[Federal Register Volume 88, Number 91 (Thursday, May 11, 2023)]
[Proposed Rules]
[Pages 30388-30440]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-09468]
[[Page 30387]]
Vol. 88
Thursday,
No. 91
May 11, 2023
Part II
Consumer Financial Protection Bureau
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12 CFR Part 1026
Residential Property Assessed Clean Energy Financing (Regulation Z);
Proposed Rule
Federal Register / Vol. 88 , No. 91 / Thursday, May 11, 2023 /
Proposed Rules
[[Page 30388]]
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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: Proposed rule; request for public comment.
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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 notice of proposed rulemaking, the Bureau
proposes to implement EGRRCPA section 307 and to amend Regulation Z to
address how TILA applies to PACE transactions to account for the unique
nature of PACE.
DATES: Comments must be received on or before July 26, 2023.
ADDRESSES: You may submit comments, identified by Docket No. CFPB-2023-
0029 or RIN 3170-AA84, by any of the following methods:
Federal eRulemaking Portal: https://www.regulations.gov.
Follow the instructions for submitting comments.
Email: [email protected]. Include Docket No. CFPB-
2023-0029 or RIN 3170-AA84 in the subject line of the message.
Mail/Hand Delivery/Courier: Comment Intake--PACE, c/o
Legal Division Docket Manager, Consumer Financial Protection Bureau,
1700 G Street NW, Washington, DC 20552.
Instructions: The CFPB encourages the early submission of comments.
All submissions should include the agency name and docket number or
Regulatory Information Number (RIN) for this rulemaking. Because paper
mail in the Washington, DC area and at the CFPB is subject to delay,
commenters are encouraged to submit comments electronically. In
general, all comments received will be posted without change to https://www.regulations.gov.
All submissions, including attachments and other supporting
materials, will become part of the public record and subject to public
disclosure. Proprietary information or sensitive personal information,
such as account numbers or Social Security numbers, or names of other
individuals, should not be included. Submissions will not be edited to
remove any identifying or contact information.
FOR FURTHER INFORMATION CONTACT: Luke Diamond, Daniel Tingley,
Counsels; Kristin McPartland, Amanda Quester, Alexa Reimelt, or Joel
Singerman, Senior Counsels, Office of Regulations, at 202-435-7700. If
you require this document in an alternative electronic format, please
contact [email protected].
SUPPLEMENTARY INFORMATION:
I. Summary of the Proposed Rule
Section 307 of the Economic Growth, Regulatory Relief, and Consumer
Protection Act (EGRRCPA) directs the Bureau to prescribe ability-to-
repay (ATR) 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 notice of proposed rulemaking, the
Bureau proposes to implement EGRRCPA section 307 and to amend
Regulation Z to address the application of TILA to ``PACE
transactions'' as defined in proposed Sec. 1026.43(b)(15).
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\1\ 15 U.S.C. 1639c(b)(3)(C).
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The proposed rule would:
Clarify an existing exclusion to Regulation Z's definition
of credit that relates to tax liens and tax assessments. Specifically,
the CFPB is proposing to clarify that the commentary's exclusion to
``credit,'' as defined in Sec. 1026.2(a)(14), for tax liens and tax
assessments applies only to involuntary tax liens and involuntary tax
assessments.
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, including:
[cir] Eliminating certain fields relating to escrow account
information;
[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 would 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 would be disclosed for PACE
transactions.
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.
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).
Exempt PACE transactions from the requirement to provide
periodic statements, under proposed Sec. 1026.41(e)(7).
Apply Regulation Z's ATR 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.
Provide that a PACE transaction is not a qualified
mortgage (QM) as defined in Sec. 1026.43.
Extend the ATR 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.
Provide clarification regarding how PACE and non-PACE
mortgage creditors should consider pre-existing PACE transactions when
originating new mortgage loans.
The Bureau proposes that the final rule, if adopted, would take
effect at least one year after publication of the final rule in the
Federal Register, but no earlier than the October 1 which follows by at
least six months Federal Register publication. The Bureau requests
comment on all aspects of the proposed rule and on whether there are
any other provisions of TILA or Regulation Z that the Bureau should
address with respect to PACE transactions.
II. Background
A. PACE Market Overview
1. How does PACE financing work?
PACE financing is a mechanism that enables property owners to
finance certain upgrades to real property
[[Page 30389]]
through an assessment on their real property.\2\ Eligible upgrade types
vary by locality but often include upgrades to promote energy
efficiency or to help prepare for natural disasters. The voluntary
financing agreements (PACE loans) 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 along with the consumer's other
property tax payment obligations. The assessments are typically
collected through the same process as real property taxes.\4\ Local
governments typically fund PACE transactions through bond issuance,
with these bonds in turn collateralized and sold as securitized
obligations.
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\2\ Some States authorize PACE financing for residential and
commercial property. In this proposal, 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.
163.08; Fla. Stat. 197.3632(8)(a); Mo. Stat. 67.2815(5).
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PACE assessments 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 superior 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 assessment 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.
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\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. 163.08(8)
(``The recorded agreement shall provide constructive notice that the
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 PACE States
provide for subordinated-lien status for PACE financing. See, e.g.,
Minn. Stat. 216C.437(4); Me. Stat. tit. 35A 10156(3), (4); 24 V.S.A.
3255(b).
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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 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. Typically, 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 often earn various fees related to the transactions.\6\
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\6\ See, e.g., Energy Programs Consortium, R-PACE, Residential
Property Assessed Clean Energy, A Primer for State and Local Energy
Officials (Mar. 2017), http://www.energyprograms.org/wp-content/uploads/2017/03/R-PACE-Primer-March-2017.pdf.
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PACE companies often rely heavily upon home improvement contractors
both to sell PACE loans to consumers and to facilitate the origination
of those loans. Home improvement contractors frequently market PACE
financing directly to consumers in the course of selling their home
improvement contracts, often door-to-door. They often serve as the
primary point of contact with consumers during the origination process,
typically collecting any 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.
2. Origin and Growth of PACE Programs
In 2008, California passed Assembly Bill no. 811 to enable the
first PACE programs. The Bureau 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\
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\7\ See infra note 329. 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.developohio.com/post/detail/lucas-county-pace-program-benefits-homeowners-234705. 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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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, reaching peak production 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, with an average investment of $769
million per year during those years.\10\ Overall, as of December 31,
2021, the PACE financing industry had financed 323,000 home upgrades,
totaling over $7.7 billion.\11\
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\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 2021.
\11\ See id.
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3. Common Financing Terms
According to data analyzed in a report that the Bureau is releasing
concurrently with this proposal (``PACE Report''), the term of PACE
loans that were originated between July 2014 and June 2020 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\ Fees vary by program, but
the CFPB has reviewed agreements that include fees for application,
origination, tax administration, lien recordation, title, escrow, bond
counsel, processing, title, underwriting, and fund disbursement. The
Bureau is not aware of any PACE obligations that are open-end or have a
negative-amortization feature.
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\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 IV.
\13\ Id.
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4. Consumer Protection Concerns
Consumer advocates have expressed concerns that the PACE market
lacks adequate consumer protections. They have indicated that the
highly secure super-priority lien associated with PACE transactions
creates incentives for PACE companies and home improvement contractors
to originate loans quickly, often on the spot, without regard to
affordability or consumer understanding. They have reported allegations
of deceptive sales tactics, aggressive sales practices, and fraud.
Consumer advocates have criticized other aspects of PACE financing
as well,
[[Page 30390]]
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 financing can result in unexpected
and unaffordable tax payment spikes that can lead to delinquency, late
fees, tax defaults, and foreclosure actions.\14\ Some local officials
have echoed many of these concerns in discussions with CFPB staff.
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\14\ See, e.g., Nat'l Consumer Law 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 Street Journal (Jan. 10, 2017), https://www.wsj.com/articles/americas-fastest-growing-loan-category-has-eerie-echoes-of-subprime-crisis-1484060984.
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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.\15\ 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.
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\15\ 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, https://www.law.berkeley.edu/wp-content/uploads/2021/02/ELC_PACE_DARK_SIDE_RPT_2_2021.pdf.
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Additionally, consumer advocates have 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. They have also
highlighted that, although a PACE assessment 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.\16\ 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 assessment to complete a
home sale.
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\16\ See Freddie Mac, Purchase and ``no cash-out'' refinance
Mortgage requirements (Mar. 31, 2022), https://guide.freddiemac.com/app/guide/section/4606.4. 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. & Urban Dev., Property Assessed Clean Energy (PACE)
(Dec. 7, 2017), https://www.hud.gov/sites/dfiles/OCHCO/documents/17-18ml.pdf.
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Mortgage industry stakeholders have also asserted that PACE
financing introduces risk to the mortgage market, as PACE liens take
priority over pre-existing mortgage liens.\17\
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\17\ See, e.g., Fed. Hous. Fin. Agency (FHFA), FHFA Statement on
Certain Energy Retrofit Loan Programs (July 6, 2010), https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Statement-on-Certain-Energy-Retrofit-Loan-Programs.aspx; FHFA Notice and Request for
Input on PACE Financing, 85 FR 2736 (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.
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Since 2015, the CFPB has received over 50 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. Six of the
complaints involve older Americans, 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 385 complaints
between 2019 and 2021.\18\
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\18\ 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. 2022)
https://dfpi.ca.gov/wp-content/uploads/sites/337/2022/08/2021-CFL-Aggregated-Annual-Report.pdf.
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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.\19\ The complaint, filed in State court,
alleged that Renovate America misrepresented the PACE program or failed
to make adequate disclosures about key aspects of the program,
including its government affiliation, tax deductibility,
transferability of assessments to subsequent property owners, financing
costs, and Renovate's contractor verification policy.\20\ Subsequently,
in June 2021, the California State PACE regulator moved to revoke
Renovate's Administrator license, required to operate a PACE company in
the State, after finding that one of its solicitors repeatedly
defrauded homeowners in San Diego County.\21\ Renovate ultimately
consented to the revocation.\22\
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\19\ 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).
\20\ Id.
\21\ 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/2021/06/04/dfpi-moves-to-revoke-pace-administrators-license-after-finding-its-solicitor-defrauded-homeowners/.
\22\ 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.
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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.\23\ 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.\24\ 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.\25\
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\23\ 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.
\24\ Id.
\25\ Id.
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5. 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
[[Page 30391]]
infrastructure measures.\26\ 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 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.\27\ Additionally, California law
requires, among other protections, financial disclosures prior to
consummation; \28\ a three-day right to cancel, which is extended to
five days for older adults; \29\ mandatory confirmation-of-terms calls;
\30\ and restrictions on contractor compensation.\31\ California law
also 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.\32\ There is
also a maximum permissible loan-to-value ratio for PACE financing under
California law.\33\ California law exempts government agencies from
some of these requirements.\34\
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\26\ See, e.g., Cal. Sts. & Hwys. Code secs. 5898.12, 5899,
5899.3.
\27\ Cal. Fin. Code sec. 22686-87.
\28\ Cal. Sts. & High. Code sec. 5898.17.
\29\ Cal. Sts. & High. Code sec. 5898.16-17.
\30\ Cal. Sts. & High. Code sec. 5913.
\31\ Cal. Sts. & High. Code sec. 5923.
\32\ Cal. Fin. Code sec. 22684(a), (d)-(e).
\33\ Cal. Fin. Code sec. 22684(h).
\34\ 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).
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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).\35\ In 2019,
the DFPI began licensing PACE administrators and subsequently
promulgated rules implementing some of California's statutory PACE
provisions, which became effective in 2021.\36\ DFPI also has certain
examination, investigation, and enforcement authorities over PACE
administrators, solicitors, and solicitor agents.\37\
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\35\ Cal. AB 1284 (2017-2018), Cal. SB 1087 (2017-2018).
\36\ 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.
\37\ 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. sec. 22017(a)-(b).
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PACE administrators must be licensed by the DFPI under the
California Financing Law. They must also establish and maintain
processes for the enrollment of PACE solicitors and solicitor agents,
including training and background checks.\38\ PACE administrators are
required to annually share certain operational data with DFPI.\39\ DFPI
compiles the data in annual reports on PACE lending in California,
which provide aggregated information on PACE loans, PACE administrators
and solicitors, and consumer complaints.\40\
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\38\ Cal. Fin. Code secs. 22680-82.
\39\ Cal. Fin. Code sec. 22692.
\40\ 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.\41\ The
authorizing legislation 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.\42\ It
also includes a maximum loan-to-value ratio and requires a short
general disclosure about PACE assessments.\43\ 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 together with the
maximum principal amount to be financed and the maximum annual
assessment necessary to repay that amount.\44\
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\41\ See Fla. HB 7179 (2010), codified at Fla. Stat. 163.08 et
seq.
\42\ Fla. Stat. sec. 163.08(9).
\43\ Fla. Stat. sec. 163.08(12), (14).
\44\ Fla. Stat. sec. 163.08(13).
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Missouri
Missouri authorized PACE programs in 2010 to finance projects
involving energy efficiency improvements and renewable energy
improvements.\45\ 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 of the assessment contract,
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 assessment.\46\ It also
requires verbal confirmation of certain provisions of the assessment
contract, imposes specific financial requirements to execute an
assessment requirement, and provides for a three-day right to
cancel.\47\ 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 assessment
contracts.\48\ The new requirements became effective January 1,
2022.\49\
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\45\ Mo. HB 1692 (2010), codified at Mo. Rev. Stat. 67.2800(8)
(defining projects eligible for financing).
\46\ Mo. HB 697, codified at Mo. Rev. Stat. 67.2818(4).
\47\ Mo. HB 697, codified at Mo. Rev. Stat. 67.2817(2)
(financial requirements to execute an assessment contract);
67.2817(4) (right to cancel); 67.2817(6) (verbal confirmation).
\48\ Mo. HB 697, codified at Mo. Rev. Stat. 67.2817(2),
67.2818(2)-(3).
\49\ Mo. HB 697, codified at Mo. Rev. Stat. 67.2840.
---------------------------------------------------------------------------
6. 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.\50\ 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.\51\ They include provisions
relating to ability-to-pay, financing disclosures, a right to cancel,
and foreclosure-avoidance protections, among others.
---------------------------------------------------------------------------
\50\ 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/.
\51\ Id.
---------------------------------------------------------------------------
B. EGRRCPA
The Economic Growth, Regulatory Relief, and Consumer Protection Act
of
[[Page 30392]]
2018 (EGRRCPA) was signed into law on May 24, 2018.\52\ 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.'' Specifically, it provides in relevant part that the
CFPB must 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,
and requires that the regulations account for the unique nature of PACE
financing.\53\ TILA section 129C(a) contains TILA's ATR provisions for
residential mortgage loans and TILA section 130 contains TILA's civil
liability provisions. Thus, section 307 requires the Bureau to apply
TILA's ATR provisions to PACE financing, and to apply TILA's civil
liability provisions for violations of those ATR provisions, all in a
way that accounts for the unique nature of PACE financing. This
proposal discusses the proposed implementation of the ATR and civil
liability requirements further in the section-by-section analysis of
proposed Sec. 1026.43.
---------------------------------------------------------------------------
\52\ Public Law 115-174, 132 Stat. 1296 (2018).
\53\ 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 Bureau to ``collect such
information and data that the Bureau determines is necessary'' in
prescribing the regulations and requiring the Bureau to ``consult
with State and local governments and bond-issuing authorities.''
---------------------------------------------------------------------------
III. Advance Notice of Proposed Rulemaking
On March 4, 2019, the CFPB issued an Advance Notice of Proposed
Rulemaking (ANPR) to solicit information relating to residential PACE
financing.\54\ The purpose of the ANPR was to gather information to
better understand the PACE financing market and other information to
inform a proposed rulemaking under EGRRCPA section 307.
---------------------------------------------------------------------------
\54\ Advance Notice of Proposed Rulemaking on Residential
Property Assessed Clean Energy Financing, 84 FR 8479 (Mar. 8, 2019).
---------------------------------------------------------------------------
The ANPR sought five categories of information related to PACE
financing: (1) written materials associated with PACE transactions; (2)
descriptions of current standards and practices in the PACE financing
origination process; (3) information relating to civil liability under
TILA for violations of the ATR requirements in connection with PACE
financing, as well as rescission and borrower delinquency and default;
(4) information about what features of PACE financing make it unique
and how the CFPB should address those unique features in this
rulemaking; and (5) views concerning the potential implications of
regulating PACE financing under TILA.
In response to the ANPR, the CFPB received over 115 comments, which
were submitted by a diverse group 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 ANPR comments is included below, and
additional information from the ANPR comments is referenced throughout
this proposal.
Regarding the need for PACE regulation, consumer groups and
mortgage industry stakeholders generally agreed that PACE transactions
require Federal regulation, advocating for strong ATR rules, in
particular. Some also supported further application of TILA to PACE
financing, including disclosure requirements, rescission rights, loan
originator compensation requirements, and protections for high-cost
PACE transactions. These commenters indicated that PACE financing is
consumer credit, and should be regulated similar to a traditional
mortgage because it is voluntary financing that is secured by the
consumer's home and because delinquency can lead to penalties,
additional interest, and foreclosure. Some argued for more stringent
regulations than currently apply to traditional mortgages due to what
they asserted was the dangerous nature of PACE financing, citing
problematic lending incentives, alleged abuses by home improvement
contractors, and alleged targeting of PACE to vulnerable populations.
On the other hand, PACE industry participants generally opposed the
imposition of additional or stringent regulations. Many argued that
PACE financing is safe for consumers, citing the involvement of State
and local governments, the relatively small size of the debt
obligation, existing State and local requirements, low delinquency
rates, and other features of PACE financing. Some expressed concern
that overly broad rules could infringe on the fundamental taxing
authority of State and local governments, undermine PACE's public
purpose of reducing barriers to green energy financing, decrease access
to private capital, and potentially lead to the termination of PACE
programs. Some were also worried that regulations would erode PACE's
point-of-sale nature, causing consumers and contractors to turn to more
dangerous unsecured credit products and decrease new applications. Many
argued that PACE financing is not consumer credit subject to TILA, and
that the CFPB lacks authority to impose TILA's requirements beyond its
ATR rules.
In regard to application of TILA's ATR requirements to PACE
financing, there were again differing opinions among commenters.
Consumer groups and mortgage industry stakeholders generally agreed
that TILA's existing ATR requirements should be applied, but some
suggested adjusting them to account for factors such as the cadence of
property tax payments, which tend to be due on an annual or semi-annual
basis, and the potential for payment shocks related to PACE financing's
impact on the consumer's existing mortgage escrow account. Some called
for verification of consumers' financial information, and for the ATR
rules to account for pre-existing and simultaneous PACE financing to
prevent loan stacking or loan splitting. In contrast, some PACE
industry participants opposed application of TILA's existing ATR
requirements, stating that it would be unnecessary and too burdensome,
and would lead to decreased consumer participation in PACE programs.
Some also argued that mandatory income verification for all consumers
would interfere with the point-of-sale nature of PACE financing, and
that a modeled income requirement would be sufficient. Some recommended
an emergency exception to any ATR requirement. Still others recommended
that the CFPB structure any ATR rules to avoid conflict with existing
California regulations.
A few commenters provided their opinions on whether certain PACE
transactions should be entitled to a presumption of compliance with the
CFPB's ATR requirements similar to QM status. One PACE company
suggested that a reasonable safe harbor is necessary to ensure that
private capital continues to invest in PACE financing. However, some
consumer groups opposed offering a presumption of compliance, stating
that PACE is structurally unsafe and a source of abuse for some
populations. A mortgage trade association recommended that, if the CFPB
decides to permit such a presumption, subordination of the PACE lien
should be required.
Regarding the application of TILA section 130 to PACE financing,
some consumer groups suggested that PACE companies should be held
liable under TILA section 130 because they are responsible for
operating the PACE
[[Page 30393]]
programs. Some PACE industry participants expressed concern that, if
government entities become subject to civil liability, they might stop
operating PACE programs. Finally, one PACE company recommended capping
civil liability at the amount of the assessment, to prevent TILA's
statutory damages from exceeding the principal amount of the average
PACE transaction.
IV. Data Collection
EGRRCPA section 307 authorizes the CFPB to ``collect such
information and data that the Bureau determines is necessary'' to
support the PACE rulemaking required by the section.\55\ 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 2014 and June 2020, 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.
---------------------------------------------------------------------------
\55\ 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.\56\
The PACE company data encompassed about 370,000 PACE transaction
applications submitted in California and Florida from 2014 to 2020 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.\57\
---------------------------------------------------------------------------
\56\ The Bureau received data from FortiFi Financial, Home Run
Financing, Renew Financial, and Ygrene Energy Fund.
\57\ 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 utilized 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'' (PACE
Report) is being published concurrently with this NPRM.\58\
---------------------------------------------------------------------------
\58\ 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 borrowers discussed in the PACE Report resided
in census tracts with higher percentages of Black and Hispanic
residents than the average for their States.\59\ 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 majority-non-white census tracts.\60\ The PACE Report also
assesses the impact of the 2018 California PACE Reforms, discussed in
part II.A.5. The analysis finds that these laws improved consumer
outcomes while substantially reducing the volume of PACE lending.\61\
---------------------------------------------------------------------------
\59\ Id. at 4.
\60\ Id. at 38-39, Figure 11.
\61\ Id. at 4-5.
---------------------------------------------------------------------------
V. Outreach
To learn about the industry and the unique nature of PACE
financing, the Bureau 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 on the ANPR, panel appearances by CFPB staff, and
written correspondence.
The CFPB's outreach relating to PACE financing is summarized at a
high level below.\62\ The outreach has supplemented information on PACE
financing that the CFPB has gleaned from independent research; the
detailed comments responding to the ANPR, discussed in part III; the
data collection described in part IV; and information from publicly
available sources such as news reports, research and analysis, and
litigation documents.
---------------------------------------------------------------------------
\62\ The CFPB also engaged in extensive outreach with numerous
stakeholders to design and complete the Bureau data collection on
PACE financing that is discussed in part IV.
---------------------------------------------------------------------------
A. 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 has continued the engagement since EGRRCPA section 307 was
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. Similar to the
perspectives they shared in ANPR comments, discussed in part III, 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.
B. Private PACE Industry Stakeholders
Since 2015, the CFPB has engaged on dozens of occasions with
various private PACE industry stakeholders, including private PACE
companies, a national trade organization, 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 financing providers, assessment
administrators, and a national trade organization 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 developed, 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
[[Page 30394]]
requirements in particular States. Some of these stakeholders have also
shared their perspectives on EGRRCPA section 307 and considerations the
CFPB should bear in mind in this rulemaking.
