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Residential Property Assessed Clean Energy (R-PACE): Key Considerations for State Energy Officials

Issue Brief – March 2018

Executive Summarya

Residential Property Assessed Clean Energy (R-PACE) has been used by hundreds of thousands ofhomeowners to invest in billions of dollars of home energy efficiency, renewable energy, water, andresilience improvements since 2009, offering a complement (and potential competitor) to residentialenergyupgradeprogramsrunbyutilities,governments,andtraditionallenders.UnlikeCommercialPACE(C-PACE)programs,whichhavebeenbroadlyadoptedandlaunchedacrossdozensofstatesandthousandsof municipalities but funded a smaller volume of projects, R-PACE has experienced challenges due toconcernsraisedbythemortgagebankingindustryandconsumeradvocates.In2017,inCalifornia,abroadcoalition of stakeholders including bankers, environmental groups, consumer advocates, and othersreachedconsensusonanewcomprehensiveconsumerprotectionandregulatoryframeworkforR-PACEwhichisnowlawinthestate.R-PACEprogramdesignrequiresuniqueattentionandconsiderationonthepartofstatelegislatures,stateandlocalgovernments,andprivatesectorstakeholders.Insomestates,StateEnergyOfficesmaybewell-positionedtoconveneappropriatestakeholdersanddevelopanalysesthatinformthedevelopmentofR-PACEenablinglegislation,programdesignandimplementation,andmessaging,aswellasalternativeandcomplementaryresidentialenergyprograms.ThisissuebriefoffersanoverviewofthehistoryandstatusofR-PACE,withanemphasisontheevolutionofR-PACEinCalifornia(itslargestmarkettodate)andfederalinvolvementintheprogram,aswellasasetofrecommendedtakeaways,lessonslearned,andalternativeresidential energy efficiency financing options that State Energy Officials can explore to inform theirapproachtoR-PACE.

aNASEOwouldliketothankthefollowingindividualsfortheinsightsandreviewtheycontributedtothisissuebrief:PaulScharfenbergeroftheColoradoEnergyOffice;KerryO’NeillandBrianFarnenoftheConnecticutGreenBank;MarkWolfeof theEnergyProgramsConsortium; JessicaBurdetteof theMinnesotaDivisionofEnergyResources;DavidTerryofNASEO;JeffPitkinoftheNewYorkStateEnergyResearchandDevelopmentAuthority;DavidGabrielsonofPACENation;LynnRasicandGregoryFrostofRenovateAmerica;andEleniPelican,SteveDunn,andSeanWilliamsonoftheU.S.DepartmentofEnergy.ContactSandyFazeliofNASEO(sfazeli@naseo.org)withquestionsortodiscussthisreport.

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The Basic Mechanics of R-PACE PACE programs enable property owners to finance energy efficiency, renewable energy, waterconservation,andresilienceupgradesthroughaspecialassessmentplacedontheirpropertytaxbill.PACEassessentsaretypicallysecuredbyalienontheproperty,whichisfiledwithalocalorcountygovernment.Importantly,andunlikemanyother typesofpropertyassessments, theuseofPACE is voluntary forallpartiesinvolved—rangingfromthegovernmentpolicymakersatthestateandlocallevelwhoauthorizetheuseofPACEintheirjurisdictions,totheindividualpropertyownerswhoelecttouseitforupgrades.

ByenactingPACE-enablinglegislation,legislaturesin33statesplustheDistrictofColumbiahaveauthorizedPACEasanoptionforbusinessesandhomes.CommercialPACE(C-PACE)programsareactivein20statesplustheDistrictofColumbia,whereasR-PACEprogramsareoffered inCalifornia,Florida,andMissouri.Despiteitslimitedprogramadoption,R-PACElendingvolumeexceedsthatofC-PACEbyafactorof7:asofMarch 2018, PACE had resulted in $4.3 billion in home energy financing, versus $583 million forcommercial,industry,andmultifamilyapplications.1PACEenablesparticipatingmunicipalitiestomakeuseoffundsprovidedbyprivatecapitalproviderstocovertheupfrontcostsofprojects;manyprogramsarerecapitalizedbyasset-backedsecurities,suchasgreenbonds,inpartnershipwithprivatesectorinvestors.

Thespecificfinancingtermsandconditions,aswellaseligibleproductscoveredbyR-PACEassessments,varybyprogramandtheprovisionsinthestate’sPACE-enablingstatute.AccordingtoananalysisbytheEnergy Programs Consortium (EPC) of data collected from PACE projects in the first half of 2016 inCalifornia, theaverageR-PACEassessmenthasaprincipalofapproximately$20,000,and interest ratestypicallyrangefrom6to10percent.2Atleastoneprovider,RenovateAmerica,offersratesaslowas2.99percent.3Typicalrepaymenttermsrangefromfiveto30years.Typically,R-PACEfinancingcoversbothhardandsoftcosts (i.e.,expenses relatedtoequipmentpurchasesand installationaswellasadministrative,financing, legal, audit, andother fees), aswell as awide rangeofeligiblemeasures (energyandwaterefficiency, renewableenergy,health and safetyupgrades, electrical systemupgrades, roof repairs, andseismicretrofits),solongastheyachievethepublicpurposeidentifiedinthestate’sPACE-enablingstatute.

TwodefiningattributesofaR-PACEassessmentincludetheseniorpositionofthetaxliencreatedtosecureitandthecollateral-basedcriteriausedtounderwriteit.Eachattributeis linkedtothefactthatR-PACEobligationsaretiedtotheproperty(nottheborrower)and,asspecialassessments,aretreatedinthesamemannerasothertaxandassessmentcharges.TheseattributesalsodistinguishR-PACEfromothertypesofsecuredhome improvement loans.Unlike other types of special assessments, R-PACE assessments arevoluntaryforpropertyownerstotakeon;liketaxesandspecialassessments,failuretopayR-PACEdebtmayultimatelyleadtothelocalgovernmentinitiatingaforeclosureinordertopayoffthepast-dueamount.

ThepositionofthelienthatsecurestheR-PACEassessmentisequaltoothertaxandassessmentliensandseniortonon-taxdebtontheproperty(e.g.,mortgageliens).Thispositioncreatesahighlevelofsecurityforinvestorsbyensuringthat,intheeventofdefaultorbankruptcy,thedelinquentportionofaR-PACEobligationisrepaidatthesametimeasotherpast-duetaxobligationsandaheadofnon-taxdebtinarrears,suchasmissedmortgagepayments.This isespecially relevant ina forcedsaleor foreclosure situation,wheretheproceedsfromthesaleareusedtorepayvariousobligationsonthepropertyanddistributedaccordingtolienposition.LienseniorityisaparticularlycontroversialaspectofR-PACE,asithassparkedconcernsthatR-PACEdowngradesthesecurityofthemortgage,defiestraditionallendingpractices,andmayeventuallyleadtoforeclosureand/orhomelossfortheborrower.

R-PACE transactions typically rely on unique underwriting practices—another key feature of R-PACE.Whereastraditionallendingisbasedonability-to-repay(ATR)criteriasuchasaborrower’scredithistory,creditscore,and/ordebt-to-incomeratio,R-PACEfinancinghastypicallyexaminedthefinancialhealthof

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thepropertyandtheowner’sequitytodetermineeligibilityforanassessment.Inabreakfromthispattern,California’s passage of AB 1284 (discussed in further detail below) in 2017 introduced enhancedunderwritingstandardsforR-PACEloansinthestate,includingincomeverificationpracticesandability-to-repaycriteria,thatbegantakingeffectin2018.

Theseuniqueattributes—lienseniorityandproperty-basedunderwriting—playaroleinminimizingcreditriskfor investorsandinenablingR-PACEprogramadministratorstoaccess lower-costcapitaltofinanceimprovements.Thiscantranslateintomoreattractivetermsandconditionsforborrowers,includinglowerinterest rates and longer tenors, than theymay otherwise be able to access (for instance, through anunsecuredhome improvement loanor credit cardpurchase).However, these features alsodiffer fromconventionalfinancingandunderwritingpractices,raisingredflagsforconsumerprotectionadvocatesandthehomemortgageandrealestatecommunities,whoseconcernsaredescribedlaterinthisdocument.

