PACE home improvement loans: Borrowers beware!

In February, Consumer Action’s network affiliate Erika Toriz-Kurkjian, of the Los Angeles non-profit Haven Neighborhood Services, reached out to Consumer Action’s Audrey Perrott when she noticed an increase in consumer complaints regarding PACE loans and contractor fraud.

The PACE (Property Assessed Clean Energy) program is designed to help homeowners make energy-saving improvements to their homes without paying money upfront. Instead, the improvements are financed through PACE loans, which are paid through assessments placed on the consumer's property tax bill. It sounds like a dream come true for cash-strapped homeowners, but the dream has turned into a nightmare for many, since PACE loans have minimal underwriting guidelines and limited consumer protections.

Perrott pointed out that Haven’s PACE loan victims have all been Latino homeowners. None of the contractors completed the home improvement work that this population financed through the PACE program, and some of the homeowners now have foreclosures pending against them.

“PACE financing is often based on a borrower’s equity in their property and their mortgage and property tax payment history, not on their ability to repay the loan,” Perrott pointed out. “Consumers who cannot afford to repay PACE loans as lump sum payments through their tax bill stand to lose their homes.”

Surprisingly, there are no federal laws that regulate PACE loans. PACE loans are not covered by the Truth In Lending Act, Home Ownership and Equity Protection Act or the Fair Housing Act. Instead, the loans are regulated at the state level.

In California, homeowners lodged so many complaints about the unaffordability of PACE loans that lawmakers passed AB 1284 and AB 2063 to establish disclosure requirements and commonsense standards that require a PACE administrator to make a phone call to the consumer (before the loan is issued) to determine if they are able to comfortably handle the payments without defaulting.

Yet problems with PACE loans persist, leaving more consumers in danger of losing their homes. If you’re interested in pursuing a PACE loan, here’s what you should consider:

• Is the contractor who will perform the home improvements licensed?
• Do you have the ability to repay a large lump sum on your property tax bill?
• Do you understand that if you are unable to pay your full property tax bill (including the additional PACE amount) you may face foreclosure?
• Do you understand that if you have a reverse mortgage you may be at risk of losing your home if you fail to pay the property tax assessment associated with your PACE loan?
• Were you given copies of the home improvement contract and the financing contract before you were asked to sign them?
• Have you read the fine print in the loan disclosures?
• Do you understand the terms of the loan as explained by the contractor or sales agent?
• Do you know how much you will be required to pay on each property tax bill and for how long?
• Did a PACE administrator call you to reconfirm the terms with you? (Note: This is a requirement in some states, but not in all.)
• Are the proposed repairs actually eligible for coverage under the PACE loan program? (Typical repairs include: replacement of broken or failing heating and cooling systems and hot water heaters; air sealing and insulation; ENERGY STAR doors, windows and roofing; ENERGY STAR appliances; solar photovoltaic systems; and water conservation and resiliency measures [e.g., seismic retrofits and wind hazard protection].)
• Are you being encouraged to perform repairs or upgrades that you do not want or need?
• Did the contractor or PACE lender’s presentation sound too good to be true?
• Are you being pressured to make a quick decision?
• Do you really need to upgrade now, or can you wait and save up the money to pay for upgrades upfront?
• Are there free or low-cost programs that can provide the same upgrade?
• Was the work completed satisfactorily before you were asked to sign a completion certificate?

Here’s what to do if you believe you have been a victim of a predatory PACE loan and/or contractor fraud:

• Contact your local governing agencies (e.g., board of supervisors or district attorney).
• Contact state regulators (e.g., department of business oversight, contractor licensing board or state attorney general).
• Contact the home retention department of the financial institution that holds the note for the first mortgage on the home and see if they are able to negotiate a loan modification or refinance the loan.
• Contact your local legal aid organization or consider speaking with a private attorney through your local bar association referral service or the National Association of Consumer Advocates.