Residential PACE loans: Too good to be true?
The following Op-Ed piece is jointly signed by leading Ohio-based organizations and groups, including Ohio REALTORS, Ohio Mortgage Bankers Association, Ohio Credit Union League, Ohio Bankers League, Ohio CDC Association, City of South Euclid, Coalition on Homelessness and Housing in Ohio (COHHIO), Cuyahoga County Vacant and Abandoned Property Action Council (VAPAC), The Fair Housing Center, Fair Housing Center for Rights & Research, Greater Cleveland Reinvestment Coalition, Greater Ohio Policy Center, Ironton Lawrence County CAO, and Miami Valley Fair Housing Center, Inc.
If it sounds too good to be true, it probably is. Municipal leaders across Ohio should not forget this simple maxim when asked to approve Residential Property Assessed Clean Energy (R-PACE) loan programs in their communities.
R-PACE loans are used to fund energy-efficient home improvements. The loans are added to the borrower’s property tax bill and are paid through tax installments, which are added to a borrower’s escrow payment if they have a mortgage. Despite an avalanche of recent media stories outlining problems with R-PACE, and a lack of robust consumer protections, Ygrene Energy Fund announced in August that it will offer R-PACE loans in Ohio. Individual communities will face the choice of whether to approve the program for their residents.
These loans don’t represent a miracle for achieving affordable green lending. In fact, the experience with these highly unregulated loans and the companies offering them in other states is beyond troubling -- leading a growing number of consumer groups, real estate groups, and mortgage lenders to oppose the program Ygrene is promoting in Ohio. There’s no reason to believe Ygrene’s R-PACE program will work better in Ohio than it has elsewhere.
But it gets worse.
Because R-PACE loans rest in a senior lien position to a mortgage, borrowers with unaffordable R-PACE loans risk losing their homes to foreclosure if they cannot pay their taxes or increased mortgage payment. The lien priority is also the reason the federal government’s housing programs -- the Federal Housing Administration, the Veterans Administration, Fannie Mae, and Freddie Mac -- will not allow a R-PACE loan on a property they finance or insure, which prevents R-PACE borrowers from accessing cost-saving refinance options on their homes.
And R-PACE loan borrowers face even more problems when they try to move. If the R-PACE loan is not paid off, a potential buyer cannot use government housing programs to finance the home purchase -- often forcing R-PACE borrowers to pay off the problematic lien before selling or severely limiting their options for potential buyers. R-PACE programs that some Ohio communities are considering will make important federal affordable housing programs unavailable to homebuyers and refinancers.
And there’s more bad news.
Despite R-PACE loans often leading to tens of thousands of dollars in tax liens attached to the borrower’s home, R-PACE lenders claim that the vast array of federal consumer protection laws does not apply to them. So, R-PACE lenders do not apply the “ability-to-repay” rules that protect mortgage borrowers. The program guidelines Ygrene has developed for Ohio do not help, as the consumer protections are unclear and have no teeth. R-PACE program administrators are not required to be licensed lenders, nor are the contractors who sell R-PACE loans door-to-door. How about the Know Before You Owe disclosures that help mortgage borrowers understand the loan’s cost? They don’t apply. Plus, unlike other financing options, there is no right of rescission of the loan if the borrower has second thoughts.
Ohio’s R-PACE program relies entirely on the entities facilitating the loans to police against abuses. This fox guarding the henhouse system will not keep Ohio from replicating the stories of consumer abuse -- especially of elderly consumers -- that are rampant in states with established programs. Uneven R-PACE consumer protection laws across states are a big reason Congress directed the Consumer Financial Protection Bureau (CFPB) to implement R-PACE rules. Municipalities should not even consider adopting R-PACE programs until the CFPB has created its rules and communities have an opportunity to review them.
R-PACE loans are -- in substance -- consumer loans secured by real property and should be subject to all of the mortgage-related federal consumer protection requirements. They should preserve financing options for buyers, sellers, and refinancing and should not be dependent on a patchwork of limited or non-existent state laws and municipal ordinances that do not adequately protect homeowners. No R-PACE municipal programs should be authorized in Ohio until there are strong protections in place, including significant consumer education. Instead of adopting R-PACE, communities should focus their resources on supporting locally-based home repair programs that address the myriad needs of Ohio homeowners.
Municipal leaders in Ohio should remember, if it sounds too good to be true, it probably is.