PACE Financing QC Best Practices
The costs of solar panels and other energy efficiency technology has fallen and become more effective, but can still be costly. PACE financing has been created so that homeowners can pay for clean energy home improvements that can save them far more than the cost over time, and even help increase their home’s value when put up for sale.
All of this may sound good, but a dark side has emerged: because PACE financing is unregulated, homeowners may not be able to afford their PACE financing payments and fall prey to abuse or poorly underwritten loans. Regulations to protect homeowners and reduce defaults may come, but it is unclear where this falls on the current administration’s priority list. Thus, to reduce the risk of late payments and defaults, we recommend the following quality control (QC) best practices for PACE funders.
What Is PACE Financing?
The property-assessed clean energy (PACE) model is an innovative mechanism for financing energy efficiency and renewable energy improvements on private property. PACE programs allow local governments, state governments, or other inter-jurisdictional authorities, when authorized by state law, to fund the up-front cost of energy improvements on commercial and residential properties, which are paid back over 10-20 years by the property owners vs. making a large up-front cash investment. Nonpayment generally results in the same set of repercussions as the failure to pay any other portion of a property tax bill.
What Are PACE Financing Concerns?
The main concern about PACE is the affordability for homeowners, particularly for retirees and others living on a fixed income. PACE financing is structured as a tax assessment instead of a loan, and there aren’t the same CFPB-type “know before you owe” requirements when these loans are financed to protect homeowners from falling prey to abuse or simply getting in over their head.
As a result, homeowners may not be able to make their PACE payments and default on these loans, which would result in a lien placed on their home. PACE financing takes priority over other lien holders and both Fannie Mae and Freddie Mac have refused to purchase or underwrite loans for properties with existing PACE-based tax assessments.
PACE Financing QC Recommendations
To minimize the risk of PACE financing defaults, we recommend the following QC best practices for the clean energy industry based on over 20 years of experience in the mortgage industry:
- Pre-Fund QC: in lieu of government requirements, we ensure that PACE underwriters follow internal funding policies by auditing a percentage of these loans prior to their close (a proactive approach)
- Post Close QC: we audit PACE underwriting after close, assess adherence to internal policies and make recommendations based on findings (a reactive approach)
- Servicing QC: we audit how your PACE loans are serviced over time, which can also increase customer satisfaction
We recommend against both waiting for the CFPB to develop regulations and we recommend against conducting all QC internally – after all, who’s auditing your auditors? MetaSource offers pre-fund, post-close and servicing QC services to PACE funders to ensure compliance to keep up with the increasing processing demands of this growing market and to prevent defaults. Here’s an example of our work.