C. State and Local Governments and Bond-Issuing Authorities
As part of the CFPB's PACE rulemaking, EGRRCPA section 307 requires
that the CFPB ``consult with State and local governments and bond-
issuing authorities.'' \63\ Consistent with this requirement, 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 for the rulemaking. Entities with which the CFPB
has consulted over the years include 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 engagements with
bond-issuing authorities occurred on a number of occasions, including
discussions over the phone and in-person, and through written
correspondence. The CFPB also conferred on a number of occasions with
membership organizations representing municipalities.
---------------------------------------------------------------------------
\63\ 15 U.S.C. 1639c(b)(3)(C)(iii)(II).
---------------------------------------------------------------------------
In the course of developing the NPRM, 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 proposal, including, for example, whether the CFPB
should use the same ATR 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 QM definitions to PACE financing, how to
apply TILA's general civil liability provisions to violations of the
ATR requirements for PACE financing, and the implications of this
rulemaking for PACE financing bonds. Each call was targeted to specific
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. In addition to feedback provided during the
calls, some participants provided input after the calls.
Public entities involved in the operation of PACE financing and
third parties operating on their behalf have expressed divergent views
on PACE financing. For example, some individuals from local tax
collectors' offices and other government units have 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 have shared consumer
protection recommendations and background information about how the
PACE financing industry operates in particular jurisdictions. Several
localities with active PACE financing programs have expressed consumer
protection concerns and informed the CFPB that they would welcome
application of TILA's ATR 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.
Other local governments (and third parties they work with) have
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 originations
\64\) 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
creating jobs. Local government representatives in certain
jurisdictions have expressed enthusiasm about aspects of PACE financing
such as increased solar panel installations, and have 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 ATR 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.
---------------------------------------------------------------------------
\64\ The Bureau understands that a number of government
sponsors, some of which participated in the Bureau'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#:~:text=Los%20Angeles%20County%20has%20ended,risk%20of%20losin
g%20their%20homes.
---------------------------------------------------------------------------
D. Other Stakeholders
The CFPB 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 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 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 standard mortgage or apply TILA more generally
to PACE.
The CFPB has also met with representatives from environmental and
energy groups. These representatives shared general views on, for
example, the role of PACE financing in the marketplace, industry
trends, and potential risks to consumers.
As discussed in part IX, the CFPB has also consulted with Federal
government entities.
VI. Legal Authority
The Bureau is proposing to amend 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
[[Page 30395]]
Act (Dodd-Frank Act),\65\ EGRRCPA section 307, TILA, and Real Estate
Settlement Procedures Act of 1974 (RESPA).\66\
---------------------------------------------------------------------------
\65\ Public Law 111-203, 124 Stat. 1376 (2010).
\66\ 12 U.S.C. 2601 et seq.
---------------------------------------------------------------------------
A. Dodd-Frank Act
CFPA section 1022(b)(1). Section 1022(b)(1) of the CFPA authorizes
the Bureau to prescribe rules ``as may be necessary or appropriate to
enable the Bureau to administer and carry out the purposes and
objectives of the Federal consumer financial laws, and to prevent
evasions thereof.'' \67\ Among other statutes, TILA, RESPA, and the
CFPA are Federal consumer financial laws.\68\ Accordingly, the Bureau
proposes 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.
---------------------------------------------------------------------------
\67\ 12 U.S.C. 5512(b)(1).
\68\ 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).
---------------------------------------------------------------------------
Dodd-Frank Act section 1405(b). 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 Bureau may exempt from or modify
disclosure requirements, in whole or in part, for any class of
residential mortgage loans if the Bureau determines that such exemption
or modification is in the interest of consumers and in the public
interest.\69\ 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.\70\ 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 proposed rule, the Bureau has considered the purposes
of improving consumer awareness and understanding of transactions
involving residential mortgage loans through the use of disclosures and
the interests of consumers and the public. The Bureau proposes 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 Bureau believes the proposal is in the interest of consumers
and in the public interest, consistent with Dodd-Frank Act section
1405(b).
---------------------------------------------------------------------------
\69\ Public Law 111-203, 124 Stat. 1376, 2142 (2010) (codified
at 15 U.S.C. 1601 note).
\70\ Public Law 111-203, 124 Stat. 1376, 2138 (2010) (codified
at 15 U.S.C. 1602(cc)(5)).
---------------------------------------------------------------------------
B. TILA
TILA section 105(a). TILA section 105(a) directs the Bureau 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 Bureau judges are necessary or proper to
effectuate the purposes of TILA, to prevent circumvention or evasion
thereof, or to facilitate compliance therewith.\71\ 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.\72\ 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.\73\
---------------------------------------------------------------------------
\71\ 15 U.S.C. 1604(a).
\72\ 15 U.S.C. 1601(a).
\73\ 15 U.S.C. 1639b(a)(2).
---------------------------------------------------------------------------
TILA section 105(b). 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.\74\ 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 Bureau provided additional
discussion of this integrated disclosure mandate in the 2013 TILA-RESPA
Rule.\75\
---------------------------------------------------------------------------
\74\ Public Law 111-203, 124 Stat. 1376, 2108 (2010) (codified
at 15 U.S.C. 1604(b)).
\75\ 78 FR 79730, 79753-54 (Dec. 31, 2013).
---------------------------------------------------------------------------
TILA section 105(f). Section 105(f) of TILA, 15 U.S.C. 1604(f),
authorizes the Bureau to exempt from all or part of TILA any class of
transactions if the Bureau 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), (B)(i). TILA section 129C(b)(3)(A)
directs the Bureau to prescribe regulations to carry out the purposes
of the subsection.\76\ In addition, TILA section 129C(b)(3)(B)(i)
authorizes the Bureau to prescribe regulations that revise, add to, or
subtract from the criteria that define a QM 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.\77\
---------------------------------------------------------------------------
\76\ 15 U.S.C. 1639c(b)(3)(A).
\77\ 15 U.S.C. 1639c(b)(3)(B)(i).
---------------------------------------------------------------------------
TILA section 129C(b)(3)(C)(ii). In section 307 of the EGRRCPA,
codified in TILA section 129C(b)(3)(C), Congress directed the Bureau 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.'' \78\
---------------------------------------------------------------------------
\78\ 15 U.S.C. 1639c(b)(3)(C)(ii).
---------------------------------------------------------------------------
C. RESPA
RESPA section 4(a). 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.\79\ 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 Bureau provided additional
discussion of this integrated disclosure mandate in the 2013 TILA-RESPA
Rule.\80\
---------------------------------------------------------------------------
\79\ Public Law 111-203, 124 Stat. 1376, 2103 (2010) (codified
at 12 U.S.C. 2603(a)).
\80\ 78 FR 79730, 79753-54 (Dec. 31, 2013).
---------------------------------------------------------------------------
RESPA section 19(a). Section 19(a) of RESPA authorizes the Bureau
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.\81\
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
[[Page 30396]]
home buyers and sellers of settlement costs.\82\ 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.\83\
In developing proposed rules under RESPA section 19(a), the Bureau 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.
---------------------------------------------------------------------------
\81\ 12 U.S.C. 2617(a).
\82\ 12 U.S.C. 2601(b).
\83\ 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.
---------------------------------------------------------------------------
VII. 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.''
Currently, comment 2(a)(14)-1.ii states, in part, that ``tax liens''
and ``tax assessments'' are not considered credit for purposes of the
regulation. The Bureau proposes to amend comment 2(a)(14)-1.ii to add
the word ``involuntary'' to clarify which tax liens and tax assessments
are not considered credit. Amended as proposed, comment 2(a)(14)-1.ii
would provide 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.\84\ The proposed amendment would resolve ambiguity in the
existing comment and bring the exclusion in line with the definition of
credit in TILA and congressional intent with respect to TILA coverage.
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\84\ The proposed rule would also make 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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For a number of years, stakeholders have expressed disagreement in
litigation, ANPR comments, and other communications about whether
comment 2(a)(14)-1.ii excludes PACE transactions from TILA coverage.
The ambiguity derives largely from the text of the comment in light of
the structure of PACE transactions. The comment excludes tax
assessments and tax liens, and PACE transactions have attributes of
both involuntary special property tax assessments that are not subject
to TILA and voluntary mortgage transactions that are. As described in
part II.A, PACE transactions have been treated as assessments under
State law, are collected through local property tax systems, and are
secured by liens treated similarly to property tax liens; but PACE
transactions arise through voluntary contractual agreement, similar to
other credit transactions that are subject to TILA.
In general, PACE industry stakeholders have argued that PACE
transactions are not TILA credit, in part because the text of the
comment states that tax liens and tax assessments are not credit
without explicitly distinguishing between voluntary and involuntary
obligations; and consumer advocates and mortgage industry stakeholders
have argued that PACE transactions are TILA credit because, unlike
other tax liens and assessments, PACE transactions are voluntary for
consumers. One Federal district court has directly addressed the
question, ruling that PACE financing is not credit for purposes of TILA
in part due to the text of comment 2(a)(14)-1.ii.\85\
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\85\ See In re HERO Loan Litig., 017 WL 3038250 (C.D. Cal.
2017); see also Burke v. Renew Fin. Grp., Inc., 2021 WL 5177776
(C.D. Cal. 2021) (ruling that PACE transactions are not consumer
credit under TILA). The In re HERO and Burke courts suggested that
PACE assessments are not ``consumer credit transactions'' for
purposes of TILA. 2017 WL 3038250, at *2-*3; 2021 WL 5177776, at *3.
TILA defines ``consumer credit transactions'' to mean that a credit
transaction is ``one in which the party to whom credit is offered or
extended is a natural person, and the money, property, or services
which are the subject of the transaction are primarily for personal,
family, or household purposes.'' 15 U.S.C. 1602(i). Consistent with
this, Regulation Z defines ``consumer credit'' to mean ``credit
offered or extended to a consumer primarily for personal, family, or
household purposes.'' 12 CFR 1026.2(a)(12). Residential PACE
transactions satisfy these definitions. Notwithstanding the rulings
in Burke and In re HERO, such Residential PACE transactions satisfy
these definitions. Notwithstanding the rulings in Burke and In re
HERO, such transactions are ``offered or extended'' to consumers,
who as natural persons are the targets of marketing and sales
efforts, are offered the loans and decide whether to sign up, and
are signatories to the financing agreements, which are for money to
fund home improvement services that are primarily for personal,
family, or household purposes.
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The Bureau proposes to amend the commentary to clarify that PACE
transactions are credit under TILA and Regulation Z. Amended as
proposed, comment 2(a)(14)-1.ii would state 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'' to comment 2(a)(14)-1.ii, the Bureau would clarify that
the comment does not exclude tax liens and tax assessments that arise
from voluntary contractual agreements, such as PACE transactions. Thus,
under the proposed amendments, tax liens and tax assessments that are
voluntary would be credit if they meet the definition of credit under
TILA and Regulation Z and are not otherwise excluded.\86\
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\86\ Under the proposed amendments, tax liens and tax
assessments that are not voluntary for the consumer would continue
to be excluded.
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The proposed amendment would bring the exclusion in comment
2(a)(14)-1.ii in line with the definition of credit in TILA and
Regulation Z. TILA defines ``credit'' to mean the ``right granted by
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.'' \87\
In general, PACE transactions appear to easily fit these definitions--
the agreements provide for consumers to receive funding for home
improvement projects and repay those funds over time in
installments.\88\
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\87\ 15 U.S.C. 1602(f); 12 CFR 1026.2(a)(14). Regulation Z
further 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 (not
including a down payment), and to whom the obligation is initially
payable, either on the face of the note or contract, or by agreement
when there is no note or contract.'' 12 CFR 1026.2(a)(17).
\88\ Treating PACE transactions as TILA credit is consistent
with the FTC's assertion of claims against a PACE company under the
Bureau'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.4 (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.
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The proposed amendments to comment 2(a)(14)-1.ii would also be in
line with congressional intent. 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.''
\89\ To that end, relevant legislative history indicates that TILA was
intended to require ``all creditors to disclose credit information in a
uniform manner'' so that ``the American
[[Page 30397]]
consumer will be given the information he needs to compare the cost of
credit and to make the best informed decision on the use of credit.''
\90\ Clarifying that voluntary tax liens and tax assessments can be
credit, such that PACE transactions are subject to TILA's uniform
disclosure requirements, would squarely align with these goals.
Consumers have a number of financing options for home improvement
projects, such as home equity lines of credit, personal loans, and
credit cards. Just like these other financing options, PACE
transactions carry certain costs, terms, and conditions that consumers
must be aware of in order to make informed credit decisions. Requiring
TILA disclosures for PACE transactions allows consumers to shop among
different options and across creditors.
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\89\ TILA section 102(a), 15 U.S.C. 1601(a).
\90\ H.R. Rep. No. 1040, 90th Cong. (1967).
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Notably, it appears that the current text of comment 2(a)(14)-1.ii
was not intended to exclude voluntary transactions such as PACE. The
Board of Governors of the Federal Reserve System (Board) first issued
the comment in 1981 as part of a broader rulemaking issuing commentary
to Regulation Z.\91\ In preamble preceding that issuance and in several
public information letters that were forerunners to the 1981 rule, it
is clear that the Board was addressing whether certain types of
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.'' \92\
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.'' \93\ Other letters contained similar
analysis,\94\ and the Board reiterated this reasoning in preamble
predating the commentary in which it explained its rationale for the
comment, again focusing on the involuntary nature of the obligations as
the reason they were not credit.\95\ The Board explained:
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\91\ See 46 FR 50288, 50292 (Oct. 9, 1981).
\92\ Fed. Rsrv. Bd., Public Information Letter No. 166 (1969).
\93\ Id.
\94\ See Fed. Rsrv. Bd., Public Information Letter No. 153
(1969) (similar with regard to sewer assessment installment
payments); 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.'').
\95\ 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.\96\
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\96\ Id.
Moreover, in this preamble and in the commentary to Regulation Z
that it adopted later that year, 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.'' \97\
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.
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\97\ 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
Bureau, which republished the 1981 Board interpretation as an
official Bureau interpretation in comment 2(a)(14)-1.ii with no
substantive changes.
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PACE industry stakeholders have asserted a number of additional
reasons PACE transactions should not be treated as TILA credit,
including that PACE financing serves important public policy purposes
as mandated by State law, and that PACE transactions are special
assessments that are repaid through the property tax system and are
secured by liens enforced similar to property tax liens under State
law. The Bureau is not aware of any indication that Congress intended
for TILA to exclude voluntary transactions like PACE financing on
account of their being processed through property tax systems or
because they are intended to further certain public policy purposes.
The Bureau recognizes that clarifying the exclusion in comment
2(a)(14)-1.ii as limited to involuntary tax assessments and involuntary
tax liens would ensure that TILA applies generally to PACE
transactions. As a result, it would ensure that certain participants in
PACE transactions would be subject to TILA requirements. For example,
various disclosure and other requirements would apply to the entity
that is the ``creditor'' as defined in Sec. 1026.2(a)(17), which the
Bureau understands is typically the government sponsor in a PACE
transaction.\98\ Other requirements would 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.\99\ In the
Bureau's view, PACE transactions share relevant characteristics with
other credit transactions, as described above. If they were not subject
to TILA and Regulation Z, consumers would be at risk, and it would run
counter to the purposes for enacting TILA expressed by Congress. The
Bureau understands, however, that certain existing requirements in
Regulation Z might warrant adjustment to better accommodate the unique
structure of PACE transactions. The Bureau is proposing amendments to
that end, as described in the relevant section-by-section analyses in
this proposal.
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\98\ 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 Bureau's understanding,
consistent with ANPR comments and other research, is that these
characteristics apply to government sponsors of PACE transactions in
the PACE programs that have been active.
\99\ 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 proposed Sec. 1026.41 for discussion of servicing provisions in
Regulation Z.
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The Bureau seeks comment on the proposed amendments to comment
2(a)(14)-1.ii. The Bureau also seeks comment on whether any TILA
provisions not addressed in this proposal warrant amendment for PACE
transactions.
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) was enacted in
1994 as an amendment to TILA to address abusive practices in
refinancing and home-equity mortgage loans with high interest rates or
high fees.\100\ Loans that meet HOEPA's high-cost coverage tests are
subject to special disclosure requirements and restrictions on loan
terms, and borrowers in high-cost
[[Page 30398]]
mortgages have enhanced remedies for violations of the law.\101\ The
provisions of HOEPA are implemented in Regulation Z in Sec. Sec.
1026.32 and 1026.34.\102\
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\100\ Public Law 103-325, 108 Stat. 2160.
\101\ See 15 U.S.C. 1602(bb), 1639.
\102\ 12 CFR part 1026.
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The Bureau is not proposing any changes to Sec. 1026.32 or Sec.
1026.34 in this proposed rule. Thus, if the proposed rule is finalized
as proposed, the high-cost loan requirements implemented in Sec. Sec.
1026.32 and 1026.34 would apply to PACE transactions that meet the
definition of high-cost mortgage in Sec. 1026.32(a)(1) in the same way
that they apply to other high-cost mortgages.\103\ The Bureau requests
comment on whether any clarification is required through rulemaking or
otherwise with respect to how HOEPA's provisions as implemented in
Regulation Z apply to PACE transactions that may qualify as high-cost
mortgages. In particular, the Bureau requests comment on the interest
rates and late fees that consumers may have to pay in connection with
their PACE transactions both before and after default, and whether, for
example, late fees that apply to all property taxes should be treated
differently from contractually-imposed late fees for purposes of
HOEPA's limitations on late fees \104\ as implemented in Sec.
1026.34(a)(8).
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\103\ 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 Bureau 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.
\104\ 15 U.S.C. 1639(k).
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1026.35 Requirements for Higher-Priced Mortgage Loans
35(b) Escrow Accounts
35(b)(2) Exemptions
35(b)(2)(i)
35(b)(2)(i)(E)
TILA section 129D generally requires creditors to establish escrow
accounts for certain higher-priced mortgage loans (HPMLs).\105\
Regulation Z implements this requirement in Sec. 1026.35(a) and (b),
defining an HPML as a closed-end consumer credit transaction secured by
the consumer's principal dwelling with an APR exceeding the average
prime offer rate (APOR) \106\ for a comparable transaction by a certain
number of percentage points.\107\ With certain exemptions, Regulation Z
Sec. 1026.35(b) prohibits creditors from extending HPMLs secured by
first liens on consumers' principal dwellings unless an escrow account
is established before consummation for payment of property taxes, among
other charges (HPML escrow requirement). The Bureau is unaware of any
PACE transactions that require consumers to escrow property tax
payments or other charges, whether or not the PACE transaction could be
characterized as an HPML. The Bureau believes that requiring escrow
accounts for PACE transactions that would be subject to the HPML escrow
requirement would provide little or no benefit to consumers while
imposing substantial burden on industry. The Bureau proposes to add
Sec. 1026.35(b)(2)(i)(E) to exempt PACE transactions from the HPML
escrow requirement.
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\105\ 15 U.S.C. 1639d.
\106\ 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. The Bureau publishes APORs for a broad range of
types of transactions in a table updated at least weekly as well as
the methodology the Bureau uses to derive these rates.
\107\ Section 1026.35(a)(1) defines HPML 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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The Bureau believes that a mandatory escrow requirement would
provide little or no benefit to PACE borrowers. According to the
Bureau's PACE data, nearly three-fourths of PACE borrowers had a
mortgage at the time their PACE transactions were funded.\108\ As a
result, a large proportion of PACE borrowers already may have escrow
accounts through their pre-existing mortgage loan.\109\ For PACE
borrowers for whom this is true, PACE payments are already incorporated
into the mortgage escrow accounts as part of the property tax payment.
Those borrowers who do not have a pre-existing escrow account are
already paying their property taxes and any other traditionally
escrowed charges on their own and likely do not need or perhaps even
want an escrow account. Because the PACE charges are billed with the
property taxes, the Bureau believes that it is unlikely that such
borrowers will mistakenly neglect to pay them.
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\108\ See PACE Report, supra note 12, at 12.
\109\ See Adam H. Langley, Lincoln Inst. Of Land Pol'y,
Improving the Property Tax by Expanding Options for Monthly
Payments, at 2 (Jan. 2018), https://www.lincolninst.edu/sites/default/files/pubfiles/langley-wp18al1_0.pdf (stating that, in 2015,
44 percent of U.S. homeowners paid their property taxes as a part of
their monthly mortgage payment).
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Additionally, escrow accounts for PACE transactions would be
governed by rules in Regulation X.\110\ The rules include a variety of
detailed requirements governing, for example, escrow account analyses,
escrow account statements, and the treatment of surpluses, shortages,
and deficiencies in escrow accounts.\111\ The Bureau believes the
additional cost and burden to comply with these requirements in this
context would not be warranted given the lack of consumer benefit.\112\
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\110\ See generally Regulation X, 12 CFR 1024.17.
\111\ Id.
\112\ Commenters to the 2008 HPML escrow 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, Federal law requires certain escrow account disclosures,
including escrow account statements required under Regulation X \113\
and escrow-related elements of the TILA-RESPA integrated disclosure
forms required under Regulation Z,\114\ that could be confusing in the
context of PACE transactions. A defining feature of PACE is that the
loans are paid back through the property tax system. 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 as
part of the property tax payment. These disclosures would not be
required if the Bureau finalizes this proposal--Regulation X does not
require escrow account statements if there will be no escrow
account,\115\ and the TILA-RESPA integrated disclosure forms would not
be required to disclose escrow-related information for PACE
transactions.\116\ Additionally, the escrow account disclosures may
create uncertainty about whether the PACE transaction affects the
consumer's pre-existing mortgage escrow account when applicable.
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\113\ See 12 CFR 1024.17(g)-(j).
\114\ See 12 CFR 1026.37, .38.
\115\ See generally 12 CFR 1024.17.
\116\ As discussed in the section-by-section analyses of
Sec. Sec. 1026.37(p) and 1026.38(u) below, the Bureau is proposing
to eliminate certain escrow-related fields from the TILA-RESPA
integrated disclosure forms, and the remaining escrow-related fields
can generally be left blank on the TILA-RESPA integrated disclosure
forms if there is no escrow account associated with the transaction.
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The Bureau notes that some of the consumer protection concerns that
[[Page 30399]]
prompted the Board to adopt the initial HPML escrows rule do not apply
in the same way to the PACE market. The Board first implemented the
HPML escrow requirement in Regulation Z in 2008, before the requirement
was codified in TILA, relying on its authority to prohibit deceptive or
unfair acts or practices.\117\ The Board's HPML rule was originally
intended to protect consumers who receive relatively high interest
rates. The Board was concerned that market pressures discouraged
creditors from offering escrow accounts to borrowers getting subprime
loans, increasing the risk that these consumers would base borrowing
decisions on an unrealistically low assessment of their mortgage-
related obligations. In contrast, PACE borrowers for whom the HPML
escrow requirement would apply will already be paying property taxes as
a function of homeownership, and the Bureau understands that PACE
transactions do not generally require any mortgage-related insurance.
