CFPB Proposed Rule for PACE Financing: Many Questions, Few Answers, and Half-Baked TRID Forms
On May 1, 2023, the CFPB issued a proposed rule to extend Truth in Lending Act (“TILA”) requirements to Property Assessed Clean Energy (“PACE”) loans. The proposed rule would implement a provision of Congress’ Economic Growth, Regulatory Relief, and Consumer Protection Act enacted in 2018 (“S2155”). S2155 contained amendments and new provisions for many of the statutes that the CFPB governs, including a requirement under section 307 of the legislation for the CFPB to issue rules implementing TILA’s Ability to Repay requirements for PACE loans. In addition to implementing this statutory requirement, the CFPB proposed to amend Regulation Z to apply to the rule’s requirements to PACE loans generally, including the TRID disclosures (with some exceptions). I will highlight some of the proposed changes and provide some brief thoughts below.
PACE Financing Would Be Credit under TILA
The proposal would amend Regulation Z’s commentary to include PACE financing under the definition of “credit.” Specifically, the proposal would amend the official staff commentary to the definition of “credit” that currently excludes “tax liens” and “tax assessments” to only exclude “involuntary” tax liens and assessments. As PACE financing typically involves a voluntary tax assessment and are secured through a tax lien, the current exclusion for all such tax liens and assessments has been used to exclude PACE financing from TILA. The CFPB believes this amendment would bring PACE financing under TILA generally. The CFPB stated that it “proposed to amend the commentary to clarify that PACE transactions are credit under TILA and Regulation Z.” The CFPB stated that PACE loans “appear to easily fit” the definitions of “credit” under TILA and Regulation Z.
The proposal would result in all of Regulation Z’s provisions potentially applying to PACE loans. For example, the CFPB noted in the preamble to the proposal that HOEPA (i.e., high-cost mortgage) requirements would apply to PACE financing, and requested comment on whether any clarifications would be needed on how HOEPA applies to such loans. The proposal would specifically exempt PACE financing from Regulation Z’s periodic statement requirement and the mandatory escrow requirements for higher-priced mortgage loans.
With respect to the TRID rule, the CFPB stated that under the proposed rule, the TRID forms would be provided for PACE financing with certain proposed modifications. Specifically, the proposal would create certain modification to the TRID forms for “PACE transactions” (as defined under the ATR/QM rule amendments discussed below), and promulgate new model forms that display the modifications. Among other changes, the proposed TRID amendments would change the Projected Payments table to delete the Escrow row of the table (but it would keep the existing Principal and Interest rows); amend the Estimated Taxes, Insurance & Assessments disclosure to specifically disclose the PACE payment as a separate item; and changes to the Contact Information, Partial Payments, Late Payment, and Assumptions disclosures. The rule does not add any commentary for other unmodified parts of the TRID forms to provide clarity regarding how they would be calculated and disclosed for PACE loans, or if they’d be left blank (e.g., the Principal and Interest rows of Projected Payments, the Loan Terms table, etc.).
It appears from the preamble of the proposed rule that the CFPB did not consumer test any of these proposed changes to ensure understandability for PACE consumers. While it would be helpful for PACE consumers to receive a clear and understandable disclosure, because the CFPB did not consumer test their modified TRID forms or any other new designs, and considering the substantial differences between mortgage and PACE loans, there appears to be an insufficient basis on which the CFPB could believe that these forms would actually benefit PACE consumers rather than cause confusion. For example, the TRID forms may include much unmodified extraneous information and terminology that may not be relevant or understandable to PACE consumers or confuse consumers. I’ve written an article in the Journal of Public Policy & Marketing about the CFPB’s failures to conduct robust and sufficient consumer testing, discussing past rules such as the Payday Loan rule and servicing rules. I hope the CFPB changes course. Consumer disclosures can have a substantial positive impact for consumers if they are understandable and useful. If the disclosures are not useful, they are useless, and only an unnecessary cost imposed on the industry that will ultimately be passed onto consumers.
PACE Financing under the ATR/QM Rule
The proposed rule would implement Section 307 of S2155 and amend the ATR/QM rule to include specific provisions dealing with “PACE transactions.” “PACE transaction” would be defined as “financing to cover the costs of home improvements that results in a tax assessment on the real property of the consumer.” The proposal would also define a “PACE company” as “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.”
The proposal would apply the ability-to-repay requirements to PACE transactions with certain adjustments. For example, the proposal would add a new comment to the provision requiring creditors to consider the consumer’s payment obligations on simultaneous loans that the creditor knows or has reason to know will be made, which would include PACE transactions included in any existing database or registry of PACE transactions to which the creditor has access. The CFPB stated that this is intended to address “loan splitting” and “loan stacking,” which some commenters to a prior Advance Notice of Proposed Rulemaking (ANPR) had concerns about in the PACE industry. In addition, for the requirement to verify information using third-party records, the proposal would clarify that a creditor does not comply with the requirement to verify mortgage-related obligations by using property tax records that do not include a PACE transaction of which the creditor knows or has to reason to know. The proposal would also require, for PACE transactions, that creditors consider the increased monthly payments the consumer will have to pay into the consumer’s escrow account for property taxes as a result of the PACE transactions.
Significantly, the proposal would not provide for a “qualified mortgage” safe harbor or presumption of compliance for PACE transactions. The CFPB stated 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.” In addition, the rule would apply the ability-to-repay requirements and liability under the ATR/QM rule to both the creditor and “any PACE company that is substantially involved in making the credit decision,” which the proposal would define as a company that, “makes the credit decision, makes a recommendation as to whether to extend credit, or applies criteria used in making the credit decision.” This proposed rule would impose significant new requirements and potential legal risk on the PACE financing industry without a compliance safe harbor.
Other Regulation Z Requirements Unaddressed
Although the proposal would bring PACE financing under the definition of “credit” under TILA and Regulation Z, the proposal does not address all of Regulation Z’s requirements to provide additional clarity for PACE financing. For example, the proposal does not address rescission, Regulation Z’s advertising requirements, the requirement to put the loan originator’s NMLS ID on loan documents, regulatory calculations, loan originator compensation and steering restrictions, or other provisions of Regulation Z.
The proposal is available here. The comment period for the proposal ends on July 26, 2023. Please email me at rich@garrishorn.com if you would like to discuss the proposal or would like help submitting a comment letter.
