The Economic Growth, Regulatory Relief, and Consumer Protection Act (Act) directs the CFPB to prescribe Truth in Lending Act (TILA) ability-to-repay (ATR) rules for Property Assessed Clean Energy (PACE) financing.  The CFPB recently issued a proposed rule that would require PACE creditors and PACE companies to consider a consumer’s ability to repay when issuing a new PACE loan, amend Regulation Z to address how it applies to PACE transactions, and adjust disclosure requirements to better fit PACE loans.  Comments must be received by the later of July 26, 2023 or 30 days after the date the proposal is published in the Federal Register.

As explained in our previous blog, PACE financing is defined as financing to cover the costs of home improvements that result in a tax assessment on the real property of the consumer.  In the proposed rule, the CFPB states that these loans differ from other loans traditionally covered under Regulation Z because they impact tax liability for consumers, they create a priority lien attached to the consumer’s home, they are typically higher cost loans, and many PACE borrowers are already making payments on an existing mortgage loan.  The Bureau acknowledges that PACE financing is not new and there are existing state laws that cover them.

In the proposal, the CFPB focuses on amendments made to California’s consumer protection laws that require a PACE administrator to make a determination that the consumer has a reasonable ability to meet the annual payment obligations based on the consumer’s income, assets, and current debt obligations.  The Bureau also discusses California’s financial disclosures prior to consummation; three-day right to cancel, which is extended to five days for older adults; mandatory confirmation-of-terms calls; and restrictions on contractor compensation.

The proposed amendments to Regulation Z include, among other things:

  • Clarification that the commentary’s exclusion to “credit,” as defined in § 1026.2(a)(14), for tax liens and tax assessments applies only to involuntary tax liens and involuntary tax assessments;
  • Requirement that the consumer be provided with modified versions of the Loan Estimate and Closing Disclosure.  The modifications including the removal of escrow related fields, a requirement that PACE and other property tax obligations be identified separately, and a requirement that the PACE company be identified;
  • Exceptions for PACE loans from requirements to establish escrow for higher-priced mortgage loans;
  • Application of Regulation Z’s ATR requirements in section 1026.43 to PACE transactions with a number of adjustments, including that such transactions are not eligible to be qualified mortgages; and
  • Extension of the ATR requirements and the liability provisions of TILA section 130 to any “PACE company.”

The Bureau published a Fast Facts document outlining the proposed amendments to Regulation Z.