To the extent consumers do lack information about their overall payment
obligations, and to the extent this could lead to them receiving
unaffordable PACE loans, the Bureau believes such concerns are better
addressed through other TILA provisions, including the TILA-RESPA
integrated disclosures and ATR requirements that are tailored to PACE
as discussed in the section-by-section analyses below.\118\
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\117\ 73 FR 44521 (July 30, 2008). The requirement was later
codified in TILA section 129D, 15 U.S.C. 1639d.
\118\ See section-by-section analyses of proposed Sec. Sec.
1026.37, 1026.38, 1026.43, infra.
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One ANPR comment letter from consumer groups advocated for applying
the HPML escrow requirement for PACE consumers without an existing
mortgage escrow, to help spread out payments. The Bureau recognizes
that having the option to break up property tax payments into smaller
amounts could be helpful to taxpayers generally and particularly to
taxpayers with PACE accounts who do not already have a pre-existing
mortgage with an escrow account.\119\ The Bureau believes it would be
beneficial if local taxing authorities facilitated the spreading-out of
payments for PACE borrowers \120\ but does not believe that requiring
an escrow account for PACE HPMLs would be the best way to accomplish
this.
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\119\ Langley, Improving the Property Tax by Expanding Options
for Monthly Payments, supra note 109, at 7.
\120\ See generally id. (encouraging local governments to expand
options for consumers to pay property taxes on a monthly basis).
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The Bureau is proposing this exemption pursuant to TILA sections
105(a) and 105(f). For the reasons discussed in this section-by-section
analysis, the Bureau believes that exempting PACE transactions from the
requirements of TILA section 125D is proper to carry out the purposes
of TILA. As described above, the Bureau believes that the requirements
of TILA section 125D would significantly complicate, hinder, and make
more expensive the credit process for PACE transactions. The Bureau
thus has preliminarily determined that 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 Bureau to integrate the mortgage loan
disclosures required under TILA and RESPA sections 4 and 5, and to
publish model disclosure forms to facilitate compliance.\121\ The
Bureau issued regulatory requirements and model forms to satisfy these
statutory obligations in 2013 (2013 TILA-RESPA Rule).\122\ 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.\123\
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\121\ CFPA sections 1098 & 1100A, codified at 12 U.S.C. 2603(a)
& 15 U.S.C. 1604(b), respectively.
\122\ 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/.
\123\ 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. It is
designed to provide disclosures that are helpful to consumers in
understanding the key features, costs, and risks of the mortgage for
which they are applying.\124\ In general, the Loan Estimate must be
provided to consumers within three business days after they submit a
loan application \125\ and not later than the seventh business day
before consummation.\126\ The Closing Disclosure is a final disclosure
reflecting the actual terms of the transaction. In general, the Closing
Disclosure must be provided to the consumer three business days before
consummation of the transaction.\127\
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\124\ See 78 FR 79730, 80225 (Dec. 31, 2013).
\125\ See Sec. 1026.2(a)(3)(ii) (defining ``application'' for
these purposes as one that ``consists of the submission of the
consumer's name, the consumer's income, the consumer's social
security number to obtain a credit report, the property address, an
estimate of the value of the property, and the mortgage loan amount
sought'').
\126\ Section 1026.19(e)(1)(iii)(A)-(B).
\127\ Section 1026.19(f)(1)(ii)(A).
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As the Bureau explained in the 2013 TILA-RESPA Rule, the TILA-RESPA
integrated disclosure forms use clear language and design to make it
easier for consumers to locate key information, such as interest rate,
periodic payments, and loan costs.\128\ The forms also provide
information to help consumers decide whether they can afford the loan
and to compare the cost of different loan offers, including the cost of
the loans over time.\129\ These benefits are important for PACE
borrowers just as they are for other mortgage borrowers.
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\128\ 78 FR 79730, 80225 (Dec. 31, 2013).
\129\ Id.
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The Bureau believes that certain elements of the current TILA-RESPA
integrated disclosures may benefit from adaptation so that the forms
more effectively disclose information about PACE transactions in view
of their unique nature. The Bureau proposes the modifications to the
Loan Estimate and Closing Disclosure described below. Where this
proposal would not provide a PACE-specific version of a particular
provision, the existing requirements in Sec. Sec. 1026.37 and 1026.38
would apply. As with other mortgage transactions, elements of the forms
that are not applicable for PACE transactions may generally be left
blank.\130\ The Bureau requests comment on the proposed amendments and
on any further amendments that may improve consumer understanding for
PACE transactions. The Bureau is proposing model forms in appendix H-
24(H) (Loan Estimate) and appendix H-25(K) (Closing Disclosure)
reflecting the proposed PACE-specific implementation of the TILA-RESPA
integrated disclosure requirements.
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\130\ See comments 37-1 and 38-1.
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The Bureau is not proposing amendments to the timing requirements
for the Loan Estimate and Closing Disclosure for PACE transactions. The
Bureau 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.\131\ The Bureau
[[Page 30400]]
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.\132\ As with the substantive disclosures, the timing
requirements are important to 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.\133\
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\131\ 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).
\132\ 78 FR 79730, 79847 (Dec. 31, 2013).
\133\ See part II.A.4, supra.
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The Bureau is proposing the implementation of the disclosure
requirements described in the section-by-section analyses of proposed
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
Bureau believes, in its initial analysis, that the proposed
implementation would be necessary and proper to carry out the purposes
of TILA and RESPA. The proposed provisions that would 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 proposed changes are intended to
make the Loan Estimate and Closing Disclosure more effective and
understandable for PACE borrowers, and to facilitate compliance given
the unique nature of PACE transactions. The Bureau believes that the
proposed provisions that would implement the disclosure requirements
under RESPA section 19(a), including interpretations discussed in the
applicable section-by-section analysis, would further the purposes of
RESPA and be consistent with the Bureau's authority under RESPA section
19(a).
For the reasons discussed in the respective section-by-section
analyses, the Bureau is proposing 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 Bureau
believes, in its initial analysis, that the proposed exemptions would
be 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 Bureau's preliminary determination, after considering the
factors in TILA section 105(f)(2), is that the disclosures proposed to
be exempted would not provide meaningful benefit to consumers in the
form of useful information or protection. In the Bureau's preliminary
analysis, the exempted disclosure requirements would significantly
complicate, hinder, or make more expensive credit for PACE
transactions, and the exemptions would not undermine the goal of
consumer protection. Where the Bureau believes that doing so would help
assure the meaningful disclosure of credit terms and avoid the
uninformed use of credit, the proposal would replace the exempted
disclosures with disclosures that serve similar purposes to the
existing disclosures, but that would better fit the context of PACE
transactions.
Section 1026.37 Content of Disclosures for Certain Mortgage
Transactions (Loan Estimate)
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)(1)-(7) would set 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.
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, 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. Proposed
Sec. 1026.37(p)(1) would exempt PACE transactions from the escrow
account payment disclosure requirements implemented under Sec.
1026.37(c)(2)(iii).
As discussed in the section-by-section analysis of proposed Sec.
1026.35(b)(2)(i)(E), the Bureau is unaware of any PACE transactions
that carry their own escrow accounts. Thus, the escrow account payment
field under Sec. 1026.37(c)(2)(iii) would generally be left blank if
it were included on the Loan Estimate associated with any PACE
transaction.\134\ This blank entry could 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
could create doubt for the consumer about whether the PACE transaction
will be repaid through the existing escrow account. The Bureau believes
the proposed exemption would mitigate this risk.
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\134\ See existing comment 37-1, which provides that a portion
of the Loan Estimate that is inapplicable may generally be left
blank. (Existing comment 38-1 provides similarly for the Closing
Disclosure.)
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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 \135\ 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.\136\ Section
1026.37(c)(4)(iii) through (vi) requires various statements about this
disclosure. Under proposed Sec. 1026.37(p)(2)(i) and
[[Page 30401]]
(ii), the Bureau would 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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\135\ As noted in the section-by-section analysis of proposed
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.''
\136\ 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 proposed Sec. 1026.37(p)(8)(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.\137\ Section 1026.37(c)(4)(iv)
currently does not require a more specific statement regarding the PACE
payment, separate from other property tax obligations. The Bureau is
proposing Sec. 1026.37(p)(2)(i) to provide such specificity. Proposed
Sec. 1026.37(p)(2)(i) would 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 statement about the
PACE loan payment would be labeled ``PACE Payment,'' and the statement
about the other property taxes would be labeled ``Property Taxes (not
including PACE loan).'' Besides having a more specific statement
regarding the PACE payment separate from the other property taxes, the
other components regarding certain insurance premiums or other charges
would continue to be disclosed under proposed Sec. 1026.37(p)(2)(i)
similar to how they are disclosed under current Sec.
1026.37(c)(4)(iv). The Bureau believes these proposed changes would
help consumers understand the unique nature of PACE and reinforce that
the PACE transaction will increase the consumer's property tax payment.
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\137\ 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 Bureau
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
Bureau is also proposing to clarify 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.
Proposed Sec. 1026.37(p)(2)(i) would eliminate this requirement for
PACE transactions. Omitting this information would avoid potential
consumer confusion for similar reasons as explained in the section-by-
section analysis of proposed Sec. 1026.37(p)(1).
The Bureau is also proposing 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. Proposed Sec.
1026.37(p)(2)(ii) would 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 Bureau believes the proposed disclosures would 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.
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.'' \138\ In
general, a creditor must disclose: (1) the name and NMLSR ID,\139\
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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\138\ Section 1026.37(k) also integrates the disclosure of
certain information required under appendix C to Regulation X.
\139\ Under Sec. 1026.37(k)(1), the NMLS ID refers to the
Nationwide Mortgage Licensing System and Registry identification
number.
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Proposed Sec. 1026.37(p)(3) would additionally require similar
disclosures for PACE companies if such information is not disclosed
under the requirements described above. Specifically, proposed Sec.
1026.37(p)(3) would 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''). Similar to Sec.
1026.37(k)(1) through (3)'s existing requirements with respect to
creditors, mortgage brokers, and loan officers, proposed Sec.
1026.37(p)(3) would provide 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. These disclosures
would not be required if the PACE company's contact information is
otherwise disclosed pursuant to Sec. 1026.37(k)(1) through (3).
Proposed comment 37(p)(3)-1 would clarify that, 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.
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 necessary to ensure
that these parties are appropriately licensed.\140\ Having this
information may also help consumers assess the risks associated with
services and service providers associated with the
[[Page 30402]]
transaction, which in turn serves the purposes of TILA, RESPA, and the
CFPA and Dodd-Frank Act.\141\ The Bureau believes that similar
considerations apply to the disclosure of the PACE company.
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\140\ 78 FR 79730, 79975-76 (Dec. 31, 2013).
\141\ See id.
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Proposed Sec. 1026.37(p)(3) would reference proposed Sec.
1026.43(b)(14) for the definition of ``PACE company.'' As explained in
the section-by-section analysis of proposed Sec. 1026.43(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 PACE financing.
The Bureau seeks comment on proposed Sec. 1026.37(p)(3) generally,
and on whether to require the contact information for the PACE company
under the ``PACE Company'' heading in all cases, instead of under the
``Mortgage Broker'' heading when applicable.
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.
Proposed Sec. 1026.37(p)(4) would instead 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 proposed statement would 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. For clarity, proposed Sec. 1026.37(p)(4) requires the
creditor to label this disclosure ``Selling the Property'' and use of
the term ``PACE loan'' in the disclosure. The Bureau believes the
proposed disclosure would further the purposes of TILA by providing
useful information about key risks of PACE loans, thus avoiding the
uninformed use of credit.
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, 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.'' 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 Bureau 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 Bureau proposes 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). Proposed Sec. 1026.37(p)(5) would require
creditors, to include one or more statements relating to late charges,
as applicable. First, proposed Sec. 1026.37(p)(5)(i) would require 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.'' Proposed comment 37(p)(5)-1 would clarify 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 Bureau 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 it,
the disclosure would not be required.
Second, proposed Sec. 1026.37(p)(5)(ii) would 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. Proposed Sec.
1026.37(p)(5)(ii) would provide flexibility for the creditor while
ensuring that the Loan Estimate contains useful information about
charges that may result from a property tax delinquency.
The Bureau solicits comment on whether it should require creditors
to disclose specific late-payment information and, if so, what
information to require.
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 Bureau is aware.
Thus, the Bureau is proposing to implement RESPA section 6(a) for PACE
transactions by requiring a servicing-related disclosure that would be
more valuable for PACE borrowers.
Proposed Sec. 1026.37(p)(6) would 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. Proposed Sec. 1026.37(p)(6) would also 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.
Proposed Sec. 1026.37(p)(6) would preserve the label ``Servicing'' for
the disclosure. The Bureau believes that proposed Sec. 1026.37(p)(6)
would promote the informed use of credit.
37(p)(7) Exceptions
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 would typically
be annual or semi-annual. The proposed model form for PACE under
proposed appendix H-24(H) would use ``annual'' in the tables disclosing
loan terms and projected payments. Proposed Sec. 1026.37(p)(7)(i)
[[Page 30403]]
would provide 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. Proposed Sec.
1026.37(p)(7)(i) would be 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.\142\
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\142\ 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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37(p)(7)(ii) PACE Nomenclature
The Bureau 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 utility and understandability, proposed Sec.
1026.37(p)(7)(ii) would 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. Proposed comment 37(p)(7)(ii)-1 would 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.
Section 1026.38 Content of Disclosures for Certain Mortgage
Transactions (Closing Disclosure)
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)(1)-(9) would set forth
modifications to the Closing Disclosure requirements under Sec.
1026.38 for ``PACE transactions,'' as defined under proposed Sec.
1026.43(b)(15), to account for the unique nature of PACE.
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,\143\ under
the heading ``Transaction Information.'' \144\ Proposed Sec.
1026.38(u)(1) would additionally require the Closing Disclosure for a
PACE transaction to include the name of any PACE company involved in
the transaction, labeled ``PACE Company.'' It would refer 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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\143\ 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 section-by-section analysis
of proposed Sec. 1026.2(a)(14), government sponsors are typically
the creditors for PACE transactions.
\144\ Section 1026.38(a)(4) also integrates the disclosure of
certain information required under appendix A to Regulation X.
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As the Bureau explained in the 2013 TILA-RESPA Rule, disclosing the
identifying information for the borrower, seller, and lender is
intended to effectuate statutory purposes by promoting the informed use
of credit.\145\ The Bureau believes disclosing the PACE company's
identifying information would do the same.\146\
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\145\ 78 FR 79730, 80002-03 (Dec. 31, 2013).
\146\ See part II.A.1 for discussion of the central role PACE
companies often play in PACE transactions.
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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),\147\ 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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\147\ 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 Bureau is proposing changes to these disclosure
requirements for PACE transactions as described in the section-by-
section analysis of proposed Sec. 1026.37(p)(1) and (2).
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Proposed Sec. 1026.38(u)(2) would retain the existing structure of
the projected payments table but would (1) eliminate the field for
escrow account information that is part of the periodic payment
disclosure currently required under Sec. 1026.37(c)(2)(iii); (2)
require the creditor to disclose whether the amount disclosed for
estimated taxes, insurance, and assessments includes payments for the
PACE transaction and, separately, whether it includes the non-PACE
portions of the property tax payment, with corresponding labels for
both; and (3) require a statement that the PACE transaction will be
part of the property tax payment and a statement directing the
consumer, if they have a mortgage with an escrow account, to contact
their mortgage servicer for what they will owe and when. Additionally,
proposed Sec. 1026.38(u)(2) would require the creditor to omit the
existing reference to detailed escrow account information located
elsewhere on the form. With these proposed amendments, the projected
payments table for the Closing Disclosure in a PACE transaction would
mirror that on the Loan Estimate as amended under proposed Sec.
1026.37(p)(1) and (2). The Bureau is proposing these changes for the
same reasons as set forth in the section-by-section analyses of
proposed Sec. 1026.37(p)(1) and (2) above.
38(u)(3) Assumption
TILA section 128(a)(13) is currently implemented in part by Sec.
1026.38(l)(1), which requires the information described in Sec.
1026.37(m)(2) to be provided on the Closing Disclosure under the
subheading ``Assumption.'' Section 1026.37(m)(2) 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. As discussed in the section-by-section analysis of
proposed Sec. 1026.37(p)(4), the Bureau understands that this
disclosure would not be as relevant for PACE transactions, since
subsequent property owners typically would not assume PACE obligations.
For the reasons discussed in the section-by-section analysis of
proposed Sec. 1026.37(p)(4), proposed Sec. 1026.38(u)(3) would thus
implement TILA section 128(a)(13) for PACE transactions by requiring
the creditor to use the subheading ``Selling the Property'' and to
disclose the information required by Sec. 1026.37(p)(4) in place of
the information required under Sec. 1026.38(l)(1).
38(u)(4) Late Payment
TILA section 128(a)(10) is currently implemented in part by Sec.
1026.38(l)(3), which requires the creditor to disclose on the Closing
Disclosure the information described in Sec. 1026.37(m)(4) under the
subheading ``Late Payment.'' It requires a statement detailing any
charge that may be
[[Page 30404]]
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.'' Proposed Sec. 1026.38(u)(4) would make changes relating to
the disclosure of late payment charges on the Closing Disclosure for
PACE transactions to parallel the changes that would be made in
proposed Sec. 1026.37(p)(5) with respect to the Loan Estimate. The
Bureau proposes these changes for the same reasons discussed in the
section-by-section analysis of proposed Sec. 1026.37(p)(5).
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 for PACE transactions. 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.
Proposed Sec. 1026.38(u)(5) would avoid potential inaccuracies
that might arise under existing requirements and is intended to provide
the consumer with useful information as it relates to a PACE
transaction. It would require 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.
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 proposed 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,
proposed Sec. 1026.38(u)(6) would exempt creditors in PACE
transactions from the requirement to disclose on the Closing Disclosure
the information otherwise required under Sec. 1026.38(l)(7).
38(u)(7) Liability After Foreclosure
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, proposed
Sec. 1026.38(u)(7) would provide that the creditor shall not disclose
the liability-after-foreclosure disclosure described in Sec.
1026.38(p)(3).\148\ It would provide 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. This information would be under the subheading
``Liability after Foreclosure or Tax Sale.'' The Bureau believes this
information would 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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\148\ 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 Bureau believes that this disclosure is
unlikely to be required on a Loan Estimate for a PACE loan.
Therefore the proposal does not currently address such language on
the Loan Estimate.
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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 disclosed in a
separate table, under the heading ``Contact Information.'' \149\ 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. Proposed Sec.
1026.38(u)(8) would 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 proposed
Sec. 1026.37(p)(3) and proposed comment 37(p)(3)-1,\150\ 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);
proposed Sec. 1026.38(u)(8) would not require the disclosure of the
PACE company a second time. As explained in the section-by-section
analysis of proposed Sec. 1026.43(b)(14), given the important role
that PACE companies play in PACE transactions, the Bureau believes that
disclosing their contact information could be useful to consumers and
would facilitate the informed use of credit.
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\149\ Section 1026.38(r) also integrates the disclosure of
certain information required under appendix A and appendix C to
Regulation X.
\150\ Proposed comment 37(p)(3)-1 explains that a PACE company
may be a mortgage broker as defined in Sec. 1026.36(a)(2).
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38(u)(9) Exceptions
38(u)(9)(i) Unit-Period
To permit creditors the flexibility to disclose the correct unit-
period for each PACE transaction, proposed
[[Page 30405]]
Sec. 1026.38(u)(9)(i) would provide 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 semi-annual
payments. The Closing Disclosure changes in proposed Sec.
1026.38(u)(9)(i) parallel the Loan Estimate changes in proposed Sec.
1026.37(p)(7)(i), and the Bureau is proposing proposed Sec.
1026.38(u)(9)(i) for the same reasons stated in the section-by-section
analysis of proposed Sec. 1026.37(p)(7)(i). Proposed Sec.
1026.38(u)(9)(i) is also 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.'' \151\
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\151\ 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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38(u)(9)(ii) PACE Nomenclature
The Bureau understands that PACE companies may market to consumers
using brand names that do not include the term ``Property Assessed
Clean Energy'' or the acronym ``PACE.'' To ensure that consumers
understand Closing Disclosures provided for PACE transactions, proposed
Sec. 1026.38(u)(9)(ii) would 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. Proposed comment 38(u)(9)(ii)-1 would 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.
1026.41 Periodic Statement
41(e) Exemptions
41(e)(7) PACE Transactions
TILA section 128(f) generally requires periodic statements for
residential mortgage loans.\152\ 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, payment breakdown, transaction
activity, contact information, and delinquency information.\153\
Proposed Sec. 1026.41(e)(7) would exempt PACE transactions, as defined
in proposed Sec. 1026.43(b)(15), from the periodic statement
requirement to reduce consumer confusion while avoiding undue burden
for PACE creditors.
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\152\ 15 U.S.C. 1638(f).
\153\ For purposes of Sec. 1026.41, the term ``servicer''
includes the creditor, assignee, or servicer of the loan, as
applicable. Sec. 1026.41(a)(2).
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Several unique characteristics of PACE financing support this
proposed exemption. First, PACE payments and delinquency charges are
typically integrated with broader property tax payments and delinquency
charges. Consumers may be confused about whether fields in the periodic
statement include details of the PACE financing, property taxes, or
both, or why the figures do not align with those in their property tax
statements. Second, the annual or semi-annual payment schedule for PACE
financing means that information on the periodic statement about the
next expected payment would come many months before the payment was
due, given timing requirements for periodic statements under Regulation
Z, which may limit its utility for consumers.\154\ Finally, requiring a
periodic statement could impose a significant burden on the party
providing the statement given that local taxing authorities would hold
needed information such as whether and when payments were made or
delinquency charges applied.
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\154\ See 12 CFR 1026.41(b).
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Even with the proposed exemption, consumers would still receive
information regarding payments and delinquency from their property tax
collector and, if they have a mortgage with an escrow, from their
mortgage servicer. Consumers could also obtain information about the
PACE loan by requesting a payoff statement pursuant to Sec.
1026.36(c)(3).
The Bureau seeks comment on proposed Sec. 1026.41(e)(7) and
whether a periodic statement requirement would benefit PACE consumers.
Specifically, the Bureau seeks comment on the types of disclosures
related to PACE financing that consumers currently receive from PACE
creditors, property tax collectors, and others. The Bureau also seeks
comment on whether an annual or semi-annual disclosure like the
periodic statement would be useful for PACE consumers and, if so, what
information it should contain.
