing is
disproportionately targeted at consumers with limited English
proficiency. Generally, CFPB stakeholders have underscored the
importance of language access as a way of ensuring fair and competitive
access to financial services and products. The CFPB believes that
competitive, transparent, and fair markets are supported by providing
translations of key material in the customer's preferred language,
along with the corresponding English-language material. Accordingly,
the CFPB is making available forms H-28(K) and H-28(L), which are
Spanish translations of forms H-24(H) and H-25(K), for PACE creditors
that wish to use them. Use of these translations is not required under
the final rule, but the CFPB is providing them as an implementation
resource for PACE lenders.\235\
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\235\ See 12 CFR 1026.37(o)(5)(ii) and 1026.38(t)(5)(viii).
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Two consumer groups noted in comments that the proposed model form
for the Loan Estimate omitted the appraisal disclosure required under
Sec. 1026.37(m)(1) and recommended its inclusion because appraisals
play a key role in PACE underwriting. The CFPB is finalizing the model
forms to include the appraisal disclosure.
The CFPB is also finalizing several additional pages for the Loan
Estimates and Closing Disclosures, to reflect variations in the
information required or permitted to be disclosed.
V. Effective and Compliance Date
Consistent with TILA section 105(d), the CFPB proposed that the
final rule 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. For the reasons discussed
below, the CFPB is finalizing an effective date of March 1, 2026.
A PACE company submitted comment to the proposal recommending an
effective date of at least 30 months from the publication of this final
rule. The commenter asserted that an extended period to come into
compliance is warranted by the breadth and complexity of the proposal.
It stated that the proposal would impact all aspects of its business,
requiring substantial updates to software, systems, and policies and
procedures. It also stated that coming into compliance would require
collaboration with other industry stakeholders, including government
sponsors and home improvement contractors, and that the CFPB should
allow industry participants adequate time to work with consultants and
legal professionals to understand the various requirements. The PACE
company stated that the CFPB provided the mortgage industry nearly two
years to come into compliance with the 2013 TILA-RESPA Rule, citing the
significant cost and system and software changes, and that the changes
in this proposed rule would be more significant than those in the 2013
TILA-RESPA Rule.
The CFPB determines that an effective date of March 1, 2026,
provides sufficient time for covered parties to come into compliance.
The ability-to-repay and TILA-RESPA integrated disclosure requirements
have been in place since 2013, albeit with certain adjustments over
time. Many of the operational and regulatory complexities have been
resolved in that time.
VI. CFPA Section 1022(b) Analysis
A. Overview
In developing this final rule, the CFPB has considered the rule's
potential benefits, costs, and impacts in accordance with section
1022(b)(2)(A) of the CFPA.\236\ The CFPB requested comment on the
preliminary analysis presented in the proposed rule and submissions of
additional data that could inform the CFPB's analysis of the benefits,
costs, and impacts, and the discussion below reflects comments
received. In developing the final rule and the proposed rule, the CFPB
consulted with the appropriate prudential regulators and other Federal
agencies, including regarding consistency with any prudential, market,
or systemic objectives administered by these agencies.\237\ As
discussed in part II.B above, the CFPB also has consulted with State
and local governments and bond-issuing authorities, in accordance with
EGRRCPA section 307.\238\
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\236\ 12 U.S.C. 5512(b)(2)(A).
\237\ 12 U.S.C. 5512(b)(2)(B).
\238\ 15 U.S.C. 1639c(b)(3)(C)(iii)(II).
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One consumer advocate stated generally that the CFPB's 1022(b)
analysis in the proposal was appropriate and satisfied the CFPB's
burden to consider costs, benefits and impacts.
Provisions To Be Analyzed
Although the final rule has several parts, for purposes of this
1022(b)(2)(A) analysis, the CFPB's discussion groups the 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 provision to apply the ability-
to-repay requirements of Sec. 1026.43 to PACE transactions, with
certain adjustments to account for the unique nature of PACE, including
denying eligibility for any qualified mortgage categories; and (2) the
provision 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
[[Page 2475]]
credit, such as PACE transactions, are credit for purposes of TILA.
Economic Framework
Before discussing the potential benefits, costs, and impacts
specific to this final rule, in the proposal the CFPB provided 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 CFPB has
previously discussed the general economics of ability-to-repay
determinations in the January 2013 Final Rule and elsewhere,\239\ and
focused in the proposal on economic forces specific to PACE.
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\239\ See, e.g., 78 FR 35430, 35492-97 (June 12, 2013).
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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 CFPB noted that, even prior to the then-new ability-to-
repay requirements of Regulation Z, most mortgage lenders voluntarily
collected income information as part of their normal business
practices, even as the January 2013 Final Rule was adopted to prevent
lenders who did not follow this practice from harming consumers and the
financial system. 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.\240\ 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.\241\
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\240\ This holds empirically as well. In the General Qualified
Mortgage Final Rule, the CFPB 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).
\241\ 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.
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The market for PACE financing has some notable differences from the
typical non-PACE mortgage market, and these differences dampen or
eliminate the economic incentive for PACE companies 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 non-PACE mortgage,\242\ 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 structured as
obligations attached to the real property, rather than to the consumer,
any remaining amounts owed on the PACE loan that are not paid through
foreclosure proceeds generally will not be extinguished and will
instead remain on the property for subsequent owners to pay.
---------------------------------------------------------------------------
\242\ PACE Report, supra note 12, at 18.
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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.\243\ Moreover, the PACE Report finds that PACE
transactions are not priced based on individual risk.\244\ The PACE
Report notes that estimated APRs for PACE transactions are tightly
bunched, with about half of estimated PACE APRs between 8.2 and 9
percent.\245\ 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.\246\
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\243\ Id. at Table 1.
\244\ Id. at 23.
\245\ Id. at Table 2.
\246\ Id. at 23.
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In response to the proposal, one PACE company disagreed with the
above analysis, stating that PACE companies do have an intrinsic
incentive to consider ability to repay due to the importance of bond
ratings. According to the commenter, PACE companies' business models
depend on being able to securitize and sell bonds backed by PACE loans,
and a high delinquency rate would impact the ratings of those bonds,
affecting PACE companies' profits.
With respect to the commenter's assertion that default rates of
PACE loans affect bond ratings, and thus provide an incentive to ensure
ability to repay, the CFPB makes two responses. First, as noted above,
consumers with a non-PACE mortgage generally will not default on a PACE
loan directly even if they cannot afford the PACE loan, as any property
tax delinquency will be paid by a mortgage servicer. The CFPB found in
the PACE Report that at least 70 percent of PACE borrowers have a non-
PACE mortgage, although PACE industry commenters stated this was an
undercount, and that a fraction closer to 90 percent of PACE borrowers
had a non-PACE mortgage. This creates an artificially low default rate
that would be observed by bond investors and would tend to reduce the
incentives of PACE companies to ensure that PACE loans are affordable
for consumers. Second, the commenter's assertion that PACE companies
have an incentive to ensure ability to repay is belied by the conduct
of PACE companies to date. The CFPB understands that PACE companies
generally have not undertaken ability-to-repay analyses with attributes
similar to the TILA requirements where they have not been required to
by applicable law. For example, PACE companies did not generally
collect or verify income of PACE borrowers in California until they
were required to by the 2018 California PACE Reforms. Similarly, PACE
companies generally did not collect income information in Florida until
its recent law change in 2024, despite having developed systems to
capture income information to comply with applicable requirements in
California.
[[Page 2476]]
Accordingly, the CFPB concludes that PACE companies lack the incentive
to ensure their borrowers' ability to repay absent legal requirement to
do so.
B. Baseline for Analysis
In evaluating the final rule's benefits, costs, and impacts, the
CFPB considers the impacts against a baseline in which the CFPB 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 clarification in this final rule that only
involuntary tax liens and involuntary tax assessments are excluded from
being credit under Regulation Z (such that the commentary does not
exclude PACE transactions), the baseline assumes that the current
practices of PACE industry stakeholders are not consistent with
treating PACE financing as TILA credit.
The CFPB notes that, since the publication of the proposal, the
baseline has shifted due to changes in State laws. Florida has passed
legislation that requires verification of consumers' household income
among other consumer protections.\247\
---------------------------------------------------------------------------
\247\ See Fla. Stat. sec. 163.081(3)(a)(12).
---------------------------------------------------------------------------
The CFPB did not receive comments regarding its choice of baseline.
C. Data Limitations and Quantification of Benefits, Costs, and Impacts
The discussion below relies on information that the CFPB has
obtained from industry, other regulatory agencies, and publicly
available sources, including reports published by the CFPB. These
sources form the basis for the CFPB's consideration of the likely
impacts of this final rule. The CFPB provides estimates, to the extent
possible, of the potential benefits and costs to consumers and covered
persons of this rule, given available data.