Key Decision Makers and State Energy Office Roles PACEinvolvesawidevarietyofstakeholdersanddecisionmakers.Statelegislatures,sometimeswithinputandanalysisfromstateandlocalagencies(suchasStateEnergyOffices,taxcollectionentities,andbondagencies),mustpassPACE-enablinglegislationthatpermitslocalgovernmentstosetupPACEassessmentdistricts.Locallawmakersmustalsopasslegislationtoestablishtheirownprogramsortoopt-intoexistingprograms. Programsmay be administered at the state or local level, by private or public entities, andtypicallyutilizenetworksoflocalcontractorstoinstallequipmentandcompleteapprovedprojects

Insomestates,theStateEnergyOfficeoranotherstateagency(suchasagreenbank)maybeinvolvedinoverseeingPACEprograms. EveninstateswheretheStateEnergyOfficemaynotbeassignedaformalrole, State Energy Officialsmay help inform its development and design in different ways, such as byadvisingandengagingpolicymakersandlegislatorsonenergymarketneedsandstakeholderprioritiesandconcerns(suchasconsumerprotections);leadingstakeholderworkinggroupsortaskforcestoidentifyandaddresspotentialchallengesandissuesandtosupportstrongerprogramdesign; identifyingpartnersorresourcestohelpadvanceorimproveprograms;collectingdatathatsupportsstategoals;and/orsharinginformationaboutR-PACEtothepublic.

The R-PACE Market Today: A Snapshot Three states—California, Florida, and Missouri—currently have active R-PACE programs. The largestmarket,byfar,isinCalifornia,hometodozensofprogramsinhundredsofcitiesandcountiesacrossthestate. Most of these programs are operated by private program administrators in partnership withindividuallocalgovernmentsorwithmultiplelocalitiesworkingthroughjointpowersauthorities,althoughsomejurisdictions(suchasPlacerandSonomaCounties)operatetheirownprogramsfully.

InresponsetogrowingconcernsthatR-PACEassessmentsmightputmortgagelendersatrisk,in2014,theCaliforniaAlternativeEnergyandAdvancedTransportationFinancingAuthority (CAEATFA) launchedthePACELossReserveProgramtomakemortgagelenderswholefordirectlossesasaresultofaPACElieninaforeclosureorforcedsale.Todate,theCaliforniaPACELossReserveProgramhasneverbeentapped.4California’sprograms,notablytheHEROProgramadministeredbyRenovateAmerica,areresponsibleforthevastmajorityofR-PACEloanvolumeinthecountry.5

Despite California’s dominance in R-PACE, some activity has also occurred in other states, includingMissouri(wherethreeresidentialprogramshavebeenestablished6)andFlorida(wherefiveprogramsoffer

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residentialfinancing7).Intwostates,MaineandVermont,havetherebeenprogramsofferingsubordinate-lienPACEassessments,althoughR-PACEloansarenotcurrentlyavailableineitherstate.b

The Evolution of R-PACE Consumer Protections and the Creation of a Regulatory Framework Over the past several years, PACE industry players have adopted and enacted a variety of consumerprotectionandmortgagelenderprotections—eitherindependentlyorasaresultofgovernmentexecutiveorlegislativeaction.GroupslikePACENation8andtheU.S.DepartmentofEnergy(DOE)9haveworkedwithPACE,mortgage,realestate,andconsumeradvocacystakeholderstocreatenational,voluntaryconsumerprotectionrecommendationsthathelpinformthedevelopmentofstateandlocalprograms.

SpecificallyinCalifornia–R-PACE’slargestmarket—R-PACEprogramprovidersandpolicymakersalikehavecontributedtotheexistenceofamulti-facetedconsumerandmortgagelenderprotectionframework.ThemajorR-PACEprogramadministrators–RenovateAmerica,RenewFinancial,andYgrene–haveproactivelyadopted Know-Before-You-Owe disclosures, live confirmation of terms, enhanced senior care, right ofcancellation,andotherprotocols.ManyCaliforniaprogramsareenrolledintheCAEATFAPACELossReserveProgramtoprotectmortgagelendersfromfinanciallossesattributabletoR-PACEobligations.Additionally,throughasuccessionoflawsandamendments,CalifornialegislatorshaverespondedtovariousstakeholderconcernsbycodifyingR-PACEconsumerprotectionpracticesandenforcement intothestatecode.ThevariousmeasuresrecentlyenactedinCaliforniatoenhanceR-PACEconsumerprotectionsinclude:

• AssemblyBill (AB)2693,enactedSeptember2016,prohibitsparticipation inaR-PACEprogram if itwouldresultinthetotalamountofanyannualpropertytaxesandassessmentsexceedingfivepercentoftheproperty’smarketvalue;providesforathree-daywindowtocancelthecontractualassessmentwithoutpenalty; requiresdisclosuresregardingproductsandcosts, financialcosts (brokendownbyapplicationfees,prepaidinterest,othercosts,totalamountfinanced,annualpercentagerate,simpleinterestrate,totalannualprincipal,interest,andadminstrativefees;totalamountpaidoverthelifeofthefinancing;othercostssuchasappraisalfees,bondrelatedcosts,otheradministrativefees,creditreporting fees, lien recording fees),monthlymortgagepayments,and late fees;andbarsprogramsfrommakinganyrepresentationsaboutwhether/howmuchthepropertyvaluewillincreasebecauseof the PACE project, unless these representations are based on an industry-accepted real estateappraisalmethodology.10

• AB1284,enactedOctober2017,requiresspecifiedcriteriabemetbeforeaprogramapprovesR-PACEfinancing (thatallproperty taxesontheapplicablepropertybecurrent, that thepropertynothave

bMaine’sPACE-enablingstatute(Title35A,Chapter99)dictatesthat“PACEassessmentsdonotconstituteatax”and“aPACEmortgageisnotentitledtoanyspecialorseniorpriority”overaprimaryhomemortgage.Additionally,thelawrequiresthatinaforcedsaleorforeclosure,“anydeficiencywithrespecttoamountspreviouslysecuredbyaPACEmortgagemust be satisfied from the reserve fund” establishedby the law in order to offset past-duebalances.bSimilarly,Vermont’sstatute(24V.S.A.§3255)requiresthatPACEassessmentsbe“subordinatetoall liensonthepropertyinexistenceatthetimethelienfortheassessmentisfiledonthelandrecords,shallbesubordinatetoafirstmortgageonthepropertyrecordedaftersuchfiling,andshallbesuperiortoanyotherlienonthepropertyrecordedaftersuchfiling.”Incompliancewiththeselaws,thestatewidePACEadministratorineachstate,EfficiencyMaineandEfficiency Vermont, launched subordinate-lien PACE programs accompanied by loss reserves to protect againstdefaults.Nearly200municipalitiesoptedintotheEfficiencyMaineprogrambandover40municipalitiesjoinedtheEfficiencyVermontprogram;however,bothprogramshavebeentemporarilysuspendedandnolongeracceptnewapplications.TheEfficiencyVermontwebsitenotesthatthis isduetothe“favorable loantermsandflexibility[of]HeatSaverLoans,”whichareofferedinpartnershipwithlocalcreditunions.b

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specifieddebtrecorded,thatthepropertyownerbecurrentonspecifieddebtandtohavenotbeenapartytoabankruptcyproceedingwithinaspecifiedtime,thatthefinancingoftheassessment,aswellasthetotalvalueofalldebtontheproperty,notexceedaspecifiedamount,andthatthetermsoftheassessmentcontractnotexceedcertainlimitations);requirestheprogramtomakea“reasonablegoodfaith determination” of ability-to-repay; requires program administrators to be licensed by theDepartmentofBusinessOversightandcomplywithsimilarreporting,disclosure,andrepresentationrequirementsastraditionalfinancelendersandbrokers;promotesenhancedoversightofcontractorsthroughminimumbackgroundchecks,complianceandperformancereviews,andtrainingprograms;requires program administrators to share data relevant to evaluating their R-PACE programs; andrequiresprogramstouseareal-timeregistryordatabasesystemfortrackingPACEassessments.11