The Bureau also requests comment on whether there are any other
mortgage servicing requirements in Regulation Z or X beyond the
periodic statement requirement that the Bureau should address in the
final rule. Some servicing requirements, such as the requirements to
provide periodic statements and to provide payoff statements, apply not
just to servicers but also to creditors and assignees.\155\ Both
Regulation Z and Regulation X also impose certain servicing
requirements that apply only to ``servicers'' as defined in Regulation
X, 12 CFR 1024.2(b).\156\ Regulation X generally defines servicer as
``a person responsible for the servicing of a federally related
mortgage loan'' and servicing as receiving any scheduled periodic
payments from a borrower pursuant to the loan's terms and making
certain payments to the loan's owner or other third parties.\157\ The
definition of ``person'' in RESPA \158\ has been interpreted not to
apply to government entities.\159\ This proposed rule does not address
any servicing requirements that apply only to ``servicers'' as defined
in Regulation X because there does not appear to be a ``servicer'' in
typical PACE transactions. Pursuant to the terms of PACE transactions
that the Bureau has reviewed, the consumer's local government taxing
authority typically receives the borrower's regular PACE payments as
part of the consumer's larger property tax payment.
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\155\ See Sec. Sec. 1026.41(a)(2); 1026.36(c)(3).
\156\ See, e.g., 12 CFR 1024.41 (loss mitigation); 1026.36(c)(1)
and (2) (payment processing and pyramiding of late fees).
\157\ 12 CFR 1024.2(b) (emphasis added); see also 12 U.S.C.
2605(i)(2).
\158\ See 12 U.S.C. 2602(5).
\159\ See, e.g., New Jersey Title Ins. Co. v. Cecere, 2020 WL
7137873, at *10 (D.N.J. 2020); United States v. Davis, 2018 WL
6694826, at *4 (C.D. Ill. 2018); Rodriguez v. Bank of Am., 2017 WL
3086369, at *5 (D.N.J. 2017). Other entities involved in PACE
transactions, such as the PACE company and home improvement
contractor, would fall within RESPA's definition of ``person'' but
do not appear to meet the Regulation X definition of ``servicer'' in
typical PACE transactions. For federally related mortgage loans,
defined in RESPA section 3(1), 12 U.S.C. 2602(1), and Regulation X
Sec. 1024.2(b), RESPA covered persons are generally subject to
RESPA's provisions including the anti-kickback provisions in 12
U.S.C. 2607.
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The Bureau proposes to use its authority under TILA sections 105(a)
and (f) and Dodd-Frank Act section 1405(b) to exempt PACE financing
from the periodic statement requirement. The Bureau preliminarily
concludes that this exemption is necessary and proper under TILA
section 105(a). Furthermore, the Bureau preliminarily 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). The
Bureau preliminarily believes that this conclusion would be true
regardless of the loan amount, borrower status (including related
[[Page 30406]]
financial arrangements, financial sophistication, and the importance to
the borrower of the loan), or whether the loan is secured by the
consumer's principal residence. Consequently, the proposed exemption
appears to further the consumer protection objectives of the statute,
and helps to avoid complicating, hindering, or making more expensive
the credit process. The Bureau also believes that the proposed
modification of the requirements in TILA section 128(f) to exempt PACE
financing would improve consumer awareness and understanding and 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 Bureau
is proposing a number of amendments to Sec. 1026.43 and its commentary
to account for the unique nature of PACE. Specifically, this proposal
would (1) define ``PACE company'' and ``PACE transaction'' for purposes
of Sec. 1026.43; (2) provide an additional factor a creditor must
consider when making a repayment ability determination for PACE
transactions extended to consumers who pay their property taxes through
an escrow account; (3) provide that a PACE transaction is not a QM as
defined in Sec. 1026.43; and (4) extend the requirements of Sec.
1026.43 and the liability provisions of section 130 of TILA \160\ to
any PACE company that is substantially involved in making the credit
decision. This proposal would also amend the commentary to this section
to explain 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 a relevant database or registry of
PACE transactions. The Bureau further proposes to amend the commentary
to make clear that pre-existing PACE transactions are considered a
property tax for purposes of considering mortgage-related obligations
under Sec. 1026.43(b)(8) and to clarify the verification requirements
for existing PACE transactions. The CFPB seeks comment on these
proposed amendments.
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\160\ 15 U.S.C. 1640.
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Background on the Existing Ability-to-Repay Requirements for Mortgages
The Dodd-Frank Act amended TILA to establish, among other things,
ATR requirements in connection with the origination of most residential
mortgage loans.\161\ As amended, TILA prohibits a creditor from making
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 all
applicable taxes, insurance (including mortgage guarantee insurance),
and assessments.\162\
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\161\ Dodd-Frank Act sections 1411-12, 1414, 124 Stat. 2142-48,
2149; 15 U.S.C. 1639c.
\162\ 15 U.S.C. 1639c(a)(1). TILA section 103 defines
``residential mortgage loan'' to mean, with some exceptions
including open-end credit plans, ``any consumer credit transaction
that is secured by a mortgage, deed of trust, or other equivalent
consensual security interest on a dwelling or on residential real
property that includes a dwelling.'' 15 U.S.C. 1602(dd)(5). TILA
section 129C also exempts certain residential mortgage loans from
the ATR requirements. See, e.g., 15 U.S.C. 1639c(a)(8) (exempting
reverse mortgages and temporary or bridge loans with a term of 12
months or less).
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TILA identifies the factors a creditor must consider in making a
reasonable and good faith assessment of a consumer's ability to repay.
These factors are the consumer's credit history, current and expected
income, current obligations, debt-to-income (DTI) ratio or residual
income after paying non-mortgage debt and mortgage-related obligations,
employment status, and other financial resources other than equity in
the dwelling or real property that secures repayment of the loan.\163\
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\163\ 15 U.S.C. 1639c(a)(3).
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In January 2013, the Bureau issued a final rule amending Regulation
Z to implement TILA's ATR requirements (January 2013 Final Rule).\164\
This proposal refers to the January 2013 Final Rule and later
amendments to it collectively as the ATR/QM Rule. The ATR/QM Rule
implements the statutory criteria listed above in the eight
underwriting factors a creditor must consider in making a repayment
ability determination set out in Sec. 1026.43(c)(2).\165\ These
factors are (1) the consumer's current or reasonably expected income or
assets (other than the value of the dwelling and attached real property
that secures the loan) that the consumer will rely on to repay the
loan; (2) the consumer's current employment status (if a creditor
relies on employment income when assessing the consumer's ability to
repay); (3) the monthly mortgage payment for the loan that the creditor
is underwriting; (4) the monthly payment on any simultaneous loans
secured by the same dwelling; (5) monthly mortgage-related obligations;
(6) the consumer's current debts, alimony, and child-support
obligations; (7) the consumer's monthly DTI ratio or residual income;
and (8) the consumer's credit history.\166\
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\164\ 78 FR 6408 (Jan. 30, 2013).
\165\ See id. at 6463.
\166\ 12 CFR 1026.43(c)(2).
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The ATR/QM Rule generally requires a creditor to verify the
information it relies on when determining a consumer's repayment
ability using reasonably reliable third-party records.\167\ For
example, to verify the consumer's income and assets, a creditor may use
a tax-return transcript issued by the Internal Revenue Service or a
variety of other records, such as filed tax returns, IRS Form W-2s,
payroll statements, financial institution records, or other third-party
documents.\168\
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\167\ 12 CFR 1026.43(c)(3)-(4).
\168\ 12 CFR 1026.43(c)(4). TILA section 129C(a)(4) provides
that, in order to safeguard against fraudulent reporting, any
consideration of a consumer's income history must include the
verification of income using either (1) IRS transcripts of tax
returns; or (2) an alternative method that quickly and effectively
verifies income documentation by a third-party, subject to rules
prescribed by the Bureau. In the January 2013 Final Rule, the Bureau
implemented TILA section 129C(a)(4)(B) by adjusting the requirement
to (1) require the creditor to use reasonably reliable third-party
records, consistent with TILA section 129C(a)(4), rather than the
``quickly and effectively'' standard of TILA section 129C(a)(4)(B);
and (2) provide examples of reasonably reliable records that a
creditor can use to efficiently verify income, as well as assets.
See 78 FR 6408, 6474 (Jan. 30, 2013).
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The ATR/QM Rule also defines categories of loans, called QMs, that
are presumed to comply with the ATR requirement.\169\ Under the ATR/QM
Rule, a creditor that makes a QM loan is deemed to have complied with
ATR requirements presumptively or conclusively, which generally depends
on whether the loan is ``higher priced.'' \170\ The ATR/QM Rule defines
several categories of QM loans. As
[[Page 30407]]
relevant here, those categories include General QM, Small Creditor QM,
Seasoned QM, and Balloon-Payment QM loans.\171\
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\169\ 15 U.S.C. 1639c(b)(1).
\170\ The ATR/QM Rule generally defines a ``higher-priced'' loan
to mean a first-lien mortgage with an APR that exceeded APOR for a
comparable transaction as of the date the interest rate was set by
1.5 or more percentage points; or a subordinate-lien mortgage with
an APR that exceeded APOR for a comparable transaction as of the
date the interest rate was set by 3.5 or more percentage points. 12
CFR 1026.43(b)(4). A creditor that makes a QM loan that is not
``higher priced'' is entitled to a conclusive presumption that it
has complied with the ATR/QM Rule--i.e., the creditor receives a
safe harbor from liability. 12 CFR 1026.43(e)(1)(i). A creditor that
makes a loan that meets the standards for a QM loan but is ``higher
priced'' is entitled to a rebuttable presumption that it has
complied with the ATR/QM Rule. 12 CFR 1026.43(e)(1)(ii).
\171\ 12 CFR 1026.43(c), (e), (f). TILA section
129C(b)(3)(B)(ii) directs HUD, the Department of Veterans Affairs
(VA), the Department of Agriculture (USDA), and the Rural Housing
Service (RHS) to prescribe rules defining the types of loans they
insure, guarantee, or administer, as the case may be, that are QMs.
Section 1026.43(e)(4) provides that, notwithstanding paragraph Sec.
1026.43.43(e)(2), a QM is a covered transaction that is defined as a
QM by HUD under 24 CFR 201.7 and 24 CFR 203.19, VA under 38 CFR
36.4300 and 38 CFR 36.4500, or USDA under 7 CFR 3555.109. In
addition, section 101 of the EGRRCPA amended TILA to provide
protection from liability for insured depository institutions and
insured credit unions with assets below $10 billion with respect to
certain ATR requirements regarding residential mortgage loans. The
Bureau is not aware of any PACE creditors that would qualify for
protection under these provisions, and these provisions are not
addressed in this proposed rule.
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QM Definitions
One category of QM loans defined by the ATR/QM Rule consists of
``General QM loans.'' \172\ The January 2013 Final Rule provided that a
loan was a General QM loan if:
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\172\ Another temporary category of QMs defined by the ATR/QM
Rule, Temporary GSE QMs, expired on October 1, 2022.
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The loan did not have negative-amortization, interest-
only, or balloon-payment features, a term that exceeds 30 years, or
points and fees that exceed specified limits; \173\
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\173\ 12 CFR 1026.43(e)(2)(i)-(iii).
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The creditor underwrote the loan based on a fully
amortizing schedule using the maximum rate permitted during the first
five years; \174\
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\174\ 12 CFR 1026.43(e)(2)(iv).
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The creditor considered and verified the consumer's income
and debt obligations in accordance with appendix Q; \175\ and
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\175\ 12 CFR 1026.43(e)(2)(v).
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The consumer's DTI ratio was no more than 43 percent,
determined in accordance with appendix Q.\176\
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\176\ 12 CFR 1026.43(e)(2)(vi). Appendix Q contained standards
for calculating and verifying debt and income for purposes of
determining whether a mortgage satisfied the 43 percent DTI limit
for General QM loans. The standards in appendix Q were adapted from
guidelines maintained by the Federal Housing Administration (FHA) of
HUD when the January 2013 Final Rule was issued. 78 FR 6408, 6527-28
(Jan. 30, 2013) (noting that appendix Q incorporates, with certain
modifications, the definitions and standards in HUD Handbook 4155.1,
Mortgage Credit Analysis for Mortgage Insurance on One-to-Four-Unit
Mortgage Loans).
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The Bureau amended the General QM definition on December 10, 2020
(General QM Final Rule).\177\ The General QM Final Rule amended
Regulation Z to remove the General QM loan definition's DTI limit (and
appendix Q) and replace it with limits based on the loan's pricing. For
non-PACE mortgages, loan pricing in general is strongly correlated with
early delinquency rates, which the General QM Final Rule used as a
proxy for repayment ability.\178\ The Bureau concluded that a
comparison of a loan's APR to the APOR for a comparable transaction is
a more holistic and flexible indicator of a consumer's ability to repay
than DTI alone.\179\ The Bureau further concluded that the bright-line
pricing thresholds established in the General QM Final Rule strike an
appropriate balance between ensuring consumers' ability to repay and
ensuring access to responsible, affordable mortgage credit.\180\ Under
the amended rule, a loan meets the General QM loan definition only if
the APR exceeds the APOR for a comparable transaction by less than 2.25
percentage points, with higher thresholds for loans with smaller loan
amounts, for certain manufactured housing loans, and for subordinate-
lien transactions.\181\
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\177\ 85 FR 86308 (Dec. 29, 2020).
\178\ See part IX.A for a discussion of why these dynamics
differ for PACE transactions.
\179\ 85 FR 86308, 86317 (Dec. 29, 2020).
\180\ Id.
\181\ Id. at 86367.
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In May 2013, the Bureau amended the ATR/QM Rule to add, among other
things, a new QM category for covered transactions that are originated
by creditors that meet certain size criteria and that satisfy certain
other requirements (the Small Creditor QM).\182\ Those requirements
include many that apply to General QMs, with some exceptions.
Specifically, Small Creditor QMs are not subject to the pricing
threshold for QM status, and the threshold for determining whether
Small Creditor QMs are higher-priced covered transactions, and thus
qualify for the QM safe harbor or rebuttable presumption, is higher
than the threshold for General QMs.\183\ In addition, Small Creditor
QMs must be held in portfolio for three years (a requirement that does
not apply to General QMs).\184\
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\182\ 78 FR 35430 (June 12, 2013). The Bureau made several
amendments to the Small Creditor QM provisions in 2015. 80 FR 59944
(Oct. 2, 2015).
\183\ QMs are generally considered to be higher priced if they
have an APR that exceeds the applicable APOR by at least 1.5
percentage points for first-lien loans and at least 3.5 percentage
points for subordinate-lien loans. In contrast, Small Creditor QMs
are only considered higher priced if the APR exceeds APOR by at
least 3.5 percentage points for either a first- or subordinate-lien
loan. 12 CFR 1026.43(b)(4). The same is true for another QM
definition that permits certain creditors operating in rural or
underserved areas to originate QMs with a balloon payment provided
that the loans meet certain other criteria (Balloon Payment QM
loans). QMs that are higher priced enjoy only a rebuttable
presumption of compliance with the ATR requirements, whereas QMs
that are not higher priced enjoy a safe harbor.
\184\ 12 CFR 1026.43(e)(5)(ii).
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In December 2020, the Bureau created a new category of QMs
(Seasoned QMs) for first-lien, fixed-rate covered transactions that
have met 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.\185\ To qualify, a transaction
generally must have no more than two delinquencies of 30 or more days
and no delinquencies of 60 or more days at the end of the seasoning
period of 36 months beginning on the date on which the first periodic
payment is due.\186\ The Bureau found that if combined with certain
other factors, successful loan performance over a number of years
indicates sufficient certainty to presume that loans were originated in
compliance with the ATR/QM Rule.\187\
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\185\ 85 FR 86402 (Dec. 29, 2020).
\186\ 12 CFR 1026.43(e)(7)(ii).
\187\ 85 FR 86402, 86415 (Dec. 29, 2020).
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TILA section 129C(b)(2)(E)(iv)(I) granted the Bureau the discretion
to create a special provision allowing origination of balloon-payment
QMs, which it implemented in the January 2013 Final Rule.\188\ As
directed by Congress, the Bureau considered the issues facing small
creditors in rural and underserved areas and determined that it was
appropriate to exercise its discretion under TILA to reduce burdens on
certain small creditors that operate predominantly in rural or
underserved areas. Accordingly, the Bureau established a special
provision allowing these creditors to originate balloon-payment QMs,
even though balloon-payment mortgages are otherwise precluded from
being considered QMs.\189\
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\188\ 78 FR 6408, 6538 (Jan. 30, 2013).
\189\ Id. The Bureau further amended the Regulation Z
requirements for balloon-payment QMs in response to the HELP Rural
Communities Act in October 2015. 81 FR 16074 (Mar. 25, 2016); see
Public Law 114-94, 129 Stat. 1312 (2015).
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43(b) Definitions
Section 1026.43(b) sets forth certain definitions for purposes
Sec. 1026.43. The Bureau is proposing to amend the commentary to Sec.
1026.43(b)(8), regarding the existing definition of mortgage-related
obligations, to clarify the treatment of payments for pre-existing PACE
transactions. The Bureau is also proposing two new definitions in Sec.
1026.43(b)(14) and (b)(15). Under the proposal, Sec. 1026.43(b)(14)
would define
[[Page 30408]]
PACE company, and Sec. 1026.43(b)(15) would define PACE
transaction.\190\
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\190\ If the Bureau finalizes the new definitions in proposed
Sec. 1026.43(b)(14) and (b)(15), the final rule would add the new
definitions into Sec. 1026.43(b) where they belong alphabetically
in that paragraph and would renumber existing definitions as needed
and make conforming technical adjustments to cross-references to
those definitions to reflect the renumbering changes.
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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 Bureau
proposes to amend comment 43(b)(8)-2 to explicitly state that payments
for pre-existing PACE transactions are considered property taxes for
purposes of Sec. 1026.43(b)(8). The intent of this proposed amendment
is to ensure that it is clear that a creditor must consider payments
for pre-existing PACE transactions as mortgage-related obligations.
The proposed amendment to comment 43(b)(8)-2 is consistent with the
existing rule but adds an explicit reference to PACE transactions for
clarity. Comment 43(b)(8)-2 already provides that all 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 Sec. 1026.43(b)(8). PACE
transactions are related to the ownership or use of real property and
are paid to a taxing authority. In addition, the existing comment
provides as an example that taxes, assessments, and surcharges imposed
by independent districts established or allowed by the government with
the authority to impose levies on properties within the district to
fund a special purpose qualify as property taxes for purposes of Sec.
1026.43(b)(8). The Bureau seeks comment on this proposed amendment.
43(b)(14) PACE Company
To provide clarity and for ease of reference, the Bureau proposes
to add a definition of ``PACE company'' in Sec. 1026.43(b)(14).
As discussed in part II.A above, most local governments that engage
in PACE financing rely on private companies to administer PACE
programs. PACE companies are generally responsible for operating the
applicable programs, including marketing PACE financing to consumers,
administering originations, making decisions about whether to extend
the loan, and enlisting home improvement contractors that will
implement the projects to facilitate the originations. PACE companies
thus play an extensive role in PACE transactions, and as discussed in
the section-by-section analysis of Sec. 1026.43(i) below, the Bureau
proposes to apply the requirements of Sec. 1026.43 to any PACE company
that is substantially involved in making the credit decision.\191\
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\191\ The Bureau also proposes to apply section 130 of TILA, 15
U.S.C. 1640, to covered PACE companies that fail to comply with
Sec. 1026.43. See section-by-section analysis of proposed Sec.
1026.43(i)(3).
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Proposed Sec. 1026.43(b)(14) would provide 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. Proposed comment 43(b)(14)-1 would provide indicia
of whether a person is administering a PACE financing program. The
Bureau intends this proposed provision and associated commentary to
target the private companies involved in running the PACE programs as
described above--the Bureau understands that it would not apply to home
improvement contractors, who may be natural persons and who generally
do not administer the PACE program. The CFPB seeks comment on this
proposed definition and, in particular, on whether it accurately
identifies the intended entities and whether the use of this term
accounts for the unique nature of PACE financing.
43(b)(15) PACE Transaction
Section 307 of the EGRRCPA amended TILA to define the term
``Property Assessed Clean Energy financing'' for purposes of TILA
section 129C(b)(3)(C) as financing to cover the costs of home
improvements that results in a tax assessment on the real property of
the consumer.\192\ The Bureau proposes to add a definition for the term
``PACE transaction'' to Regulation Z that is based on the EGRRCPA
section 307 definition. Specifically, proposed Sec. 1026.43(b)(15)
would provide 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. The Bureau seeks comment on this proposed
definition.
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\192\ See 15 U.S.C. 1639C(b)(3)(C)(i).
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43(c) Repayment Ability
Section 307 of the EGRRCPA directed the Bureau to prescribe
regulations that carry out the purposes of TILA's ATR provisions for
residential mortgage loans with respect to PACE transactions. The
Bureau has preliminarily concluded that the existing ATR framework set
out in Sec. 1026.43(c) effectively carries out the purposes of TILA's
ATR provisions and is generally appropriate for 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) described below.
As described above, the existing ATR 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. These verification requirements are
important to carrying out the purpose of TILA's ATR provisions.\193\
TILA section 129C(a)(4) is intended to safeguard against fraudulent
reporting and inaccurate underwriting, as the statute specifically
notes that a creditor must verify a consumer's income history ``[i]n
order to safeguard against fraudulent reporting.'' These concerns
appear to be heightened in the PACE market given the consumer
protection issues observed by advocates and others, such that weakening
the verification requirement in this context would be inappropriate.
The Bureau believes the current ATR provisions, which provide minimum
requirements for creditors making ability-to-repay determinations but
do not dictate particular underwriting models, are similarly
appropriate for PACE transactions, subject to certain proposed
adjustments specific to PACE transactions discussed below.
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\193\ See 78 FR 6408, 6475 (Jan 30. 2013) (``One of the purposes
of TILA section 129C is to assure that consumers are offered and
receive covered transactions on terms that reasonably reflect their
ability to repay the loan. See TILA section 129B(a)(2). The Bureau
believes that a creditor consulting reasonably reliable records is
an effective means of verifying a consumer's income and helps ensure
that consumers are offered and receive loans on terms that
reasonably reflect their repayment ability.'').
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Applying existing Sec. 1026.43(c) to PACE transactions will allow
PACE creditors to account for the particular features of the PACE
transactions that they originate when assessing a consumer's ability to
repay. The Bureau's ATR framework is designed to be flexible, to allow
creditors to develop
[[Page 30409]]
and apply their own underwriting standards, and to permit creditors to
consider the facts and circumstances of each individual extension of
credit. The ATR provisions of Regulation Z also do not provide
comprehensive underwriting standards to which creditors must
adhere.\194\ For example, the rule and commentary do not specify how
much income is needed to support a particular level of debt or how
credit history should be weighed against other factors. So long as
creditors consider the factors set forth in Sec. 1026.43(c)(2)
according to the requirements of Sec. 1026.43(c), creditors are
permitted to develop their own underwriting standards and make changes
to those standards over time in response to empirical information and
changing economic and other conditions.\195\ As such, the Bureau
preliminarily believes that the existing ATR framework provides 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.