Among other sources, this discussion relies on the CFPB's PACE
Report, as described in part II.B.4 above. The Report utilizes data on
applications for PACE transactions initiated between July 1, 2014, and
December 31, 2019, 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 (``Originated Consumers'') to
those who were approved but did not have an originated transaction
(``Application-Only Consumers''). The Report uses a difference-in-
differences regression methodology, essentially comparing the changes
in outcomes like mortgage delinquency for Originated Consumers before
and after their PACE transactions were originated to the same changes
for Application-Only Consumers. In this discussion of the benefits,
costs, and impacts of the final rule, the CFPB 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.\248\ 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.\249\
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\248\ During the year immediately after consummation of a PACE
transaction, PACE payments generally have not been included in a
consumer's property tax bill. As discussed further below, it would
not be appropriate to include this period in an analysis of the
affordability of PACE loans.
\249\ Florida's recent State law requiring consideration of a
borrower's income was enacted in 2024, after the period studied in
the PACE report.
---------------------------------------------------------------------------
The CFPB 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 Advance Notice of Proposed Rulemaking.
The CFPB acknowledges several important limitations that prevent a
full determination of benefits, costs, and impacts. The CFPB 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.\250\ The data used in the Report to evaluate consumer
impacts are restricted primarily to consumers with a credit record.
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 CFPB's consideration of
the impacts of this final rule on consumers and covered persons, this
final rule has different requirements from the State laws that made up
the 2018 California PACE Reforms, such that the potential impacts may
differ.
---------------------------------------------------------------------------
\250\ Id. at 52.
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In light of these data limitations, the analysis below provides
quantitative estimates where possible and a qualitative discussion of
the final rule's benefits, costs, and impacts. General economic
principles and the CFPB's expertise, together with the available data,
provide insight into these benefits, costs, and impacts. In the
proposal, the CFPB requested additional data or studies that could help
quantify the benefits and costs to consumers and covered persons of the
rule. Commenters largely did not provide such information, except as
described below.
PACE industry stakeholders raised a number of concerns regarding
the PACE Report's methodology.
A PACE company took issue with the fact that the data request only
allowed PACE companies to submit information for a single property
owner, and the fact that if a property was owned by multiple consumers,
the CFPB's contractor received identifying information on just one of
the consumers for matching purposes. The commenter stated that, based
on its own records, 50 percent of properties with PACE loans are
jointly owned and thus had multiple PACE loan applicants on a single
loan. The commenter asserted that, by excluding from the analysis
outcomes for these other applicants, the PACE Report cannot reliably
make conclusions on the impact of PACE loans on consumer outcomes.
The CFPB acknowledges that its data collection only sent
information on one consumer per PACE loan to the CFPB's contractor for
matching. While this means that some consumers who have PACE loans were
not included in the PACE Report's analysis, the CFPB does not agree
that this aspect of the data collection biased the results of the PACE
Report substantively. Where a PACE loan borrower has a joint non-PACE
mortgage with another person, the non-PACE mortgage will appear on both
consumers' credit records, such that the analysis in the PACE Report
would still track whether that household had difficulty paying their
non-PACE mortgage. Thus, on balance, the CFPB finds that tracking the
outcomes of one consumer per PACE loan is sufficiently informative of
the household's financial outcomes.
Two PACE companies and an industry trade association stated that
the PACE Report did not identify all PACE borrowers who had a pre-
existing non-PACE mortgage. The PACE Report finds that 70 percent of
PACE borrowers had a non-PACE mortgage prior to receiving a PACE loan;
commenters stated that this fraction is closer to 90 percent. The
commenters asserted that by failing to identify all those with a
mortgage in the sample, the CFPB did not accurately capture the impact
of PACE borrowing.
The CFPB acknowledges that the true share of PACE borrowers with a
pre-existing non-PACE mortgage is likely higher than the 70 percent
identified in the PACE Report. In cases where the non-PACE mortgage is
in the name of only one member of a household while the PACE loan is in
the name of another
[[Page 2477]]
member, the methodology used by the CFPB's contractor to extract the
data used in the PACE Report would omit the non-PACE mortgage. However,
the CFPB does not agree that this limitation biases or undermines the
results of the Report. There is no evidence to suggest that PACE
consumers whom the CFPB might have incorrectly categorized as not
having a non-PACE mortgage had better outcomes than those who were
correctly categorized.
One PACE company stated that it was not appropriate for the PACE
Report to analyze credit card balances, as homeowners with and without
PACE loans use credit cards differently, and increased credit card
balances cannot be attributed to having a PACE loan. The commenter
asserted that homeowners who financed some projects through a PACE loan
may be undertaking additional home improvement projects on their homes
and paying for these using credit cards if the additional projects are
not PACE-eligible. In addition, two PACE companies stated that the PACE
Report shows that the analysis for credit card balances did not meet
the required assumptions for a valid difference-in-differences
analysis, as it showed balances for Originated Consumers increasing
relative to Application-Only Consumers prior to the PACE loan
application.
The CFPB agrees that homeowners with and without PACE loans may use
credit cards differently. The results in the PACE Report describing the
impact of PACE loans on credit card balances are not relied upon for
the final rule. The CFPB primarily relies on the mortgage estimates
included in the PACE Report for this 1022(b) analysis, as described
further below.
A PACE company and an industry trade association stated that the
methodology used in the PACE Report was invalid because it did not
distinguish between the general impact of taking out new credit and the
specific features of PACE loans such as paying through property tax
bills. The commenters suggested that any resulting negative impacts
found in the PACE Report as resulting from a PACE loan are just the
result of consumers taking on more debt of any kind, rather than being
specific to PACE financing. One of the commenters noted that increased
spending and higher debt amounts negatively impact credit score. They
stated that because credit score is treated as an outcome in the PACE
Report, consumers with a PACE loan will necessarily perform worse.
The CFPB acknowledges that the estimates in the PACE Report
evaluating the impact of a PACE loan include the impact of additional
debt in general, as well as the specific features of PACE loans that
differ from other forms of credit. However, the CFPB views this as the
correct way to evaluate the costs of PACE loans for consumers and thus
the potential benefits of the rule in preventing such loans. PACE loans
have a variety of features that are relevant to whether consumers can
repay, including but not limited to the structure of the obligations,
the way they are marketed by home improvement contractors and PACE
companies, the potential that consumers would take on a home
improvement contract that might not otherwise occur, and the infrequent
payment cycle relative to non-PACE mortgages, as well as imposing
additional debt on the consumer. But for the purposes of this rule, to
determine whether consumers have difficulties affording PACE loans, the
CFPB must determine the impact of all of these features collectively.
That is, regardless of whether it is true, as the commenters assert,
that it is not feasible to disentangle the impact on consumers of the
various features of PACE loans, the CFPB maintains that this would not
answer the relevant question. The overall impact of PACE loans on
consumers is the relevant quantity for this analysis.
One public PACE provider and its associated local government
expressed concern that the CFPB did not use data provided by Sonoma
County, California. The commenters stated that government-run PACE
programs such as the program in Sonoma County are unique, since they
are entirely administered by the local government and not a PACE
company. They asserted that the tax delinquency rate on loans in the
Sonoma County PACE program are low, around 0.5 percent, similar to the
annual delinquency rate for all secured parcels in the county. The
commenters noted that, in the Sonoma County program, property owners
have a minimum of five years to cure delinquencies before the property
is subject to sale through a tax defaulted auction.
While Sonoma County provided data, it was not sufficiently detailed
to be used in the PACE Report. The Report's main analyses rely on
comparing consumers with PACE loans to those who were approved for a
PACE loan but did not end up getting one. Sonoma County provided
information on about 400 originated PACE loans but did not provide
information on applications that did not result in a loan. Given the
CFPB's methodology in the PACE Report, it would not have been possible
to analyze the outcomes of Sonoma County's government-run program
separate from those of privately-run PACE programs considered in the
Report.
Several PACE companies stated that the control group of
Application-Only Consumers used in the PACE Report is not comparable to
Originated Consumers, and that this undermines the results of the
Report. One commenter asserted that the comparison is invalid because
the CFPB did not check that the two groups were comparable on loan-to-
value ratio of the underlying mortgage, unemployment, income stability
over time, variability in mortgage payments, negative equity in
property, or income verification procedures used by the lender. Another
commenter asserted that the PACE Report characterizes the two groups as
having largely similar credit characteristics prior to their PACE
application dates but disagreed with this characterization, stating
that the PACE Report shows that Originated Consumers were somewhat more
likely to have a mortgage, student loan payments, and auto loans than
Application-Only Consumers. Additionally, the commenter noted that
Originated Consumers had higher average monthly mortgage payments,
higher credit card balances, lower credit card limits, and lower
incomes than Application-Only Consumers.
