By Priscilla Sims Brown, President and CEO, Amalgamated Bank
With the launch of any new financial product—from home equity loans to digital currency—policy and regulation often lag behind a step. That’s the way innovation works. A new product may fill an important public need, but it may not fall under existing regulations and consumer protections. This is the case with Property Assessed Clean Energy (PACE) financing.
As America’s socially responsible bank—the first in the nation to become a public benefit corporation—Amalgamated Bank is committed to working toward a more equitable, sustainable economy, and the PACE program clearly aligns with our mission. We believe in the potential of PACE financing to provide both commercial property owners and homeowners with an affordable way to borrow money for clean energy and resilience projects.
At the same time, we see the need for greater consumer protection to ensure that this relatively new financing vehicle fulfills its promise. Working alongside consumer advocacy groups, we have identified ways in which Residential PACE (R-PACE) financing can better serve homeowners, through such measures as requiring ability-to-pay testing, conducting pre-project suitability assessments to determine which upgrades would be the most beneficial, and using state regulated originators to review and approve homeowner applications. We also urge lawmakers to join us in protecting consumers by adopting a PACE Bill of Rights, which is something Amalgamated is proposing as a national standard.
For brief background, the PACE program allows homeowners to make improvements to their properties, such as installing renewable energy or water-saving features, with no upfront costs. Instead, homeowners agree to a special property tax assessment that is paid over time (often up to 25 years) at a fixed interest rate. The typical project ranges in cost from $10,000 to $30,000. Residential PACE programs have been adopted by three states, California, Missouri and Florida, and Commercial PACE (C-PACE) legislation has been enacted in 35 states.
Unfortunately, in the states that have adopted R-PACE, the legislation is not consistent from state to state. A current issue with R-PACE loans in some areas is that homeowners are approved for the loan based solely on their home equity with no consideration of their ability to pay back the annual assessment. This has resulted in some homeowners falling behind on property taxes, putting their homes at risk. At Amalgamated, we believe that ability-to-pay testing is a critical step to address this problem.
Another built-in challenge is that R-PACE loans currently are offered through private contractors who solicit and enroll homeowners on the spot. This introduces a potential conflict of interest, as it gives contractors an incentive to promote larger, more expensive projects. At Amalgamated, we believe that a pre-project suitability assessment should be part of the R-PACE approval process, because it would help homeowners identify which projects — from replacing windows to installing a new HVAC system — would be most beneficial.
Having a contractor explain financing options is also problematic. We believe that homeowners would be better served by having a state regulated originator review their application. A financing professional would be able to explain the true cost of financing options, which may include non-PACE programs offered by their state or local utility.
Many people, however, fall in a financing gap. They may not qualify for low-income energy efficiency funding offered through a state program, but their credit scores may put other conventional financing (a mortgage refinance or a home equity loan) out of reach. For this group, an R-PACE loan could be the best option to help them reduce their energy costs and improve the safety and comfort of their home. It is important to recognize that R-PACE programs, unlike traditional bank financing, are not dependent on consumer credit ratings like FICO scores. Without a program like R-PACE, individuals with no credit or poor credit are often forced to pay for critical improvements to their home with high cost, short term financing like credit cards or hard money loans.
At Amalgamated, we believe that if the R-PACE program is administered duly and comes with a strong consumer Bill of Rights, a large segment of the population will no longer be left out but will have a way to make clean energy upgrades. That’s a goal worth working towards, because when it happens, we all benefit.