• SenateBill(SB)242,enactedOctober2017,requiresspecificdocumentsandoralconfirmationstobeexchangedbetweenR-PACEprogramsandprospectiveborrowers(forinstance,regardingkeytermsoftheassessment, totalestimatedcosts, that thefinancingsubjects thepropertytoa lien, thatutilitysavingsarenotguaranteed,thattheborrowerhasathree-dayrighttocancel,andothers),includingaccommodations for non-English speakers; prohibits any representations regarding the taxdeductibility of an assessment contract unless it is consistentwith state and federal law; prohibitsprogramsfromwaivingordeferringthefirstpayment,fromworkingwithcontractorswhoareinpoorstandingorunlicensed,orfromprovidinganycashpaymentstoacontractorexceedingthecostoftheproject;prohibitscontractorsfromchargingadifferentpriceforaR-PACE-financedprojectthantheywouldifthepropertyownerpaidincash;andrequiresreportingbyPACEprograms.12

History of Federal Interventions in R-PACE Although PACE as a financing option is overseen and implemented at the state or local level, federalagenciesandregulationshaveaffectedthemarket.Inparticular,concernsfromthebankingindustryandfromfederalmortgageregulatorshavehinderedwidespreadadoptionofR-PACEacrossthecountry,whichaccountsfortheextremelyconcentratedmarketinCalifornia,whosestateandlocallawmakersdeterminedtomoveforwardonR-PACEoriginationsdespitetheopposition.

The following timeline (Table 1) highlights key intervention points and writtenmaterials from variousfederalagencies,includingtheFederalHousingFinanceAgency(FHFA),whichoverseesthegovernment-sponsoredenterprises(GSEs)theFederalNationalMortgageAssociation(FannieMae)andFederalHomeLoanMortgageCorporation(FreddieMac);theFederalHousingAdministration(FHA),anofficewithintheU.S.DepartmentofHousingandUrbanDevelopment(HUD);theU.S.DepartmentofVeteransAffairs(VA);andtheU.S.DepartmentofEnergy(DOE),aswellasresponsesandactionsfromvariousstates.

Inadditiontothefederalactionslistedbelow,anumberofpendinglegislativeissuesmayfurtheraffectR-PACEregulationatthefederallevel.InApril2017,inresponsetobankingindustryandconsumerprotectionconcerns, theProtectingAmericans fromCredit EntanglementsActwasproposed in theU.S.HouseofRepresentativesandtheU.S.SenatewiththegoalofregulatingR-PACEundertheprovisionsoftheTruthinLendingAct(TILA),alawwhichPACEsupportersclaimisincompatiblewithR-PACEandwouldjeopardizethemarket.TILAisdiscussedinfurtherdetailinthefollowingsection.

In November 2017, the U.S. Senate Committee on Banking, Housing, and Urban Affairs released theEconomicGrowth,RegulatoryRelief,andConsumerProtectionAct(S.2155)whichwouldamendTILAbydirectingtheConsumerFinancialProtectionBureau(CFPB)toengageinrulemakingtailoredtotheuniquenatureofPACE.13

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Table 1: Timeline of Federal Involvement in R-PACE Date Action

May2010 DOEreleases“GuidelinesforPilotPACEFinancePrograms”highlightingbestpracticeguidelinesforconsiderationandvoluntaryadoptionandadaptationbyR-PACEprograms.

July2010 FHFAreleases“StatementonCertainEnergyRetrofitLoanPrograms,”expressingitsoppositiontosenior-lienPACE,notingthatitrunscontrarytotheFannieMae-FreddieMacUniformSecurityInstrument,anddirectingtheGSEstodrasticallytightentheiroriginationandunderwritingprocessestoprotecttheir“safeandsoundoperations.”ThisactioncatalyzedanumberoflegalcomplaintsandlawsuitsfiledagainstFHFAforfailingtoconductaformalrulemakingbeforeitsdecision,notablyfromstategovernmentsandlocalitiesinCalifornia,Florida,andNewYork.

November2010 FHFAissueslettertoEfficiencyMaineexpressingsupportforthesubordinate-lienstatusofloansmadebytheMainePACEprogram.

March2013 TheU.S.CourtofAppealsfortheNinthCircuitfilesanopinionconcludingthat“FHFA’sdecisiontoceasepurchasingmortgagesonPACE-encumberedpropertiesisalawfulexerciseofitsstatutoryauthorityasaconservatorofthe[GSEs]”anddismissingakeycaseagainstFHFA.

March2014 InresponsetoFHFAconcerns,theCaliforniaAlternativeEnergyandAdvanceTransportationAuthoritylaunchesthePACELossReserveProgramtocoverfirstmortgagelenderlossesincurredduetotheexistenceofaPACElienonapropertyduringforeclosureorsale.Todate,CAEATFAhasnotreceivedanyclaimsonthelossreserve.

August2015 FHAheadEdGoldingannouncestheagency’sintenttoreleaseguidelinesfortheuseofSingleFamilyFHAfinancingforpropertieswithPACEliens.

July2016 TheObamaWhiteHouseannouncesthe“CleanEnergySavingsforAll”initiative,citingnewguidancefromFHAandVAontheabilityofhomeswithPACEassessmentstousetheirmortgageproducts.FHFAcontinuestoopposesenior-lienR-PACE.FHAproductsareestimatedtorepresentapproximately18%ofoverallmortgages,including21.9%ofmortgageoriginationsatpurchaseand13.1%atrefinance,openingasignificantmarketopportunityatthetime.

November2016 Followinganextensivestakeholderengagementandpubliccommentprocess,DOEfinalizesanupdatetoits2010guidelinesbyreleasingBestPracticeGuidelinesforResidentialPACEFinancingProgramsandannouncingtechnicalassistanceandpeerexchangeopportunitiesforstatesonR-PACE.

December2017 HUDannouncesthatR-PACEputstaxpayersatriskbyplacingunduestressontheMutualMortgageInsuranceFund.FHAissuesMortgageeLetter2017-18revisingitsJuly2016policyandendingitsshort-livedpracticeofprovidingFHA-insuredmortgagestohomeswithPACEliens.

Consumer Protections, Mortgage Banking Concerns, and PACE Industry Responses

Truth in Lending Act A cross-sectionof advocates from the consumerprotection, banking, and real estate communities hasraisedconcernsaboutthepotentialfinancialrisksR-PACEposestoborrowersandmortgagelenders.SomehavecoalescedaroundtherecommendationthatR-PACEbegovernedbythefederalTruthinLendingAct(TILA),whichisusedtoregulateconsumercreditandmortgageloans.Keyprovisionsofthislawinclude:ability-to-repayrequirements;three-dayadvancereviewofdocumentswiththerightofrescission;rulestoavoidconflictsofinterest;extraprotectionsforhigh-costloans;andbansonforcedarbitrationclauses.14

Asspecialassessmentsthatoperateatthediscretionofgovernment,R-PACEobligationsarenotsubjecttothesamerequirementsasthoseimposedontraditionalformsofconsumerandmortgagecredit,norisR-PACEdesignedtofitwithinconfinessuchasthoseposedbyTILA.ThisincompatibilitystemsfromthefactthatstatestatutesdefinePACEobligationsastaxassessments,discretefromconsumercredittransactionsgovernedbyTILA,adistinctioncorroboratedbothbytheCFPBandafederalcourtrulinginJuly2017.15

PACEindustryplayerslargelyagreethatconsumerprotectionsanddisclosuresarecritical,andsupportedthe inclusion of ability-to-repay, strengthened disclosure practices, contractor oversight, and other

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provisions intheseriesofPACElawsenacted in2017 inCalifornia. Indeed,manyhavealsoexpressedawillingnesstoworkwithlawmakersandtheCFPBtocreatefederalregulationscustomizedtoR-PACE.