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\194\ See comment 43(c)(1)-1.
\195\ See id.; see also comment 43(c)(2)-1.
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For these reasons, the Bureau proposes 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) described below. The Bureau seeks comment on these proposed
changes. In particular, the Bureau seeks comment on whether Sec.
1026.43(c) should be amended to permit or require a creditor to
consider the effect of potential savings resulting from the home
improvement project financed in the PACE transaction (such as lowered
utility payments).
43(c)(2) Basis for Determination
43(c)(2)(iv)
Section 1026.43(c)(2) sets forth factors creditors must consider
when making the ATR 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 Bureau proposes to
add new comment 43(c)(2)(iv)-4 to provide additional guidance to
creditors originating PACE transactions. Proposed comment 43(c)(2)(iv)-
4 would provide 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.
Proposed comment 43(c)(2)(iv)-4 is intended to help address
concerns about the prevalence of ``loan splitting'' and ``loan
stacking'' in the PACE industry that were raised in ANPR comments from
consumer groups and other stakeholders. As described in the 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 Bureau's statistical
analysis indicates that a little more than 13 percent of PACE borrowers
between 2014 and 2020 received multiple PACE transactions, with many of
these transactions originated simultaneously or within a few months of
each other, which could be indicative of loan splitting or
stacking.\196\ About one-fourth of PACE borrowers with multiple PACE
transactions consummated multiple transactions in the same month, and
about three-quarters of PACE borrowers with multiple PACE loans
consummated more than one transaction within the same 6-month
period.\197\ In some cases, the creditor originating the second or
successive PACE transaction might not be aware of previous
transactions, due to delays in recording.
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\196\ See PACE Report, supra note 12, at 12, 24.
\197\ See id. at 24.
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Given these concerns and the increased possibility of a PACE
borrower having previously entered a PACE transaction, the Bureau
preliminarily concludes that it is practical and appropriate for a PACE
creditor to search 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. A PACE industry
association has recommended that market participants create a PACE-
related lien registry for PACE companies to review when underwriting
consumers for PACE transactions.\198\ In addition, the Bureau
understands that at least one active PACE State has contemplated
establishing a real-time registry or database system for tracking PACE
assessments.\199\ The Bureau believes that if a database of PACE
transactions that covers the geographic area in which the property is
located exists, proposed comment 43(c)(2)(iv)-4 would lead PACE
creditors to discover more simultaneous loans, which could reduce the
extent of loan splitting and loan stacking. The Bureau is not proposing
to apply this provision to creditors originating non-PACE mortgages,
because the origination of a PACE loan and a non-PACE mortgage in short
succession does not appear to raise the same concerns regarding loan
splitting or loan stacking. Additionally, it is relatively rare for a
new mortgage borrower to have a pre-existing PACE transaction on the
same property, since PACE transactions are less common than non-PACE
mortgages and a property sale is unlikely to be completed unless any
existing PACE loan has already been paid off. The Bureau seeks comment
on this proposal.
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\198\ PACENation, Residential Property Assessed Clean Energy (R-
PACE) State and Local Consumer Protection Policy Principles, at 3
(Oct. 21, 2021), https://www.pacenation.org/wp-content/uploads/2021/11/PACENation-R-PACE-Consumer-Protection-Policy-Principles-ADOPTED-October-21.2021.pdf.
\199\ See Cal. Fin. Code sec. 22693.
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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
Bureau proposes to amend comment 43(c)(3)-5 to clarify how this
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.
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\200\ As discussed above, the Bureau is proposing 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 section-by-
section analysis of proposed Sec. 1026.43(b)(8) supra.
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The Bureau proposes to amend comment 43(c)(3)-5 to clarify that a
[[Page 30410]]
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. A PACE creditor might know or have reason
to know of a PACE transaction that is about to be originated and that,
therefore, will not appear in property tax records or property tax
information in a title report. For example, a PACE creditor might learn
of the existing PACE transaction by searching a relevant database of
PACE transactions, or a consumer might inform the creditor of the PACE
transaction in application materials. In those circumstances, the
proposed amendment provides that a creditor would not comply with the
requirement to verify mortgage-related obligations using reasonably
reliable third-party records 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 seeks comment on this proposed amendment.
43(i) PACE Transactions
43(i)(1)
Many consumers who obtain PACE transactions have pre-existing
mortgages that require the payment of property taxes through an escrow
account. 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. This increase is relevant to the consumer's ability to
repay the PACE transaction. The CFPB preliminarily concludes that, for
consumers who pay their property taxes through an escrow account, a
creditor's reasonable and good faith determination of a consumer's
ability to repay a PACE transaction according to its terms must include
the creditor's consideration of the effect of incorporating a PACE
transaction into a consumer's escrow payments. For the reasons
discussed below, the Bureau proposes 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).
One unique aspect of PACE transactions is that, unlike traditional
mortgages, consumers may pay them through an escrow account on another
mortgage loan. PACE transactions are also distinct from non-PACE
mortgage loans in several other respects, including with regard to the
timing of when the first PACE payment is due and their annual or semi-
annual repayment schedule. These distinct features of PACE transactions
can result in significant payment spikes for consumers. Consumers who
are required to make their PACE payments through their existing escrow
account have faced particularly long delays before payments have come
due on their PACE transaction.\201\ These consumers 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. A servicer
must conduct an escrow account analysis every 12 months but may, and in
some cases must, do so more frequently. The Bureau 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.\202\
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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 generally 12 CFR 1024.17(c)(3) (discussing annual
escrow account analyses).
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For example, assume a PACE transaction was consummated in June
2021, and the first PACE payment was due November 1, 2021. If the
servicer had not learned of the PACE transaction before receiving a tax
bill for the November 1, 2021 payment, the PACE transaction would not
have been promptly incorporated into the consumer's escrow account.
Assuming no funds were set aside to pre-pay the consumer's escrow
account, in this example the servicer's next escrow account analysis
might newly account for (1) the initial payment due November 1, 2021
for which no escrow funds were previously collected, (2) the upcoming
PACE payment that would be due November 1, 2022, and (3) any potential
adjustments to the escrow account cushion attributable to the PACE
transaction.\203\ In this example, a consumer could experience a sharp
and unexpected increase in their initial escrow payments beyond the
amount that would have been owed had the PACE transaction been
incorporated into escrow promptly. This payment spike would undercut a
central benefit of escrow accounts to consumers in spreading out large
obligations into more manageable, regular payments.
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\203\ Under 12 CFR 1024.17(c)(1), servicer may charge a cushion
of no greater than one-sixth (\1/6\) of the estimated total annual
payments from the account.
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Consumer group commenters to the ANPR stated that the delay in this
adjustment of the escrow account means that the first year or two of a
consumer's increased escrow payments to account for the PACE
transaction will likely be higher than in subsequent years due to
significant shortages in the escrow account. These commenters expressed
that if, for example, the servicer analyzes the escrow account just
before property tax bills are issued, the servicer will advance the
full property tax amount, including the amount owed on the PACE
transaction, but the escrow account will then carry a deficiency (or
negative balance due to the prior year's PACE payment) going forward.
They stated further that, at the next escrow account analysis, the
servicer will calculate the new escrow payment by adding to the base
payment an amount sufficient to repay the deficiency, an amount to
cover the upcoming year's PACE payment that was not accounted for in
the prior year's escrow analysis (an escrow shortage), and a reserve
cushion of no greater than one-sixth (\1/6\) of the estimated total
annual payments from the account.\204\ A State trade association
indicated that in general, it is not uncommon for a PACE transaction to
double a consumer's monthly escrow payment because the PACE transaction
amount could be as much or more than the existing property tax. This
commenter stated that the escrow adjustment to bring the escrow account
current after one year, provide for the next PACE payment, and fund a
cushion can potentially triple the consumer's monthly escrow payment
amount for a 12-month period.
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\204\ A deficiency is the amount of a negative balance in an
escrow account, while a shortage is an amount by which a current
escrow account balance falls short of the target balance at the time
of escrow analysis. 12 CFR 1024.17(b).
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The CFPB understands that at least some PACE consumers have had
difficulty repaying their PACE transaction because of this substantial
and unanticipated spike in their escrow
[[Page 30411]]
payments. Some consumer group commenters to the ANPR asserted that the
addition of a PACE transaction to the property tax bill has frequently
driven PACE consumers' escrow payments to unaffordable levels that
result in many PACE consumers being unable to make their full mortgage
payments and going into default and even foreclosure. These commenters
cited as examples a homeowner in Stockton, California, who saw his
escrow payment increase by almost $500 a month, and an older adult
homeowner in Oakland, California, whose monthly fixed income was only
about $1,000 and faced an increase in her escrow payment of over $900.
The Bureau preliminarily concludes that a creditor can only make a
reasonable and good faith determination of the consumer's ability to
repay the PACE transaction by considering the potential spike in the
consumer's escrow payments it may cause. As described above, commenters
to the ANPR expressed that the payment spike that can result when a
PACE transaction is added to a consumer's property tax bill frequently
increases their escrow payments to unaffordable levels, which could
result in the consumer's default and even tax sale or foreclosure. The
CFPB thus preliminarily concludes that it is consistent with the
purposes of the ATR requirements to require a PACE creditor to consider
whether a consumer who will pay their PACE payments through an escrow
account will be able to make their monthly escrow payment once the
escrow payment amount is adjusted to account for any potential
deficiency or shortage and an escrow cushion attributable to the PACE
transaction. Although 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. This short-term payment
spike is also foreseeable by PACE creditors at consummation.
The CFPB also preliminarily concludes that the heightened consumer
uncertainty that may arise for PACE transactions paid through escrow
accounts as compared to other types of covered transactions supports
this proposal. The Bureau has heard anecdotally and from commenters to
the ANPR that PACE consumers are often surprised by and unprepared for
the large payment spike. A few consumer group commenters to the ANPR
asserted that the information provided by PACE programs regarding the
relationship between PACE financing and escrow accounts is insufficient
to prepare consumers for the payment shock--or equip them to prevent
it--when there is a delay between consummation and when the servicer
learns of the PACE transaction and adjusts the escrow payment.\205\ The
Bureau is concerned that the consumer uncertainty that can arise from
the lack of information regarding how escrow accounts work in the
context of PACE transactions could be further compounded by the lack of
notice to consumers regarding when the escrow payments incorporating
the PACE transactions will begin. The uncertainty that PACE consumers
with escrow accounts experience regarding how much their escrow
payments will increase because of their PACE transaction and when those
increases will occur may persist even with the proposed disclosures and
other protections that would be afforded under the proposal.
Accordingly, the CFPB expects that the uniquely unpredictable and
complex nature of the initial PACE payment obligations could make it
challenging for these consumers to accurately track the amount owed as
a result of their PACE transaction and set aside an amount sufficient
to cover the higher initial payments once the escrow account is
adjusted.
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\205\ As an example, these commenters stated that California's
financing estimate and disclosure includes the following advice:
``If you pay your taxes through an impound account you should notify
your mortgage lender, so that your monthly mortgage payment can be
adjusted by your mortgage lender to cover your increased property
tax bill.'' Cal. Sts. & Hwys. Code sec. 5898.17.
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For these reasons, the Bureau proposes to add new Sec.
1026.43(i)(1). Section 1026.43(i)(1) would require that, for PACE
transactions extended to consumers who pay their property taxes through
an escrow account, in making the repayment ability determination
required under Sec. 1026.43(c)(1) and (c)(2), a creditor must consider
the factors identified in Sec. 1026.43(c)(2)(i) through (viii) 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 Sec. 1026.43(c)(2)(iii). The CFPB
preliminarily concludes that proposed Sec. 1026.43(i)(1) would provide
an appropriately calibrated means to address concerns about a
consumer's repayment ability when incorporation of the PACE transaction
into the escrow payments could result in a sharp payment increase. As
described above, the Bureau preliminarily concludes that it would not
be reasonable for a creditor to make an ATR determination while
ignoring a potentially significant and unexpected spike in the
consumer's escrow payments once adjusted to account for the PACE
transaction. At the same time, this potential payment spike would not
last for the duration of the PACE transaction. Creditors would be
required to consider any monthly payments that are in excess of the
monthly payment amount considered under Sec. 1026.43(c)(2)(iii), but
they would not need to assume these higher payments would be owed for
the entire duration of the loan. Creditors would also not be required
to calculate this amount as part of the consumer's monthly payment
amount for purposes of Sec. 1026.43(c)(5) or to include the amount
considered under proposed Sec. 1026.43(i)(1) in their DTI or residual
income calculations required under Sec. 1026.43(c)(2)(vii) but could
do so at their option as one possible means of complying with proposed
Sec. 1026.43(i)(1). The Bureau expects the proposal would provide an
appropriate means for creditors to consider this limited duration, but
potentially significant PACE-related obligation, faced by consumers who
pay through an escrow account.
Proposed Sec. 1026.43(i)(1)(i) and (ii) would provide additional
detail on what 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,\206\ and the Bureau understands that servicers
frequently charge the full allowable amount of this cushion.
Accordingly, proposed Sec. 1026.43(i)(1)(i) would provide 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 12 CFR
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
[[Page 30412]]
cushion amount will be required, in which case the creditor must use
that amount. The Bureau preliminarily concludes that it is appropriate
to require consideration of this cushion for PACE transactions given
the unique potential for consumer uncertainty regarding the timing and
amount of the new, higher escrow payments once adjusted to include the
PACE transaction.
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\206\ 12 CFR 1024.17(c)(1).
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Proposed Sec. 1026.43(i)(1)(ii) would address specifically the
payment spike that can result from a delay in incorporating the PACE
transaction into the consumer's escrow payments. It would require 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. There may be a significant time lag between when a PACE
transaction is consummated and when the first escrow payment reflecting
the PACE transaction comes due. As commenters to the ANPR noted, this
delay could result in consumers incurring an escrow deficiency and
shortage that would lead to significantly higher escrow payments than
otherwise would have been required had the PACE transaction been
incorporated promptly into the consumer's escrow payments. The Bureau
understands that the timing of when the servicer is expected to learn
of the PACE transaction can affect the existence and amount of such a
deficiency or shortage. This, in turn, would affect the monthly payment
that the consumer is required to pay into their escrow account and the
amount that would be considered under proposed Sec. 1026.43(i)(1).
As described above, when the servicer is expected to learn of the
PACE transaction will depend, in part, on whether the servicer is
informed of the covered PACE transaction at or prior to consummation.
For example, assume a PACE transaction is consummated in June, the
first payment is due November 1 of the same year, and the consumer has
an escrow account. The creditor does not notify the servicer of the
PACE transaction at consummation and no funds are allocated to pre-pay
the consumer's escrow account for any payments related to the PACE
transaction. If the creditor considers the consumer's monthly payment
on the PACE transaction under Sec. 1026.43(c)(2)(iii) but fails to
consider that the consumer will be unable to pay the higher amount
required for the initial escrow payments due to the one-sixth (\1/6\)
cushion and escrow shortage or deficiency, the creditor does not comply
with Sec. 1026.43(i)(1). On the other hand, if under the same
circumstances the creditor notifies the servicer of the PACE
transaction at consummation to ensure the transaction will be
incorporated into the escrow account promptly and determines that,
given the timing of the notification, there will not be an escrow
shortage or deficiency, and also confirms the consumer will be able to
make initial escrow payments even with the additional one-sixth (\1/6\)
cushion, the creditor complies with Sec. 1026.43(i)(1). For the
purposes of proposed Sec. 1026.43(i)(1)(ii), where a creditor provides
prompt notification to the servicer of the PACE transaction, it appears
that it would be 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.
The Bureau seeks comment on proposed new Sec. 1026.43(i)(1) and
specifically on whether it would provide additional clarity to include
the above examples in commentary to Sec. 1026.43(i)(1).
Although the proposed rule would not require creditors to notify
servicers of PACE transactions, the Bureau strongly encourages prompt
notice to servicers of the PACE transaction and rapid adjustment of the
escrow payments by servicers to minimize payment spikes for PACE
consumers. As an alternative approach to addressing the potential delay
in incorporating PACE payments into a consumer's escrow account, the
Bureau considered requiring all PACE creditors to notify the servicer
at consummation that the consumer has entered into a PACE transaction.
This requirement would eliminate one source of delay leading to payment
shocks--the time between origination and the mortgage servicer learning
of the PACE transaction. Such a requirement could reduce the likelihood
that a payment spike would be significant enough to result in a
consumer being unable to meet the payment obligations of the PACE
transaction.
The Bureau considered imposing this requirement pursuant to its
authority under TILA section 129B(e)(1).\207\ This section authorizes
the Bureau to prohibit or condition terms, acts, or practices relating
to residential mortgage loans that the Bureau finds to be abusive,
unfair, deceptive, predatory, necessary or proper to ensure that
responsible, affordable mortgage credit remains available to consumers
in a manner consistent with the purposes of TILA sections 129B and
129C, necessary or proper to effectuate the purposes of TILA sections
129B and 129C, to prevent circumvention or evasion thereof, or to
facilitate compliance with such sections, or are not in the interest of
the borrower. The Bureau believes the act or practice of originating a
PACE transaction for a consumer who has a pre-existing non-PACE
mortgage and pays property taxes through an escrow account without
notifying the servicer of the non-PACE mortgage may not be in the
interest of the borrower because it could lead to a payment shock when
the PACE transaction is incorporated into the borrower's escrow
account, as described above. The Bureau preliminarily concludes,
however, that it is preferrable to address the payment shock risk
associated with non-notification under proposed Sec.
1026.43(i)(1)(ii), which would grant PACE creditors greater 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.
The Bureau nevertheless seeks comment on this alternative approach and
any advantages or disadvantages it has in comparison to proposed Sec.
1026.43(i)(1)(ii).\208\
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\207\ 15 U.S.C. 1639b(e)(1).
\208\ Some commenters to the ANPR recommended requiring
creditors to consider a consumer's ability to repay the full annual
or semi-annual PACE payment (rather than the monthly payment amount,
as otherwise required by Sec. 1026.43(c)(2)(iii)) based on a single
month's income. The Bureau declines to propose such amendments. The
ATR requirements anticipate that covered transactions (and other
obligations that must be considered) may feature non-monthly
payments and require that these non-monthly payments be converted
into monthly payment amounts. Comment 43(c)(5)(i); see, e.g.,
comment 43(c)(2)(v)-4. The Bureau thus does not believe that the
non-monthly payment aspect of PACE transactions is unique and seeks
to take an approach here that is consistent with how it has handled
other non-monthly payments under the ATR rules.
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43(i)(2)
EGRRCPA section 307 requires the Bureau to prescribe regulations
that carry out the purposes of TILA section 129C(a) with respect to
PACE transactions. For the reasons described below, the CFPB is
proposing to apply the Regulation Z ATR framework to PACE transactions
without providing for a QM presumption of compliance for PACE
transactions. Specifically, proposed Sec. 1026.43(i)(2) would provide
that, notwithstanding Sec. 1026.43(e)(2), (e)(5), (e)(7), or (f), a
PACE transaction
[[Page 30413]]
is not a QM as defined in Sec. 1026.43. If finalized, this provision
would exclude PACE transactions from eligibility for each of these QM
categories in Sec. 1026.43.\209\ For the reasons explained herein, the
CFPB preliminarily concludes that it would be inappropriate to provide
PACE transactions eligibility for a presumption of compliance with the
ATR requirements, particularly given the inherent consumer risks
presented by these transactions and the unique lack of creditor
incentives to consider repayment ability in this new and evolving
market.
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\209\ The Bureau also appreciates that, as a consequence of this
proposal, PACE transactions would not be permitted to include
prepayment penalties. 15 U.S.C. 1639c(c); 12 CFR 1026.43(g). The
Bureau understands that in general PACE transactions currently do
not include these penalties.
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The purposes of the QM provisions of Regulation Z include ensuring
that responsible, affordable mortgage credit remains available to
consumers in a manner consistent with the purposes of TILA section
129C. 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 and that are understandable
and not unfair, deceptive, or abusive. QMs thus are intended only to be
those mortgages for which it is reasonable to presume that the creditor
made a reasonable determination of consumer repayment ability. The
unique nature of PACE transactions, however, raises serious risks that
undermine the Bureau's confidence in the reasonableness of presuming
creditor compliance with the ATR requirements.
First, as described above, certain aspects of PACE financing create
unique 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 with payments due simultaneously with large
property tax payments may render loans unaffordable. The super-priority
lien status of PACE transactions also heightens the risk of negative
outcomes for consumers. These characteristics suggest that it may be
inappropriate to provide a presumption of compliance to PACE financing.
TILA specifically excludes from the QM definition loans with certain
risky features and lending practices well known to present significant
risks to consumers, including loans with negative amortization or
interest-only features and (for the most part) balloon loans.\210\ The
CFPB preliminarily concludes that certain aspects of PACE financing can
result in unaffordable payments that present similar risks to consumers
and therefore should not be granted QM status.
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\210\ In the January 2013 Final Rule, the Bureau observed that
the clear intent of Congress was to ensure that loans with QM 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' apparent
intent to provide incentives to creditors to make qualified
mortgages, since they have less risky features and terms'').
---------------------------------------------------------------------------
Available data that show the broader effect that PACE transactions
have on consumers' finances further highlight affordability risks
inherent in PACE financing. The Bureau's PACE Report estimated the
causal effect of a PACE transaction on consumer financial outcomes and
found clear evidence that PACE transactions increase non-PACE mortgage
delinquency rates.\211\ For consumers with a pre-existing non-PACE
mortgage, getting a PACE transaction increased the probability of a 60-
day delinquency on their non-PACE mortgage by 2.5 percentage points
over a two-year period.\212\ For comparison, the average two-year non-
PACE mortgage delinquency rate in the Bureau's data was about 7.1
percent.\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 also noted
in its PACE Report that PACE transactions may impact other credit
outcomes if consumers adjust their borrowing and spending behavior to
prioritize their payments for mortgage and property taxes.\216\ The
PACE Report finds that, for the 29 percent of PACE consumers without a
pre-existing non-PACE mortgage, their average monthly credit card
balance increased by over $800 over a two-year period following
origination of the PACE transaction.\217\ The PACE Report concludes
that consumers without a pre-existing non-PACE mortgage appear to
respond to the cost of PACE transactions by increasingly relying on
credit cards. Although not tied directly to the consumer's performance
on the PACE transaction, these results suggest that at least some
consumers without a pre-existing non-PACE mortgage have obtained PACE
transactions that were unaffordable at the time of consummation. The
CFPB preliminarily concludes that, even with the ATR requirements
applied to PACE, affordability risks could remain due to PACE
transactions' inherent features that shield creditors from losses, as
discussed below.
