Jessica Christian/San Francisco Chronicle via AP
Jeremy Brenner, top, and Billy Hall of Luminalt work to install solar panels on the roof of a home in Menlo Park, California, July 13, 2022.
Regulators are cracking down on a predatory lending scheme for home improvement projects that has been advertised for over a decade as a climate-friendly way to save money.
The Property Assessed Clean Energy (PACE) program was meant to make it easier for homeowners to install clean-energy technology, such as solar panels. But many of the projects financed through PACE, which is administered through private companies, have forced homeowners to default on their property taxes, or even left them facing foreclosure.
The idea behind PACE, which Joe Biden championed as vice president after the 2008 financial crisis, is sound. A more energy-efficient dwelling can emit less pollution while bringing down energy bills, but many homeowners don’t have the capital to pay for the improvements up front. So PACE secures loans with a lien on the property, and homeowners pay back the cost of equipment, plus interest, on their property tax bill.
Biden touted the program as a triple win, bringing down pollution, saving money, and creating green jobs in the construction industry after the housing crash destroyed demand.
But a report published this week from the Consumer Financial Protection Bureau (CFPB), which used new data on PACE loans, found that over a two-year span, taking out a PACE loan increased the risk of mortgage delinquency by about 35 percent.
Borrowers were more likely to live in Black and Hispanic neighborhoods, the report finds, and PACE loans charged “substantially higher” interest rates than most home equity loans.
If a homeowner doesn’t make the increased payments that show up on property taxes—which can reach tens of thousands of dollars—she may lose the home. And a PACE lien is “super-priority,” meaning that the loan must be paid off before any other mortgage.
Along with this week’s report, the CFPB has issued a proposed rule that would require PACE lenders to assess a borrower’s ability to repay.
Local governments authorize PACE financing, collect payments, and are parties to the agreements. That gives a patina of state authority to the program. But governments then outsource origination and financing to private companies, including home improvement contractors that sell the loans door-to-door, often on behalf of separate loan administrators that securitize the assets.
“Our proposal is designed to get at not just the lenders, but also these administrators,” a senior CFPB official said on a Monday press call, referring to companies that securitize PACE loans and sell them on the secondary market. Among the biggest are Ygrene, FortiFi Financial, Home Run Financing, and Renew Financial.
The CFPB’s proposed rule, which was required by a 2018 law signed by President Trump but was never promulgated, could shield at-risk homeowners from being targeted through the predatory scheme. But the scandals surrounding PACE also underscore the persistent high cost of housing electrification, especially when a home-energy overhaul requires private financing.
New federal funds for clean-energy home improvements in last year’s Inflation Reduction Act include big rebates for technology like solar panels and heat pumps, some of which are designed to be applied at the point of sale. But other programs, such as a $27 billion Greenhouse Gas Reduction Fund, are designed to encourage tapping private lenders to lever up funds.
Clean-energy lenders catering their services to low-income areas are already seeing a boom in business. Earlier this year, I wrote about BlocPower, a tech startup that says it can deliver attractive returns to investors such as Goldman Sachs while also helping residents of low-income housing save money on their utilities. (It does not guarantee those savings, however, and Goldman said its profits don’t depend on bringing down energy bills.)
BlocPower has been hired to help decarbonize cities including Denver, Oakland, and Ithaca, New York. Last month, it inked a deal with Cambridge, Massachusetts.
Meanwhile, the pattern of PACE lending is shifting. More than 37 states have enabled PACE for commercial properties, but residential PACE borrowers have been concentrated in California and Florida. (The program originated in Berkeley, California, in 2008.)
The states have used the program for different purposes: In California, the most common home improvement project was installing solar panels, according to the CFPB report. In Florida, by contrast, almost 63 percent of PACE loans went to “disaster-related improvements,” with less than 7 percent installing solar panels.
Last October, the Federal Trade Commission and the state of California sued Ygrene over what they termed deceptive and fraudulent marketing practices.
Given the pattern of predatory lending associated with PACE, some Florida counties have attempted to bar the program. But a judge overrode local efforts to do so, ruling that a special district created to administer the program can continue giving out loans.
