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Trade Groups Raise Alarm on PACE Loan Guidance

Phil Hall
Aug 17, 2016

A coalition of industry trade groups is seeking to stop proposed changes to how the Federal Housing Administration (FHA) and Department of Veterans Affairs (VA) handle Property Assessed Clean Energy (PACE) loans raise questions about lack of consumer protections and increased risks to FHA and VA insurance programs.

Last month, the FHA and the VA issued guidance to enable their agencies to finance or refinance residential with energy-related installations funded through the PACE program. In a letter to U.S. Department of Housing & Urban Development (HUD) Secretary Julian Castro and VA Secretary Robert McDonald, the trade groups sought the suspension of this guidance in favor of a new proposal for rule-making that would ensure lenders, consumers and federal agencies were free from risks associated with PACE loans.

"Our associations support responsible efforts to provide homeowners with affordable and accessible financing for energy efficient home improvements, and sounder alternatives to the FHA's and VA's new PACE guidelines already exist," the letter said. "Allowing any PACE loan amount to hold a senior priority undermines the lender's (and the government's) collateral position and disrupts the very nature of secured lending. Moreover, rather than requiring definitive subordination of the PACE loan to the FHA or VA mortgage, the new guidance simply declares that a PACE loan structured as a tax assessment is not a super lien. But this declaration is a form over substance evasion that fails to protect the FHA Mutual Mortgage Insurance Fund and the VA loan guaranty program."

To further strengthen their point, the trade groups noted how PACE loans fell outside the jurisdiction of a certain regulatory authority that has established a near-omnipresent authority over lending activities.

"PACE loans are not typically accompanied by federal Consumer Financial Protection Bureau disclosures and protections associated with home mortgages, including the new Know Before You Owe disclosures, right of rescission protections or the Ability to Repay standards," the letter said. "This is because PACE financing has been conveniently classified as a tax assessment rather than a loan. However, a PACE loan is still a financial obligation that can negatively affect one's mortgage repayment ability. Borrowers may not fully understand the consequences of assuming an increased financial obligation on their tax bill." 

The trade groups signing the letter included the American Bankers Association, American Land Title Association, Appraisal Institute; Credit Union National Association, Housing Policy Council of the Financial Services Roundtable, Independent Community Bankers of America, Mortgage Bankers Association, National Association of Federal Credit Unions, National Association of Realtors, Real Estate Services Providers Council and The Realty Alliance.

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