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\211\ A large majority of PACE borrowers 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.
\212\ Id. at 26-27. As in the Bureau's analysis of the General
QM 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.
\213\ Id. at 27.
\214\ Id. at 37.
\215\ Id. at 33.
\216\ The Bureau stated in the PACE Report that it expected that
credit card outcomes may be particularly relevant for PACE consumers
without non-PACE mortgage loans. The PACE Report finds essentially
no impact on credit card balances or delinquency rates for consumers
with a pre-existing non-PACE mortgage in the two-year period
following consummation of their PACE transaction. Id. at 41-42. In
general, accumulating revolving debt following a new financial
obligation may be probative of difficulty repaying the new
obligation. Typically, the Bureau has not evaluated these outcomes
in its rulemakings related to the QM categories due to both the
availability of more direct measures of ability to repay in the non-
PACE mortgage space and the greater data requirements for reliably
attributing changes in revolving balances to the effect of a new
financial obligation. The data would need to link non-mortgage
outcomes to a mortgage application, follow such outcomes over time,
and ideally have a similarly situated comparison group that does not
receive the new mortgage loan, to capture how non-mortgage outcomes
would have evolved absent the new loan. Although the data used in
the PACE Report had all of these characteristics, the datasets used
in the January 2013 Final Rule and General QM Final Rule and the
Bureau's 2018 ATR/QM Assessment, such as the HMDA data, generally
lacked one or more of these necessary characteristics.
\217\ Id. at 41.
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In addition, the Bureau is concerned that creditors originating
PACE transactions may possess a uniquely strong disincentive to
adequately consider a consumer's income or assets, debt obligations,
alimony, child support, and monthly debt-to-income ratio or residual
income, as required under the Bureau's existing QM definitions, and
under the Regulation Z
[[Page 30414]]
ATR framework, because these creditors bear minimal risk of loss
related to the transaction. As noted, under most PACE-enabling
statutes, the liens securing PACE transactions 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.\218\
In the event of foreclosure, any amount owed on the PACE transaction 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 IX.A below, 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 for the more
than seventy 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.\219\ 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. These factors
limit creditors' economic incentives to determine repayment ability and
raise risks of consumer harm that undermine the Bureau's confidence in
the reasonableness of presuming creditor compliance with the ATR
requirements.
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\218\ See, e.g., Cal. Sts. & Hwys. Code sec. 5898.30; Fla. Stat.
Ann. Sec. 163.08(8).
\219\ PACE Report, supra note 12, at 18.
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Further, the PACE market is still relatively new and evolving. As
discussed in part II.A, PACE has only existed for 15 years, and State
PACE authorizing statues have been amended in a number of ways since
the product originally emerged. Additionally, some major PACE companies
have recently exited the industry. These factors, coupled with the
other factors discussed above, make it particularly difficult to draw
any inferences that would support providing PACE transactions a
presumption of compliance with the ATR requirements.
In addition to these concerns about PACE transactions receiving a
QM presumption of compliance, the Bureau also preliminarily concludes
that the criteria used to determine QM status under the existing QM
definitions in Sec. 1026.43 would not be suitable for PACE
transactions. In particular, the Bureau preliminarily concludes that
the unique pricing model and risk structure associated with PACE
transactions may make any price-based criterion--including the pricing
thresholds set forth for the General QM category in Sec.
1026.43(e)(2)(vi) and any PACE-specific thresholds the Bureau might
develop--an inappropriate measure of a consumer's repayment ability at
consummation.
In the General QM Final Rule, the Bureau 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
transactions 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 Bureau having APRs between 8.3 and 9
percent.\222\ The Bureau's available data indicate that pricing is
primarily correlated with State and property type, causing the Bureau
to doubt that any pricing threshold could serve as an appropriate
indicator of a consumer's ability to repay.\223\ The PACE Report
confirms that PACE transactions are not generally 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\ Rather, as discussed in part IX.A, the
data on PACE pricing shows that it is consistent with the unique and
substantial protection from loss enjoyed by parties involved with PACE
transactions that is not common in the non-PACE mortgage market.
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\220\ 85 FR 86308, 86325, 86361 (Dec. 29, 2020).
\221\ See generally part II.A.
\222\ PACE Report, supra note 12, at 22.
\223\ For example, projects involving solar panels (comprising
over a third of projects in California but less than 7 percent of
projects in Florida) are the least expensive among project types,
and projects in Florida had substantially lower APRs than projects
in California. Id. at 22-23.
\224\ Id.
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Further, while the Bureau'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 QM
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 Bureau's research, PACE transactions with rate spreads above 3.5
percent and between 2.25 and 3.49 percent increase delinquency rates on
a consumer's non-PACE mortgage by an estimated 2.8 percent and an
estimated 1.4 percentage points, respectively, and that PACE
transactions with rate spreads below 2.25 percent have almost zero
effect on non-PACE mortgage delinquency.\226\ The CFPB preliminarily
concludes that this data would not be sufficient to provide a basis for
applying the current General QM pricing thresholds to PACE transactions
even if a QM were not otherwise inappropriate for the reasons discussed
above. As discussed in part IX.A below, the economic logic that
normally supports pricing being based on risk is absent in the market
for PACE transactions. As a result, even though the PACE Report finds
that PACE transactions with low rate spreads had relatively better
delinquency outcomes, it does not appear reasonable to presume that a
creditor that offers a PACE transaction with a low APR has made a
reasonable and good faith determination of a consumer's ability to
repay.\227\
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\225\ Pursuant to the General QM Final Rule, a loan generally
meets the General QM 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 QMs, 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\ The Bureau is also skeptical that defining a category of
QMs for PACE transactions based on a specific DTI threshold would be
suitable for PACE, given the risk factors described above. Moreover,
the CFPB's available evidence does not demonstrate a correlation
between a PACE consumer's DTI and non-PACE mortgage outcomes. The
Bureau 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 QM Final Rule,
a criterion for the General QM category. Id. at 48-49. In any event,
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 Bureau doubts that a presumption of compliance
would be appropriate given the unique characteristics of PACE
transactions discussed above.
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The Bureau also preliminarily concludes that the QM categories in
Sec. 1026.43(e)(5), (e)(7), and (f) would not
[[Page 30415]]
be appropriate for PACE transactions for additional reasons beyond the
inherent risk of these transactions. As discussed above, the Small
Creditor QM category in Sec. 1026.43(e)(5) extends QM status to
covered transactions that are originated by creditors that meet certain
size criteria and that satisfy certain other requirements. The Bureau
created the Small Creditor QM 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 QM status
to loans that meet the criteria in Sec. 1026.43(e)(5), including that
the creditor consider and verify the consumers DTI or residual
income.\228\
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\228\ 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.'').
---------------------------------------------------------------------------
The CFPB preliminarily 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. 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 QM. The Bureau thus has reason to question whether
PACE 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.\229\
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
more likely these entities will be repaid even in the event of
foreclosure or other borrower distress.
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\229\ See 80 FR 59947 (Oct. 2, 2015).
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Similarly, the reasoning for the Seasoned QM loan category set out
in Sec. 1026.43(e)(7) would not apply to PACE transactions. In 2020,
the Bureau created the Seasoned QM 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, 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 creditor compliance with the ATR requirements at consummation.
Given this, it does not seem appropriate to draw any inference from a
borrower's successful payment history on a PACE transaction regarding
the creditor's ability-to-repay determination at consummation.
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 ATR 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 would not be sufficiently probative of the creditor's
compliance with the ATR requirements at consummation for PACE
transactions to create a presumption of compliance.
Similar concerns apply to the Balloon-Payment QM category in Sec.
1026.43(f). The ATR/QM Rule permits balloon-payment loans originated by
small creditors that operate in rural or underserved areas to qualify
for QM status, even though balloon-payment loans are generally not
eligible for General QM status. In addition to the general reasons
discussed above for not having a QM definition for PACE, the same
specific concerns noted above with respect to the Small Creditor QM--
namely, that the involvement of nationwide PACE companies limits the
applicability of any special features of small creditors--are equally
applicable to the Balloon-Payment QM criteria. Moreover, the Bureau is
not currently aware of PACE financing with balloon payments.
The CFPB recognizes that applying the ATR requirements without
providing QM status for any PACE transactions may affect the number of
PACE loans made. As discussed in more detail in part IX.D, however, the
Bureau expects that many affected consumers will retain access to other
forms of mortgage and non-mortgage credit that could serve the purposes
of PACE-authorizing statutes, such as energy efficiency improvements.
Moreover, the CFPB believes any credit access impacts must be justified
against the consumer protection risks of extending QM status to PACE
transactions. As discussed, the many distinct features of the PACE
market and PACE financing significantly undermine the case that it
would be appropriate to afford PACE creditors and companies protection
from civil liability under TILA section 130 for claims that they failed
to comply with the proposed ATR requirements.
For these reasons, the Bureau is proposing to apply the Regulation
Z ATR framework to PACE transactions without providing for a QM
presumption of compliance. The CFPB is issuing this proposal consistent
with EGRRCPA section 307 and pursuant to its authority under TILA
sections 129C(b)(3)(C)(ii), 129C(b)(3)(B)(i), and 105(a). EGRRCPA
section 307 makes no mention of PACE loans qualifying for a presumption
of compliance with the ATR requirements it directed the Bureau 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 shall make a residential
mortgage loan unless the creditor makes a reasonable and good faith
determination based on verified and documented information that the
consumer has a reasonable ability to repay the loan--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 QMs) or otherwise indicate that the
Bureau's adoption of ATR requirements specific to PACE loans should
make further allowance for any presumption of compliance with those
requirements. Instead, by requiring that the Bureau ``account for the
unique nature'' of PACE financing, the Bureau preliminarily concludes
that Congress understood that elements of the existing ATR regime for
residential mortgage loans--including the QM provisions--may not be
appropriate in the case of PACE financing.
In any event, TILA 129C(b)(3)(A) directs the Bureau to prescribe
[[Page 30416]]
regulations to carry out the purposes of section 129C and TILA section
129C(b)(3)(B)(i) in turn authorizes the Bureau to prescribe regulations
that revise, add to, or subtract from the criteria that define a QM
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,
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 Bureau 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
ATR and QM provisions and the unique nature of PACE financing, the
Bureau preliminary concludes there is ample reason not to extend a
presumption of compliance with the ATR requirements to PACE
transactions. The Bureau seeks comment on its preliminary conclusion
not to extend QM to PACE financing.
43(i)(3)
EGRRCPA section 307 requires the Bureau to ``prescribe regulations
that carry out the purposes of [TILA's ATR 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 ATR requirement. Proposed Sec. 1026.43(i)(3) would 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. A PACE company would be ``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. A PACE company would not be
substantially involved in making the credit decision for purposes of
proposed Sec. 1026.43(i)(3) if it merely solicits applications,
collects application information, or performs administrative tasks.
Proposed Sec. 1026.43(i)(3) would also apply section 130 of TILA \230\
to covered PACE companies that fail to comply with Sec. 1026.43. These
proposed amendments would implement EGRRCPA section 307 and would
account for the unique and extensive role that PACE companies play in
PACE financing by creating incentives for those companies to ensure
that TILA's ATR requirements are met for PACE transactions and
enhancing consumers' remedies in the event that the ATR requirements
are not met.
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\230\ 15 U.S.C. 1640.
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PACE companies play an extensive role in PACE financing programs.
As noted in the section-by-section analysis of proposed Sec.
1026.2(a), it is the Bureau's understanding that PACE creditors are
typically government entities. At present in the PACE industry, these
government creditors generally contract with PACE companies to perform
many of the day-to-day operations of PACE financing programs. This
encompasses tasks such as marketing PACE financing to consumers,
training home improvement contractors to sell PACE transactions 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. Some ANPR commenters indicated that it is
also common for PACE companies to help raise the private capital needed
to fund PACE financing programs through the acquisition and
securitization of PACE bonds issued by PACE creditors. In exchange for
their role, PACE companies typically receive part of the profit from
PACE financing.
Given the unique role that PACE companies play in PACE financing,
the Bureau preliminarily concludes that application of Sec. 1026.43 to
PACE companies, in addition to creditors, is both appropriate and
consistent with the Congressional mandate in EGRRCPA section 307 to
implement regulations that carry out the purposes of TILA's ATR
provisions.
The Bureau similarly believes that it is appropriate to implement
section 307's mandate to apply section 130 to PACE transactions by
extending the applicability of section 130 of TILA for violations of
the ATR requirements to PACE companies that are substantially involved
in making credit decisions. As described above, PACE companies are the
entities most likely to perform or oversee the credit decision making,
including any ability-to-repay analysis, and to receive much of the
profit from operation of PACE financing programs. Applying section 130
to PACE companies that are substantially involved in the credit
decision making, therefore, would 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.
In addition, application of section 130 to covered PACE companies
would enhance consumers' ability to obtain remedies for violation of
the ATR rules. TILA section 113(b) \231\ 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 protection, and therefore, without
application of section 130 to PACE companies, PACE consumers would be
limited in their ability to obtain remedies for violations of the ATR
requirements. By specifically directing the Bureau to apply section
130's liability provision as well as the ATR requirements to PACE,
while ``account[ing] for the unique nature'' of PACE financing,
Congress intended the Bureau to do more than simply apply the ATR
requirements to PACE financing. To apply the ATR requirements but not
change the liability framework would mean section 130's penalty
provisions would be less effective as to ATR violations, since the only
creditor available in a consumer civil action is the state or local
government entities who are not subject to civil penalties.
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\231\ 15 U.S.C. 1612(b).
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The Bureau proposes to use 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. For the reasons described above, the Bureau believes that the
unique nature of PACE financing supports its proposal to add Sec.
1026.43(i)(3). The Bureau seeks comment on this proposed provision and
how best to define when a PACE company should be subject to proposed
Sec. 1026.43(i)(3). For example, the Bureau invites feedback on
whether ``substantially involved in making the credit decision for a
PACE transaction'' is the best way to define the type of involvement a
PACE company should have in the PACE transaction to be subject to
proposed Sec. 1026.43(i)(3).
[[Page 30417]]
Appendix H--Closed-End Forms and Clauses
The Bureau proposes to add forms H-24(H) and H-25(K) to appendix H
to Regulation Z. Forms H-24(H) and H-25(K) would 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.
The proposed forms 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 Estimate--Modification to Closing Disclosure for
Transaction Not Involving Seller. The Bureau plans to publish
translations of Forms H-24(H) and H-25(K) if the Bureau finalizes the
proposed additions to appendix H. The Bureau is also considering
modifying proposed forms H-24(H) and H-25(K) in the final rule to
provide additional pages for variations in the information required or
permitted to be disclosed. For example, existing form H-24(G) contains
four versions of page two to reflect the possible permutations of the
disclosures under Sec. 1026.37(i) and (j). The Bureau proposes forms
H-24(H) and H-25(K) pursuant to the authority and for the reasons
described above in the discussion of Sec. Sec. 1026.37(p) and
1026.38(u), as well as pursuant to its authority to publish such
integrated model disclosure forms under TILA section 105(b) and RESPA
section 4(a).
VIII. Effective Date
The Bureau proposes that the final rule, if adopted, 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.\232\ The final rule would apply to covered
transactions for which creditors receive an application on or after
this effective date. The Bureau tentatively determines that a one-year
period between Federal Register publication of a final rule and the
final rule's effective date would give creditors enough time to bring
their systems into compliance with the revised regulations. The Bureau
requests comment on this proposed effective date.
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\232\ Under TILA section 105(d), Bureau regulations requiring
any disclosure which differs from disclosures previously required by
part A, part D, or part E, or by any Bureau regulation promulgated
thereunder, shall have an effective date of that October 1 which
follows by at least six months the date of promulgation, subject to
certain exceptions. 15 U.S.C. 1604(d). To the extent TILA section
105(d) applies, the proposed effective date would be consistent with
it.
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IX. CFPA Act Section 1022(b) Analysis
A. Overview
In developing this proposed rule, the Bureau has considered the
proposed rule's potential benefits, costs, and impacts in accordance
with section 1022(b)(2)(A) of the CFPA.\233\ The Bureau requests
comment on the preliminary analysis presented below and submissions of
additional data that could inform the Bureau's analysis of the
benefits, costs, and impacts. In developing the proposed rule, the
Bureau has consulted or offered to consult with the appropriate
prudential regulators and other Federal agencies, including regarding
the consistency of this proposed rule with any prudential, market, or
systemic objectives administered by those agencies, in accordance with
section 1022(b)(2)(B) of the CFPA.\234\ As discussed in part V.C above,
the Bureau also has consulted with State and local governments and
bond-issuing authorities, in accordance with EGRRCPA section 307.\235\
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\233\ 12 U.S.C. 5512(b)(2)(A).
\234\ 12 U.S.C. 5512(b)(2)(B).
\235\ 15 U.S.C. 1639c(b)(3)(C)(iii)(II).
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Provisions To Be Analyzed
Although the proposal has several parts, for purposes of this
1022(b)(2)(A) analysis, the Bureau's discussion groups the proposed
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 proposal to apply
the ATR provisions of Sec. 1026.43 to PACE transactions, with certain
adjustments to account for the unique nature of PACE, including denying
eligibility for any QM categories; and (2) the proposal 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 credit,
such as PACE transactions, are credit for purposes of TILA.
Economic Framework
Before discussing the potential benefits, costs, and impacts
specific to this proposal, the Bureau provides 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 Bureau has previously discussed the general
economics of ATR determinations in the January 2013 Final Rule and
elsewhere,\236\ and focuses here on economic forces specific to PACE.
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\236\ 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 Bureau noted that even prior to the then-new ATR
requirements of Regulation Z, most mortgage lenders voluntarily
collected income information as part of their normal business
practices. 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.\237\ 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.\238\
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\237\ This holds empirically as well. In the General QM Final
Rule, the Bureau 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).
\238\ 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 that dampen or eliminate the economic
incentive 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
[[Page 30418]]
non-PACE mortgage,\239\ 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 technically structured as obligations attached to the
real property, rather than the consumer, any remaining amounts that are
not paid through foreclosure proceeds generally will not be
extinguished and will instead remain on the property for subsequent
owners to pay.
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\239\ 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.\240\ Moreover, the PACE Report finds that PACE
transactions are not priced based on individual risk.\241\ The PACE
Report notes that estimated APRs for PACE transactions are tightly
bunched, with about half of estimated PACE APRs between 8.3 and 9
percent.\242\ 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.\243\
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\240\ Id. at Table 1.
\241\ Id. at 23.
\242\ Id. at Table 2.
\243\ Id. at 23.
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B. Data Limitations and Quantification of Benefits, Costs, and Impacts
The discussion below relies on information that the Bureau has
obtained from industry, other regulatory agencies, and publicly
available sources, including reports published by the Bureau. These
sources form the basis for the Bureau's consideration of the likely
impacts of the proposed rule. The Bureau provides estimates, to the
extent possible, of the potential benefits and costs to consumers and
covered persons of this proposal, given available data.
Among other sources, this discussion relies on the Bureau's PACE
Report, as described in part IV above. The Report utilizes data on
applications for PACE transactions initiated between July 2014 and June
2020, 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 to those who were approved but did not
have an originated transaction. The Report uses a difference-in-
differences regression methodology, essentially comparing the changes
in outcomes like mortgage delinquency for originated PACE borrowers
before and after their PACE transactions were originated to the same
changes for applicants who were approved but not originated. In this
discussion of the benefits, costs, and impacts of the proposal, the
Bureau 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. 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. The
Bureau 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 ANPR.
The Bureau acknowledges several important limitations that prevent
a full determination of benefits, costs, and impacts. The Bureau 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.\244\ The data used in the report are restricted primarily
to consumers with a credit record, with respect to consumer impacts.
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 Bureau's consideration
of the impacts of the proposed rule on consumers and covered persons,
the proposed rule has different requirements from the State laws that
made up the 2018 California PACE Reforms, such that the potential
impacts may differ.
---------------------------------------------------------------------------
\244\ 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 proposed rule's benefits, costs, and impacts. General economic
principles and the Bureau's expertise, together with the available
data, provide insight into these benefits, costs, and impacts. The
Bureau requests additional data or studies that could help quantify the
benefits and costs to consumers and covered persons of the proposed
rule.
C. Baseline for Analysis
In evaluating the proposal's benefits, costs, and impacts, the
Bureau considers the impacts against a baseline in which the Bureau
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 proposed clarification that only
involuntary tax liens and involuntary tax assessments are excluded from
being credit under Regulation Z (such that the commentary would not
exclude PACE transactions), the baseline assumes that the current
practices of PACE industry stakeholders generally are not consistent
with treating PACE financing as TILA credit.
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 proposed ATR provisions, and the proposal to clarify 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
Proposed ATR Provisions
The Bureau proposes amendments under 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 Bureau also proposes to provide that
a PACE transaction is not a QM as defined in Sec. 1026.43.
Potential Benefits and Costs to Consumers of the Proposed ATR
Provisions
Under the proposed rule, consumers who are not found to have a
reasonable
[[Page 30419]]
ability to repay the loan would not be able to obtain a PACE loan. In
general, the Bureau expects that consumers who would be denied PACE
transactions due to the required ATR determination would otherwise
struggle to repay the cost of the PACE transaction. These consumers
generally would benefit from the proposal.
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.\245\ For consumers without a pre-existing non-PACE
mortgage, the Report finds that, following a PACE transaction, such
consumers' monthly credit card balances increase by over $800 per
month.\246\
---------------------------------------------------------------------------
\245\ Id.
\246\ Id. at 41-42.
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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 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 borrowers), a 3.8
percentage point increase for consumers with near-prime credit scores
(23.4 percent of borrowers), and a 6.2 percentage point increase for
consumers with subprime credit scores (20.4 percent of borrowers).\247\
The consumers with subprime credit scores would be the most likely to
be excluded by the ability-to-repay analysis that the proposal would
require. Credit score tends to be correlated with income. Moreover,
credit scores are based on credit history, and the proposed ATR
requirements would require consideration of credit history.
---------------------------------------------------------------------------
\247\ Id. at Figure 10.
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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.\248\ 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 the
proposed ATR requirements in some respects.
---------------------------------------------------------------------------
\248\ Id. at Table 1.
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The PACE Report finds that PACE transactions increase non-PACE
mortgage delinquency less for consumers where the PACE company
collected income information.\249\ 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.\250\ However, the Report
also finds that the effect of PACE 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.\251\ The
PACE Report was inconclusive with respect to whether income or a
calculation of DTI predicted negative effects of PACE 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.\252\
---------------------------------------------------------------------------
\249\ Id. at 45.
\250\ Id. at 46.
\251\ Id. at 46-47.