However,theyarguethatsubjectingR-PACEtoTILAdirectlywouldrenderprogramsinoperableforstateand local governmentsby introducingunnecessary andunsuitable complexities to the financing. TILA’stechnical requirements specifyhowcreditors interactwithborrowers, the frequencywithwhichbillingoccurs,howandwhenpaymentscanbereceivedandcredited,howloanservicershandlelatefeesanddelinquencycharges,andmanyotherpracticescommontoconsumercreditandmortgagelending.Stateand local tax lawsalreadydictatesuchprocesses forspecialassessments,so itcouldrequiresignificantlegislativeandoperationalchangesforR-PACEtocomplywithTILAaswritten.

PACE supporters also contend that TILA would not go far enough to inform borrowers of the uniquefinancialobligationsand repayment structuresassociatedwithR-PACEassessments.For instance,TILA-compliantdisclosureswouldnotadequatelycommunicatetoaprospectiveborrowerthetaxassessmentstructureofthefinancingandthepotentialplacementofa lienonthehome.R-PACEstakeholdersandlegislatorsinCaliforniahavedevelopedtailoredpracticesthatcommunicatenotonlytheelementsthatarecommon among R-PACE and other types of loan products (elements such as interest rate and feeschedules)butalsothosethatareuniquetoR-PACE,suchasdisclosuresregardingthepotentialpenaltiesassociatedwithdelinquentpayments,and thepossibility that theborrowerwillbe required topay thebalanceoftheR-PACEobligationasaconditionofahomesaleorrefinance.

Potential Impacts on Low-Income and Vulnerable Borrowers ConsumeradvocateshaveexpressedtheirconcernswiththeimpactsthatR-PACEmayhavespecificallyonborrowerswithlimitedfinancialmeansorwhodonotfullyunderstandthefinancialobligation.Theycitethepotentialfordeceptive,high-pressure,orpredatorysalestacticsbycontractors;theuseofautomatedverificationandelectronicapplication,contractreview,andsignaturepractices(afactorwhichacceleratesapplicationandapprovaltime,butwhichmaydisadvantageborrowerswhoarenotcomputer-literate);thewiderangeofprojects(includingnon-energy-savingornon-cost-savingmeasures)whichR-PACEprogramsareauthorizedtofinance;andinstancesoflow-incomehomeownerstakingoutR-PACEassessmentsevenwhentheyareeligibleforlow-orno-costweatherizationservices.16

Theimpactofthesepractices,notestheNationalConsumerLawCenter(NCLC),isthathomeownersmaybeatriskofforeclosure,strippedofequityintheirhome,surprisedwhentheyexperienceproblemswithrefinancingorselling,andoverwhelmedbyhightaxbills,aproblemexacerbatedifthemeasuresinstalledproduceminimalornoenergycostsavingsfortheborrower.17NCLChasnotedthathomeownersmaynotrecognizemisrepresentationsregardingthecostorpaybackofmeasuresimmediatelybecauseofthe“lagtimethatittakesforPACEfinancingtoappearontheirtaxbillsorinescrowedmortgagepayments.”18

AlongwiththeNationalHousingLawProject(NHLP),NCLChasencouragedstrongconsumerprotectionregulation and implementation from California’s Department of Business Oversight (DBO), the agencynamedbyAB1284tolicensePACEprogramadministratorsandregulatethePACEindustry.Theysuggestseveralstrategiestoensureconsumerprotection,suchasrequiringthatability-to-repayunderwritingoccurbeforetheconsummationoftheR-PACEobligation(adistinctionnotmadeinAB1284),removingperverseincentivesforunderwriterstoqualifyborrowerswhodonotmeetability-to-repaycriteria,and/orholdingPACE administrators responsible for shortfalls between the R-PACE obligation and the qualifying loanamount calculated in the ability-to-repay analysis. These groups also suggest measures to verify andintegrateincomeconsiderationsinability-to-repayanalyses, identifythepotentialneedforappraisalsindetermining the size of a R-PACE obligation, and limit contractors’ involvement in the PACE loanunderwritingandoriginationprocess,amongotherrecommendations.19

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Ina2017study fundedbyPACENation,SurdnaFoundation,andRenewFinancial, theEnergyProgramsConsortium(EPC)foundthatlow-incomefamiliesarelesslikelytoparticipateinPACE,andtakeoutslightlysmallerprincipalamounts,thanhigherincomefamilies,andthatthereislittlestatisticalevidenceofPACEcontractorssystematicallytargetinglow-incomeareas.

However,theEPCstudydidfindevidenceofalimitedbutpotentiallyproblematictrend:namely,individualhouseholdswithmultipleassessments.Ofthe25,000CaliforniahouseholdsenrolledinR-PACEprogramsinthefirsthalfof2016examinedbyEPC,1,766hadmorethanonePACEassessment,ofwhich217hadmultiple PACE assessments from multiple providers.c Low-income households represented adisproportionatelylargepercentageofmulti-assessmentandmulti-providerhouseholds,posingapotentialconcernbecause“theprincipalamountscombinedcouldexceedPACE’sdebt-to-homevalueanddebt-to-equityrequirements,”andbecausethesefiguresmaysuggestthat“contractorsareusing[theirrelationshipwithmultiplePACEproviders]tocircumventmaximumassessmentrequirements.”20

ThestateofCaliforniahastakenstepstocombatunscrupulouscontractorbehaviorandtomanagemultipleassessments.AB1284requiresR-PACEproviderstoensurethatcontractorsmeetminimumbackgroundchecks and maintain good standing with the state license board, and to offer training programs tocontractors.ProgramadministratorsmustverifyanyrecordedPACEassessmentontheproperty,andtoaskthepropertyownerintheirapplicationwhetherthereareanyotherexistingPACEassessmentsontheproperty, recorded or unrecorded. In addition, under the confirmation calls required by SB 242, thehomeownerwillbeaskedabouttheexistenceofanyotherPACEassessmentsontheproperty.ThelawalsoauthorizesDBOtorequirethedevelopmentanduseofareal-timeregistryforPACEassessmentstodealwiththeissueofmultipleassessmentsonthesamepropertybydifferentproviders.

Mortgage and Real Estate Industry Impacts Mortgageindustryconcernsrelatetotherisksenior-lienR-PACEposestothefirstmortgageonahome,whose collateral position is downgraded once an assessment is recorded. According to theMortgageBankersAssociation,R-PACE’sclassificationasataxassessmentenablesittocircumventtraditionalfederalconsumerprotectionrequirements,puttingborrowers,mortgagelenders,andguarantors(andtaxpayer-backedguaranteeprogramssuchasthetheVAloanguaranteeprogram)atincreasedrisk.Therealestatecommunityhas raisedsimilar concernswithR-PACE,and inadditionhascited thepotential forR-PACEassessmentstofrustrateorslowhomesalesduetolenderdiscomfort, lackofconsumerunderstanding,andinconsistentprogramframeworksbetweendifferentjurisdictions.21

ThoughR-PACEisstillayoungindustry,marketdatasuggestthatR-PACEposeslowrisktomortgages:initsFebruary2018analysis,creditratingagencyDBRSconcludedthatR-PACEdelinquencyratesarelowerthanpropertytaxdelinquenciesgenerally.22Similarly,a2016studyforRenovateAmericapublishedintheJournalofStructuredFinancefoundthatR-PACEhasanetpositiveimpactontheresalevalueofthehome.23

The tableon the followingpage (Table2)highlights individual concerns raisedbydifferent stakeholdergroups, details potential remedies suggestedby these groups, and compares themwith PACE industrypractices and counterpoints.While this table is not comprehensive, itmayoffer insights regarding thepotential hurdles that R-PACE programs would need to clear in order to succeed, along with marketresponsestodate.

cOfthe1,766households,over70percentwereinareaswithanareamedianincomegreaterthan80%ofthestatemedian.Thesehouseholdstookonsignificantlymoredebtthantheaverage:whilethemeanprincipalamountforalllow-incomehouseholdsparticipatinginthesamplewas$24,120,low-incomemulti-assessment/single-providerhouseholdstookoutanaverageof$45,669andlow-incomemulti-assessment/multi-providerhouseholdshadanaverageprincipalof$59,993.