On balance, the CFPB finds the Application-Only Consumers to be a
reasonable control group for the effect of PACE loans on consumer
outcomes. As discussed in more detail below, although small differences
exist between Application-Only Consumers and Originated Consumers on
some observable characteristics, Application-Only Consumers are much
more similar to Originated Consumers than alternate control groups
suggested by commenters or considered in the PACE Report. Contrary to
the views of the commenters, the PACE Report includes extensive
analysis to substantiate the similarity of the primary control group of
Application-Only Consumers to Originated Consumers. Appendix B of the
PACE Report includes several robustness checks exploring alternate
control groups, all of which are consistent with the results based on
the main control group of Application-Only Consumers. For example, the
PACE Report includes an analysis where consumers whose applications for
a PACE loan were denied are included in the control group. We would
expect that this comparison would dampen the negative impact of PACE
loans since these denied consumers likely would have worse financial
outcomes
[[Page 2478]]
compared to Application-Only Consumers. The PACE Report instead finds
that including these denied consumers in the control group along with
approved Application-Only Consumers increases the magnitude of the
impact of PACE loans on mortgage delinquency, and using only denied
consumers as the control group increases the magnitude more.
Two PACE companies and an industry trade association stated that
the analysis in the PACE Report overstates any negative effects of PACE
loans on consumers because it excludes the period immediately after
each PACE loan was originated. Commenters noted that consumers may be
receiving benefits from the home improvement funded by a PACE loan
during this period while not making loan payments yet.
The CFPB disagrees with the assertion of some commenters that the
CFPB should have considered the effect of PACE loans on consumer
outcomes between the date of loan origination and the date the first
payment was due. Consumers cannot be delinquent or have difficulty
making payments before their loan payments are due, so there is no
basis to evaluate affordability during this period.
One PACE company stated that the PACE Report does not correctly
handle consumers with multiple PACE loans, resulting in inflated non-
PACE mortgage delinquency rates. The commenter asserted that if a
consumer has multiple PACE loans, they may have multiple properties
with multiple mortgages, and thus have more opportunity to be
delinquent on any non-PACE mortgage even if only one of their PACE
loans is delinquent.
The CFPB does not agree with certain commenters that the PACE
Report's inclusion of consumers with multiple PACE loans inflated the
Report's estimates of delinquency outcomes. The CFPB notes that the
PACE Report includes a version of its analysis that excluded consumers
with multiple PACE loans entirely, and this analysis found
substantively the same result as the main analysis that included
consumers with multiple loans.\251\
---------------------------------------------------------------------------
\251\ See PACE Report at 64-65.
---------------------------------------------------------------------------
One PACE company stated that the PACE Report incorrectly states
that the CFPB requested data for consumers who applied for PACE loans
through June 2020, an error that was repeated in the proposal. The
commenter noted that the CFPB in fact requested and received data on
PACE applications through December 31, 2019. The commenter asserted
that the error was significant for the data analysis in the PACE Report
because data from 2020 and later would be more reflective of current
market conditions.
The CFPB acknowledges that the body of the PACE Report incorrectly
states that the CFPB requested PACE loans originated and PACE
applications submitted through June 2020, when in fact it requested
data through December 2019. It is also true that this error was
repeated in the proposal. The PACE Report includes the original data
request in Appendix C, which includes the correct dates. However, this
is not a material error. The Report is clear that all estimates include
only loans where it was possible to follow a consumer for three years
after origination. This effectively excludes any loan originated in
late 2019 or after. Any loans originated in 2020 or later would not
have been usable for the main analysis of the PACE Report, even if they
were requested and provided by the PACE companies.
Two commenters asserted that the 1022(b) analysis did not
appropriately incorporate recent changes in the PACE industry. One PACE
company asserted that the analysis included in the PACE Report is no
longer relevant because PACE financing has changed since the period
covered by the Report. The PACE Report includes data on PACE
applications through 2019. The commenter stated that, in 2021, the
industry imposed self-regulatory measures to address many of the PACE
Report's concerns. The commenter further stated, as noted in the CFPB's
proposal, consumer complaints have declined in recent years. The
commenter asserted that more recent data would better reflect this
improvement. Similarly, an industry trade association suggested that
since they believe that the proposed 1022(b) analysis focused on the
change in mortgage delinquency over a sample period that is unlike the
current PACE environment, the CFPB should have primarily relied on
estimates from the PACE Report that are specific to the time period
after the 2018 California PACE Reforms. The commenter asserted that the
current environment includes the 2018 California PACE Reforms, and that
relying on the overall estimate overstated the present costs and
benefits of the proposal.
The CFPB does not agree with the commenter's assertion that it was
inappropriate to focus on PACE loans originated during the period
covered by the PACE Report. The PACE Report covers the period spanning
the implementation of 2018 California PACE Reforms and presents results
separately for loans originated before and after these Reforms became
law. The PACE Report finds that PACE loans still increase primary
mortgage delinquency in California during the post-Reform period. The
CFPB acknowledges that the benefits of the rule may be lower than the
estimates discussed below if some State laws provide protections
covered by the rule. The CFPB does not believe this undermines its
analysis of benefits, costs and impacts, and discusses how this affects
its choice of baseline above.
A State-level chamber of congress, eight Members of the U.S.
Congress, and a State government unit stated that the proposal seemed
to be targeting Florida and would impose costs on Florida entities
specifically. The commenters stated that the proposed rule highlighted
some Florida-specific impacts of the rule, such as an expected decrease
in applications in that State, and stated that home improvement
contractors and government entities in Florida would experience
additional costs. The commenters expressed concern that the proposed
rule would have a disproportionate impact on Floridians who have
limited financial means or limited access to credit.
The rule will apply to covered parties and covered transactions
nationwide, not only those in Florida. PACE companies have chosen to
operate PACE programs in just Florida, California, and Missouri
currently, and this rule will apply equally in all States.
Additionally, there are multiple other States with legislation enabling
PACE financing. The rule will apply equally to covered parties who
begin to operate PACE programs in other States as well.
One PACE company criticized the CFPB for various aspects of the
limitations of the data used in the proposed rule and enumerated the
number of times that the CFPB stated that it lacked information on
costs relevant to the proposal. The commenter stated that some of this
missing information was crucial, and that the proposal lacked insight
into costs for PACE companies and home improvement contractors to
comply with the rule, or costs for consumers to undertake appraisals.
The CFPB used all data that were available and requested comment
and data from the public both generally and on specific areas where the
CFPB lacked information to quantify potential costs and benefits. As
noted below, the CFPB largely did not receive any specific information
from commenters regarding the impact analysis topics on which it sought
comment.
[[Page 2479]]
The same PACE company also stated that the data in the PACE Report
are flawed because not all consumers were matched to credit records
from the consumer reporting agency that served as the CFPB's contractor
as described in part II.B. The commenter particularly disputed the
CFPB's assertion, in the PACE Report, that 99 percent of PACE borrowers
had sufficient credit histories to have a credit score. The commenter
stated that the 99 percent figure ignores the 22 percent of consumers
that were not matched to credit record data. They stated further that
omitting this 22 percent of PACE applicants is problematic for many of
the Report's conclusions, including the assumption that PACE customers
have access to other credit.
The CFPB does not agree with the commenters' assertion that the
match rate of the data used in the PACE Report was problematic. As
discussed in the PACE Report, while some PACE consumers who did not
match to credit report data were likely credit invisible (consumers who
do not appear in credit record data), others may have been unmatched
due to data issues from either the PACE companies or the credit
reporting company. The matching in the Report was based only on name
and address, due in part to concerns by the PACE companies about
sharing more identifying information. While this matching was largely
successful, an imperfect match rate is unsurprising given that
addresses could be out of date, or names could include spelling errors.
Essentially all PACE consumers who matched to credit record data had
other credit available, meaning that at least 77 percent of PACE
consumers had other credit options, supporting the CFPB's conclusion
that PACE consumers had other credit options.
One PACE company asserted that, since the CFPB made methodological
decisions that trimmed the sample used in the PACE Report, the
resulting sample was unrepresentative. The commenter asserted that the
main analysis in the PACE Report omits consumers who were not matched
to credit bureau data or who did not have mortgage payments due prior
to the PACE loan origination date. The commenter also asserted that
consumers who were not matched to the credit record data likely were
credit invisible.\252\ The commenter asserted that the population of
consumers who were not in the data of the CFPB's contractor would have
benefitted from a PACE loan because of their lack of access to other
credit products, and that it was a mistake to assume in the PACE Report
that the unmatched consumers would perform the same as the matched
consumers. The commenter also asserted that, for some of the analyses
in the PACE Report that focus on mortgage outcomes, requiring the
consumers in the sample to have had a mortgage in the credit bureau
data excluded new homeowners. The commenter also took issue with
limiting the sample used in the static difference-in-differences model
to those who have two years of credit bureau data before their PACE
loan origination date and three years following.
