The CFPB Crosses the Finish Line to Regulate Property Assessed Clean Energy Financing
On December 17, 2024, the Consumer Financial Protection Bureau (CFPB or Bureau) issued its final rule (Final Rule) applying certain residential mortgage requirements to Property Assessed Clean Energy (PACE) financing. The CFPB issued the Final Rule in response to the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA), which required the CFPB to issue regulations applying the Truth in Lending Act’s (TILA) ability to repay and civil liability provisions to PACE financing. The Final Rule is materially similar to the CFPB’s May 2023 proposed rule and becomes effective March 1, 2026.
Background and Regulatory Scrutiny
PACE programs are established by states and municipalities to provide homeowners an alternative to traditional financing for energy-efficient home improvements. A PACE obligor finances home improvements through a special tax assessment on their real property. Repayment of the PACE transaction is secured by a property tax lien that takes priority over existing and future mortgages on the obligor’s real property. Although government agencies administer PACE programs, private home improvement financing companies typically originate the transactions, often through door-to-door or point-of-sale contractors soliciting homeowners for their products and services and providing applications and disclosures relating to the PACE transaction.
PACE financing has drawn scrutiny from regulators and consumer advocates. Consumer advocates and regulators argue that there is the potential for contractors to engage in aggressive sales tactics or otherwise unfair, deceptive, or abusive marketing practices, often originating PACE products quickly without considering consumers’ ability to repay or understanding of the product. Private financing companies also may face low repayment risk given the super-priority status of the property tax lien. The CFPB’s Office of Research Publication has reported that PACE financing caused homeowners’ property taxes to increase by an average of $2,700 per year, representing an 88% increase, and that PACE obligors were more likely to become delinquent on their first mortgage than consumers who chose to finance their home improvements through other means. Additionally, the Bureau estimates that the annualized cost for PACE financing tends to be approximately 5% higher than first mortgages, despite their priority status over first mortgages.
This Legal Update summarizes several of the main requirements for PACE financing under the Final Rule.
Final Rule
- TILA Applicability
TILA and its implementing Regulation Z apply only to transactions that constitute “credit.” Previously, Regulation Z’s official commentary excluded tax liens and tax assessments from the definition of “credit” so that PACE transactions would not be subject to regulation. The Final Rule amends commentary to TILA’s implementing Regulation Z to specify that only “involuntary” tax liens and tax assessments are excluded. Consumer advocates and regulators criticized that exclusion for allowing PACE financing companies to avoid providing disclosures that would be required for standard loan products. In the Final Rule, the Bureau indicates that PACE transactions allow consumers to receive funding for home improvement projects and repay those funds over time in installments, and the fact that the transactions are repaid alongside property tax payments should not change the fundamental nature of the transaction as a loan.
- Loan Estimate and Closing Disclosures
Because PACE transactions are credit secured by residential real property, they become subject to mortgage-related requirements under TILA and Regulation Z. The CFPB issued integrated disclosures for mortgage loan transactions consisting of a Loan Estimate and a Closing Disclosure, which are provided as model forms in the Appendix to Regulation Z. The Final Rule requires lenders to provide Loan Estimates and Closing Disclosures to PACE obligors, with certain modifications to the existing forms. The Bureau sets forth model forms in Appendix H-24(H) and H-25(K) of the Appendix to Regulation Z. Fields that are irrelevant to particular PACE transactions may be left blank. Disclosures required under some state laws or those voluntarily provided by some PACE financing companies would not be a substitute for the TILA disclosures.
The CFPB recognized comments from the PACE industry characterizing the disclosure requirements as burdensome given that home improvement projects frequently involve change orders that may require re-disclosure under the Final Rule. However, the Bureau noted that the Loan Estimate and Closing Disclosure help consumers understand their financing options and that the rule only requires re-disclosure post-consummation if an event during the 30-day period after consummation causes the Closing Disclosure to become inaccurate. The Bureau also declined to amend the timing requirements for the Loan Estimate and Closing Disclosures for PACE transactions, indicating that the seven-business-day waiting period between the Loan Estimate and transaction consummation is intended to provide consumers effective advance disclosure of settlement charges and that the three-business-day waiting period following the Closing Disclosure is intended to enhance consumer awareness of the costs associated with the transaction. The Bureau indicated that its prior testing of those forms—although for use with standard mortgage loans—supports their effectiveness in disclosing transaction costs and providing a nationwide waiting period.
- Right of Rescission
Regulation Z provides for a three-day right of rescission in a credit transaction in which the lender takes a security interest in the consumer's principal dwelling, with certain exemptions including, but not limited to, a residential mortgage transaction, a refinancing, a transaction in which a state agency is a creditor, and an advance.1 The three-day right of rescission allows consumers to rescind a transaction 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 and 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. Under the Final Rule, a PACE transaction, as a credit transaction secured by real property, would become subject to the three-day right of rescission.