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Table 2: Summary of Key Consumer Protection and Mortgage Industry Concerns with R-PACE Concern SuggestedRemedy RelatedIndustryPracticesorCounterpointsHomeownermaybeunabletorepayloan,triggeringsevereconsequencessuchastaxforeclosureandeviction

• Requireability-to-repayinunderwriting• Requireaudit,prioritizemeasureswithROI• TrackR-PACEtransactionsinreal-time,toavoidexceedingprogramorstatutethresholdsorborrower’sabilitytorepay

• AB1284*requiresallpropertytaxesbecurrentandfreeofspecifictypesofdebt;thatthehomeownerbecurrentonallmortgagedebtandnothavebeenpartytoabankruptyproceedingwithin7years;thattheassessment,andtotalvalueofalldebtontheproperty,notexceedcertainamountsbasedonhomevalue

• AB1284**willrequireprogramstomake“reasonablegoodfaithdetermination”ofabilitytorepay• AB1284**willrequireprogramstoestablishareal-timeregistryordatabasetotrackPACEassessments

Homeownersmaynotunderstandtermsandconditionsoffinancingorotheroptionsavailabletothem,potentiallytakingonunnecessarydebt

• Disclosefullfinancingcostsbeforeconsummationofthetransaction

• Providefinancialcounselingforvulnerableborrowers(suchastheelderly)

• Screenforandnotifyhomeownerseligibleforlow-/no-costoptions(weatherization)

• Educateprospectiveborrowersonalternativehomeequityproductsandenergyefficiencyfinancingproducts

• ProgramsuseKnow-Before-You-OwedisclosuremodeledafterTILAandrequiredbyAB2693**• Programsuserecorded,liveconfirmationoftermscallswithenhancedprotections(suchasopen-endedquestions)forelderlyapplicants

• SB242*requiresoralconfirmationthatthehomeownerhasacopyofdocumentsandformsrelatedtotheR-PACEcontract,andofkeyterms

• R-PACEmaybeanimportantoptionforhomeownersinneedofemergencyequipmentreplacement,whoseonlyotheroptionmaybehigh-interestcreditcarddebt

• Educationofborrowersonalternativegrantandfinancingoptionsistheresponsibilityofthoseproviders,suchascommunityactionagenciesandlendersofferingrelevantproducts

Contractorabusesmayoccur:predatoryand/ordeceptivesalestactics,ormisrepresentationofenergysavings,contractterms,repaymentterms,andprogramstructureandfunding

• Adoptrulesdiscouraging“upselling”ofproductsandequipmentnotrecommendedbyanenergyaudit

• Bandeceptivesalestactics• Adoptlicensing/insurancerequirements• ConductQAandQCtoensureappropriateequipmentandinstallation

• Programsusepre-approved,registered,andlicensed/insuredcontractorsandofferfreeonlinetraining• AB2693*prohibitscontractorsfromstatingwhether/howmuchpropertyvaluewillincreaseunlessusingindustry-acceptedappraisalmethods

• SB242*prohibitsprogram,contractor,orother3rdpartyfrommisrepresentingtaxdeductibilityofproject• AB1284*requiresenhancedprogramoversightofPACEsolicitorsandsolicitoragents(contractors)• AB1284***willholdR-PACEprogramsaccountableforviolationsandmisrepresentationsinthesamewayasafinancelenderorbroker

Injuredhomeownerslackclearremediesorrecourseoptions

• Protecthomeownersfromlossduetocontractorabuseorpoorworkmanship

• PACENationConsumerProtectionPoliciesrecommendsR-PACEadministratorsproviderecourseoptionsforhomeownersandsetprocedurestoreceive,manage,track,andresolvecomplaintsandinjuries

HomeownersmayfacedifficultyrefinancingorsellingduetoFHFAopposition,mortgageediscomfort,orlackofawareness

• Priortoorigination,disclosepotentialdifficultiesinselling/refinancingthehomewithoutfullypayingofftheobligation

• AB2693**requireshomeowneracknowledgementofstatement:“IunderstandthatImayberequiredtopayofftheremainingbalanceofthisobligationbythemortgagelenderrefinancingmyhome.IfIsellmyhome,thebuyerortheirmortgagelendermayrequiremetopayoffthebalanceofthisobligationasaconditionofsale.”

Senior-lienR-PACEexposesmortgagelendersandguarantorstoincreasedrisk

• SubordinateR-PACEobligationstoallprior-recordedmortgages

• SubjectR-PACEtotraditionalbankingrulessuchasTILA

• SubordinatingR-PACEobligationsorsubjectingR-PACEtoTILAwillrequirefundamentalrestructuringofprogramsandstatutes,placingR-PACEmarketinjeopardy

• Marketanalysesfind“minimal”increasedrisktounderlyingmortgageinahomewithaR-PACE24• CAPACELossReservemakesmortgagelenderswholeintheeventofanylossesattributabletoR-PACE• EscrowingR-PACEpaymentsandensuringthatR-PACEdebtwillnotaccelerateupondefaultprotectslendersandinsurersbylimitingtheamountoftheR-PACEobligationthatispaidbeforethemortgage

Lackofstandardizeddisclosures/programsdeepenuncertaintyforlenders,realtors,appraisers,titlecompanies,buyers

• Imposeregulationsatthefederallevel,toavoidpatchworkofprogramrulesandofferingsbetweendifferentjurisdictions

• PACEsupportershaveshownopennesstofederalrulemakingthatfactorstheuniquefeaturesofR-PACE.• StatewideR-PACEprograms(similartoCTandCOC-PACEprograms)canreduceinconsistencies/confusion• BestpracticesharingthroughPACENation,DOE,theNationalConferenceofStateLegislatures,NASEO,andotherstakeholdergroupsmaypromoteprogramconsistency

*Provisioniscurrentlyineffect**ProvisionwilltakeeffectbeginningApril2018***ProvisionwilltakeeffectbeginningJanuary2019

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Key Takeaways and Considerations ForanystateorlocalityexploringR-PACE,thedecisiontopursueaprogramshouldbeproactive,basedonsoundmarketdata,analysis,andstakeholder input,andcognizantof thesignificant time,expense,andmulti-agencycoordinationthatmaybeneeded.ThefollowingtakeawaysmayassistStateEnergyOfficialsinexaminingtheadvantagesanddisadvantagesofR-PACE,determiningwhetheritisaviableandvaluablefinancingoptionintheircommunities,andassemblingrelevantstakeholderstosupportaprogramdesignthatiscustomizedandresponsivetoborrowers’andmarketneeds.1. Determine whether (and how) R-PACE meets low- and moderate-income households’

energy upgrade needs, and design policy, regulation, and consumer protections accordingly.Forhomeownerswhohavelimitedoptionsbutareinneedofcost-effectiveefficiencyimprovementstoreducehighenergybills,ortoreplaceequipment,R-PACEmayofferoneoption(inadditiontodirectassistancethathouseholdsmayqualifyfor),iftheyhavesufficientincomeandequityintheirhome.While low-andno-costweatherizationprogramsacross the countryhavebeencrucial inprovidinghomeenergyimprovementsandcomfortforeligiblelow-incomefamilies,thereisalargeportionoftheU.S.marketthatdoesnothaveaccesstotheseservices,eitherduetoinsufficientprogramfundingorincomelevelthatmakehouseholdsineligibleforweatherizationassistance.