---------------------------------------------------------------------------
\252\ This commenter seemed to conflate consumers with thin
credit files--those with insufficient information on their credit
reports to generate a credit score--with consumers who do not appear
in credit record databases at all. The PACE Report data includes all
consumers for whom the CFPB's contractor could successfully match,
regardless of whether that consumer had sufficient credit history to
be scored. To avoid confusion, the CFPB characterizes the comment as
being in reference to consumers who do not have a credit record.
---------------------------------------------------------------------------
The CFPB also does not agree with commenters that estimates of the
PACE Report were biased by the consumers who were not able to be
matched to credit record data. It is possible that these unmatched
consumers were credit invisible, but this seems unlikely to be true in
the vast majority of cases since PACE borrowers must be homeowners and
most home purchases are funded by mortgages.\253\ Even mortgages that
are paid in full will remain on a consumer's credit report, potentially
indefinitely, and thus would provide a potential match for the CFPB's
contractor, even if the consumer otherwise had no active credit
accounts. Moreover, while the CFPB does not have data indicating what
share of PACE consumers are credit invisible, it is reasonable to
expect that the share of consumers who are credit invisible is
proportional to the share who are visible but have credit files too
thin to calculate a credit score. As noted above, 99 percent of PACE
consumers that the CFPB's contractor was able to match were also
scored, compared to about 90 percent of the U.S. population
overall.\254\ This suggests that PACE consumers are if anything less
likely to be credit invisible than the average U.S. consumer. Thus, the
most reasonable conclusion is that most of the individuals who were not
matched were not matched due to mismatches in addresses or names
between the PACE company data and the credit reporting company data.
---------------------------------------------------------------------------
\253\ See Nat'l Assoc. of Realtors, Highlights from the Profile
of Home Buyers and Sellers, https://www.nar.realtor/research-and-statistics/research-reports/highlights-from-the-profile-of-home-buyers-and-sellers (showing 80% of home purchases funded by a
mortgage in 2023).
\254\ See e.g., FICO, More than 232 Million U.S. Consumers Can
Be Scored by the FICO Score Suite, FICO Blog (Aug. 2021), https://www.fico.com/blogs/more-232-million-us-consumers-can-be-scored-fico-score-suite.
---------------------------------------------------------------------------
The CFPB acknowledges that, as some commenters asserted, the Static
model in the PACE Report, which was cited for the main estimates in the
proposal's 1022(b) analysis and again below, omits consumers who do not
have sufficient data before and after their PACE loans were originated.
Although this inevitably reduces the sample size somewhat,\255\ there
is no reason to believe that the consumers who were excluded due to a
lack of sufficient data before or after the PACE origination are
dissimilar to those who were included. In particular, the Dynamic model
from the PACE Report generally includes all consumers regardless of
whether they have full data before and after the PACE origination and
finds substantively similar estimates to the Static model.
---------------------------------------------------------------------------
\255\ See PACE Report, supra note 12 at 53.
---------------------------------------------------------------------------
A PACE company commenter criticized the fact that the CFPB's data
request asked for a single application approval date for the PACE loan.
The commenter stated that this date definition was ambiguous because it
could be the date the financing agreement was executed or the date the
contractor and property owner received the notice to proceed, among
other possibilities. The commenter asserted that PACE companies
interpreted this date in inconsistent ways, and that the PACE Report
may have incorrectly counted some applications as not going forward
when the recorded assessment may just be missing.
The CFPB acknowledges the challenges that commenters raised with
defining relevant dates in its PACE data collection but disagrees that
this undermines the conclusions of the PACE Report. The CFPB consulted
at length with PACE companies, including the commenter who expressed
concerns with the date specifications, prior to issuing its data
request. Given the inherent challenges of issuing a single,
standardized data request to multiple private companies, the CFPB's
voluntary data collection was reasonably specific with respect to
identifying date specifications. Further, the PACE Report includes
robustness analysis using alternate date definitions, which yielded
substantively similar results.
One PACE company asserted that the PACE Report's treatment of the
date when PACE payments are due was improper, making the findings of
the Report invalid. In the PACE Report, the CFPB described that the
``treatment'' by
[[Page 2480]]
a PACE loan occurs when the first PACE payment was due or would have
been due. The commenter stated that, because Application-Only Consumers
did not obtain PACE financing, the CFPB should not refer to the period
after the first PACE payment would have been due for these consumers as
the post-treatment period, because they did not receive a PACE loan and
thus experienced no ``treatment.'' The commenter further stated that
any delinquencies associated with non-PACE alternative financing for
Application-Only consumers would be included in the pre-treatment
period, biasing the PACE Report's estimates of the effect of PACE loans
on consumer financial outcomes towards zero.
The CFPB does not agree with some commenters' assertion that the
imprecision in the dates used in the PACE Report invalidates the
results of the Report. If anything, measurement error of this nature
would increase the likelihood of finding no impact of PACE loans on
consumer financial outcomes. In general, measurement error in a
regression analysis such as the one in the PACE Report would tend to
bias results towards zero, that is, toward finding that PACE loans have
no impact on consumer financial outcomes. This is not what is found in
the PACE Report.
One PACE company expressed concern that the PACE Report includes
PACE loans with a performance window during the COVID-19 pandemic. The
commenter asserted that the pandemic impacted credit performance
outcomes for many Americans. The commenter also asserted that, during
this time, mortgages and student loans were subject to forbearance
programs, and that forbearance was also available for some property tax
payments. The commenter also stated that there is not a methodological
strategy that would have allowed the authors of the PACE Report to
disentangle the impact of the pandemic from the impact of PACE loans on
consumers' financial outcomes.
The CFPB does not agree with commenters that the use of information
during the COVID-19 pandemic undermines the conclusions of the Report
that were relied on in the proposal and in this final rule. Despite
widespread economic disruption during the pandemic, mortgage
delinquency rates fell during the early days of the pandemic and
remained low for years.\256\ This was due in part to assistance and
forbearance programs such as those issued under the CARES Act enacted
by Congress in March 2020.\257\ With mortgage delinquency rates
suppressed generally for all consumers during the pandemic, if
anything, the CFPB would expect the gap in mortgage delinquency rates
between PACE consumers and Application-Only Consumers to be compressed
during this period, leading to a smaller estimated effect of PACE on
primary mortgage delinquency during the study period compared to pre-
pandemic, independent of the true average impact of PACE loans on
consumers' finances. Indeed, although the PACE Report documents that
PACE loans had a smaller impact on mortgage delinquency for loans
originated after 2018, a point cited by several industry commenters, it
is precisely these loans that were potentially impacted by the COVID-19
pandemic. The reduced impact of PACE loans on mortgage delinquency
during this period may be due in part to the overall reduction in
mortgage delinquency due to pandemic assistance and forbearance
programs.
---------------------------------------------------------------------------
\256\ See e.g., Ryan Sandler & Judith Ricks, The Early Effects
of the COVID-19 Pandemic on Consumer Credit, Off. of Rsch. Issue
Brief, CFPB (Aug. 2020), https://files.consumerfinance.gov/f/documents/cfpb_early-effects-covid-19-consumer-credit_issue-brief.pdf (showing the reported rate of new delinquencies on
mortgage loan accounts fell between March 2020 and June 2020, after
being flat or increasing gradually for the year prior.); Lisa J.
Dettling & Lauren Lambie-Hanson, Why is the Default Rate So Low? How
Economic Conditions and Public Policies Have Shaped Mortgage and
Auto Delinquencies During the COVID-19 Pandemic, FEDS Notes, Bd. of
Governors of the Fed. Rsrv. Sys. (Mar. 4, 2021), https://doi.org/10.17016/2380-7172.2854 (showing mortgage delinquencies fell
throughout the pandemic); Ryan Sandler, Delinquencies on Credit
Accounts Continue to be Low Despite the Pandemic, CFPB (June 16,
2021), https://www.consumerfinance.gov/about-us/blog/delinquencies-on-credit-accounts-continue-to-be-low-despite-the-pandemic/ (showing
new delinquencies on mortgages remained low from July 2020 through
April 2021); Ctr. for Microeconomic Data, Quarterly Report on
Household Debt and Credit 2024, Fed. Rsrv. Bank of NY Rsch. & Stat.
Grp. (Nov. 2024), https://www.newyorkfed.org/medialibrary/interactives/householdcredit/data/pdf/HHDC_2024Q3 (showing that
transitions into serious delinquency for mortgages were historically
low compared to 2009 through early 2024, nationally and in Texas and
California).
\257\ See Coronavirus Aid, Relief, and Economic Security Act,
Public Law 116-136 (Mar. 27, 2020) https://www.congress.gov/bill/116th-congress/house-bill/748/text (CARES Act).
