Residential Property Assessed Clean Energy Financing (Regulation Z)

<RULE> CONSUMER FINANCIAL PROTECTION BUREAU <CFR>12 CFR Part 1026</CFR> <DEPDOC>[Docket No. CFPB-2023-0029]</DEPDOC> <RIN>RIN 3170-AA84</RIN> <SUBJECT>Residential Property Assessed Clean Energy Financing (Regulation Z)</SUBJECT> <HD SOURCE="HED">AGENCY:</HD> Consumer Financial Protection Bureau. <HD SOURCE="HED">ACTION:</HD> Final rule. <SUM> <HD SOURCE="HED">SUMMARY:</HD> Section 307 of the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA) directs the Consumer Financial Protection Bureau (CFPB or Bureau) to prescribe ability-to-repay rules for Property Assessed Clean Energy (PACE) financing and to apply the civil liability provisions of the Truth in Lending Act (TILA) for violations. PACE financing is financing to cover the costs of home improvements that results in a tax assessment on the real property of the consumer. In this final rule, the CFPB implements EGRRCPA section 307 and amends Regulation Z to address how TILA applies to PACE transactions. </SUM> <EFFDATE> <HD SOURCE="HED">DATES:</HD> This final rule is effective March 1, 2026. </EFFDATE> <FURINF> <HD SOURCE="HED">FOR FURTHER INFORMATION CONTACT:</HD> George Karithanom, Regulatory Implementation and Guidance Program Analyst, Office of Regulations, at 202-435-7700 or <E T="03">https://reginquiries.consumerfinance.gov/.</E> If you require this document in an alternative electronic format, please contact <E T="03">CFPB_Accessibility@cfpb.gov.</E> </FURINF> <SUPLINF> <HD SOURCE="HED">SUPPLEMENTARY INFORMATION:</HD> <HD SOURCE="HD1">Abbreviations</HD> The following abbreviations are used in this final rule: <EXTRACT> <FP SOURCE="FP-1">• APOR = Average Prime Offer Rate</FP> <FP SOURCE="FP-1">• APR = Annual Percentage Rate</FP> <FP SOURCE="FP-1">• Board = Board of Governors of the Federal Reserve System</FP> <FP SOURCE="FP-1">• CAEATFA = California Alternative Energy and Advanced Transportation Financing Authority</FP> <FP SOURCE="FP-1">• California DFPI = California Department of Financial Protection and Innovation</FP> <FP SOURCE="FP-1">• CARES Act = Coronavirus Aid, Relief, and Economic Security Act</FP> <FP SOURCE="FP-1">• EGRRCPA = Economic Growth, Regulatory Relief, and Consumer Protection Act</FP> <FP SOURCE="FP-1">• FDIC = Federal Deposit Insurance Corporation</FP> <FP SOURCE="FP-1">• FHA = Federal Housing Administration</FP> <FP SOURCE="FP-1">• FHFA = Federal Housing Finance Agency</FP> <FP SOURCE="FP-1">• FRFA = Final Regulatory Flexibility Analysis</FP> <FP SOURCE="FP-1">• FTC = Federal Trade Commission</FP> <FP SOURCE="FP-1">• HOEPA = Home Ownership and Equity Protection Act</FP> <FP SOURCE="FP-1">• HUD = U.S. Department of Housing and Urban Development</FP> <FP SOURCE="FP-1">• IRFA = Initial Regulatory Flexibility Analysis</FP> <FP SOURCE="FP-1">• LTV = Loan to Value</FP> <FP SOURCE="FP-1">• OCC = Office of the Comptroller of the Currency</FP> <FP SOURCE="FP-1">• NCUA = National Credit Union Administration</FP> <FP SOURCE="FP-1">• NEPA = National Environmental Policy Act</FP> <FP SOURCE="FP-1">• NPRM = Notice of Proposed Rulemaking</FP> <FP SOURCE="FP-1">• PACE = Property Assessed Clean Energy</FP> <FP SOURCE="FP-1">• PACE Report = Property Assessed Clean Energy (PACE) Financing and Consumer Financial Outcomes, a CFPB report published on May 1, 2023</FP> <FP SOURCE="FP-1">• RESPA = Real Estate Settlement Procedures Act</FP> <FP SOURCE="FP-1">• RFA = Regulatory Flexibility Act</FP> <FP SOURCE="FP-1">• TILA = Truth in Lending Act</FP> </EXTRACT> <HD SOURCE="HD1">I. Summary of the Final Rule</HD> Section 307 of the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA) directs the CFPB to prescribe ability-to-repay rules for Property Assessed Clean Energy (PACE) financing and to apply the civil liability provisions of the Truth in Lending Act (TILA) for violations. <SU>1</SU> <FTREF/> In this final rule, the CFPB implements EGRRCPA section 307 and amends Regulation Z to address the application of TILA to “PACE transactions” as defined in § 1026.43(b)(15). <FTNT> <SU>1</SU>  15 U.S.C. 1639c(b)(3)(C). </FTNT> This final rule: • Clarifies an existing exclusion to Regulation Z's definition of credit that relates to tax liens and tax assessments. Specifically, the CFPB is clarifying that the commentary's exclusion of tax liens and tax assessments from being “credit,” as defined in § 1026.2(a)(14), applies only to involuntary tax liens and involuntary tax assessments. • Makes a number of adjustments to the requirements for Loan Estimates and Closing Disclosures under §§ 1026.37 and 1026.38 that will apply when those disclosures are provided for PACE transactions, including: ○ Eliminating certain fields relating to escrow account information; ○ Requiring the disclosure of other fees and amounts not included in the principal and interest on the projected payments table in place of disclosure of mortgage insurance premiums; ○ Requiring the PACE transaction and other property tax payment obligations to