Many bills came to a grinding halt last week as we hit one of the Legislature’s annual milestones. Friday, April 28 was the deadline for policy committees to kick bills over to fiscal committees. The bills that fail passage in a policy committee, are considered “dead.” However, bills that are referred to a policy committee, but were never presented at a hearing can be shelved until next year and become what’s known as “two-year bills.”
AB 271 (Caballero) has passed out of its policy committees (Revenue and Taxation, and Local Government). However, Auditor-Controller Robert Campbell has indicated that additional amendments are forthcoming that would address his (and his Association's) concerns regarding the bill's effect on the "Teeter Plan." (The Teeter Plan, first enacted 1949, provides California counties with an optional alternative method for allocating delinquent property tax revenues. Using the accrual method of accounting under the Teeter Plan, counties allocate property tax revenues based on the total amount of property taxes billed, but not yet collected. The Teeter Plan allows counties to finance property tax receipts for local agencies by borrowing money to advance cash to each taxing jurisdiction in an amount equal to the current year's delinquent property taxes. In exchange, the county's Tax Losses Reserve Fund (TLRF) receives the penalties and interest on the delinquent taxes when collected. The county can transfer an amount from the TLRF as long as the TLRF maintains a minimum balance as required by law.) With those amendments, his and his Association's objections to the bill would be addressed.
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Introduced: |
02/01/2017 |
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Last Amend: |
04/04/2017 |
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Disposition: |
Pending |
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Location: |
Assembly Appropriations Committee |
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Summary: |
Authorizes the county tax collector to direct the county's auditor to remove a delinquent installment based on a Property Assessed Clean Energy (PACE) assessment from the county's secured tax roll, if it arises from a contract entered into after a specified date. Requires specified costs to be deposited in a county fund to be used for offsetting general fund property tax revenues of local taxing agencies that are lost when a property subject to a PACE assessment is sold at a tax defaulted land sale. |
The text of the bill can be found here: http://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201720180AB271
The Assembly Revenue & Taxation Committee analysis of the bill is provided below:
2017 CA A 271: Bill Analysis - 04/21/2017 - Assembly Revenue and Taxation Committee, Hearing Date 04/24/2017
Date of Hearing: April 24, 2017
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Sebastian Ridley-Thomas, Chair
271 (Author:Caballero) - As Amended Ver:April 4, 2017
Majority vote. Fiscal committee.
SUBJECT: Property Assessed Clean Energy program
SUMMARY: Allows county tax collectors to direct a county auditor to remove a delinquent Property Assessed Clean Energy (PACE) assessment from the tax roll, requires that penalties and costs applicable to a defaulted PACE assessment be deposited into a restricted fund, and limits subordination agreements, as specified. Specifically, this bill:
1) Allows the county tax collector to direct the county auditor to remove the delinquent installment from the county's secured tax roll. Delinquent installments include those based on a voluntary contractual assessment, voluntary special tax, or special tax that arises from a contract entered into on or after January 1, 2018.
2) Requires the county tax collector to provide a notice on the secured tax roll that the delinquent installment has been removed immediately upon removal. The notice shall be displayed on the secured tax roll in a manner that conveys that the removal has occurred, and may include the name and telephone number of the person or entity to be contacted to receive further information.
3) Defines a "PACE assessment" as a voluntary contractual assessment, voluntary special tax, or special tax, as described in Public Resources Code (PRC) Section 26054.
4) Requires that penalties or costs accrued by a property subject to a PACE assessment pursuant to Revenue and Taxation Code (R&TC) Sections 2617, 2618, 2621, or 4103 and that are subject to Government Code Section 53340 and Streets and Highway Code (S&HC) Section 5898.3, be deposited in the restricted county fund, whether collected on the secured tax roll or pursuant to a sale or foreclosure. If the funds are collected pursuant to a sale or foreclosure, the holder of the lien based on the PACE assessment shall remit the penalty or cost to the county tax collector within 30 days of the sale or foreclosure.
5) Prohibits, except as specified, a property subject to a PACE assessment from being subject to an agreement wherein the authority to collect a defaulted lien based on a PACE assessment is transferred to, subject to, or contingent upon, third-party approval or another arrangement or agreement by the lienholder, unless that lien has been removed from the county's secured tax roll and the right to collect the PACE assessment and any defaulted lien amount is returned to the administrator of the PACE program. This prohibition does not apply to a PACE assessment made, on or before January 1, 2018, and subject to a contractual waiver of the right to foreclose, or other arrangement or agreement between a lienholder and a lender, or a lienholder and another third party, wherein the agreement requires approval by the other party prior to the lienholder's exercise of foreclosure.