---------------------------------------------------------------------------
Commenters generally did not provide additional data or studies
about the benefits and costs of the proposed rule, with one notable
exception. A PACE industry trade association obtained the same data as
was used in the PACE Report from the consumer reporting agency that
served as the CFPB's contractor. The trade association conducted
analysis of the data. The results of this analysis are described in a
comment from the trade association itself, as well as in comments from
individual PACE companies. The CFPB refers to the data and analysis in
these comments collectively as ``the Trade Group Analysis.'' The Trade
Group Analysis did not include a formal regression analysis to control
for other factors, such as a difference-in-differences analysis as used
in the PACE Report and did not report any measures of statistical
precision. Instead, the Trade Group Analysis claims to compare the raw
average rates of non-PACE mortgage delinquency across different groups,
using different comparison groups and sample choices than were used in
the PACE Report, as described below.
The Trade Group Analysis compared outcomes between Originated
Consumers (nominally as defined in the PACE Report) and an alternate
control group, a subset of Application-Only Consumers who took out a
secured loan after applying for the PACE loan and whose non-PACE
mortgage payment increased by at least $1,000 after applying for the
PACE loan.\258\ The analysis was further limited to applications for
both groups that were received between July 2018 and December 2018. The
proposed control group consisted of 312 homeowners. The Trade Group
Analysis found that homeowners who received PACE financing had better
outcomes than the control group. For example, three years after the
expected loan origination date, the 90-day mortgage delinquency rate
was 5.3 percentage points higher for the alternate control group than
for Originated Consumers.
---------------------------------------------------------------------------
\258\ The Trade Group Analysis uses alternate terms for the
relevant groups of PACE consumers than the terms Originated
Consumers and Application-Only Consumers used in the PACE Report. To
avoid confusion, the CFPB in this discussion refers to the groups
that are comparable to those used in the PACE Report using the terms
from the Report, and the alternate groups suggested by the
commenters as alternate control groups.
---------------------------------------------------------------------------
The Trade Group Analysis also presented results based on a control
group it refers to as ``Standard Financing'' consumers, which it
described as a group of consumers who resided in the same ZIP code as
an Originated Consumer and took on between $15,000 and $40,000 of debt
from a company that ``typically provides home improvement financing,''
between July 2018 and June 2019. The types of debt for the control
group included a mix of credit types, including credit cards, second
mortgages, and home improvement loans. The comparison shows these
Standard Financing consumers performing worse on several delinquency
outcomes and on credit score compared to Originated
[[Page 2481]]
Consumers and Application-Only Consumers.
The Trade Group Analysis includes data for the period after a PACE
loan is originated but before payments become due. The Trade Group
Analysis finds that including this window shows improved credit
performance for Originated Consumers compared to Application-Only
Consumers. Commenters note that consumers may be receiving benefits
from the PACE home improvement during this period even though they are
not yet making PACE loan payments. One commenter asserted that omitting
repayment data from the year following the PACE loan origination date
accounts for about half of the difference in the mortgage delinquency
rate between the PACE homeowners and the Application-Only homeowners.
Finally, the Trade Group Analysis reported data on consumer credit
scores. The Trade Group Analysis found that the average credit score
for Originated Consumers who applied for a PACE loan from the second
half of June 2019 through June 2020 increased 1.25 points more than the
average for Application-Only Consumers over a three-year period. A PACE
company stated that the improving trend in outcomes over time deserved
additional analysis and that relying on earlier data is misleading. The
commenter stated that the improvement in credit scores from 2019 to
2020 should be examined further to confirm that the trend continued
through 2021 and into the future. As with the analysis of delinquency
outcomes, the Trade Group Analysis does not conduct any statistical
analysis to account for variation in other factors, but rather simply
compares averages for the different groups, without reporting sample
sizes or measures of statistical precision.
The CFPB does not agree that the alternate control groups suggested
in the Trade Group Analysis are informative about the effect of PACE
loans on consumer financial outcomes. At the outset, the CFPB notes
that the goal for choosing a control group for a difference-in-
differences analysis is to find a group that will capture the
counterfactual. That is, the control group should capture how outcomes
would have changed for the treated group had they not been treated. It
is reasonable to expect that Application-Only Consumers would capture
that counterfactual trend for Originated Consumers--consumers in both
groups were approached by a home improvement contractor marketing the
PACE loan, agreed to apply for a PACE loan, and were approved for a
PACE loan. The PACE Report includes analysis supporting the assumption
that these two groups had similar trends in their financial outcomes
prior to applying for a PACE loan. In addition, the CFPB reiterates
that the relevant quantity for purposes of this rule is the overall
effect of PACE loans, including the way they are marketed and the fact
that they may induce consumers into undertaking a home improvement
project in the first place, or into financing a project that they might
otherwise pay cash for.
Additionally, the CFPB notes that the alternate control groups
suggested by the Trade Group Analysis are aimed at limiting attention
to consumers who have chosen to finance a home improvement project.
While in principle this might be an appropriate strategy to disentangle
the effects of PACE marketing from the unique features of the loans,
that will not identify the overall impact of PACE loans on consumer
financial outcomes, which is the relevant issue for the CFPB.
With respect to the Trade Group Analysis's approach to use only
Application-Only consumers whose mortgage payments increased
significantly, the CFPB notes that this subsample is small and highly
selected. As the commenter notes, this control group contains only 312
consumers--compared to 46,906 in the full Application-Only group. This
suggested control group is too small to have statistical power
necessary to draw conclusions about the effect of PACE on consumer
financial outcomes, even if the commenter had conducted a full
regression analysis.\259\ Furthermore, again, this alternate control
group would not capture the overall effect of PACE transactions on
consumers' financial outcomes, which the CFPB finds to be the relevant
issue here.
---------------------------------------------------------------------------
\259\ Although the commenter did not supply confidence bands or
other measures of statistical precision, some arithmetic shows that
there was no reasonable expectation that a sample size of 312 would
be sufficient. For example, the PACE Report estimates that PACE
loans increased non-PACE mortgage delinquency by 2.5 percentage
points, with a standard error of 0.00234. A 95 percent confidence
interval includes values within about 2 standard errors above and
below the central estimate. The PACE Report's estimates were based
on 46,906 observations in the control group, 150 times larger than
the alternate group offered by the commenter. Standard errors scale
with the square root of sample size, such that, as a first
approximation, we would expect standard errors about 12 times larger
for the commenter's estimate compared to those in the PACE Report,
and a 95 percent confidence interval for a sample size of 312 would
likely cover more than 6 percentage points on either side of a
central estimate.
---------------------------------------------------------------------------
The ``standard financing'' control group is also problematic. The
statistics provided by the commenters show that this control group was
very different from Originated Consumers along several key dimensions,
including credit score and delinquency rate prior to origination. For
instance, within the subsample of PACE applications that the Trade
Group Analysis chose to focus on, the average non-PACE mortgage
delinquency rates for Originated Consumers and Application-Only
Consumers prior to their PACE application was about 7 percent for both
groups. The ``standard financing'' group had a delinquency rate of just
0.61 percent.\260\ The Trade Group Analysis even notes that this
control group had much higher credit scores than PACE borrowers. The
commenters asserted that this is to be expected given that standard
financing companies primarily market to higher-credit score
individuals; however, this is precisely why the standard financing
group is not a reasonable control group.
---------------------------------------------------------------------------
\260\ The delinquency rates for the ``standard financing'' group
are so low, in fact, that the CFPB questions whether they were
calculated in a way that is comparable to the rates for PACE
applicants. The Trade Group Analysis describes that data on the
``standard financing'' group as aggregated statistics provided by
the credit reporting company, rather than account-level information
as in the data obtained by the CFPB and nominally used for the other
groups in the Trade Group Analysis. It is not clear from the
comments whether the credit reporting company necessarily calculated
aggregated delinquency rates in the same way as in the PACE Report,
or the same way as the Trade Group Analysis did for other groups.
---------------------------------------------------------------------------
The CFPB notes that the PACE Report does analyze the effect of PACE
loans in more recent years and continued to find that PACE loans
increase non-mortgage delinquency. The CFPB also notes that due to the
payment structure of PACE loans, it is impossible to fully evaluate
affordability without a lag of several years. As discussed above, PACE
loans may have a delay of up to a year and a half between origination
and the due date of the first property tax bill that includes the PACE
transaction. Because property taxes are typically billed annually or
semi-annually, it is difficult to evaluate affordability without
considering a period of at least two years after payments begin, as
even a period of this length includes only two or possibly four
payments. As a result, a methodology similar to what was done in the
Static Model of the PACE Report--requiring three years of non-PACE
mortgage payment information after the origination of the PACE loan--is
necessary. This means that even if the CFPB could gather and analyze
additional data on more recent PACE loans with no delay, it would not
be feasible to study the affordability of PACE loans originated after
around 2021. Given that gathering and
[[Page 2482]]
analyzing data is not an instantaneous process, the data considered in
the PACE Report, including PACE loans originated through 2019, is as
timely as is reasonably feasible.