To illustrate, DOE estimates that the U.S.Weatherization Assistance Program provides services to35,000homesannually25;yet, thereareapproximately20to30millionhouseholdseligible for low-incomeweatherization services nationwide.26 Similarly, theU.S. Department of Health andHumanServicesestimatesthatoneinfivehouseholdseligiblefortheLow-IncomeHeatingEnergyAssistanceProgram(LIHEAP)receivesbenefits.27

Whilestate-andlocally-fundedgrantandweatherizationprogramsmayhelpaddressaportionoftheremaininghomes,theseservicesaresimplynotprevalentenoughorsufficientlyfundedtomeetthesignificant demand; nor do moderate-income households whose earnings exceed weatherizationprogramthresholdshaveaccesstotheseservices.

Energyefficiencyfinancingofferedbystateandlocalgovernmentsinpartnershipwithprivatefinancialinstitutions and utilities can help to shrink this gap.Many State EnergyOffices operate or supportprograms that provide direct loans to homeowners for energy efficiency and renewable energyimprovementsatbelow-market rates.28Additionally,on-bill financing,on-bill repayment, andotherloan programs offered by State Energy Offices, utilities, and/or third-party administrators provideadditionallow-interestoptions.

Yet,excludingR-PACE,subscriptionlevelsinhomeenergyupgradeprogramsislow.AccordingtodatacompiledbyLawrenceBerkeleyNationalLaboratory,in2014non-PACEprogramsrepresentedjustoverhalfofresidentialenergyefficiencyfinancingmarketactivity($289millionof$537million),withR-PACEprogramsservingtheremainderofthemarketthatyear($248million).29

Contractors can also help market a wide range of privately-offered financing options, includingunsecuredconsumercreditproductsthroughmanufacturersorretailers.Whiletheseproductsmayhavelow-interestoffersforthefirstseveralmonthsoftheloan,ratesmayincreasedramaticallyatthecloseofthepromotionaloffer.

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Additionally, low-andmoderate-incomeborrowers’access toprivately-offeredhome improvementfinancingmaybelimitediftheirdebt-to-incomeratioorpersonalcreditscorefalloutsideofindustry-acceptedranges.Othercommerciallyavailableproducts,suchashomeequitylinesofcredit(HELOCs)andenergy-efficientmortgages,maybeavailablebutgenerallyhaveatime-consumingapplicationorapprovalprocess,potentiallymakingthemill-suitedforemergencyequipmentreplacementsituationsorotherurgentprojectneeds.

Thisdynamicunderscorestheneednotonlyforgreaterfundingforlow-andno-costweatherizationassistanceprogramsandservicesandhomeenergyefficiencygrants,butalsoforinnovativefinancingandpublic-privatepartnershipsthatdeliveroptionstohomeowners inneedofenergyupgrades.R-PACEmaybeone suchoption, alongwithunsecured financingproducts, lease financing structures(e.g.,solarleasewithenergyefficiency)andon-billutilityfinancingprograms.

As with any form of financing for homeowners, R-PACE requires robust consumer protections topreventabuseandoverfinancing. Suchprotectionsmay include requiredenergyauditsorusinganeligiblemeasureslist,requiringability-to-repayscreening(includingincomeverification,creditscoreand debt-to-income ratio criteria), educating citizens on alternative funding and financing options,strengtheningcontractoroversight,limitingeligibleimprovementstocost-effectiveenergyefficiencyand renewableenergymeasures, trackingand limitingmultipleassessments,providing forbearanceoptions for assessments in default, and/or various other measures identified in partnership withrelevantlocal,state,andnationalstakeholders.

RegardlessofthespecificformanddesignR-PACEassumes, itmayhelpsomeborrowers–evenlow-andmoderate-incomehomeowners—byavertingtheneedtofinanceprojectsusinghigh-interestratecreditcardsorotherunsecuredloanswithunfavorableandpunitive loanterms.WhilemuchofthediscoursearoundR-PACEhasfocusedonitsnegativeimpactsonvulnerableapplicants(suchaslow-incomeandelderlyborrowers),incertainscenarios,itcanofferapowerfultooltoprotecttheseveryconsumers fromhighenergyor financingcosts.For this reason it isworthseriousconsiderationbypolicymakerswhomayotherwisefeelcompelledtodismissthevalueofR-PACE.Aswithotherfinancialproducts,statesshouldconsiderdevelopingandimplementingaregulatoryframeworkandoversightmechanismsforR-PACEprogramsofferedbycommunitiesandindividualPACEproviders.

2. Compare R-PACE to other available or possible program options to determine whether it meets a market need.While R-PACE may be one potential solution, several states, municipalities, utilities, and privatefinancialinstitutionshaveimplementedotherproductsforresidentialenergyefficiencyfinancing.LikeR-PACE,someoftheseprogramsarenotcurrentlyavailableineverystateandjurisdiction;however,itisvaluableforstatepolicymakerstobeawareofthesemodels,astheymayofferacomplementoralternative to R-PACE depending onmarket needs and the availability of public and private sectorresourcestodedicatetospecializedenergylendingprograms.

Thematrixbelow(Table3)providesabriefdescriptionofthesevariousoptionsandcomparesgeneralcharacteristicsfromeachoftheseprogramstothoseofR-PACE.

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Table 3: Comparison of Key Characteristics of Residential Energy Efficiency Financing Options R-PACE On-BillLending Publicly-Supported

HomeEnergyLoansPrivateConsumerCreditProducts

Energy-EfficientMortgages(EEMs)

HomeEquityLineofCredit(HELOC)

MainProvider(s)

Specializedprogramadministrators;oftendesignatedbyalocalgovernment.

Utilitiesand/ordesignatedthird-partyadministrator.

State,local,orthird-partyadministratorand/orfinancialinstitutions.

Privatelendersworkingwithcontractors,whomarketproductstoclients.

Federalagencies(VAandFHA),FannieMae,andFreddieMacworkingwithqualifiedlenders.

Mortgagelenders.

GeneralProgramStructure

Partnershipwithlocalgovernmentstoplacevoluntarytaxassessmentonhomestofinanceenergy,water,andresilienceupgrades.

Useofborrower’sutilitybillasrepaymentvehicle;capitalmaybeprovidedbytheutilityitselforathird-party,nonutilitypartner.

Publicly-funded/subsidizedprogramsofferingspecialized,low-interestloansforhomeenergyefficiencyfinancing,sometimesinpartnershipwithlocalfinancialinstitutions.

Specializedproductsmaybe:privatelabel(store-branded)creditcardsorspecializeddirect-to-consumerleasesorloans,typicallywithpromotionaloffers.d

Programsthatenablehomebuyerstosecuremorefavorableratesorborrowmoreinordertobuyanenergy-efficienthomeorcoverthecostofimprovements.

Lineofcreditenablinghomeownerstoborroweragainstavailableequityintheirhomeforavarietyofpurposes(notspecifictoenergyimprovements).

Terms Averagebetween6-10%,maybeaslowas2.99%,overasmanyas30years.

Interestraterangesfrom0-8%.Typicalloantermsarebetween5-10years.

Interestraterangesfrom0-10%.Typicalloantermsbetween0-10years.

Deferredinterestavailable.Afterpromotionaloffer,ratesmayriseto15-20%.Termstendtobeshort(upto3years).

Rateiscomparabletomortgageinterestrate.15-and30-yearfixedrate,someadjustableratemortgagesareeligibleforEEMoffers.

Typicallytheprimerate(asofearly2018,4.50%)plusapremium.Termstypicallyrangefrom5-15years.

ApplicationReviewandApproval

Approvalmayoccurin-homeatpointofsale.

Loanapprovalprocessmaytake1-5businessdays.

Mayrequirepublicagencyreview/approval.Applicationandreviewmaybetime-consuming.

Approvalmayoccurin-homeatpointofsale.

Mayrequireenergyauditorhomeenergyscore.Applicationandreviewmaybetime-consuming.

HELOCstypicallyclose2-3weeksafterapplication.