6) Requires the county to create a restricted fund to receive accrued penalties and costs, and requires counties to appropriate those funds for the purpose of offsetting general fund property tax revenues of local taxing agencies that are lost when a property subject to a PACE assessment is sold at a tax-defaulted land sale for less than the total amount necessary to redeem the amount of defaulted taxes, delinquent penalties and costs, redemption penalties, and redemption fees.
7) Prohibits a PACE assessment that has been removed from the county's secured tax roll by the county auditor from being subject to penalties and interest for delinquent assessments.
8) Provides that, if the Commission on State Mandates determines that this bill contains costs mandated by the state, reimbursement to local agencies and school districts for those costs shall be made, pursuant to current laws governing state mandated local costs.
EXISTING LAW:
1) Provides, generally, that the maximum amount of any ad valorem tax on real property shall not exceed 1% of the full cash value of such property. (Cal. Const., Art. VIII.)
2) Defines an "assessment" as any levy or charge upon real property by an agency for a special benefit conferred upon the real property. "Assessment" includes, but is not limited to, "special assessment," "benefit assessment," "maintenance assessment" and "special assessment tax." (Cal. Const., Art. VIII.)
3) Allows public agencies and property owners to enter into voluntary contractual assessments to finance the installation of distributed generation renewable energy sources or energy or water efficiency improvements that are permanently affixed on real property. (S&HC Section 5898.2.)
4) Establishes a PACE program as a way to help homeowners and small business owners finance voluntary energy and water efficiency and clean energy improvements. (PRC Section 26050.)
5) Establishes a PACE Reserve Program designed to address the Federal Housing Finance Agency's (FHFA) financial concerns by making first mortgage lenders whole for any losses in a foreclosure or a forced sale that are attributable to the PACE program. (PRC Section 26060.)
FISCAL EFFECT: Unknown
COMMENTS:
1) The author has provided the following statement in support of this bill:
The PACE program has proven an effective way to finance energy efficiency and renewable energy upgrades for consumers. Yet as PACE continues to grow, so do opportunities for unscrupulous behavior and the potential for consumers to be taken advantage of by a program otherwise designed to help them. We must ensure that consumer protections are in place, and this bill does that. AB 271 protects counties, schools, and taxpayers, and also protects PACE so it can remain a viable alternative for energy efficiency and renewable energy generation.
2) Supporters argue, "The proposed changes will protect tax payers and those who rely on local government services by removing defaulted PACE liens from the property tax bill. The proposed changes will reduce the chances counties, schools, other local government entities and the State will lose revenue as a result of properties with PACE assessments being sold at tax defaulted land sale at prices below the original minimum bid amount. It will also ensure that the property tax bill is not being used to inappropriately enrich private parties at the expense of consumers who may not realize that tax code related penalties and interest will apply to their delinquent PACE assessments."
3) Opponents state that "[t]he legislation proposed by Assemblywoman Caballero is intended to address a problem that does not presently exist. Renovate America's HERO program has a 98.75% on time payment rate. To date, there has not been a single foreclosure initiated on a home as a result of a PACE assessment. PACE is working, and we believe that there are mechanisms that can be effectively incorporated into statute to protect homeowners and the program itself." Opponents further state that "[c]hanging the fundamental nature of PACE as a secured assessment will have an immediate and adverse impact on the capital markets that support the private capital that has fueled the growth of PACE in California. Capital markets have supported PACE through the purchase of PACE securitizations because of the secured interest in the property. The removal of security for the PACE assessment will lower credit ratings of securitizations, and will decrease and make more expensive the availability of capital - resulting in higher interest rates for property owners. The shortage of capital and increased costs to property owners will be a detriment to the state's ability to meet the public policy goal of increasing energy efficiency, renewable energy, and water conservation to combat climate change."