For the reasons described above, the CFPB continues to rely on the
PACE Report, among other sources, as the basis for the CFPB's
consideration of the likely impacts of this final rule.
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 ability-to-repay provisions, and the clarification 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
Ability-To-Repay Provisions
The final rule amends 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 rule also provides that a PACE transaction
is not a qualified mortgage as defined in Sec. 1026.43.
Although the CFPB uses the overall estimates of the effect of PACE
loans on consumer financial outcomes from the PACE Report to illustrate
possible aggregate benefits and costs of the ability-to-repay
provisions of the rule, the CFPB notes that both benefits and costs may
differ due to the changes in State laws in recent years. Both
California and Florida now require PACE companies to verify income
before making a PACE loan, such that this final rule may have less
impact than might be expected in a world where PACE companies did not
always verify prospective borrowers' income, as was the case prior to
2018 in California and prior to 2024 in Florida. It is unclear to what
extent the impacts of these State laws replicate the impacts of the
protections included in this rule. In particular, Florida's recent
statute only requires that annual PACE loan payments be less than 10
percent of annual household income.\261\ Data from the PACE Report
suggests that PACE loans with payments above this threshold are rare,
such that consumers would rarely have an application for a PACE loan
denied due to Florida's income requirement.\262\ However, merely
verifying income may have benefits and costs. The final rule generally
will not create benefits or costs related to verifying income, as this
is now required at baseline under State laws in States where PACE is
most active.
---------------------------------------------------------------------------
\261\ See Fla. Stat. sec. 163.081(3)(a)(12).
\262\ See PACE Report, supra note 12, at Table 2 (showing that
75% of PACE loans had annual payments of less than $3,300, while 75%
of PACE borrowers with reported income had annual income above
$54,000, such that even a relatively high payment for a relatively
low-income PACE loan borrower would be well under 10% of income).
---------------------------------------------------------------------------
Potential Benefits and Costs to Consumers of the Ability-To-Repay
Provisions
Benefits of Reducing Non-PACE Mortgage Delinquency Caused by
Unaffordable PACE Transactions
Under the final rule, consumers who are not found to have a
reasonable ability to repay the loan would not be able to obtain a PACE
loan. In general, the CFPB expects that consumers who will be denied
PACE transactions due to the required ability-to-repay determination
would otherwise struggle to repay the cost of the PACE transaction.
These consumers generally will benefit from the rule.
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.\263\
---------------------------------------------------------------------------
\263\ Id.
---------------------------------------------------------------------------
Two PACE companies characterized the estimated effect of a PACE
loan on non-PACE mortgage delinquency from the PACE Report as small.
These commenters also stated that the CFPB's estimate was not
meaningful, because the PACE Report shows the effect of PACE loans on
non-PACE mortgage delinquency was short-lived, with non-PACE
delinquency increasing immediately after PACE payments become due, and
gradually returning to normal over the subsequent 24 months.
The CFPB does not agree with the commenter's characterization of
the effect of a PACE transaction on mortgage delinquency being small.
The PACE Report shows that the baseline rate of mortgage delinquency
among PACE borrowers in the two years prior to receiving a PACE loan
was 7.2 percent, such that the PACE loan increased the risk of
delinquency by 35 percent relative to that baseline. With respect to
the PACE Report finding impacts of PACE loans on delinquency primarily
early in the term of the loans, the CFPB notes that delinquency early
in the term of a loan is a more direct signal of the affordability of
the loan than later delinquency.\264\
---------------------------------------------------------------------------
\264\ See 85 FR 86308, 86317 (Dec. 29, 2020).
---------------------------------------------------------------------------
PACE industry stakeholders also expressed skepticism about the
CFPB's estimated effect of PACE loans on non-PACE mortgage delinquency
generally, citing instead data on property tax delinquencies.
Specifically, a PACE company cited a report by a bond rating agency
suggesting a delinquency rate of 3 to 4 percent on PACE loans, while a
special assessment administrator stated that properties with PACE loans
it managed experienced a property tax delinquency rate of 2 to 3
percent.
Industry commenters' characterization of property tax delinquency
rates of PACE borrowers is problematic. As discussed above, property
tax payments are paid by mortgage servicers for consumers who have a
mortgage with an escrow account, and even for mortgages without a pre-
existing escrow account, servicers will generally establish an escrow
account to pay an otherwise delinquent property tax bill. As a result,
a property tax delinquency would generally only manifest in the data
cited by commenters if the borrower does not have a mortgage. This
means that the true share of consumers who are unable to afford a PACE
loan is likely significantly higher than the 2 to 4 percent property
tax delinquency rate cited by the commenters. Moreover, a local
government commenter that runs its own PACE program asserted that its
loans had a tax delinquency rate of around 0.5 percent, suggesting that
privately-run PACE programs have significantly higher tax delinquency
rates than could be explained by unrelated shocks to consumers' income
or expenses.
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
[[Page 2483]]
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 all PACE borrowers), a 3.8 percentage point increase for
consumers with near-prime credit scores (23.4 percent of all PACE
borrowers), and a 6.2 percentage point increase for consumers with
subprime credit scores (20.4 percent of all PACE borrowers).\265\ The
consumers with subprime credit scores would be the most likely to be
excluded by the ability-to-repay analysis that the final rule requires.
Credit score tends to be correlated with income. Moreover, credit
scores are based on credit history, and the ability-to-repay
requirements in the final rule require consideration of credit history.
---------------------------------------------------------------------------
\265\ Id. at Figure 10.
---------------------------------------------------------------------------
A PACE company stated that the PACE Report's finding of larger
impacts for borrowers with sub-prime credit scores had no bearing on
the affordability of PACE loans. The commenter asserted that consumers
with sub-prime credit scores are inherently more likely to default on a
non-PACE mortgage, regardless of whether they take up a PACE loan, such
that larger increases in delinquency for this group are not related to
the specific effect of PACE loans on that group.
The CFPB also does not agree that the higher delinquency risk of
low-credit score individuals invalidates the results for that subgroup
reported in the PACE Report. The subgroup analyses in the PACE Report
were limited to members of each subgroup in both the Originated
Consumers and Application-Only Consumer groups. This means that low-
credit score individuals are compared to other low-credit score
individuals, with a similarly high underlying risk of mortgage default.
The fact that Originated Consumers with lower credit scores saw a
larger increase in delinquency than Originated Consumers with higher
credit scores is thus relevant to demonstrate that lower credit score
individuals may be more negatively impacted by PACE transactions.
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.\266\ 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 this
final rule's ability-to-repay requirements in some respects.
---------------------------------------------------------------------------
\266\ 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.\267\ 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.\268\ However, the Report
also finds that the effect of PACE transactions 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.\269\
The PACE Report is inconclusive with respect to whether income or a
calculation of DTI predicted negative effects of PACE transactions 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.\270\
---------------------------------------------------------------------------
\267\ Id.at 45.
\268\ Id. at 46.
\269\ Id. at 46-47.
\270\ Id. at 47-48.
---------------------------------------------------------------------------
One PACE company took issue with the CFPB's finding in the
1022(b)(2)(A) analysis of the proposal that collecting income
information from potential PACE borrowers could lead to better
outcomes. The CFPB's discussion of this subject was based on the PACE
Report's finding that PACE outcomes improved in California relative to
borrowers in Florida after the implementation of the California PACE
Reforms. The commenter stated that the PACE Report's analyses of the
2018 California PACE Reforms were not valid, as the Report considered
only the first effective date of the statutes collectively referred to
as ``the 2018 California PACE Reforms,'' ignoring the effective dates
of statutes that became effective later in 2018. The commenter also
stated that the CFPB did not account for the fact that the 2018
California PACE Reforms were endogenous--that is, that the laws were
not implemented in California by chance, such that other unrelated
factors may have contributed to both the implementation of the 2018
California PACE Reforms and any subsequent changes in PACE lending in
California.
The CFPB reiterates, as it said in the proposal and again in this
final rule, that this analysis was suggestive rather than causal. The
CFPB agrees that the 2018 California PACE Reforms may not constitute an
exogenous, natural experiment, and that the measured changes in the
effect of PACE loans in California on consumers following the
implementation of those statutes may not reflect the causal impact of
the laws. However, the PACE Report's use of the 2018 California PACE
Reforms as a benchmark to inform the potential impact of requiring the
collection of income information remains appropriate to inform the
CFPB's analysis of benefits, costs and impacts of this final rule.
