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While California has stepped up regulation of a type of financing that allows homeowners to fund energy-saving improvements with an assessment on their properties, the industry now faces new proposed federal legislation that it says could threaten the industry.

Under property-assessed clean energy, or PACE, lending programs the cost of various improvements such as energy-rated water heaters, windows, and solar panels can be repaid through annual payments on property tax bills.

PACE financing was started in California in 2007. The state is a leader in this industry, with Santa Rosa-based Ygrene Energy Fund as a major player.

Such residential programs have grown dramatically in recent years, reaching close to $4 billion in transactions across 140,000 American homes, supporting 35,000 jobs, according to PACENation, a nonprofit group that helps support program financing.

With the rapid growth have come concerns about “predatory business practices” from lawmakers and other organizations that cite a lack of consumer protections and accountability over energy savings.

The Boston-based National Consumer Law Center recently warned that an absence of federal protections are leading to complaints that elderly and low-income property owners in California, where PACE originated, are being targeted by third-party contractors for expensive improvements and being extended credit they cannot afford to repay. Some consumers have also been mislead into believing the loans could be passed from home seller to buyer, when in most cases they cannot.

The federal Protecting Americans from Credit Exploitation Act (PACE Act) would require PACE providers to follow the same regulations and disclosures as banks and mortgage lenders. It would do so by subjecting PACE financing to the Truth in Lending Act (TILA) that requires disclosures about the manner in which costs associated with borrowing are calculated and disclosed.

Arkansas Sen. Tom Cotton, one of the bill’s sponsors, called the program “a scam,” stating that PACE loans require no underwriting and have high interest fees, with rates of 8 percent–12 percent. PACE lenders also receive first priority of repayment, before mortgage brokers. And currently, there is no standardized rate or fee disclosure required for PACE loans.

“Predatory green-energy lenders are changing state and local laws to trick seniors into taking out high-interest rate loans for 20 years, along with liens on their homes, for technology that could be obsolete in a few years,” he said. “Requiring disclosure will reduce the advantage that PACE loan sharks have over hard-working Americans. It’s just the accountability we need.”

PACENow, a nonprofit advocacy group for the industry, called the bill “a thinly disguised effort to kill PACE by subjecting it to extraneous federal regulations.” The group stated the bill is being “driven by banking interests that only see PACE as competition for market share.”

PACE-enabling legislation is active in 33 states and the District of Columbia, and programs are launched and operating in 19 states and the district, according to PACENation. Residential PACE loans currently are currently active in California, Florida and Missouri.

Last fall, California enacted AB 2693. Provisions limit the amount of annual property taxes and assessments to 5 percent of the property’s market value, provides a three-day right to cancel the assessment, and a notice to borrowers that they may not be able to refinance or sell without paying off the PACE loan.

The bill’s author, Assemblyman Matt Dababneh, said the purpose of the bill was not to dismantle the program, but to empower homeowners and create a more stable market and opportunities for PACE providers.

“It’s a wake-up call (to the industry) to self-regulate,” he said. “We kept the good elements of the program without compromising the benefits to consumers and the lending companies. We created a dialog between the government, communities and the providers to agree what the goals are. It’s created a good synergy in the state.”

A new bill, SB 242, by State Senator Nancy Skinner, adds even more consumer protections. The bill adds requirements to help determine if a homeowner has the ability to pay off the PACE assessment, sets standards for the type of projects that can be funded by PACE, and requires contractors to be licensed with the state.

Ygrene was in support of AB 2693, and is supportive of the Skinner bill if it is amended.

“We are proposing alternate language in a couple of areas,” said Mike Lemyre, senior vice president, market development and governmental affairs.

If the federal legislation is passed, however, the company says it will kill the program.

“The (state) legislation is straightforward and preserves the nature of the PACE program,” Lemyre said. “The opposite is true for the PACE Act. It would eliminate it.”

PACE acts as a lien on the property making the program more like an equity loan, Lemyre said. Placing the same requirements on PACE as mortgages have would become overly burdensome on the provider. It could work, he said, if was defined under TILA with its own rules.

“If passed as currently drafted, (the legislation) would endanger one of the most innovative and popular forms of home improvement financing available today” said Rocco Fabiano, president and CEO in a statement. “PACE financing uses 100 percent private capital to fund projects in communities from California to Florida at no cost to taxpayers, while promoting energy independence and supporting local communities through job creation. PACE is good for homeowners, communities and the country – endangering it, as this legislation would do, is not in the best interests of ordinary Americans.”

Ygrene administers PACE lending in 320-plus cities and counties. The firm’s loan originations grew 200 percent last year to nearly $500 million, and expects this year to be significantly higher, Fabiano told the Business Journal in March.

The PACE Act comes as Ygrene is facing a federal class-action lawsuit alleging it misled clients in California and Florida. According to the lawsuit, Ygrene concealed information about the PACE loans, including prepayment penalties and/or fees assessed by the company to avoid prepayment penalties.

The suit also alleges Ygrene’s marketing materials and other sales approaches inform consumers that the loan will remain with the home and not the borrower, when in fact the PACE loan does not actually remain with the home. The PACE loans “make it impossible or nearly impossible for consumers to sell their homes without first paying off the loan and incurring a large prepayment penalty,” the lawsuit states.

Ygrene has denied any wrongdoing.

“We hold ourselves to the highest ethical standards. Complete transparency and a commitment to consumer disclosure, protection, and education are of utmost importance to Ygrene,” said Lemyre.