4) Committee staff comments:
a) Background. The PACE program, which began in 2007, is a financing tool that residential and commercial property owners can use to pay for renewable energy upgrades, energy or water efficiency retrofits, or electric vehicle charging stations for their homes or buildings. Most PACE programs are implemented and administered under two statutory frameworks: AB 811 (Levine), Chapter 159, Statutes of 2008, which amended the Improvement Act of 1911 to allow for voluntary contractual assessments to finance PACE projects; and SB 555 (Hancock), Chapter 493, Statutes of 2011, which amended the Mello-Roos Community Facilities District Act to allow for Mello-Roos special taxes to finance PACE projects. Local agencies create PACE assessment districts in their jurisdictions via a resolution of their legislative body, allowing the local agency to issue bonds to finance the up-front costs of improvements. In turn, property owners enter into a voluntary contractual assessment agreement with the local agency to re-pay the bonds via an assessment on their property tax bill. The assessment remains with the property even if it is sold or transferred.
The FHFA first raised concerns in 2010 that residential PACE financing could pose a risk for federal mortgage enterprises (Fannie Mae and Freddie Mac) because PACE loans are first-priority liens in the case of foreclosure and lenders would have to pay outstanding PACE assessments before paying mortgage costs. In August 2010, Fannie Mae and Freddie Mac announced they would not purchase mortgages for homes with first lien priority PACE obligations. The FHFA's action triggered many local governments to suspend their residential PACE programs.
To address the concern raised by Fannie Mae and Freddie Mac back in 2010, the Legislature enacted SB 96 (Committee on Budget and Fiscal Review), Chapter 356, Statutes of 2013. This budget trailer bill tasked CAEATFA with administering a PACE loss reserve program that would use a $10 million reserve fund to keep mortgage interests whole during a foreclosure or a forced sale. In order to receive the benefits of the state's PACE loss reserve program, local PACE administrators must first apply and meet a specified set of underwriting standards.
The FHFA issued a statement clarifying their position following the creation of the PACE Loss Reserve Program in a letter to Governor Brown dated May 1, 2014:
I am writing to inform you that FHFA is not prepared to change its position on California's first-lien PACE program and will continue to prohibit the Enterprises from purchasing or refinancing mortgages that are encumbered with first-lien PACE loans...In making this determination, FHFA has carefully reviewed the Reserve Fund created by the State of California and, while I appreciate that it is intended to mitigate these increased losses, it fails to offer full loss protection to the Enterprises. The Reserve Fund is not an adequate substitute for Enterprise mortgages maintaining a first lien position and FHFA also has concerns about the Reserve Fund's ongoing sustainability.{1}
To date, FHFA has maintained its position against first-priority PACE liens.
b) How does PACE work? In California, there are several models available to local governments in administering a PACE program. Only the counties of Sonoma and Placer administer their own PACE programs. The majority of local governments contract with a private third-party or join a Joint Powers Authority (JPA), which contracts with a private third-party to carry out their PACE programs. The cost of third-party administration is not borne by the local agency, but is built into PACE loan financing. Some of these programs focus on residential projects, others target commercial projects, and some handle both residential and commercial projects.
c) Problems with PACE: Over the last few years, concerns have been raised with the lending practices of private third-parties that have contracts with local governments or JPAs to carry out of PACE program. To address some of these concerns, the Legislature enacted AB 2693 (Dababneh), Chapter 618, Statutes of 2016, which established disclosure requirements and provided owners with a right to cancel. However, a major concern of the PACE program, which has yet to be addressed, is with the underwriting standards. Under the PACE program, the only financial requirements that must be met for a person to qualify for a PACE loan are the following: the owner must be current on the mortgage; the owner is not in default or in bankruptcy; financing cannot exceed 15% of the value of the property or 10% if property is worth more than $700,000; and the total mortgage-related debt and PACE financing on the underlying property cannot exceed the value of the property. A key factor that is missing within these underwriting standards, and is standard among almost all loans, is an assessment of the borrower's ability to pay.
The Consumer Financial Protection Bureau recently highlighted loose underwriting standards as a major contributing factor in the recent mortgage crisis. The report noted that many lending institutions at the time failed to verify "consumers' income or debts" and then qualified consumers for mortgages based on "teaser" interest rates that would rise and make the monthly mortgage payments unaffordable{2}. The issue became such a big problem that "in 2008, the Board of Governors of the Federal Reserve System adopted a rule under the Truth in Lending Act prohibiting creditors from making higher-priced mortgage loans without assessing consumers' ability to repay the loans."