In addition, the CFPB does not agree that the variety of
implementation dates of the 2018 California PACE Reforms was material
to the analysis in the PACE Report. First, the difference is a matter
of months, such that most PACE loans that were considered to be subject
to the 2018 California PACE Reforms in the PACE Report were originated
after all of the component statutes were in place. Further, by using
the first implementation date as the date of ``treatment'' by the State
laws, one would expect later laws contributing to the overall effect to
bias the effect of the Reforms toward zero (as some loans originated in
2018 were in fact only partially treated, but were considered in the
analysis to be fully treated, potentially lowering the estimated
impact).
The facts documented by the PACE Report, described above, indicate
that the ability-to-repay provisions in this final rule will likely
prevent some consumers who cannot afford a PACE transaction from
entering into a PACE transaction and suffering negative consequences as
a result of that transaction.
[[Page 2484]]
Quantifying Aggregate Benefits of Preventing Unaffordable PACE
Transactions
Consumers who become delinquent on their mortgages will, at a
minimum, incur late fees on their payments. If a PACE transaction
causes a borrower to be in delinquency for a longer period of time, 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 transactions on credit scores--perhaps in part
because PACE borrowers tended to already have relatively low credit
scores prior to the PACE transaction. The CFPB quantifies the
individual and aggregate monetary benefits of avoiding these consumer
harms below to the extent possible given the data available to the CFPB
from the PACE Report, information provided by commenters, and other
data sources. The CFPB uses the estimates from the PACE Report of the
average effect of PACE transactions on consumer financial outcomes to
estimate these benefits but notes that these estimates likely overstate
aggregate benefits to the extent that State laws already protect
consumers from some unaffordable PACE transactions.
The PACE Report finds that the average monthly mortgage payment for
consumers with PACE transactions originated between 2014 and 2019 was
$1,877.\271\ Assuming a late fee of 5 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.
---------------------------------------------------------------------------
\271\ Id. at 16.
---------------------------------------------------------------------------
Two PACE companies stated that the CFPB's estimate of late fee
costs related to PACE loan-induced delinquencies in the proposal was
not significant and that this generally indicated that the benefits to
consumers of preventing non-PACE mortgage delinquencies due to PACE
transactions were limited. However, the CFPB did not assert that this
was the only cost of potentially unaffordable PACE loans, only that it
was a cost that can be readily quantified. The CFPB discusses other
potential costs, including from potential foreclosures, in the proposal
and below in this final rule.
Foreclosure is extremely costly, both to the consumer who
experiences foreclosure and to society at large. In its 2021 RESPA
Mortgage Servicing Rule, the CFPB 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.\272\ The CFPB adopts the same assumption here with an
adjustment for inflation, 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 2024 dollars, the benefit of an
avoided foreclosure is at least $35,538.
---------------------------------------------------------------------------
\272\ See 86 FR 34889 (June 30, 2021).
---------------------------------------------------------------------------
The CFPB 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.\273\ This small effect on credit scores
likely combines large reductions in scores for consumers who became
delinquent on their non-PACE mortgages with zero or positive effects
for consumers who are able to afford PACE loans; regardless, this
suggests that the aggregate benefits from credit score changes would be
negligible in magnitude.
---------------------------------------------------------------------------
\273\ See PACE Report, supra note 12, at 41.
---------------------------------------------------------------------------
Two PACE companies stated that credit score is a key measure of
consumers' financial health, and further stated because the PACE Report
does not find evidence of an effect of PACE loans on PACE borrowers'
credit scores, this means that PACE loans are not harmful, or else that
the methodology of the PACE Report is flawed.
The CFPB does not agree with the assessment that credit score is
the only outcome that matters for consumers, such that the lack of an
average credit score impact means that PACE loans under the baseline
impose no costs on consumers. Credit scores can be a useful measure of
credit health but are not the only measure of potential impacts to
consumers. The PACE Report documents impacts that lead to significant
costs to consumers, such as mortgage delinquency, independent of any
changes in average credit scores. Further, the PACE Report documents
that PACE borrowers tended to have relatively low credit scores on
average. The credit scores of individuals with lower scores are often
relatively insensitive to marginal negative information such as an
additional delinquency. The CFPB also does not agree that the lack of
an effect on average credit scores combined with increased mortgage
delinquency indicates a problem with the methodology of the PACE
Report, as a commenter suggested. While the CFPB views the increase in
non-PACE mortgage delinquency as significant and evidence that
consumers have difficulty repaying PACE loans, the share of PACE
consumers who experience negative credit outcomes is small enough in
absolute size that the average change in credit score would be expected
to be relatively small. Indeed, the estimated average effect of PACE
loans on credit scores from the PACE Report is consistent with a large
negative credit score effect for PACE consumers who became delinquent
on a non-PACE mortgage due to the PACE loan. Specifically, the PACE
Report estimates that a PACE loan reduces consumers' credit scores by
an average of 1.65 points, with a 95 percent confidence interval
spanning from 0.98 to 2.32 points. If this change in credit scores were
concentrated in the 2.5 percent of Originated Consumers for whom PACE
loans caused a 60-day mortgage delinquency, with no average effect on
the credit scores of other consumers, that would mean the affected
consumers would have credit scores reduced by an average of about 65
points. While the effect of a mortgage delinquency on credit scores
depends on a number of factors, including the rest of the consumer's
credit history, the CFPB finds this is a plausible effect size. As
such, the small overall average effect of PACE loans on Originated
Consumers' credit scores does not suggest problems with the methodology
of the PACE Report.
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.\274\ For the 71.1 percent of such borrowers with a pre-
existing non-PACE mortgage,\275\ 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.\276\ The PACE Report
[[Page 2485]]
finds that PACE transactions increase the probability of a foreclosure
by 0.5 percentage points over a two-year period.\277\
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\274\ Id. at Figure 16.
\275\ Id. at 18.
\276\ 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 CFPB's 2013 RESPA Servicing Rule
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. See CFPB, 2013 RESPA Servicing Rule Assessment
Report (Jan. 2019), https://files.consumerfinance.gov/f/documents/cfpb_mortgage-servicing-rule-assessment_report.pdf.
\277\ 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 CFPB'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.
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Assuming that 0.5 percent of consumers who engage in a PACE
transaction will ultimately experience foreclosure as a result of the
PACE transaction, this final rule could prevent about 120 foreclosures
per year, for an aggregate annual benefit to consumers of about $4.2
million per year. If the 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.
Multiple PACE industry commenters disagreed with the CFPB's
assessment of the potential impacts of the rule on prevented
foreclosures. Two PACE companies stated that the data in the PACE
Report only capture initiated foreclosures, while not all foreclosures
are completed. These commenters also cited an academic study of PACE
using data from early in California's PACE program, which found a
completed foreclosure rate on PACE-encumbered properties of about 0.5
percent by 2015.\278\ A PACE industry trade association stated that it
would be impossible for the proposed rule to prevent 120 foreclosures
per year as the proposed 1022(b) analysis projected, because in
California there had only been seven foreclosures of PACE-encumbered
properties since 2019; the commenter did not cite any source for this
statistic. In addition, one PACE company stated that the statewide
foreclosure rates for California and Florida were similar to the
national average, demonstrating that PACE loans do not cause a large
number of foreclosures. The same commenter also stated that the PACE
Loss Reserve Program in California, established to compensate non-PACE
mortgage holders for losses related to foreclosures on properties with
PACE loans, had no claims between 2014 and 2020 and only two claims
between 2020 and 2023. The commenter further stated that this meant
that PACE loans do not contribute to default on non-PACE mortgages.
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\278\ Laurie S. Goodman & Jun Zhu, PACE Loans: Does Sale Value
Reflect Improvements?, 21 The Journal of Structured Fin., no. 4
(2016).
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The CFPB acknowledged above and in the proposal that the credit
record data used in the PACE Report cannot reliably distinguish between
initiated and completed foreclosures but notes that this does not mean
the data are limited to initiated foreclosures. Indeed, as discussed
above, the ratio of the PACE Report's estimated effect on foreclosures
to the estimated effect on 60-day delinquency is consistent with other
evidence on the share of 60-day delinquent mortgages that end in a
foreclosure sale. In addition, the CFPB notes that even an initiated
foreclosure that is not ultimately completed imposes significant costs
on consumers, including fees, time costs, and distress, even if these
costs are more difficult to quantify.
The CFPB is not aware of the underlying data behind the statistic
cited by the PACE industry trade association that there were only seven
foreclosures in California on PACE-encumbered properties since 2019.
However, it is not plausible that this is the total number of
properties with a PACE loan that had a completed foreclosure in
California since 2019. Even if PACE loans had no effect on the
probability of foreclosure, a small percentage of consumers face
foreclosure every year for reasons unrelated to PACE transactions, and
this base rate alone should account for more than seven foreclosures.
