Property Assessed Clean Energy (PACE)

R-PACE programs have helped thousands of homeowners, primarily in the state of California, finance solar and energy efficiency improvements. Unlike conventional loans, which are based on the borrower’s credit score, R-PACE financing takes the form of a special assessment and typically available to any homeowner who is current on property tax and mortgage payments. The R-PACE obligation is typically attached to the property and is legally able to transfer upon sale to the new homeowner. 

• Senior-lien vs. junior-lien: As special assessments, PACE obligations are typically secured by the property itself, are collected in the same manner as taxes, and take precedence over other debts on the property, such as mortgages. In a foreclosure, this senior status means that the delinquent portion of the PACE obligation is paid by the foreclosure sale proceeds before the mortgage is paid. While some mortgage lenders have raised concerns with subordinating their mortgage to a PACE assessment, studies have found that PACE can increase property values and increase owners’ ability to pay (see Goodman and Zhu’s 2016 report, “PACE Loans: Does Sale Value Reflect Improvements?” from the Journal for Structured Finance to learn more). To mitigate the perceived risks of senior-lien PACE, some states, such as Vermont, have opted to implement junior-lien PACE programs that make PACE assessments subordinate to the mortgage, thus providing the mortgage holder with priority status to be repaid in the event of default or foreclosure.

• Federal involvement in R-PACE: Because of its potential impacts on federally-backed mortgage products, R-PACE has drawn attention from multiple federal agencies and entities, including: the U.S. Department of Energy (DOE); the Federal Housing and Finance Administration (FHFA), an independent regulatory agency which oversees Fannie Mae, Freddie Mac, and the Federal Home Loan Bank System (the government-sponsored enterprises, or GSEs); the Federal Housing Agency FHA) within the U.S. Department of Housing and Urban Development (HUD); and the Department of Veterans Affairs (VA), which guarantees loans to eligible veterans and their families. Below are a timeline and documents relating various federal actions and developments on R-PACE.

  • May 2010: DOE releases “Guidelines for Pilot PACE Finance Programs” highlighting best practice guidelines for the residential market.

  • July 2010: FHFA releases “Statement on Certain Energy Retrofit Loan Programs,” expressing its opposition to senior-lien PACE, noting that senior-lien PACE runs contrary to the Fannie Mae-Freddie Mac Uniform Security Instrument, and directing the GSEs to drastically tighten their origination and underwriting processes to protect their “safe and sound operations.”

  • November 2010: FHFA issues letter to Efficiency Maine expressing support for the subordinate-lien status of loans made by the Maine PACE program.

  • March 2014: In response to FHFA concerns, the California Alternative Energy and Advance Transportation Authority launches the PACE Loss Reserve Program to cover first mortgage lender losses incurred due to the existence of a PACE lien on a property during foreclosure or sale. To date, CAEATFA has not received any claims on the loss reserve.

  • August 2015: FHA head Ed Golding announces intent to release guidelines for the use of Single Family FHA financing for properties with PACE liens. In response to this announcement, NASEO submitted a comment letter to HUD and received this response.

  • July 2016: White House announces the “Clean Energy Savings for All” initiative, citing new guidance from FHA and VA on the ability of homes with PACE assessments to use their mortgage products. Click here to view NASEO's summary memo of what this announcement means for state and local governments advancing R-PACE across the country.

  • November 2016: Following an extensive stakeholder engagement and public comment process in which NASEO participated (see here for comment letter), DOE finalizes an update to its 2010 guidelines by releasing Best Practice Guidelines for Residential PACE Financing Programs and announcing technical assistance and peer exchange opportunities for states on R-PACE, including a partnership with NASEO to establish a Taskforce for state officials to explore R-PACE further.

  • December 2017: HUD reverses earlier guidance, announcing that R-PACE puts taxpayers at risk by placing undue stress on the Mutual Mortgage Insurance Fund. FHA issues Mortgage Letter 2017-18 revising its July 2016 policy and ending is short-lived practice of providing FHA-insured mortgages to homes with PACE liens.