StateorLocalGovernmentInvolvement

Requiresstateandlocalgovernmentadoption.Localgovernmentsmayplayoversightroleand/orissuebondstofundprograms.Otheractivitiesmayinvolveconveningstakeholders,informingprogramdesign,orsharinginformationaboutprograms.

Somestateshavepassedlegislationtoauthorizetheuseofpublicbenefitfundsforcapitalforon-billprograms,createpilots,orrequireutilitiestoofferprograms.Statesmayalsopartnerwithutilitiestoofferon-billprograms.

Statemayprovidecapitalforprojects(throughaloanfundorloanparticipationprogram),providecreditenhancement(throughaloanlossreserveorguarantee),orbuy-downtheinterestrateofloansofferedbypartnerbanks.

Statesandlocalitiesdonotgenerallyhavedirectinvolvementintheseprograms,butmayhelppromoteawarenessandadoptionoftheseproducts.

Statesandlocalitiesdonotgenerallyhavedirectinvolvementintheseprograms,butmayhelppromoteawarenessandadoptionofenergy-efficientmortgagesintheirjurisdictions.

StatesandlocalitiestypicallydonothavedirectinvolvementintheuseofHELOCs.

dExamplesanddescriptionsoftheseproductsareavailableathttps://www.egia.org/geosmart-program-descriptions/.

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Security Securedbylienonproperty.Missedpaymentsmayleadtoforeclosure.

Maybesecuredbyutility’sdisconnectiontermsandservices.Nonpaymentmayleadtoadditionalfeesand/orutilitydisconnection.

Nocollateralrequired.Nonpaymentmayleadtoadditionalfees,interestrateincreases,andreducedcreditscore.

Availableinsecuredorunsecuredforms.

Secured(aspartofmortgage)bymortgagelienonproperty.Missedpaymentsmayleadtoforeclosure.

Homeisusedascollateral.Missedpaymentsmayleadtoforeclosure.

GeographicAvailability

AvailableinstatesandlocalitieswithR-PACE-enablinglegislationandactiveprograms.

Availableinserviceterritoryofparticipatingutilities.

Availableinstatesandlocalitiesthathaveestablishedspecializedprograms.

Availablenationalwideviapartnercontractors.

Availablenationalwideviaapprovedlenders.

Availablenationwide.

TypicalEligibleMeasures

Energyefficiency,renewableenergy,waterefficiency,and/orresiliencyupgradeimprovements.

Energyefficiencyandrenewableenergyimprovements.Someprogramsmayrequireenergyauditsand/orbillneutrality(whereenergycostsavingsareequaltoorgreaterthanthecostofthefinancing).

Energyefficiencyandrenewableenergyimprovements.Someprogramsmayrequire]energyauditsand/orbillneutrality.

Variesbyproduct,butmaycoverenergyefficiencyandrenewableenergyupgradesaswellasother(non-energy)homeimprovementmeasures.

Energy-efficientpropertiesorenergy-saving,cost-effectivemeasures.Mayrequirehomeenergyratingtoverifythathomeisenergy-efficient.

Avarietyofexpenses(education,medicalbills,creditcarddebt,homeprojects,etc.),includinghomeenergyupgrades.

MajorFactorsConsideredinApplicantScreening/Underwriting

Loan-to-valueratio;mortgagepaymenthistory;bankruptcyhistory.Commencing2018inCalifornia:income-basedscreening,ability-to-repay.

Debt-to-incomeratio;mortgagepaymenthistory;creditscore;utilitybillpaymenthistory(potentiallyinplaceofcreditcheck).

Debt-to-incomeratio;mortgagepaymenthistory;creditscore.

Underwritingvariesbyproducttype,buttypicallyinvolvesacreditcheckand/orincomeverification.

Borrowerhasaccesstounderwritingflexibilities/”stretchratios”regardingloan-to-value,debt-to-income,andothercriteriaduetoenergyefficiencyofhome.

Loan-to-value;creditscore;debt-to-income;bankruptcy/foreclosurehistory.

Transferability Obligationisnotrequiredtoberepaidbeforesellinghomeandmaytransfertothenewowner,unlessnegotiatedasaconditionofsale.

Debtistiedtothemeterandmaytransfertothenewownerunlessnegotiatedasaconditionofsale.

Debtistiedtotheborroweranddoesnottransfertoahome’snewowner.

Debtistiedtotheborroweranddoesnottransfertoahome’snewowner.

Conventionalmortgageoutstandingbalancemustbepaidoffattimeofsale.

HELOCoutstandingbalancemustbepaidoffattimeofsale.

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3. Acknowledge the role of eligible measures and high-quality installations in protecting consumers.FinancialandlegalprotectionsarecriticaltoensuringapositiveexperienceforR-PACEborrowers;yet,withouttechnicalandprogrammaticmeasurestopromoteprojectpaybackandquality,theymaybeinsufficienttoachieveprogramsuccessandgrowth.Carefulconsiderationofaprogram’slistofeligiblemeasures;energyauditsandassessment requirements;contractor training,oversight,qualification,and certification; and/or samplingofprojectperformance forquality assuranceandquality controlpurposes shouldbe considered inR-PACEprogramdesign. Thesemay serve as apotential tool forborrowerprotectionsinadditiontothelegalandfinancialscreening,accesstorecoursemechanisms,andapplicanteducationmeasuresthatmanyprogramshavealreadyadopted.

Such measures can help ensure that projects result in real cost savings, steer contractors andhomeowners towardenergyefficientequipment (e.g.,ENERGYSTARproductsandappliances),andreduce the potential for improper installation. According to a study by the National Institute ofStandardsandTechnologyandtheAirConditioningContractorsofAmerica, installationdeficienciescan reduce theenergyefficiencyofheatpumpequipmentbyasmuchas30percent compared tomanufacturers’expectations.30Similarly,theefficiencyofwindows,insulationandairsealingmeaurescanalsobeaffectedbythequalityofinstallationpractices.Efficiencylossesofthissizeandscalecanbeacritical factor inwhetheraborroweraffordstheirpaymentsordefaults, so there is significantvalue intakingstepstoensurethatprojectsaredonecorrectlyandbyexperienced,knowledgeablecontractorsthathavereceivedrelevanttrainingandcertificationsfortheirareaoftradepractice.

4. Identify opportunities for economies of scale.

Tounlock thebenefits of PACE financing, theonus is typically on local governments todesign anddeliverprogramseffectively.Theevolvingregulatoryandmarketlandscape,aswellassomeoppositionatthefederallevel,maydissuadelocalpolicymakersfrompursuingR-PACE,especiallyinjurisdictionswithlimitedbandwidthorknow-how.Opportunitiestocoordinate,exchancebestpractices,shareR-PACE administrative or legal services across multiple municipalities, or –as some states haveestablishedinC-PACE—createstatewideprogramsmayhelpmaximizeeconomiesofscale,reducetheburdenonlocalities,andcreateamorestandardanduser-friendlymarketforborrowers,realestateprofessionals,andbankers.

5. Identify the most appropriate role(s) for the State Energy Office.StateEnergyOfficialsmaybewell-positionedtonavigatethecomplexlandscapeofR-PACE.Aspolicyplanners and advisors, many are experienced in convening diverse stakeholders, collecting andanalyzingmarketdata,andengaginglocalgovernments.AmajorityofStateEnergyOfficesacrossthecountry have operational experience running financing programs, and thus are familiar with thenetworkoffinancialinstitutions,programadministrators,andborrowersthatmaybeinvolvedinPACEfinancing.

StateEnergyOffice leadershipand involvement inR-PACEcanhelpcreatemoreeffectiveprogramswith stronger consumer protections by organizing various stakeholders for discussions of R-PACEprogram design characteristics and protectionsmeasures; engaging other state agencies and localgovernmentsonthebenefitsandpotentialchallengesassociatedwithR-PACE;engagingcontractorstoimprovequalityofinstallations;andeducatingthepublic,includingfinancialinstitutionsandtherealestate community, on how R-PACE works. As a number of states have already done with C-PACE

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programs31,StateEnergyOfficesmayalsobeinstrumentalinpromotingR-PACEprogramconsistencybysupportingthecreationofstatewideprogramsorvoluntarystandardsthatincreaseeconomiesofscaleandtheuseofsharedservicesamongparticipatingjurisdictions.