There are several ongoing disputes as to whether PACE assessments are loans or assessments. In 2010, then Attorney General Brown sued Fannie Mae and Freddie Mac seeking legal clarification that the PACE programs operate through assessments, not loans. The issue has not yet been resolved. Irrespective of the program's legal characterization, the program functions very much like a loan. Just because the improvements are secured by a contractual assessment that is attached to the property and then repaid through property taxes does not change the fact that people are paying back borrowed funds. Without stronger underwriting standards, loose lending that led to the mortgage crisis a decade ago may cause similar problems within the PACE program. The lack of substantive underwriting standards has also prompted the Department of Energy to establish "Best Practice Guidelines for Residential PACE Financing Programs." These guidelines recognize that the PACE assessment is an additional financing obligation for the property owner. As such, the PACE program "should confirm property owners can support the cost of the PACE assessment by collecting and reviewing information from property owners on their household income and debt obligations." One key reason why lenders are not currently assessing a borrower's ability to pay is that the assessment runs with the land even after a foreclosure. This allows a lender to make riskier loans because if a property owner who took on a PACE loan fails to make payments, the subsequent buyer will become liable for the assessment. In the end, the PACE provider and the bondholders always get paid.
d) What problem does this bill hope to address? When taxes become delinquent, state law imposes a 10% penalty on each amount and counties can also apply administrative charges. The property becomes tax defaulted if taxes remain unpaid as of June 30th, triggering redemption penalties of 1.5% a month (18% per year) until the full amount is paid. After five years, the tax collector, with approval by the board of supervisors, can sell a tax defaulted residential property to satisfy back taxes, penalties, costs, and other liens; for commercial property, the tax collector can do so after three years. After the sale, funds are distributed to taxing agencies with valid claims and to the tax collector to pay for notices and contacting taxpayers. After that, proceeds satisfy liens held by parties in interest. Any amounts left over, known as "excess proceeds," are then divided up between each taxing entity according to their appropriate share of the property tax. If a property fails to sell for a price sufficient to cover all of the debts due, known as a "minimum bid," the amount received by the tax collector in the auction is distributed on a proportional basis.
The sponsors of this bill want to ensure that local government services are protected by minimizing the chance of having a property sell for below the minimum bid amount due to the property having a PACE assessment. Third-party providers may not necessarily be worried about property going into default or being sold at a tax sale because, as mentioned earlier, the new buyer becomes liable for the assessment. Additionally, some third-party providers may actually look forward to delinquencies and defaults because it may substantially increase penalties and interests collected by bond holders. A third-party provider was recently quoted as saying that "[i]f a homeowner doesn't pay their taxes, they're subject to a penalty - which in California is 10% of the tax due - and after a certain number of months interest begins accruing at 1.5% a month. In the event of delinquencies, there's actually more cashflow available to a PACE deal than if the property owner defaults on their mortgage payment.{3}"
This bill would address the concern of having penalties and interest being remitted to bond holders by either allowing the county tax collector to remove the delinquent installment from the county's secured tax roll or by ensuring that all interest and penalties that accrue from a PACE assessment be deposited into a restricted fund if the property sells for below the minimum bid. The first solution effectively forces the PACE provider to seek collection of the delinquent debt directly from the taxpayer. The priority of the lien is not modified when the tax collector removes the delinquent assessment from the secured tax roll. The lien continues to be on the property even if removed from the secured roll. The second provision ensures that the penalties and interest will be deposited into a restricted account used only to offset general fund property tax revenues of local taxing agencies when a property fails to meet the minimum bid.
d) Double-referral: This bill was heard in Assembly Committee on Local Government and passed out of Committee with a vote of 7 to 2.
REGISTERED SUPPORT / OPPOSITION:
Support
California Association of County Treasurers and Tax Collectors
Opposition
RenovateAmerica
Analysis Prepared by: Carlos Anguiano / REV. & TAX. / (916) 319-2098
1 Melvin L. Watt. Letter to Governor Edmond G. Brown, California Property Tax Assessed Clean Energy Program, Office of the Director, FHFA. May 1, 2014.
2 Ability to Repay and Qualified Mortgage Rule: Small entity compliance guide, Consumer Financial Protection Bureau, March, 2016.
3 Craig Braun of Renovate America, Structured Credit Investor, June 13, 2016.
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