General Background on PACE Financing
California law allows cities, counties, and other authorized public agencies to establish voluntary financing districts to facilitate energy and water efficiency improvements to existing residential and commercial properties. Such financing is commonly referred to as Property Assessed Clean Energy (PACE) financing. Once established, property owners within the boundaries of such a district can voluntarily choose to enter into a contractual assessment and borrow funds from the district to make energy efficiency improvements to private property. The assessment is then repaid in installments on the property tax bill. If the property owner were to default on their property taxes, the Treasurer-Tax Collector would have the authority to foreclose on the property to collect payment.
Over the past few years, several PACE financing providers have expressed interest in establishing PACE financing districts and offering PACE loans to property owners in Contra Costa County. Such financing districts would not be formed or operated by the County, but the establishment of such financing districts requires a resolution of approval by the Board of Supervisors. For most current PACE programs, the sponsoring public agency is a joint powers authority (JPA), which forms the financing district and is responsible for its administration. In such cases, the County would need to be a member of the JPA in order for the PACE program to operate within the County’s jurisdiction.
Benefits and Risks of PACE
PACE financing has the potential to generate both environmental and economic benefits to County residents, and is consistent with County policy objectives to improve energy efficiency and reduce greenhouse gas emissions. Improved energy efficiency on private property reduces greenhouse gas emissions and the associated negative impacts of climate change, consistent with the County’s Climate Action Plan. Construction of energy and water efficiency improvements on private property also stimulates the local economy, expanding employment and increasing tax revenue for the County.
However, PACE financing also involves risks to property owners and the County. PACE financing is a complex financial product, similar in many ways to a mortgage or a home equity line of credit. The contractual terms of PACE loans are complicated, and can be difficult to understand. Therefore, as with mortgages and other complex financial products, there is a risk that consumers may not fully understand the products they are buying, potentially resulting in the purchase of a loan that is not in the best interest of the consumer.
The federal government has long recognized the risks associated with residential lending products and has regulated the mortgage industry for many years in an effort to protect consumers from such risks. Still, the complexities of mortgage lending have resulted in numerous law suits involving lenders, consumers, and public agencies. These factors contributed to the decision by Congress to enhance consumer protections for borrowers through the creation of the federal Consumer Protection Bureau, established by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank).
Dodd-Frank and other federal regulations include provisions requiring mortgage lenders to provide various financial disclosures to potential borrowers and verify that borrowers have a reasonable ability to repay loans they are seeking. In practice, this means mortgage lenders verify borrowers’ income and review borrowers’ credit reports and tax returns. PACE lending has no such statutory or regulatory requirements. The lack of consumer protection regulation associated with PACE makes it easier for borrowers to obtain PACE financing compared to obtaining a mortgage, but it also increases the risk that consumers will enter into PACE loans they do not understand or do not have the ability to repay.
PACE not only shares the risks to consumers associated with other complex financial products, but also has additional risks to consumers resulting from regulatory intervention by the federal government to discourage the use of PACE financing. In 2010, the Federal Housing Financing Agency (FHFA), the federal agency that regulates the mortgage industry, took actions to prevent Fannie Mae and Freddie Mac from purchasing mortgages for properties with PACE liens. This negatively impacts consumers, resulting in circumstances where home owners have been forced to pay off their PACE loans in order to sell their home or refinance their existing mortgage.
The risks for consumers associated with PACE financing also result in risks for the County. Although the County does not directly operate PACE programs, the Board of Supervisors must authorize the operation of PACE programs within the County’s jurisdiction. Therefore, the County is at risk of being named in law suits that may arise from the impacts PACE financing programs have on consumers.
To facilitate the environmental and economic benefits of PACE financing while also managing the risks such programs represent to home owners and the County, the County has established policies to that require PACE programs operating within the County’s jurisdiction to implement measures that protect consumers and the County from the risks associated with PACE.
Prior Actions by the County
On June 16, 2015, the Board of Supervisors (the Board) approved the recommendation of the Internal Operations Committee to direct the Department of Conservation and Development (DCD) to establish an application process and accept applications from PACE providers to operate within the unincorporated area of the County. The Board also approved the form of an Operating Agreement the County would require PACE providers to enter into with the County as a condition of operations.
The purpose of the Operating Agreement is to enable PACE programs to operate within the County’s jurisdiction while also establishing terms and conditions to protect the County and home owners from the risks associated with PACE programs. The Operating Agreement was prepared by County Counsel, with extensive input from the CAO, Treasurer-Tax Collector, Auditor Controller and DCD.
The Operating Agreement addresses the risks associated with PACE financing through three mechanisms:
- Disclosure of risks and costs to consumers
- Indemnification of the County from legal claims
- Participation of PACE programs in the State’s PACE Loss Reserve Program
Disclosure requirements in the County’s PACE Operating Agreement are designed to help property owners understand the terms of PACE loans so they can act as informed consumers. Although the County’s PACE disclosure requirements are much less rigorous than the disclosure requirements associated with mortgages, they assure that consumers receive basic financial information about the terms of PACE loans, and information about the potential impacts to consumers associated with FHFA’s regulation of PACE. AB 2693 was introduced in February in response to growing concern about misinformed or uninformed PACE consumers. The legislation, as currently amended, would add consumer protections by placing limits on the amounts of PACE loans, and establishing uniform underwriting criteria and financial disclosures, much like what the County requires in its PACE Operating Agreement.
Indemnification is the primary means by which the Operating Agreement protects the County from risks associated with PACE financing. Although the County is not involved in the operation of PACE programs, some property owners and other interested parties may mistakenly perceive PACE to be a County program. This perception could result from the fact that the Board of Supervisors must give approval for PACE programs to operate within the County’s jurisdiction. The perception that the County is partially responsible for the operation of PACE programs could expose the County to potential legal claims. Therefore, the Operating Agreement requires PACE providers to fully indemnify and defend the County from any and all claims resulting from PACE programs.
Participation of PACE programs in the State’s PACE Loss Reserve Program, operated by a division of the State Treasurer’s Office, is required in the County’s Operating Agreement as a best practice designed to mitigate risks to mortgage lenders associated with PACE programs.
Current Status of PACE within the County’s Jurisdiction
Following the Board’s direction in June 2015 that County staff establish a PACE application process, DCD received applications from two PACE financing programs in July 2015: HERO and CaliforniaFirst. County staff proceeded to review the application materials submitted and negotiate Operating Agreements with both programs.
On November 17, 2015, the Board approval an Operating Agreement with the Western Riverside Council of Governments (WRCOG), the joint powers authority (JPA) responsible for the HERO program, and adopted a Resolution authorizing the HERO program to operate within the unincorporated area of the County. All legal documents associated with this action have been fully executed by the County and WRCOG. WRCOG has since initiated a court proceeding to legally validate the operation of the HERO program within the County. In April 2016, WRCOG informed County staff that the HERO program would become operational in the unincorporated area of the County within “a few weeks.”
The County has not concluded an Operating Agreement with the California Statewide Communities Development Authority (CSCDA), the JPA responsible for the CaliforniaFirst program. Unlike WRCOG, CSCDA has not agreed to the indemnification and insurance provisions in the County’s PACE Operating Agreement. The alternative provisions proposed by CSCDA would expose the County to unnecessary risk, and therefore staff has not recommended the Board approve an Operating Agreement with CSCDA. |