United States: CFPB Issues Advance Notice Of Proposed Rulemaking

On March 4, 2019, the Consumer Financial Protection Bureau (CFPB) issued an advance notice of proposed rulemaking (ANPR) on residential property assessed clean energy financing (PACE financing).1 The CFPB is seeking information to support implementation of section 307 of the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA). Section 307 amends the Truth in Lending Act (TILA) to require the CFPB to issue regulations for PACE financing that "carry out the purposes of" TILA's ability-to-repay requirements for mortgages, and apply TILA's civil liability provisions to PACE financing. In crafting the regulations, the CFPB is required to take into account "the unique nature of PACE financing."

PACE financing is currently authorized in California, Florida and Missouri. The typical PACE financing arrangement consists of a homeowner agreeing to a voluntary tax assessment to fund energy efficiency and other improvements to the home. PACE financing involves private "administrators" who contract with governmental authorities to carry out PACE financing programs, and work with home improvement contractors who market and install PACE-financed improvements for homeowners. The PACE financing assessment is on the property, is paid over a term as short as 5 years or as long as 20 years, and is senior to any mortgages. If the homeowner sells the home with an assessment in place, the new owner takes the home subject to the assessment. 

The CFPB's ANPR requests information about residential PACE financing including: (i) documentation associated with PACE financing; (ii) current PACE financing origination standards and practices; (iii) application of TILA's civil liability provisions, the right of rescission, and borrower delinquency and default to PACE financing; (iv) features unique to PACE financing and how the regulations should reflect those features; and (v) the potential implications of "regulating PACE financing under TILA." Comments are due May 7, 2019.

The EGCRRPA's directives present some interesting issues for residential PACE financing. Notably, the EGRRCPA does not require the CFPB to apply TILA's ability to repay requirement for mortgages to PACE financing, instead it requires the CFPB to apply the purposes of ability-to-repay to PACE financing. The purpose of TILA's ability-to-repay requirement 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."2 The broad purpose essentially gives the CFPB discretion to tailor ability-to-repay rules to PACE financing's "unique nature." In contrast, TILA's ability-to-repay requirement sets forth several specific factors mortgage creditors must consider in their assessments, including the applicant's monthly debt-to-income ratio or residual income, based on verified information of the applicant's income and debts.

Even if the CFPB crafts broad and flexible rules, PACE financing administrators in California are already subject to an ability-to-pay requirement that requires consideration of several factors, including verification of income and debts, and consideration of the homeowner's residual income after the PACE financing obligation and other monthly debts are paid.3 Assembly Bill 1284's ability-to-pay requirement took effect April 1, 2018, and the California Department of Business Oversight (DBO) is writing rules to implement that requirement and other consumer protections for PACE financing.4 TILA generally does not preempt state law unless the state law is in conflict with TILA.5 Thus, California's PACE financing programs will have to navigate two sets of rules once the DBO and the CFPB have issued final rules.

The EGRRCPA also tasks the CFPB with applying TILA's civil liability provisions to PACE financing. For mortgages, TILA imposes civil liability on creditors and assignees for failing to assess repayment ability. TILA also protects creditors and assignees from liability if the loan is a "qualified mortgage" as defined in TILA and CFPB regulations. For PACE financing, the homeowner signs a contract with a local government authority, agreeing to a voluntary tax assessment on the home. While governmental organizations are not exempt from TILA, TILA shields States "or political subdivision[s] thereof, or any agency of any State or political subdivision" from civil penalties and fines for TILA violations.6 

California did not create a new private right of action for PACE financing's ability-to-pay requirement, however, AB 1284 requires PACE financing administrators to be licensed under California Financing Law in a manner similar to certain lenders and brokers.7 PACE financing administrators are also subject to the DBO's oversight and enforcement authority. The DBO has strong investigative and enforcement authority including suspension or revocation of licenses.8

We will continue to monitor developments at the CFPB and in California related to PACE financing.

Footnotes

1 CFPB's ANPR

2 15 U.S.C. § 1639b(a)(2).

3 CA Fin. Code § 22686.

4 California Assembly Bill 1284, Ch. 425, October 4, 2017 ("AB 1284").  For information about the DBO's rulemaking, see Department of Business Oversight.  Note that AB 1284's ability-to-pay requirement is imposed only on PACE financing administrators; California regulations have separately required California Finance Lenders to assess ability-to-repay – with no required factors and no further guidance.  10 CA. Admin. Code § 1452.

5 15 U.S.C. § 1610(a)(1).

6 15 U.S.C. §§ 1602(c), (d), and 1612(b).

7 CA Fin. Code § 22101.  Section 3 of AB 1284 revised § 22000 to rename the "California Finance Lenders Law" as the "California Financing Law."  Note that banks, savings associations, and credit unions are exempt from licensing under the California Financing Law.  CA Fin. Code § 22050.

8 CA Fin. Code §§ 22700-22718.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

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