Removing Barriers Blog

PACE Loans Remain A Troublesome Issue for Credit Unions
Posted June 17, 2016 by CUNA Advocacy

Recently, a joint informational hearing regarding Property Assessed Clean Energy (PACE) loans was held in California. PACE loans allow governments, when authorized by state law, to finance loans for energy improvements on commercial and residential properties. PACE loans are troublesome for credit unions in their role as lienholders because they take first priority and must be paid before borrowers can refinance or sell their property.

SchoolsFirst FCU Vice President of Compliance Tony Diaz testified on behalf of credit unions at the hearing. Diaz shared with the committees some of the challenges that SchoolsFirst members are experiencing as a result of the loans. “An average of six members per week apply for mortgage loans with our credit union on properties that are encumbered with a PACE loan,” he said. “We advise these members that, due to the priority-lien status of the PACE loan, they will have to pay off this loan prior to us being able to refinance their existing mortgage loan.”

Diaz recommended three reforms for the PACE program to continue to operate and not harm consumers. These include disclosure, true underwriting standards, and subordination of the lien status.

Alfred Pollard, general counsel for the Federal Housing Finance Agency—FHFA, also testified at the hearing. Pollard noted that by allowing a lien to jump ahead of the first-mortgage poses excessive risk to lenders and the government-sponsored enterprises (GSEs).

In California, the League is supporting A 2693, which addresses some consumer protection issues surrounding PACE programs that credit unions and their members have begun to encounter. The bill will subordinate the PACE liens to a holder of a note secured by a deed of trust for purchase money, or a refinanced purchase money obligation in the case of default or foreclosure. The bill will also require a substantial consumer disclosure that will mirror TRID requirements (TILA-RESPA Integrated Disclosure), with some language additions to reflect the unique aspects of PACE loans.

In addition to California, there have been attempts to expand these programs statewide in Alaska, Kansas, Nebraska and Tennessee. A bill was introduced in Rhode Island yesterday that would give PACE liens precedence over all other liens except tax liens.