\252\ Id. at 47-48.
---------------------------------------------------------------------------
The facts documented by the PACE Report, described above, indicate
that the proposed ATR provisions would likely protect some consumers
who cannot afford a PACE transaction from entering into a PACE
transaction and potentially suffering negative consequences as a result
of that transaction. The Bureau does not have data available to
precisely determine the number of consumers who would benefit, or the
monetary value of those benefits, but the Bureau provides some rough
estimates below.
Consumers who become delinquent on their mortgages will, at a
minimum, incur late fees on their payments. If a PACE transaction
causes a longer delinquency, 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 on credit
scores--perhaps in part because PACE borrowers tended to already have
relatively low credit scores prior to the PACE transaction. The Bureau
quantifies the individual and aggregate monetary benefits of avoiding
these consumer harms below to the extent possible. The Bureau uses the
estimates from the PACE Report of the average effect of PACE on
consumer outcomes to estimate these benefits but notes that these
estimates may overstate aggregate benefits to the extent that existing
laws in California already protect consumers in that State from some
unaffordable PACE transactions.
The PACE Report finds that the average monthly mortgage payment for
consumers with PACE transactions originated between 2014 and 2020 was
$1,877.\253\ Assuming a late fee of five 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.
---------------------------------------------------------------------------
\253\ Id. at 16.
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Foreclosure is extremely costly, both to the consumer who
experiences foreclosure and to society at large. In its 2021 RESPA
Mortgage Servicing Rule, the Bureau 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.\254\ The Bureau adopts the same assumption here with
an adjustment for inflation,
[[Page 30420]]
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 2023 dollars, the benefit of an avoided foreclosure is $33,169.
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\254\ See 86 FR 34889 (June 30, 2021).
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The Bureau 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,\255\ suggesting that such benefits would
be negligible in magnitude.
---------------------------------------------------------------------------
\255\ PACE Report, supra note 12, at 41.
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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.\256\ For the 71.1 percent of such borrowers with a pre-
existing non-PACE mortgage,\257\ 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.\258\ The PACE Report finds that PACE transactions
increase the probability of a foreclosure by 0.5 percentage points over
a two-year period.\259\
---------------------------------------------------------------------------
\256\ Id. at Figure 16.
\257\ Id. at 18.
\258\ 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 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.
\259\ 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 Bureau'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 would ultimately experience foreclosure as a result of the
PACE transaction, the proposed rule could prevent about 120
foreclosures per year, for an aggregate annual benefit of about $4
million per year. If the proposed 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.
As discussed above, the difference-in-differences analysis in the
PACE Report also finds that credit card balances increased
significantly for PACE borrowers who did not have a pre-existing non-
PACE mortgage, compared to the change in balances for PACE applicants
who did not originate a loan and also did not have a pre-existing non-
PACE mortgage.\260\ The additional credit card balances incurred by
consumers without a pre-existing non-PACE mortgage could result in
interest charges if they are not paid in full on time.\261\ If the
proposed rule prevented the 29.9 percent of PACE consumers without a
pre-existing non-PACE mortgage from revolving an additional $833 in
average credit card balances for an average of one year, with an APR of
24 percent this could result in about $1.4 million in aggregate benefit
annually.
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\260\ PACE Report, supra note 12, at 41.
\261\ Interest charges generally do not result if a balance is
paid in full and on time, but it stands to reason that if balances
increased in response to another financial obligation, the consumer
does not have the resources available to pay the balance in full.
The PACE Report does not distinguish between revolving balances and
``transacting'' balances that are paid in full.
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The proposed ATR requirements may also benefit consumers by
increasing the likelihood that they understand the nature of PACE
transactions, particularly in combination with the required TILA-RESPA
integrated disclosures discussed below in the next section. Commenters
responding to the ANPR, as well as stories in the media, 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 who is asked to produce
documentation of their income will realize that they are signing up for
a loan that must be repaid over time. As such, the proposed 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 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, agree to a
PACE transaction, the potential benefits of the proposed rule to each
such consumer 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 Bureau assumes
that at least some would seek to pay off the PACE transaction after the
first payment becomes due.\262\ 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 2020
was $1,301, and the average capitalized interest was $1,412.\263\ The
average interest rate was 7.6 percent.\264\ On the average original
balance of $25,001,\265\ 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
[[Page 30421]]
financing), the benefit of preventing misunderstanding is greater
still, depending on the value the consumer nonetheless receives from
the project.\266\
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\262\ If the consumer did not realize they had effectively
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.
\263\ 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.
\264\ Id.
\265\ Id.
\266\ 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
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.
---------------------------------------------------------------------------
The Bureau does not have data indicating how often consumers
currently misunderstand the nature of a PACE transaction or what share
of those consumers would have, in the counterfactual, opted not to
agree to the PACE transaction or the related home improvement project
had they understood the nature of the PACE transaction. 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.\267\ CAEATFA reports aggregate statistics from this collection
publicly on its website.\268\ Using this information, the Bureau 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.
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\267\ See Cal. State Treasurer, Property Assessed Clean Energy
(PACE) Loss Reserve Program, https://www.treasurer.ca.gov/caeatfa/pace/activity.asp (last visited Apr. 6, 2023).
\268\ Id.; see also Cal. State Treasurer, PACE Loss Reserve
Program Enrollment Activity, https://www.treasurer.ca.gov/caeatfa/pace/activity.pdf (last visited Apr. 20, 2023).
---------------------------------------------------------------------------
According to the CAEATFA data, there were 17,401 PACE transactions
outstanding in California as of June 30, 2014, and 202,901 new
transactions originated after that through June 30, 2020. However,
about 89,000 transactions were paid off during this time, based on the
change in total outstanding portfolios, meaning that up to 40 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 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 six percent of
PACE transactions have terms of five years.\269\ 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.\270\ 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., 4 percent of all PACE borrowers)
were due to a misunderstanding that the proposal could address, the
aggregate benefits would be over $4.4 million annually.\271\
---------------------------------------------------------------------------
\269\ See PACE Report, supra note 12, at Figure A1.
\270\ The Bureau 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 16.
\271\ 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 in California prevents consumers from misunderstanding the
nature of PACE transactions in that State. 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 Bureau is being conservative in assuming that only 10 percent of
early repayments were due to misunderstandings, the Bureau
preliminarily determines that this estimate is, on balance, likely
an underestimate.
Table 1
--------------------------------------------------------------------------------------------------------------------------------------------------------
(a) Actual total (c) New (d) Actual total
outstanding (b) New financings outstanding (e) Number paid
Year portfolio through financings July January 1st- portfolio through off ((a) + (b) +
June 30th, prior 1st- December December 31st, June 30th, (c)-(d))
year 31st prior year current year current year
--------------------------------------------------------------------------------------------------------------------------------------------------------
2015..................................................... 17,401 7,022 11,515 34,308 1,630
2016..................................................... 34,308 23,206 32,743 83,904 6,353
2017..................................................... 83,904 34,036 25,850 119,082 24,708
2018..................................................... 119,082 25,764 15,482 146,403 13,925
2019..................................................... 146,403 9,982 6,967 146,525 16,827
2020..................................................... 146,525 5,541 4,793 131,200 25,659
----------------------------------------------------------------------------------------------
Total................................................ N/A 97,350 105,551 N/A 89,102
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: CAEATFA, https://www.treasurer.ca.gov/caeatfa/pace/activity.pdf.
To the extent that some consumers continue to receive PACE
transactions that they are not able to afford, the proposal would
benefit those consumers by providing an avenue for obtaining relief
under the civil liability provisions of TILA and Regulation Z. The
Bureau does not have data indicating how often this would occur,
although as noted below in its discussion of litigation costs to
covered persons, the Bureau expects that in the long run this would be
infrequent.
If the rule is finalized as proposed, 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 Bureau has previously noted in the context of
[[Page 30422]]
non-PACE mortgages that the time required to produce pay stubs or tax
records should not be a large burden on consumers. This may differ 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. In any event, the proposal likely would
not increase time costs in a meaningful way for PACE applicants in
California, because these consumers already must produce documentation
similar to what might be necessary for an ATR determination as part of
a PACE application under the proposal. In addition, the PACE Report
indicates that at least some PACE companies have collected income
information from applicants even in Florida, so again there may be
little change for some consumers in that State.\272\ Further, the
Bureau understands that, even in California after the effective date of
the 2018 California PACE Reforms, PACE companies do not always collect
full income documentation if other eligibility standards are not met.
For instance, State laws governing PACE often prohibit PACE
transactions from being made to consumers with evidence of recent
payment difficulty, such as a recent bankruptcy, mortgage delinquency,
or property tax delinquency. The Bureau understands that PACE companies
in California set up their eligibility determination process to check
these criteria before requesting income documentation from the
consumer. The evidence in PACE Report is consistent with this--the
Report finds that income information was not available for a sizeable
minority of applications in California after 2018 where the application
did not result in an originated PACE transaction.\273\
---------------------------------------------------------------------------
\272\ See PACE Report, supra note 12, at Table 1. As noted in
part II.A.6, in 2021, the main trade association for PACE companies
announced a set of consumer protection policy principles that
includes considering ability to pay, although the Bureau does not
know to what extent this translates to requiring documentation from
consumers where it is not required by State law.
\273\ PACE Report, supra note 12, at Table 1.
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The PACE Report shows that, in 2019, the last full year for which
data are available, the PACE companies that participated in the
voluntary data collection received about 45,500 applications from
prospective borrowers in Florida.\274\ As discussed further below, the
number of applications would likely fall significantly if the proposal
is finalized, possibly by as much as half. In addition, the PACE Report
indicates that about a third of PACE applications in Florida after
April 2018 included income information.\275\ Moreover, about one
quarter of PACE applications in California after April 2018 (i.e., when
the 2018 California PACE Reforms took effect and began requiring such
income information as part of the ability-to-pay analysis) did
not,\276\ indicating that such consumers in California were rejected
before being asked for income information. Together, this suggests
that, on average, approximately 11,400 additional consumers might be
asked to provide income documentation annually under this rule as
proposed.\277\ The Bureau does not have data indicating the average
amount of time it takes a PACE applicant to produce the documentation
for an ATR determination as would be required under the proposed rule.
Assuming the time to be one hour and using the median hourly wage in
Florida of $18.63,\278\ the aggregate time cost to consumers would be
about $212,000 annually.
---------------------------------------------------------------------------
\274\ Id. at 50.
\275\ Id. at 10.
\276\ Id. at Table 1.
\277\ The calculation is the product of 45,500 current
applications, 0.5 (the assumed reduction due to proposal), 0.67 (the
share of Florida applications that do not currently collect income),
and 0.75 (the share of the remaining applications that would collect
income, based on the share in California that currently collect
income), which equals 11,375.
\278\ See Bureau of Lab. Stats., May 2021 State Occupational
Employment and Wage Estimates, Florida, https://www.bls.gov/oes/current/oes_fl.htm (last visited Mar. 6, 2023).
---------------------------------------------------------------------------
Consumers would also face costs under the proposed rule due to
losing access to PACE financing. This would include consumers whose
PACE applications are denied due to failing the proposed ATR
determination, as well as consumers who do not apply for PACE as a
consequence of the proposal.\279\ For consumers who cannot, in fact,
afford the cost of a PACE transaction, being denied is likely a benefit
on net. However, no ATR determination can perfectly predict ability to
repay, and some consumers who could, in fact, afford and benefit from a
PACE transaction may be denied as a result of the proposed rule, if
finalized.
---------------------------------------------------------------------------
\279\ Consumers might not apply for PACE due to the effect of
the proposal if home improvement contractors who otherwise might
have marketed PACE withdraw from that market, or if they opt not to
proceed with a PACE transaction as a consequence of the provisions
of the proposed rule.
---------------------------------------------------------------------------
To quantify the cost to consumers of having applications for PACE
transactions denied, the Bureau would need to be able to calculate the
number of consumers that could afford the cost of a PACE transaction
but would be denied as a result of the proposed rule, and the cost to
the average consumer of being denied. The Bureau 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 proposed rule might 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, falling from around 55 percent to around 40 percent.\280\
However, the Report also finds that approval rates recovered over time,
rising back to around 55 percent by the 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 seven percentage points, although this average includes both
the initial drop and the later recovery.\281\ Although the provisions
of the proposed rule differ from the requirements of the 2018
California PACE Reforms, it is likely that the rule would have limited
additional effect on PACE transaction approval rates in California.
Instead, the proposal, if finalized, would primarily reduce approval
rates in Florida.
---------------------------------------------------------------------------
\280\ PACE Report, supra note 12, at Figure 16.
\281\ Id. at Table 13.
---------------------------------------------------------------------------
As noted above, the PACE Report indicates that PACE companies in
Florida received about 45,500 applications in Florida in 2019, the last
full year of data available. Again assuming that the proposed rule
would lead to about half as many applications, and assuming that
approval rates fall by seven percentage points, that would mean at most
about 1,600 consumers annually might have a beneficial PACE application
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 could afford and benefit
from it. However, as discussed above, one benefit of the proposal would
be that consumers would be less likely to misunderstand the nature of a
PACE
[[Page 30423]]
transaction, which would also reduce PACE applications. As also noted
above, 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 Bureau expects the volume of PACE
transactions in Florida and other States would decline if the proposed
rule were finalized, it does not have data that would indicate how much
of this decline would 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 Bureau 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 proposed rule 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 in 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 did not due to the proposed rules relating to ATR could
be better off than they would be without the proposed 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 averaged 8.5 percent.\282\ This is greater than
typical rates for home equity lines of credit, but less than typical
rates for credit cards.\283\ 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 on the consumer's
credit score.
---------------------------------------------------------------------------
\282\ Id. at Table 2.
\283\ Average credit card interest rates on accounts assessed
interest were between 13 and 17 percent during the period studied by
the PACE Report. See Fed. Rsrv. Econ. Data, Fed. Rsrv. Bank of St.
Louis, Commercial Bank Interest Rate on Credit Card Plans, Accounts
Assessed Interest (Apr. 8, 2023), https://fred.stlouisfed.org/series/TERMCBCCINTNS. Interest rates for personal loans averaged
around 10 percent. See Fed. Rsrv. Econ. Data, Fed. Rsrv. Bank of St.
Louis, Finance Rate on Personal Loans at Commercial Banks, 24 Month
Loan (Apr. 8, 2023), 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_data-points_updated-review-hmda_report.pdf.
---------------------------------------------------------------------------
The PACE Report suggests that under the proposal, many consumers
who would not receive a PACE transaction would 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 have sufficient credit history to have a credit score,
almost 90 percent of PACE borrowers had a credit card pre-PACE, and on
average PACE borrowers had more than seven unique credit accounts of
any type pre-PACE.\284\ More than half of PACE borrowers had prime or
super-prime credit scores at the time they entered into a PACE
transaction.\285\ The Bureau notes, however, that this aspect of the
PACE Report's analysis was limited to consumers who had a credit
report. The Report had to exclude roughly a quarter of the consumers in
the data submitted to the Bureau because they could not be matched to a
credit report with the credit reporting company that acted as the
Bureau's contractor. Some of these consumers may simply have had a
mismatch in name or address with the credit reporting company's
database, but likely at least some of these consumers had no credit
report and were credit invisible. The true share of PACE borrowers with
substantial access to credit is likely smaller than what is noted
above.
---------------------------------------------------------------------------
\284\ See PACE Report, supra note 12, at Table 6.
\285\ See id. at Figure 1.
---------------------------------------------------------------------------
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.\286\ Other projects may be
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 Bureau does not have data available to estimate the average energy,
water, or insurance savings actually obtained by PACE borrowers, nor is
the Bureau aware of any research to estimate real-world savings from
PACE transactions. One study the Bureau 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.\287\ The
academic literature has found that engineering estimates can frequently
overestimate real-world savings from energy efficiency programs.\288\
Public comments from consumer advocacy groups in response to the ANPR
also cited instances where consumers received smaller energy savings
than what was advertised to them.
---------------------------------------------------------------------------
\286\ 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 Bureau that consumers may have difficulty obtaining
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 force-
place 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.
\287\ Adam Rose & Dan Wei, Impacts of Property Assessed Clean
Energy (PACE) program on the economy of California, 137 Energy Pol'y
111087 (2020).
\288\ 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).
---------------------------------------------------------------------------
Potential Benefits and Costs to Covered Persons of the Proposed
Ability-to-Repay Provisions
The proposed ATR provisions would primarily affect PACE companies.
Although the Bureau understands that local government sponsors are
generally the creditor, as defined in TILA, for PACE transactions, the
Bureau expects that the required ATR determination, and in practice the
liability for any failures to make that determination, would fall on
the PACE companies that
[[Page 30424]]
run PACE programs.\289\ Although the PACE Report provides some
information on potential impacts of the ATR provisions on PACE
companies, many of the potential benefits and costs to PACE companies
are outside the scope of the Report. The Bureau discusses these
benefits and costs qualitatively here.
---------------------------------------------------------------------------
\289\ The Bureau 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
the proposed 12 CFR 1026.43(b)(15). Data on such programs is
dispersed, and so the Bureau does not have sufficient information to
reliably estimate how many such programs exist or to assess their
current practices in providing financing. The Bureau understands
these programs to operate independently of one another, under
differing laws and practices. Consequently, the Bureau is unable to
quantify (1) the number of such programs that are not commonly
understood as PACE, but would meet the definition of PACE financing;
(2) how many of those programs are operated by covered entities; or
(3) the effects the proposed rule would have on each such covered
entity. Any such program's additional costs under the proposed ATR
provisions would depend on its current procedures. The Bureau
requests comment on how the proposed rule may affect such programs.
---------------------------------------------------------------------------
PACE companies may benefit from legal clarity provided by the
proposed ATR 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.\290\ 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, as described
above in reference to benefits to consumers, the act of collecting
income documentation as part of the proposed ATR provisions may make it
more likely that consumers correctly understand the nature of a PACE
transaction, potentially preventing some legal actions. Again, the
required TILA-RESPA integrated disclosures (discussed in more detail
below) would also assist in this respect. The Bureau 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
Bureau to determine what share might be prevented by following the
proposed ATR provisions.
---------------------------------------------------------------------------
\290\ 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).
---------------------------------------------------------------------------
By providing a Federal ability-to-repay standard, the proposal may
also encourage greater consistency across States. For example, the
Bureau understands that PACE companies currently adhere to different
processes for determining consumer eligibility for PACE transactions in
California, involving some collection and verification of income and
other documentation, than in Florida, where eligibility determinations
generally involve less documentation. If the proposed 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, the nationwide minimum standard provided by the
proposed rule could make it easier for PACE companies to expand into
additional States, leading to additional business. As noted above, the
Bureau understands that many States have legislation authorizing PACE
transactions,\291\ 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
Bureau finds it plausible that controversies and consumer protection
concerns discussed in part II.A.4 above may in part hold some
government entities back from engaging in PACE. To the extent this is
the case, the proposed rule could 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.\292\ 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 would be prohibited by
the proposal.
---------------------------------------------------------------------------
\291\ See part II.A.2, supra.
\292\ PACE Report, supra note 12, at Figure 16.
---------------------------------------------------------------------------
Although PACE companies would likely receive some of the benefits
discussed above from the proposed ATR provisions, PACE companies would
also likely experience significant costs under the proposal, including
reduced lending volumes in Florida and Missouri, 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.\293\ 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 average of over 5,300 per month in that State prior to the
reforms.\294\ The Report finds that the number of originated PACE
transactions in California declined by about 1000 per month due to the
2018 California PACE Reforms, representing about a 63 percent decrease
from a pre-reform average of about 1600 originations per month in
California.\295\ The specific requirements of the 2018 California PACE
Reforms differ from those of the proposal, even with respect to
provisions having to do with the California ability-to-pay requirements
and the proposal's Federal ATR requirements, but the Bureau expects
that PACE companies would see a similar decline in originated loans in
other States if the proposal is finalized. Conversely, the Bureau does
not expect that the ATR requirements in the proposal would cause an
additional reduction in PACE transactions in California due to the
mechanisms discussed above.
---------------------------------------------------------------------------
\293\ Id.
\294\ Id. at Table 13.
\295\ Id.
---------------------------------------------------------------------------
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 firm 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 in
response to a Federal regulation that applies nationwide, such as the
proposed rule.
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 ATR 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 Bureau does not have data indicating the magnitude
of these costs. However, the Bureau notes that some of these costs may
be ameliorated by the existing requirements in California. The Bureau
understands that all currently active PACE companies are engaged in
PACE financing in California and thus
[[Page 30425]]
must already have systems in place to allow for collection of income
information and other documentation needed for the ATR determination
the proposal would require. The Bureau thus expects that costs related
to software changes would 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 Bureau
acknowledges that legal and compliance review costs would likely apply
in all States, as the specific proposed requirements differ from the
requirements of California State law and regulation.
PACE companies may also experience additional litigation costs due
to alleged violations of the proposed ATR provisions. As noted earlier
in this analysis, the Bureau is proposing to apply civil liability in
TILA section 130 to PACE companies that are substantially involved in
making the credit decision. As the Bureau stated in the January 2013
Final Rule, even creditors making good faith efforts when documenting,
verifying, and underwriting a loan may still face some legal challenges
from consumers ex-post. This will occur when a consumer proves unable
to repay a 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. This will likely result in some litigation
expense, although the Bureau 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 some experience, 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
Bureau also stated in the January 2013 Final Rule, the Bureau 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 Bureau notes that
litigation likely would arise only when a consumer in fact was unable
to repay the loan (i.e., was seriously delinquent or had 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 lacked a reasonable and good faith belief in the consumer's
ability to repay at consummation or failed to consider the statutory
factors in arriving at that belief.
Beyond PACE companies, the proposed ATR provisions would impose
some costs on local government entities and home improvement
contractors.\296\
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\296\ 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 Bureau exercises its discretion to consider benefits,
costs and impacts to these entities.
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Some local government entities would also experience costs due to
the proposed ATR provisions, if finalized. The Bureau 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 bills. The Bureau
does not have data indicating the average revenue that government
entities receive from each PACE transaction. To the extent that the
proposal reduces the volume of PACE transactions, the Bureau expects
that it would also reduce revenue to such government entities, in
proportion to the revenue they currently receive from such
transactions. Similar to the discussion above related to PACE
companies, the Bureau expects that government entities in California
would be less affected by the proposed rule than government entities in
other States. If, as discussed above, the proposal were to facilitate
growth of PACE transactions in States that do not currently have active
programs, local government entities in those State might benefit as a
result.