For instance, the PACE Report indicates that about 0.8 percent of
Originated Consumers had at least one foreclosure in the two years
prior to taking out a PACE loan.\279\ Even allowing that not all of
these foreclosures would ultimately have been completed, this
translates to at least a few hundred foreclosures in total. Unless PACE
loans drastically decreased the rate of foreclosure, which would be
inconsistent with the PACE Report's other findings on non-PACE mortgage
delinquency, it is unlikely that there have been only 7 completed
foreclosures over the past 5 years.\280\ It is possible that the
commenter was referring to the number of completed tax foreclosures
initiated by the taxing authority. A low rate of completed foreclosures
initiated by the taxing authority would be consistent with other
comments indicating that tax foreclosures are infrequent and take a
considerable amount of time and the CFPB's conclusion discussed above
that consumers struggling with paying a PACE loan will rarely default
on the PACE loan payments themselves, but rather will become delinquent
on their non-PACE mortgage. Because of this conclusion, the number of
tax foreclosures does not reflect the potential benefits of the rule in
preventing all types of foreclosures, nor does it reflect on the
methodology of the PACE Report.
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\279\ See PACE Report, supra note 12, at Table 9.
\280\ The CFPB also notes that the period following 2019 is a
difficult time to study foreclosures as an outcome, as mortgage
forbearance required by the CARES Act in 2020 and 2021 prevented
many foreclosures from proceeding.
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The CFPB does not find the average foreclosure rates in California
and Florida relative to the national average to be a relevant
consideration as some commenters suggested. Given the relatively small
scale of the PACE industry and the size of the effect of PACE loans on
foreclosure estimated in the PACE Report, the CFPB would not expect
PACE loans to measurably impact the foreclosure rate statewide. The
CFPB also does not find the usage of the California PACE Loss Reserve
Program to be a relevant consideration. Non-PACE mortgage-holders will
only incur losses due to a PACE loan-related foreclosure if the
foreclosed property has less equity than outstanding PACE payments at
the foreclosure sale. The period from 2014 through the present
represents a time of rising house prices in California, and moreover
California State law imposed maximum combined loan-to-value ratios for
PACE loans.\281\ As a result, it is unsurprising that foreclosures in
California related to PACE loans would not result in claims on the PACE
Loss Reserve Program.
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\281\ Cal. Fin. Code sec. 22684(h).
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Other Benefits of Preventing Unaffordable PACE Loans
In the proposal, the CFPB discussed the benefits to consumers
implied by the finding from the PACE Report that credit card balances
increased significantly for PACE borrowers who did not have a pre-
existing non-PACE
[[Page 2486]]
mortgage, compared to the change in balances for PACE applicants who
did not receive a PACE loan and also did not have a pre-existing non-
PACE mortgage.\282\ As discussed above, the CFPB agrees with commenters
that this finding is, at best, merely suggestive, as the PACE Report
shows that, unlike the Report's estimates for mortgage delinquency, the
estimates for credit card balances did not meet the required
assumptions for a valid difference-in-differences analysis. While it is
plausible that consumers who do not have a non-PACE mortgage will incur
credit card debt as a result of an unaffordable PACE loan, the CFPB
does not have a reliable estimate of whether or how much this will be
prevented by this rule.
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\282\ See PACE Report, supra note 12, at 41.
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A PACE company opined that credit card delinquency would have been
a more relevant outcome to study than non-PACE mortgage delinquency
because consumers may prioritize mortgage payments over credit card
payments. The commenter also noted that the PACE Report's analysis of
credit card delinquency included more data than the analysis of
mortgage delinquency, as the delinquency analysis for each type of
credit studied in the Report was limited to consumers with the relevant
type of credit prior to obtaining a PACE loan, and more consumers had
credit cards than non-PACE mortgages. Separately, a PACE industry trade
association stated that the CFPB's estimate of credit card interest
savings was overstated because, if PACE loans were not available,
consumers would pay for the same home improvement projects with a
credit card instead, likely incurring significant interest charges as a
result in the view of the commenter.
The CFPB does not agree that credit card delinquency is a better or
more central outcome to study than non-PACE mortgage delinquency. As
discussed above, for the substantial majority of consumers with a pre-
existing non-PACE mortgage, failure to pay a PACE loan will manifest in
the data as a mortgage delinquency. The PACE Report shows that PACE
loans clearly increase non-PACE mortgage delinquency, with less clear
effects on credit card delinquency. Also, the relative sample sizes of
PACE borrowers who had credit cards compared to PACE borrowers with
pre-existing non-PACE mortgages are irrelevant. The PACE Report shows
that the sample of PACE borrowers with a pre-existing non-PACE mortgage
was large enough that the resulting difference-in-differences estimates
were precise, with reasonably small standard errors.
Credit card delinquency rates may be informative for consumers
without a non-PACE mortgage, although the CFPB notes that industry
commenters also held that many consumers in the PACE Report's data who
appeared not to have a non-PACE mortgage likely in fact had a mortgage,
such that we would not expect a strong effect on credit card
delinquency or balances in this group. Indeed, if those comments are
correct, the effect of PACE loans on consumers' credit card outcomes is
probably more negative than what was estimated in the PACE Report.
With respect to the commenter's assertion that consumers will use
credit cards if a PACE loan is not available, and thus incur additional
interest charges, the CFPB finds this to be unlikely for multiple
reasons. First, the PACE Report shows that, if anything, Originated
Consumers tend to have higher credit card balances than Application-
Only Consumers. While there are limitations to that finding, discussed
above in part VI.C, it is clearly inconsistent with the notion that
credit card usage will increase absent a PACE loan. In addition, the
commenter presupposes that, absent a PACE loan, the consumer would
necessarily engage in the home improvement project at all.
To the extent that some consumers continue to receive PACE
transactions that they are not able to afford in contravention of the
ability-to-repay requirements of this final rule, the rule will benefit
those consumers by providing an avenue for obtaining relief under the
civil liability provisions of TILA and Regulation Z. The CFPB does not
have data indicating how often this would occur, although as noted
below in its discussion of litigation costs to covered persons, the
CFPB expects that this would be infrequent in the long run.
Costs of the Ability-to-Repay Provisions to Consumers
In the proposal, the CFPB discussed the possibility that 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 CFPB has previously noted in the context
of non-PACE mortgages that the time required to produce pay stubs or
tax records should not be a large burden on consumers. This may have
been different in the past 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.
However, given recent changes in State law, the rule likely will not
increase time costs in a meaningful way for PACE applicants because
these consumers already must produce at least some documentation
similar to what will be necessary for an ability-to-repay determination
as part of a PACE application under the rule. Producing income
information is also likely to be required by alternative financing
options to a PACE transaction, as this is generally required for home
improvement loans covered by TILA.
Consumers will also face costs under the rule due to losing access
to PACE financing. This includes consumers whose PACE applications are
denied due to failing the ability-to-repay determination, as well as
consumers who do not apply for a PACE loan as a consequence of the
rule.\283\ For consumers who cannot, in fact, afford the cost of a PACE
transaction, being denied is likely a benefit on net, as discussed
above. However, some consumers who could, in fact, afford and benefit
from a PACE transaction may be denied as a result of the rule.
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\283\ Consumers might not apply for a PACE loan due to the
effect of the rule if home improvement contractors who otherwise
might have marketed PACE financing withdraw from that market, or if
the consumers opt not to proceed with a PACE transaction as a
consequence of the provisions of the rule.
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To quantify the cost to consumers of having applications for PACE
transactions denied, the CFPB would need to be able to calculate the
number of consumers that could afford the cost of a PACE transaction
and would benefit from it but would be denied as a result of the rule,
and the cost to the average consumer of being denied. The CFPB 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 rule will 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, but
then fully recovered in 2019. Initially, approval rates fell from
around 55 percent to around 40 percent.\284\ However, the Report finds
that approval rates recovered over time, rising back to around 55
percent by the
[[Page 2487]]
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 7 percentage points, although this
average includes both the initial drop and the later recovery.\285\
Although the provisions of the rule differ from the requirements of the
2018 California PACE Reforms, it is likely that the rule will have
limited additional effect on PACE transaction approval rates in
California. Instead, the rule will primarily reduce approval rates
instates that have not adopted robust ability-to-repay provisions.
While Florida now has a requirement for PACE companies to confirm
consumers' income, the statute generally provides that the total
financing cannot exceed 10 percent of the property owner's annual
household income,\286\ which, as discussed above, is a threshold
unlikely to cause many consumers to be rejected.
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\284\ See PACE Report, supra note 12, at Figure 16.
\285\ Id. at Table 13.
\286\ Fla. Stat. sec. 163.081(3)(a)(12).
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The CFPB can calculate an upper bound on the number of PACE
applicants who are likely to be denied due to the rule, using the
change in approval rates discussed above, along with the number of PACE
loan applications received by PACE companies at the baseline. The PACE
Report indicates that PACE companies received about 45,500 ap