State Energy Office involvement does not mean indefinite commitment; rather, strategic supportthroughstakeholderconveningorinearlyprogramdesignphasesmayhelptobuildconfidenceinR-PACEprogramswithoutlong-termoversightoradministrationresponsibilities.WhileaStateEnergyOfficemaybehelpfulinadvancinganddesigningR-PACEinlinewithmarketneedsandpriorities,ultimateresponsibilityforoversight—andpotentialregulation—ofprogramsislikelytorest with regulatory bodies such as departments of financial or business oversight, comptroller’soffices, and/or consumer protection bureaus. In California’s case, for instance, the Department ofBusinessOversighthasbeenassignedregulatoryoversightoverPACEprogramadministrators.e

Conclusions R-PACE has already delivered billions of dollars for home energy efficiency, renewable energy, andresilience upgrade financing while creating jobs, stimulating local economies and demonstrating aninnovativepublic-privatepartnershipstructureforenablinghomeupgradesusingprivatesectorcapital.AsthemarketforR-PACEfinancingcontinuestogrow,stateandlocalgovernmentscanworkwithconsumeradvocates, PACE providers, and home improvement contractors to develop effective mechanisms toensureR-PACEdeliversbenefitstohomeownersandtomitigatethepotentialrisksitposestohomeownersandmortgagelenders,thepotentialforabusesbyprogramsandcontractors,andgenerallackoffamiliarity.

Forthisreason,thedesignandimplementationofR-PACEatthestateandlocal levelaremorelikelytosucceed iftheyarecustomized inrecognitionofstakeholderneeds,priorities,andconcerns.Statesandlocal governments may be able to utilize existing regulatory and contractor oversight mechanisms todevelopaframeworkforR-PACE,suchascontractorlicensingboards,financialregulatoryagencies,betterbusinessbureaus,andconsumerprotectiondepartments.

This issuebriefoffers insights forStateEnergyOfficialsandotherpolicymakers interested inexaminingwhetherR-PACEmaybeaviableandvaluableoptionforhomeenergyprojectfinancingintheirstatesandcommunities.OfthefewstatesthathaveimplementedR-PACEtodate,Californiahasnotonlyemergedasamarketleader,butalsoasabattlegroundwhereconsumeradvocates,financialinstitutions,andR-PACEproviders and supporters have grappled with important questions surrounding consumer protections,mortgageindustryinterests,andenergyandenvironmentalconcerns.WhileCalifornia’sexperienceinR-PACEoffersahelpfulstartingpoint,otherstatesandmunicipalitieswill likelyneedtoadaptCalifornia’smodel rather than replicate it exactly. State associations and nonprofit groups, such as the NationalConferenceofStateLegislatures(NCSL)andPACENation,canalsoprovidelegislativemodels,bestpracticesandprogramdesignguidancetoStates.

Ultimately, itwill requireextensivestakeholderengagementandthoughtonthepartofstateand localpolicymakers—aswellasstakeholdersonbothsidesoftheseissues—todevelopuniqueframeworksthatstriketheappropriatebalanceamongconsumerprotection,mortgageindustryinterests,programviability,andmarketgrowth.

eViewDBO’swebpageforPACEProgramAdministratorsathttp://www.dbo.ca.gov/Licensees/pace/Pace%20Program%20Administrators.asp.

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Endnotes 1PACENation,“MarketData,”http://pacenation.us/pace-market-data(accessedMarch2018).2Wolfe,Mark,CassandraLovejoy,AmyRadin,DonnaChen,andRachelConnor,AssessmentofLow-IncomeHomeownerParticipationinthePropertyAssessedCleanEnergy(PACE)PrograminCalifornia.EnergyProgramsConsortium,2017.3RenovateAmerica,“TulareCountyApprovesRenovateAmerica’sHEROPACEFinancing,”2017.4CaliforniaAlternativeEnergyandAdvancedTransportationFinancingAuthority,“PropertyAssessedCleanEnergyLossReserveProgram,”http://www.treasurer.ca.gov/caeatfa/pace/index.asp(accessedFebruary2018).5PACENation,“MarketData,”http://pacenation.us/pace-market-data(accessedDecember2017).6PACENation,“PACEinMissouri,”http://pacenation.us/pace-in-missouri(accessedJanuary2018).7PACENation,“PACEinFlorida,”http://pacenation.us/pace-in-florida(accessedJanuary2018).8PACEConsumerProtectionPolicies,Verion2.0(ResidentialPACEPrograms).PACENation,2017.9BestPracticeGuidelinesforResidentialPACEFinancingPrograms.U.S.DepartmentofEnergy,2016.10CaliforniaAssemblyBillNo.2693,2017.11CaliforniaAssemblyBillNo.1284,2017.12CaliforniaSenateBillNo.242,2017.13U.S.SenateBillNo.S.2155,2017.14“Resolution2017-2,UrgingtheAdoptionofStateLawsandRegulationstoProtectConsumersfromAbusesintheMarketingandTermsofResidentialPropertyAssessedCleanEnergy(PACE)LoansforEnergyEfficiencyUpgrades.”NationalConsumerLawCenter,2017.15“InReHeroLoanLitigation.”U.S.DistrictCount,C.D.,California,2017.16Rao,John,“ResidentialPropertyAssessedCleanEnergy(PACE)Loans:ThePerilsofEasyMoneyforCleanEnergyImprovements.”NationalConsumerLawCenter,2017.17Ibid.18Ibid.19Rao,JohnandA.Cohen,“CommentsoftheNationalConsumerLawCenter(onbehalfofitslow-incomeclients)andNationalHousingLawProjecttotheCaliforniaDepartmentofBusinessOversightRegardingProposedRulemakingImplementationofAB1284.”NationalConsumerLawCenterandNationalHousingLawProject,2018.20Wolfeetal.,AssessmentofLow-IncomeHomeownerParticipationinthePropertyAssessedCleanEnergy(PACE)PrograminCalifornia.EnergyProgramsConsortium,2017.21“JointSupportforPACELegislation,”AppraisalInstituteSign-OnLetter,2017.22Mezzanotte,Claire,ChuckWeilamannandLainGutierrez.ResidentialPACEDelinquencyTrends,DBRS,2018.23Goodman,LaurieS.andJunZhu.PACELoans:DoesSaleValueReflectImprovements?JournalofStructuredFinance,v.21no.4,2016.24Zu,Phoebe,StephanieK.Mah,andBrianSandler.ClearingtheAir:AddressingThreeMisconceptionsofPACE,Morningstar,2017.25U.S.DepartmentofEnergy,“WeatherizationAssistanceProgram,”https://energy.gov/eere/wipo/weatherization-assistance-program(accessedMarch2018).26Benefits.gov,“WeatherizationAssistanceProgramforLow-IncomePersons,”https://www.benefits.gov/benefits/benefit-details/580(accessedMarch2018).27OfficeofCommunityServices,“LIHEAPFrequentlyAskedQuestions,”https://www.acf.hhs.gov/ocs/resource/consumer-frquently-asked-questions(accessedMarch2018).28Fazeli,Sandy.“StateEnergyLoanFunds,”NASEO,2016.29Deason,Jeff,GregLeventis,CharlesA.Goldman,andJuanPabloCarvallo.EnergyEfficiencyProgramFinancing:Whereitcomesfrom,whereitgoes,andhowitgetsthere,LawrenceBerkeleyNationalLaboratory,2016.30AirConditioningContractorsofAmerica,“QualityStandards,”http://www.acca.org/standards/quality(accessedMarch2018).31Fazeli,Sandy.AcceleratingtheCommercialPACEarket:StatewideProgramsandStateEnergyOfficeParticipationinPropertyAssessedCleanEnergyFinancing,NASEO,2016.