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 ATR
determination. As with time costs for consumers discussed above, the
Bureau assumes these costs would primarily affect home improvement
contractors in Florida and that the volume of applications in Florida
would decrease from current levels if the proposal is finalized; see
above for details. The PACE Report indicates that roofs and disaster
hardening are the most common type of project for PACE transactions in
Florida, and so the Bureau uses the median wage for roofers in Florida,
$18.43 per hour,\297\ to value the time costs to home improvement
contractors. Under these assumptions, the total costs to home
improvement contractors from additional staff time would total about
$210,000 annually.\298\
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\297\ See Bureau of Lab. Stats., May 2021 State Occupational
Employment and Wage Estimates, Florida, https://www.bls.gov/oes/current/oes_fl.htm (last visited Mar. 6, 2023).
\298\ In the January 2013 Final Rule, the Bureau noted that most
non-PACE mortgage lenders already collected income information as
part of the normal course of business, and so assumed no significant
costs relative to the baseline. See 78 FR 6546 (Jan. 30, 2013). This
likely would not be the case for PACE companies outside of
California. The Bureau requests comment on the actual time costs of
gathering this information and typical wages of staff employed to
collect it.
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Potential Benefits and Costs to Consumers and Covered Persons of
Clarifying That PACE Financing Is Credit
The proposal would revise the official commentary for Regulation Z
to clarify that PACE transactions are credit for purposes of TILA.\299\
In practice, this would impose 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 three-day right of
recission; \300\ (2) disclosure requirements, including provision of
relevant TILA-RESPA integrated disclosure forms and a mandatory waiting
period between provision of the disclosure and consummation; \301\ (3)
requirements related to loan originators; \302\ and (4) certain
requirements for PACE transactions that meet the definitions of a high-
cost mortgage or a higher-priced mortgage loan.\303\ The Bureau is not
addressing in depth certain other provisions.\304\
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\299\ See section-by-section analysis of proposed Sec.
1026.2(a)(14), supra.
\300\ 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. See 12 CFR 1026.23(a)(3)(i).
\301\ See, e.g., 12 CFR 1026.37, 1026.38.
\302\ See, e.g., 12 CFR 1026.36(a)(1)(i), 1026.36(d)-(g).
\303\ 12 CFR 1026.32, 1026.34.
\304\ For instance, PACE companies would also be required to
comply with the prohibition on prepayment penalties under 12 CFR
1026.43(g), but the Bureau does not expect this would create
significant costs or benefits for consumers or covered persons, as
the Bureau 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 Bureau 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.
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[[Page 30426]]
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. As discussed above, many PACE borrowers pay off their PACE
transactions early, which suggests that some of these consumers may
decide they do not want a PACE transaction after origination, or may
not have intended to take out the PACE transaction at all. A rescission
period could give consumers more time to exercise such preferences.
However, the Bureau 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 already have a three-day right to cancel under
State law,\305\ and PACE companies may currently voluntarily provide a
recission option outside of California. As a result, the Bureau expects
the application of this provision of TILA to impose few benefits or
costs on consumers and covered persons.
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\305\ 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.
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The disclosure requirements would likely benefit consumers by
increasing their understanding of the terms of the PACE transaction and
mandating a waiting period between disclosure and consummation. As
discussed above in the context of collecting income information,
mandating disclosures and a waiting period for PACE transactions
conforming with TILA-RESPA integrated disclosure requirements would
make it more likely that consumers understand the terms of their
proposed PACE transactions. The disclosure requirements would also
likely increase understanding of the fundamental nature of PACE
transactions as financial obligations that must be repaid over time.
The potential benefits of avoiding consumer misunderstanding of the
nature of a PACE transaction are discussed above.
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 assessment.\306\ 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.\307\ Some of the disclosures
on the proposed modified TILA-RESPA integrated disclosure form for PACE
transactions may prompt consumers with a pre-existing 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.
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\306\ PACE Report, supra note 12, at 13.
\307\ Id. at 18-20.
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PACE companies would experience one-time adjustment costs related
to the TILA-RESPA integrated disclosure if the proposal is finalized.
The Bureau 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 would be required under the proposal. The Bureau expects that
ongoing costs will be minimal relative to the baseline, since PACE
companies already provide disclosures. To the extent that the proposed
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 if the proposal is
finalized.
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
discussed in part II.A.4 above, the Bureau 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
Bureau that this speed of origination is necessary to compete with
unsecured financing options. It is possible that the seven-day waiting
period would 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 Bureau is aware, so this aspect of the proposal would likely
affect PACE lending volumes in all States. The Bureau does not have
data to indicate how large this effect might be.
TILA and Regulation Z include a variety of provisions that apply to
loan originators. With current PACE industry practices, the Bureau
understands that, if the proposal is finalized, these provisions would
primarily apply to home improvement contractors. 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.\308\ The Bureau does not have data available to quantify
the costs to home improvement contractors from complying with TILA as
loan originators.
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\308\ 12 CFR 1026.36(f).
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It is possible that, if the proposal is finalized, home improvement
contractors would opt not to bear the cost of complying with TILA
provisions to the extent they apply and would instead exit the PACE
market. The home improvement contractors themselves would incur costs
in this case. The Bureau does not have data available to estimate these
costs. The costs to home improvement contractors from exiting the PACE
industry depend on what would happen to prospective home improvement
contracts for which PACE financing would 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.\309\ However, contractors could lose
some sales due to the unavailability of a PACE transaction as a
financing option. The Bureau does not have data that would indicate how
frequently this would happen. It is also possible that, if the proposal
enables PACE financing to expand into additional States, home
improvement contractors in those States would benefit from additional
business. Again,
[[Page 30427]]
the Bureau does not have data that would indicate how many contractors
might benefit if this were to occur, or how much they would benefit.
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\309\ The Bureau'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 would cost them these
commissions, although they might be replaced by commissions from an
alternate financial product, if any.
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Consumers may experience both costs and benefits due to the
proposed application of TILA's loan originator provisions to PACE, if
finalized. 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 marketed by PACE companies
or local governments directly as a result of the proposal being
finalized, consumers may benefit from such changes to the way PACE
transactions are marketed. Many consumer protection issues identified
in the comments responding to the ANPR are related to conduct by home
improvement contractors. Either mandatory compliance with TILA's loan
originator provisions by home improvement contractors, or a shift to
marketing PACE transactions directly by PACE companies or local
governments could ameliorate some of these issues.
Finally, 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.\310\ Few PACE transactions have appear to have
APRs high enough to meet the first prong,\311\ and the Bureau
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 points-and-fees threshold.\312\ 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.\313\
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\310\ See TILA section 103(bb)(1)(A); 12 CFR 1026.32(a)(1).
\311\ See PACE Report, supra note 12, at 15 (finding that 96
percent of PACE transactions made between 2014 and 2020 had
estimated APR-APOR spreads below 6.5 percent).
\312\ Id. at Table 5.
\313\ Id.
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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 Bureau expects that, if the proposal is
finalized, PACE companies would 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 would impose costs on
PACE companies and the affiliated local government entities in the form
of lost revenue and will benefit PACE consumers by the same measure.
PACE companies may also experience costs due to the requirements of
Regulation Z with respect to higher-priced 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--
currently $31,000 in 2023--and to provide the consumer with a written
copy of the appraisal.\314\ The PACE Report indicates that about a
quarter of PACE transactions originated between June 2014 and July 2020
had original principal amounts above that threshold, and moreover shows
that most PACE transactions have APR-APOR spreads above the threshold
for higher-priced mortgage loans.\315\ The Bureau 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
may also experience costs to the extent that the price of conducting an
appraisal is passed on to them. The Bureau does not have data on the
amount of these costs, and requests comment on this.
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\314\ See generally 12 CFR 1026.35(c); comment 35(c)(2)(ii)-3.
\315\ See PACE Report, supra note 12, at Table 2, Table 5.
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E. Potential Specific Impacts of the Proposed Rule on Access to Credit
As discussed above, the proposal, if finalized, may reduce access
to PACE credit. Potential PACE borrowers who cannot qualify for a PACE
transaction due to the proposed ATR analysis will not have access to
PACE credit. As also noted above, the 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.\316\ 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. It seems likely that, if
the rule is finalized as proposed, a similar reduction would occur in
other States. However, 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 long-term financial
obligation. Some provisions of the proposed 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, may be able to access other forms of
credit, potentially at more favorable APRs.
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\316\ Id. at 45.
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To the extent that the legal clarity provided by the proposal were
to enable PACE financing to expand into additional States, this would
increase access to PACE credit for consumers in those States.
The Bureau quantifies the potential impacts of the proposal on
access to credit in its discussion above in part IX.D where possible
but seeks comment on this issue, particularly in the form of additional
studies or data that might inform the potential impact of the proposal
on access to credit.
[[Page 30428]]
F. Potential Specific Impacts on Consumers in Rural Areas and
Depository Institutions With Less Than $10 Billion in Assets
The proposed rule would not have a significant impact on consumers
in rural areas. If anything, the proposed rule would 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 sixth-smallest rural
population shares among all States, respectively.
The Bureau understands that depository institutions of any size are
not typically involved with PACE transactions, and thus the proposed
rule would have no direct impact on such entities, regardless of asset
size.
X. 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 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).\317\ The Bureau 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.\318\ As the below analysis shows,
an IRFA is not required for this proposal because the proposal, if
adopted, would not have a SISNOSE.\319\
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\317\ 5 U.S.C. 601 et seq.
\318\ 5 U.S.C. 609.
\319\ This analysis considers collectively the potential impacts
of all aspects of the proposal on small entities, including both the
affirmative proposed new requirements and the proposed revisions to
the official commentary.
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Small entities, for purposes of the RFA, include both small
businesses as defined by the Small Business Administration, and small
government jurisdictions, defined as jurisdictions with a population of
less than 50,000.\320\
---------------------------------------------------------------------------
\320\ 5 U.S.C. 601(3), 601(5).
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For the reasons discussed below, the Bureau does not believe that
the proposed rule will have a SISNOSE. While it is possible that the
proposed rule would 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.
The Bureau understands that any economic impact from the proposed
rule would primarily fall on PACE companies, as defined under proposed
Sec. 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 proposed
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 Bureau 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 Bureau, none of these entities currently are small
entities. The local government entity that directly originates PACE
transactions has population greater than 50,000.\321\
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\321\ Sonoma 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.
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For private firms, Small Business Administration (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.\322\ For private firms whose primary
business is originating PACE transactions, the relevant SBA threshold
is $47 million in annual receipts.\323\ The Bureau'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.\324\ This is consistent with how PACE
companies tend to describe the volume of their business.\325\
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\322\ 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.
\323\ 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 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.
\324\ This will somewhat undercount annual receipts, which would
also include revenues the firms receive from the sale of PACE
securities to the secondary market.
\325\ 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).
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Based on the evidence available to the Bureau, 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.\326\
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.\327\ Even
if all currently
[[Page 30429]]
operating PACE companies were small, they would not represent a
substantial number within any of the relevant 6-digit NAICS industries.
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\326\ Although the data used in the Bureau's PACE Report did 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 $500 million in new PACE transactions
in 2021. See PACE Nation, PACE Market Data (updated Dec. 31, 2021),
https://www.pacenation.org/pace-market-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.
\327\ The Bureau 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 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.
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The Bureau also considered whether a substantial number of small
government entities could experience a significant impact if this
proposal were finalized. As noted above, the Bureau 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 program.\328\ To the extent that the
proposed rule could directly impact these other government entities,
the Bureau must consider whether the proposed rule would create a
significant economic impact on a substantial number of these entities.
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\328\ As discussed in part VII above, the Bureau 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 Bureau does not expect significant economic impact on
these government entities from these provisions, as the Bureau
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 proposed 12 CFR
1026.43(b)(15). Even in this case, the Bureau 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.
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As discussed above, under the RFA, government entities are small if
they have populations of less than 50,000. The 19 States plus the
District of Columbia which the Bureau 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.\329\ Of these small governments, currently, only small
governments in California, Florida, and Missouri would be directly
impacted by the proposed rule in any meaningful way because they are
the only States with active PACE programs.\330\ 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 districts.
Even if all government entities in the three States were significantly
impacted by the rule (which is unlikely, as not all local governments
in those States sponsor PACE programs), this would be only about 11.6
percent of small government entities in States with active PACE
legislation, which the Bureau does not consider to be a substantial
number. In addition, those small government entities that would be
directly impacted by the proposed 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.\331\
---------------------------------------------------------------------------
\329\ 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.
\330\ See PACENation, PACE Programs, https://www.pacenation.org/pace-programs/ (``Residential PACE is currently offered in
California, Florida, and Missouri.'') (last visited Mar. 16, 2023).
\331\ The Bureau 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 Bureau 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.
---------------------------------------------------------------------------
The proposed rule may impact the home improvement contractors who
market and help originate PACE financing. Here again it appears that
the rule would not directly impact a substantial number of small
entities, even assuming that any small home improvement contractor
would 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.\332\ By
comparison, there are currently approximately 2,000 firms registered in
California as PACE solicitors.\333\ Even if all of these entities are
small and there were a similar number of small entities acting as PACE
solicitors in Missouri and Florida, this would be less than three
percent of all relevant small entities, and so not a substantial
number.\334\
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\332\ 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/economic-census/naics-sector-23.html. The Economic Census data does not
disaggregate firm counts by State at the 6-digit NAICS level.
\333\ See Cal. Dep't of Fin. Prot. & Innovation, Enrolled PACE
Solicitors Search (updated Feb. 27, 2023), https://dfpi.ca.gov/pace-program-administrators/pace-solicitor-search/?emrc=63ee970c63d06 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).
\334\ 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 proposed rule if finalized. 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 Bureau to
determine the number of firms by industry and annual revenue.
---------------------------------------------------------------------------
Accordingly, the Director hereby certifies that this proposal, if
adopted, would not have a significant economic impact on a substantial
number of small entities. Thus, neither an IRFA nor a small business
review panel is required for this proposal. The Bureau requests comment
on the analysis above and requests any relevant data.
XI. 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, 2023. The Bureau has determined that
this proposed rule would not impose any new information 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.
XII. Severability
The Bureau preliminarily intends that, if any provision of the
final 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.
[[Page 30430]]
List of Subjects in 12 CFR Part 1026
Consumer protection, Credit, Housing, Mortgage servicing,
Mortgages, Truth-in-lending.
Authority and Issuance
For the reasons set forth in the preamble, the CFPB proposes to
amend Regulation Z, 12 CFR part 1026, as set forth below:
PART 1026--TRUTH IN LENDING ACT (REGULATION Z)
0
1. The authority citation for part 1026 continues to read as follows:
Authority: 12 U.S.C. 2601, 2603-2605, 2607, 2609, 2617, 3353,
5511, 5512, 5532, 5581; 15 U.S.C. 1601 et seq.
Subpart E--Special Rules for Certain Home Mortgage Transactions
0
2. Amend Sec. 1026.35 by adding paragraph (b)(2)(i)(E) to read as
follows:
Sec. 1026.35 Requirements for higher-priced mortgage loans.
* * * * *
(b) * * *
(2) * * *
(i) * * *
(E) A PACE transaction, as defined in Sec. 1026.43(b)(15).
* * * * *
0
3. Amend Sec. 1026.37 by adding paragraph (p) to read as follows:
Sec. 1026.37 Content of disclosures for certain mortgage transactions
(Loan Estimate).
* * * * *
(p) PACE transactions. For PACE transactions as defined in Sec.
1026.43(b)(15), the creditor must comply with the requirements of this
section with the following modifications:
(1) Escrow account. The creditor shall not disclose the information
in paragraph (c)(2)(iii) of this section.
(2) Taxes, insurance, and assessments. (i) In lieu of the
information required by paragraph (c)(4)(iv), the creditor shall
disclose 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 Sec. 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), a statement that the PACE transaction, described as a ``PACE
loan,'' will be part of the property tax payment and 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.
(3) Contact information. If the PACE company as defined in 12 CFR
1026.43(b)(14) is not otherwise disclosed pursuant to 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
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 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 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.
(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.
0
4. Amend Sec. 1026.38 by adding paragraph (u) to read as follows:
Sec. 1026.38 Content of disclosures for certain mortgage transactions
(Closing Disclosure).
* * * * *
(u) PACE transactions. For PACE transactions as defined in Sec.
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 Sec. 1026.43(b)(14).
(2) Projected payments. The creditor shall disclose the information
required by paragraph (c)(1) of this section as modified by Sec.
1026.37(p)(1) through (2) and shall omit the information required by
paragraph (c)(2).
(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 Sec.
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 Sec.
1026.37(p)(5).
(5) Partial payment policy. In lieu of the information required by
paragraph (l)(5) of the section, under the
[[Page 30431]]
subheading ``Partial Payments,'' 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.
(6) Escrow account. The creditor shall not disclose the information
required by paragraph (l)(7) of this section.
(7) Liability after foreclosure. 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 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, under the subheading ``Liability
after Foreclosure or Tax Sale.''
(8) Contact information. If the PACE company is not otherwise
disclosed pursuant to paragraph (r) of this section, the creditor shall
disclose the information described in paragraph (r)(1)-(7) of this
section for the PACE company, as defined in Sec. 1026.43(b)(14) (under
the subheading ``PACE Company'').
(9) Exceptions--(i) Unit-period. Wherever 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 semi-annual payments.
(ii) PACE nomenclature. 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.
0
5. Amend Sec. 1026.41 by adding paragraph (e)(7) to read as follows:
Sec. 1026.41 Periodic statements for residential mortgage loans.
* * * * *
(e) * * *
(7) PACE transactions. PACE transactions, as defined in Sec.
1026.43(b)(15), are exempt from the requirements of this section.
* * * * *
0
6. Amend Sec. 1026.43 by adding paragraphs (b)(14), (b)(15), and (i)
to read as follows:
Sec. 1026.43 Minimum standards for transactions secured by a
dwelling.
* * * * *
(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 paragraphs
(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 servicer may charge under 12 CFR 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; 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.
0
7. Appendix H to part 1026 is amended by adding the entries for Model
Forms H-24(H) and H-25(K) to read as follows:
Appendix H to Part 1026--Closed-End Model Forms and Clauses
* * * * *
H-24(H) Mortgage Loan Transaction Loan Estimate--Model Form for PACE
Transactions
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[[Page 30433]]
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[[Page 30434]]
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[[Page 30435]]
* * * * *
H-25(K) Mortgage Loan Transaction Closing Disclosure--Model Form for
PACE Transactions
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[[Page 30436]]
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[[Page 30437]]
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[[Page 30438]]
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* * * * *
0
8. Amend Supplement I to Part 1026--Official Interpretations, as
follows:
0
a. Under Section 1026.2--Definitions and Rules of Construction, in
2(a)(14) Credit, revise comment 2(a)(14)1.ii;
0
b. Under Section 1026.37--Content of disclosures for certain mortgage
transactions (Loan Estimate), add as a heading 37(p) PACE transactions
and add the following comments: 37(p)(3) Contact information; 37(p)(5)
Late payment; 37(p)(7) Form of disclosures--Exceptions; and
37(p)(7)(ii) PACE nomenclature;
0
c. Under Section 1026.38--Content of disclosures for certain mortgage
transactions (Closing Disclosure), add as headings 38(u) PACE
transactions and (u)(9) Exceptions and add the following comment:
38(u)(9)(ii) PACE Nomenclature;
0
d. Under Section 1026.43--Minimum standards for transactions secured by
a dwelling,
[[Page 30440]]
0
i. in 43(b)(8) Mortgage-related obligations, revise comment 43(b)(8)-2,
0
ii. add as a heading 43(b)(14) PACE company and add comment 43(b)(14)-
1,
0
iii. in 43(c) Repayment ability, add comment 43(c)(2)(iv)-4, and revise
comment 43(c)(3)-5; and
0
e. Under Appendix H--Closed-End Forms and Clauses, revise comment-30.
The additions and revisions read as follows:
Supplement I to Part 1026--Official Interpretations
* * * * *
Section 1026.2--Definitions and Rules of Construction
* * * * *
2(a)(14) Credit.
1. Exclusions. The following situations are not considered
credit for purposes of the regulation:
i. * * *
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.
* * * * *
Section 1026.37--Content of disclosures for certain mortgage
transactions (Loan Estimate).
* * * * *
37(p) PACE transactions.
37(p)(3) Contact information.
1. Section 1026.37(p)(3) requires disclosure of information
about the PACE company if the PACE company is not otherwise
disclosed pursuant to Sec. 1026.37(k)(1) through (3). For example,
if a PACE company is a mortgage broker as defined in Sec.
1026.36(a)(2), then the name of the PACE company is disclosed as a
mortgage broker and the field for PACE company may be left blank.
See comments 1026.37(k)-1 and-2 for more guidance.
37(p)(5) Late payment.
1. For purposes of Sec. 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) Form of disclosures--Exceptions.
37(p)(7)(ii) PACE nomenclature.
1. Wherever Sec. 1026.37 requires disclosure of the word
``PACE'' or form H-24(H) in appendix H uses the term ``PACE,'' Sec.
1026.37(p)(7)(ii) permits a creditor to substitute an alternative
name for the specific PACE financing program that will be
recognizable to the consumer. For example, if the name XYZ Financing
is used in marketing and branding a PACE transaction 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).
* * * * *
38(u)--PACE transactions
38(u)(9) Exceptions.
38(u)(9)(ii) PACE nomenclature.
1. Wherever Sec. 1026.38 requires disclosure of the word
``PACE'' or form H-25(K) in appendix H uses the term ``PACE,'' Sec.
1026.38(u)(9)(ii) permits a creditor to substitute an alternative
name for the specific PACE financing program that will be
recognizable to the consumer. For example, if the name XYZ Financing
is used in marketing and branding a PACE transaction 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 Closing Disclosure.
* * * * *
Section 1026.43--Minimum standards for transactions secured by a
dwelling
* * * * *
43(b)(8) Mortgage-related obligations.
* * * * *
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 Sec. 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 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 Sec.
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 Sec. 1026.43(b)(8).
* * * * *
43(b)(14) PACE company.
1. 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.
* * * * *
43(c) Repayment ability.
* * * * *
43(c)(2) Basis for determination.
* * * * *
Paragraph 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 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.
* * * * *
43(c)(3) Verification using third-party records.
* * * * *
5. Verification of mortgage-related obligations. Creditors must
make the repayment ability determination required under Sec.
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
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. 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. 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. With respect to other information in a record
provided by an entity assessing charges, such as a homeowners
association, the creditor complies with Sec. 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 Sec. 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 Sec. 1026.43(c)(2)(v) if the
source provided the information objectively.
* * * * *
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 (J)
are model forms for the disclosures required under Sec. Sec.
1026.37 and 1026.38. However, pursuant to Sec. Sec. 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 Sec. Sec.
1026.37 and 1026.38, respectively.
* * * * *
Rohit Chopra,
Director, Consumer Financial Protection Bureau.
[FR Doc. 2023-09468 Filed 5-10-23; 8:45 am]
BILLING CODE 4810-AM-P