The PACE Assessment Protection Act of 2011, Bill Summary

Resource Type:

Federal Legislation

The PACE Assessment Protection Act of 2011 (H.R. 2599) is a bill “To prevent Fannie Mae, Freddie Mac, and other Federal residential and commercial mortgage lending regulators from adopting policies that contravene established State and local property assessed clean energy laws.” This summary is based on text jointly introduced on July 20, 2011 by Representatives Nan Hayworth (R-N.Y.), Dan Lungren (R-Calif.) and Mike Thompson (D-Calif.).

PACE is a financing tool that allows municipalities to sell bonds, the proceeds of which would allow property owners to pay up-front for renewable energy and energy efficiency retrofits. A participating owner would accept a low-interest tax assessment on the property, thus spreading out the reimbursement and still allowing the owner to sell the property without losing the investment. Such a program reduces utility bills, stress to the grid and pollution, raises property values and creates jobs for contractors and manufacturers. However, because a new tax assessment pushes back a mortgage-collector’s priority for reimbursement, there was a backlash from the secondary mortgage market, which called PACE a loan and stopped financing homes in participating districts. Through the PACE Assessment Protection Act, a PACE assessment would be defined as a tax or an assessment, and not as a loan in violation of mortgage lending practices.

Treatment of PACE Programs by Fannie Mae and Freddie Mac.

The bill would direct Fannie Mae and Freddie Mac to accept that a PACE lien will not violate their standards.
It would direct the institutions and agencies with roles in the secondary mortgage market, including the Federal Housing Finance Administration, Fannie Mae, Freddie Mac and the Office of the Comptroller of the Currency, not to discriminate against governments implementing or participating in PACE programs by engaging in any of the following activities: (1) prohibiting lending within the jurisdiction or requiring more restrictive underwriting criteria for properties within the jurisdiction; (2) requiring payment of PACE assessments before they are due; or (3) applying more restrictive underwriting criteria to a property with a PACE lien than would apply if the same property was subject to a tax or assessment that was not a PACE assessment.

Consumer Protections.

A number of administrative requirements for PACE programs would be instituted to protect consumers:

Residential Properties:

A residential property owner would have to agree in writing to the PACE assessment and to the schedule and rules for re-payment;
The local government would have to disclose to the owner the costs and risks of participating in the PACE program, the interest rate, the fees and the rights of rescission;
The property owner or local government would have to provide notice of the terms of the PACE assessment to the holders of any existing mortgages; and
Personal financial information would be protected by privacy laws.

Commercial and Industrial Properties:

The property owner would have to obtain written authorization to enter into a PACE program from the holder of the first mortgage on the property;
The local government and the owner would have to enter into a written agreement addressing the terms of the PACE improvement;
The property owner would contract for PACE improvements and/or purchase materials for the improvements, and upon submission of proper documentation, the local government would disburse the funds required for the improvements;
A payment schedule would provide the terms of payment, the schedule and amount for each payment, and the annual amount due on the assessment;
After full payment, the local government would provide a written statement certifying that all payments and requirements have been satisfied;
The local government would disclose the costs and risks of participating in PACE to the property owner; and
Any collection of financial information would comply with privacy laws.

Public Notice.

The local government would file a public notice of the PACE assessment, identifying that a tax assessment is levied on the property and that the lien is senior to all private liens.

Underwriting Standards for the Property Owner.

Before levying a PACE assessment, the local government would have to certify that:

All property taxes and other public assessments are current and have been current for three years (or otherwise, for the property owner’s period of ownership);
There are no involuntary liens on the property, such as mechanics liens, in excess of $1000;
No notices of default and not more than one instance of property-based debt delinquency have occurred for the past three years, or, otherwise for the property owner’s period of ownership;
The property owner has not filed for or declared bankruptcy in the previous seven years;
The property owner is current on all mortgage debt on the property;
The property owner or owners are the holders of record of the property;
The property title is not subject to power of attorney, easements, or subordination agreements restricting the property owner’s authority to undergo a PACE lien; and
The property meets geographic eligibility requirements.

The local government may adopt additional, appropriate, criteria.

Qualifying Improvements and Contractors.

For a residential property to qualify for a PACE assessment:

A certified building analyst would have to perform an audit or feasibility study for energy improvements. It would have to:
- Identify recommended energy conservation, efficiency, and/or clean energy improvements;
- Estimate the improvements’ potential cost savings, useful life, benefit-cost ratio, and simple payback or return on investment; and
- Provide the estimated overall difference in annual energy costs with and without the recommended improvements.
The local government would have to determine that the improvements are intended to be affixed to the property for their entire useful life.
Improvements would be made by “qualified” contractor(s). Work requiring a license would be done by someone with a license. The owner could be approved for self-installed PACE improvements, but the owner’s labor could not be included.
Before receiving disbursement, the property owner would have to:
- Sign a document requesting disbursement of funds;
- Submit a certification of satisfactory installation; and
- Submit documentation of all costs to be financed and copies of required permits.

Financing Terms for Residential Properties.

PACE programs would be designed so that:

The total energy and water cost savings realized during the life of the improvement would be expected to exceed the total cost of the improvement.
The amount that could be financed by a PACE assessment would be no more than the cost of the PACE improvement minus the total amount of all rebates, grants, and other direct financial assistance received by the owner on account of the PACE improvements.
The total amount of PACE assessments for a property would not exceed 10% of the estimated value of the property.
The owner would need equity of at least 15% of the estimated value of the property.
The maximum term of financing could not exceed 20 years. The term shall not exceed the improvement’s expected useful life.

Collection and Enforcement.

PACE assessments would be collected in accordance with state law. In the event of foreclosure, the entity that foreclosed (e.g. a lending bank) could be obligated to pay only PACE payments that are due (including delinquent amounts) and applicable penalties and interest. Except as provided by State law, foreclosure may not accelerate payments that are not due. Payment of a PACE assessment installment from loan loss reserve funds set up by administrators would not release property owners from their obligation to pay that amount.