The Bureau notes that PACE obligors in some states, including California and Florida, already have a three-day right to cancel under state law, so the new requirement is unlikely to impose additional benefits or costs on consumers and PACE providers. However, the right to cancel under state law may start from the date the consumer signs the financing agreement2 rather than from the date that accurate disclosures are provided under Regulation Z, which may create complication.
- Higher-Cost Mortgage Loans
The Home Ownership and Equity Protection Act (HOEPA) amended TILA decades ago to address abusive practices in home equity mortgage loans. HOEPA imposes additional requirements for high-cost mortgage loans, which are mortgage loans in which either (i) the rate of interest is 6.5% greater than the average prime offer rate for a first-lien transaction or 8.5% greater than the average prime offer rate for a subordinate-lien transaction or (ii) the points and fees exceed 5% of the total loan amount for loans under $20,000 or the lesser of 8% or $1,000 for loans over $20,000. The Final Rule will apply HOEPA protections to PACE transactions in the same way those protections apply to non-PACE mortgage loans. The Bureau commented that distinguishing between PACE and non-PACE high cost loans would contravene HOEPA’s protections for vulnerable consumers.
However, the Final Rule excludes PACE transactions from the escrow account requirement that otherwise applies to higher-priced mortgage loans. The CFPB determined that requiring escrow accounts—with the related Regulation X requirements for escrow account analyses, statements, and administration of surpluses and shortages—could be confusing in the context of PACE transactions.
- Periodic Statements
The Final Rule exempts PACE transactions from the Regulation Z requirement to provide periodic statements. Regulation Z requires creditors, servicers, and assignees of mortgage loans to provide a statement for each billing cycle that contains information such as the amount due, past payment breakdown, transaction activity, contact information, and delinquency information.3 The CPPB reasoned that consumers would receive information regarding payments and delinquency from their property tax collectors, as well as mortgage servicers if the consumers have a mortgage with an escrow account. The CFPB also declined to address any servicing requirements that apply only to “servicers” as defined by Regulation X because there is not a “servicer” in a typical PACE transaction given that a governmental authority receives payments as part of the consumer’s property tax payment.
- Ability to Repay Assessment
Regulation Z currently 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.4 A creditor’s failure to consider a consumer’s ability to repay where required is subject to special enforcement provisions under TILA, including damages equal to the sum of all finance charges and fees paid by the consumer.5 These claims are subject to a three-year statute of limitations and may be used as a defense to foreclosure.6 Attempts to defend against tax foreclosure, which would limit a state government’s taxation authority, could potentially present constitutional issues relating to the state-federal taxation power that otherwise would not be present for non-PACE mortgage loans.
Regulation Z requires the creditor to consider specific factors in making the repayment ability determination and verify the information using reasonably reliable third-party records. The Final Rule applies the existing ability-to-repay requirements for mortgage loans to PACE transactions without providing for a qualified mortgage presumption of compliance for PACE transactions. The Bureau determined that it would be inappropriate to provide PACE transactions eligibility for a presumption of compliance with the ability-to-repay requirements, citing the risk of PACE transactions being unaffordable and the lack of incentives for creditors to consider an obligor’s repayment ability in the market. With regard to the requirement to consider, in the ability-to-repay determination, the amount of the consumer’s payment on any simultaneous loans, the Final Rule adds commentary that a PACE creditor is deemed to know of any simultaneous loans that are PACE transactions if the transactions are included in any existing database or registry of PACE transactions. This comment is intended to address concerns about predatory “loan stacking” and “loan splitting” practices in which a contractor divides a loan into multiple transactions or returns to existing consumers to offer additional PACE financing.
Conclusion
The Final Rule as enacted brings about material changes to PACE transactions by sweeping them into the definition of “credit” under TILA and Regulation Z. Many mortgage banking trade associations as well as housing advocacy groups have reacted positively to the Final Rule, characterizing the Final Rule as “a significant step to protect consumers and reduce mortgage delinquencies by ensuring that consumers are both informed of the obligations they are signing up for when they take out a PACE loan and that they have the ability to repay the loan.” Meanwhile, the PACE industry has criticized the Final Rule for failing to account for the “unique nature of PACE” as required under the EGRRCPA as well as positive developments in the PACE industry since the CFPB initially drafted the rule.
While the Final Rule could be less susceptible to claims that the Bureau exceeded its authority given that Congress required the Bureau to issue regulations applying TILA’s ability to repay and civil liability provisions to PACE financing under the EGRRCPA, the Final Rule could be a target under the Congressional Review Act (“CRA”). The CRA requires agencies to submit final rules to Congress, which may overturn agency rulemaking by issuing a joint resolution of disapproval that is approved by both houses of Congress and signed by the president. The CRA precludes rulemaking with similar substance after an enacted joint resolution of disapproval, consequently it would be difficult to present a CRA challenge without eliminating the underlying EGRRCPA statutory requirement.