  • March 2018: NASEO releases a new Issue Brief, Residential Property Assessed Clean Energy (R-PACE): Key Considerations for State Officials. The Issue Brief provides an overview of the history or R-PACE, including the evolution of the market in California, discusses federal involvement in the program, and provides a set of recommended takeaways, lessons learned, and alternative residential financing options that State Energy Officials can explore to inform their approach to R-PACE.

  • May 2018: President Trump signs S. 2155, the Economic Growth, Regulatory Relief, and Consumer Protection Act, into law. The new law directs the Consumer Financial Protection Bureau (CFPB) to issue regulations around the Truth-in-Lending Act's (TILA's) ability-to-repay requirements to R-PACE and apply TILA's civil liability position for violations of those requirements, while "[accounting] for the unique nature of PACE financing."

  • March 2019: CFPB issues an Advance Notice of Proposed Rulemaking on Residential Property Assessed Clean Energy to seek comment on and inform their upcoming regulations on R-PACE, in order to "better understand the PACE financing market and the unique nature of PACE financing." 

• Consumer protections: Consumer protections are a vital component of effective and successful R-PACE programs. These protections may take several forms, including: setting stringent underwriting and eligibility criteria; following transparent disclosures and documentation procedures; registering, certifying, and/or training contractors; ensuring fair pricing; and promoting integrity in program and project marketing and communications, among others. Many groups, representing both PACE industry stakeholders and consumer advocates, have addressed consumer protections in R-PACE programs, including PACENation, DOE, and the National Consumer Law Center.

With programs active in 16 states and the District of Columbia, and authorizing legislation enacted in over 30 states, the C-PACE market is growing steadily. C-PACE has proven to be a flexible and effective tool for financing upgrades in multiples types of buildings, including office, retail, industrial, multifamily, mixed use, and agricultural facilities, and accounts for over $300 million in projects to date. The growth and success of C-PACE programs has primarily been led by local governments, with 2,000 municipalities creating C-PACE programs across the country. However, C-PACE market growth has faced challenges in some jurisdictions, potentially due to C-PACE’s novelty, its complexity, the lack of program standardization across jurisdictions, and the administrative and legal lifts required to get from program initiation to project completion.

There are multiple roles State Energy Offices can play in supporting and advancing C-PACE in their markets. NASEO’s 2016 report, Accelerating the Commercial PACE Market: Statewide Programs and State Energy Office Participation in PACE Financing, highlights strategies and examples from diverse C-PACE markets, including Texas, Michigan, Connecticut, Colorado, and California.

Key findings from this report include:

• Because C-PACE financing uses local government tax assessment infrastructure, the onus is typically on local governments to overcome the steep learning curves and high costs associated with launching C-PACE. This places a heavy burden on localities to design and deliver complex programs while undertaking the time-intensive partnerships, processes, and program structures that successful C-PACE programs require. These demands have deterred some localities and municipalities from participating in C-PACE, leaving millions of dollars of cost-effective projects without C-PACE as a financing option.

• There is an urgent need for C-PACE program support and market organization, which State Energy Offices and other state-level entities, such as green banks, are uniquely positioned to offer. State-level coordination can help overcome the patchwork of inconsistent program requirements, underwriting criteria, and rules that can emerge in states with multiple competing local and private programs.

• A more consistent statewide C-PACE program can put an end to confusion experienced by borrowers, investors, and contractors, who might be deterred by the complexity and inconsistency of C-PACE programs. Effective and informed state involvement can streamline C-PACE program costs, ease the administration and transaction burden for local governments, and offer a more user-friendly market for potential borrowers.

• Program approaches and examples from the Connecticut Green Bank, Lean and Green Michigan, NYSERDA and Energize New York, and the Texas State Energy Conservation Office offer insights into how State Energy Offices and other state-level program administrators can help realize market consistency and economies of scale.