be identified as separate components of estimated taxes, insurance, and assessments; ○ Clarifying certain implications of the PACE transaction on the property taxes; ○ Requiring disclosure of identifying information for the PACE company; ○ Requiring various qualitative disclosures for PACE transactions that will replace disclosures on the current forms, including disclosures relating to assumption, late payment, servicing, partial payment policy, and the consumer's liability after foreclosure; and ○ Clarifying how unit-periods will be disclosed for PACE transactions. • Provides new model forms under H-24(H) and H-25(K) of appendix H for the Loan Estimate and Closing Disclosure, respectively, specifically designed for PACE transactions, as well as Spanish translations of those model forms under H-28(K) for the Loan Estimate and H-28(L) for the Closing Disclosure. • Exempts PACE transactions from the requirement to establish escrow accounts for certain higher-priced mortgage loans, under § 1026.35(b)(2)(i)(E). • Exempts PACE transactions from the requirement to provide periodic statements, under § 1026.41(e)(7). • Applies Regulation Z's ability-to-repay requirements in § 1026.43 to PACE transactions with a number of adjustments to account for the unique nature of PACE financing, including requiring PACE creditors to consider certain monthly payments that they know or have reason to know the consumer will have to pay into the consumer's escrow account as an additional factor when making a repayment ability determination for PACE transactions extended to consumers who pay their property taxes through an escrow account on their existing mortgage. • Provides that a PACE transaction is not a qualified mortgage as defined in § 1026.43. • Extends the ability-to-repay requirements, as well as TILA section 130, to any “PACE company,” as defined in § 1026.43(b)(14), that is substantially involved in making the credit decision for a PACE transaction. • Provides clarification regarding how PACE and non-PACE mortgage creditors should consider pre-existing PACE transactions when originating new mortgage loans. <HD SOURCE="HD1">II. Background</HD> <HD SOURCE="HD2">A. PACE Financing Market Overview</HD> <HD SOURCE="HD3">How does PACE financing work?</HD> PACE financing enables property owners to finance upgrades to real property through an assessment on their real property. <SU>2</SU> <FTREF/> Eligible upgrade types vary by locality but often include upgrades to promote energy efficiency or to help prepare for natural disasters. The voluntary financing agreements are made between the consumer and the consumer's local government or a government entity operating with the authority of several local governments, <SU>3</SU> <FTREF/> and they leverage the property tax system for administration of payments. PACE financing is repaid through the property tax system alongside the consumer's other property tax payment obligations. PACE loans are typically collected through the same process as real property taxes. <SU>4</SU> <FTREF/> Local governments typically fund PACE loans through bond issuance. PACE assessments are sometimes collateralized and sold as securitized obligations. <FTNT> <SU>2</SU>  Some States authorize PACE financing for residential and commercial property. In this final rule, the term PACE financing refers only to residential PACE financing unless otherwise indicated. </FTNT> <FTNT> <SU>3</SU>  Although PACE financing programs may be sponsored by individual local governments, many are sponsored by intergovernmental organizations whose membership consists of multiple local governments. </FTNT> <FTNT> <SU>4</SU>   <E T="03">See, e.g.,</E> Cal. Sts. & Hwys. Code sec. 5898.30; Fla. Stat. sec. 163.081(1)(e); Fla. Stat. sec. 197.3632(8)(a); Mo. Stat. sec. 67.2815(5). </FTNT> PACE loans are secured by a lien on the consumer's real property. The liens securing PACE loans typically have priority under State law similar to that of other real property tax liens, which are superior to other mortgage liens on the property, including those that predated the PACE lien. <SU>5</SU> <FTREF/> In a foreclosure sale, this super-priority lien position means that any amount due on the PACE loan is paid with the foreclosure sale proceeds before any proceeds will flow to other liens. The PACE loan is tied to the property, not the property owner. As such, the repayment obligation remains with the property when property ownership transfers unless paid off at the time of sale. <FTNT> <SU>5</SU>   <E T="03">See, e.g.,</E> Cal. Sts. & Hwys. Code sec. 5898.30 (providing for “the collection of assessments in the same manner and at the same time as the general taxes of the city or county on real property, unless another procedure has been authorized by the legislat ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ Preview showing 10k of 589k characters. Full document text is stored and available for version comparison. ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━