Consumer Protections Fall Short Again for California PACE Customers

Property Assessed Clean Energy (“PACE”) is a type of financing program that is implemented by a state or local government. This program is designed to increase the usage of expensive clean energy technology and can be applied to either commercial or residential property. This program has been active in California since 2007. Enabling Legislation, PACENation, (Last visited 6/20/2017).

However, as I previously discussed in Moving Too Quickly: Consumers Left Behind in PACE Financing Scheme, the program is fraught with consumer issues including defaults and foreclosures. In recognition of this problem the California Legislature, Renovate America along with other industry leaders and consumer advocates attempted to address these problems. Andrew Khouri, Legislature Passes Bills to Reform PACE Energy-Efficiency Loan Program, L.A. TIMES, September 16, 2017. They helped draft two bills S.B. 242, and A.B. 1284. S.B. 242, 2017-2018 Reg. Sess. (Cal. 2017); Assemb. B. 1284, 2017-2018 Reg. Sess. (Cal. 2017). Both of these bills are a great first step, but they do not go nearly far enough.

A.B. 1284 was signed into law by Governor Brown on October 4, 2017. See Assemb. B. 1284, 2017-2018 Reg. Sess. (Cal. 2017). This bill attempts to address the consumer issues by requiring companies to have more stringent underwriting standards and requires licensing of certain finance company employees. See id. It specifically requires the program administrator make “a reasonable good faith determination that the property owner has a reasonable ability to pay the PACE assessments.” Id. The bill forces the financing companies to inquire into certain factors that are related to a consumer’s ability to repay the loan. Id. They may look at such factors as the timeliness of mortgage payments and tax payment history. Id. Also, by 2019 all program administrators must be licensed as PACE Solicitors by the Department of Business oversight. Id. This licensing process will include a criminal background check. Id. Further, the law empowers the Department of Business oversight to police these companies for any misleading or fraudulent practices. Id. This bill was a great first start and when combined with S.B. 242 provides some protections.

S.B. 242 was signed into law at the same time as A.B. 1284. See, S.B. 242, 2017-2018 Reg. Sess. (Cal. 2017), Assemb. B. 1284, 2017-2018 Reg. Sess. (Cal. 2017). The bill was motivated by the same consumer issues that prompted A.B. 1284. See S.B. 242, 2017-2018 Reg. Sess. (Cal. 2017). S.B. 242 provides for consumer protections in the form of regulating the conduct of the finance companies. Id. The bill prevents finance companies from providing kickbacks to contractors or PACE solicitors and informing contractors of how much available PACE financing for which a consumer is eligible. Id. The bill also, requires a finance company to call a consumer and orally confirm that a homeowner is in possession of the contract and they understand the key terms. Id. This phone call must be in the consumer’s preferred language. Id. Finally, the bill also prevents contractors from charging more for a job that is financed through PACE than a job that is paid for with cash. Id.

The California legislature should be commended for trying to address the numerous consumer issues that have cast a shadow over the program. These bills do add some meaningful protections such as the no kickbacks provision and the licensing structure. See, S.B. 242, 2017-2018 Reg. Sess. (Cal. 2017); Assemb. B. 1284, 2017-2018 Reg. Sess. (Cal. 2017).  However, they do disappoint in a few ways. Some companies, like Renovate America, have been conducting phone calls with consumers since the inception of their program. However, this did not prevent fraud within the system. These phone calls are to be conducted by employees of the finance companies. The fox is once again protecting the hen house. Letting this industry self-police itself is just setting the stage for a 2008 like disaster with home foreclosures skyrocketing.

The bills do not require a specific way in which the companies are supposed to determine if a consumer can pay back their loans. See, S.B. 242, 2017-2018 Reg. Sess. (Cal. 2017), Assemb. B. 1284, 2017-2018 Reg. Sess. (Cal. 2017). The bill only provides some examples but does not specify what a “reasonable good faith determination” what a finance company thinks is a reasonable debt load vs. how a person is actually living may very well be two different things. Id. Also, there is no specification for a cushion to make sure that if something in life occurs the consumer can still pay their debt. Id. If you allow the consumer to be maxed out on their disposable income they will eventually default. Id. Massachusetts consumers have the option now to look at what California has done and how their regulatory regime for PACE has evolved from no consumer protections to a bare minimum. Massachusetts has the ability to actually protect consumers by going further than California’s protections. First, as I have previously advocated Massachusetts should apply TILA to these loans. See Seth Barron, Moving Too Quickly: Consumers Left Behind in PACE Financing Scheme, NULR Online Forum, October 1, 2017. Second, they should follow the same lending guidelines that mortgage lenders must follow to determine if a consumer can afford the loan. Third, Massachusetts should require an outside company funded by a tax or fee on recording of the assessment contract be in charge of the phone calls to make sure consumers understand the contract. This cost should be borne by the companies.