BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                    AB 2693


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          Date of Hearing:  May 4, 2016


                       ASSEMBLY COMMITTEE ON LOCAL GOVERNMENT


                           Susan Talamantes Eggman, Chair


          AB 2693  
          (Dababneh) - As Amended April 28, 2016


          SUBJECT:  Contractual assessments:  financing requirements:   
          property improvements.


          SUMMARY:   Makes changes to the statutes which govern  
          contractual voluntary assessments and Mello-Roos special taxes  
          which provide the financing authorization for Property Assessed  
          Clean Energy (PACE) programs.  Specifically, this bill:   


          1)Prohibits a public agency from permitting a property owner to  
            participate in any voluntary contractual assessment program if  
            any of the following apply:


             a)   The total mortgage-related debt and contractual  
               assessment-related debt on the underlying property would  
               exceed the fair market value of the property, as determined  
               at the time of the owner's contractual assessment;  


             b)   The total mortgage-related debt on the property alone is  
               equal to 90% or greater of the property's fair market  
               value, as determined at the time of approval of the owner's  
               contractual assessment; and,









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             c)   The property owner is unable to meet all of the  
               following criteria:


               i)     The property owner certifies that the property taxes  
                 are current and that there is no more than one late  
                 payment, as specified;


               ii)    The property owner certifies that he or she is not  
                 currently in default on any debt secured by the property  
                 and that there is no more than one late payment, as  
                 specified;


               iii)   If the property owner is a homeowner applicant, the  
                 property owner has not had any active bankruptcies within  
                 the last seven years.  This criteria can be met if the  
                 bankruptcy was discharged between two and seven years  
                 before the application date and there are no mortgage or  
                 nonmortgage payments past due, as specified; and,  


               iv)    The property owner does not have an involuntary lien  
                 recorded against the property in excess of $1,000.  


          2)Prohibits a public agency from permitting a homeowner from  
            participating in any voluntary assessment program, unless the  
            property owner has been provided with a completed financing  
            estimate document, described in 7), below, or a substantially  
            equivalent document that displays the same information in a  
            substantially similar format.  


          3)Provides failure to comply with the requirements of 1), and  
            2), above renders the contractual obligation of a property  
            owner for a voluntary contractual assessment void.  








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          4)Specifies that the 5% cap on any annual property taxes and  
            assessments, as determined at the time of the approval of the  
            owner's voluntary contractual assessment, is on the property  
            fair market value.  





          5)Deletes exiting law which provides that nothing in the  
            statutes which govern contractual assessments shall be  
            construed to void or otherwise release a property owner from  
            the contractual obligations incurred by a contractual  
            assessment, particularly in the event that the total amount of  
            annual property taxes and assessments exceeds 5% of a  
            property's market value after the property owner has entered  
            into a contractual assessment.  Instead provides, except as  
            stated in 1), and 2), above, nothing in the statutes which  
            govern contractual assessments shall be construed to void or  
            otherwise release a property owner from the contractual  
            obligations incurred by a contractual assessment on a  
            property.  



          6)Requires specified disclosure to be completed and delivered to  
            a homeowner, as soon as practicable before, and in no event  
            later than when a homeowner becomes obligated to a voluntary  
            assessment, pursuant to existing law which governs voluntary  
            contractual assessments, Mello-Roos special taxes, and the  
            definition of a PACE bond under the California Alternative  
            Energy and Advanced Transportation Financing Authority's  
            (CAEATFA) Act.  


          7)Specifies the contents and format of the "Financing Estimate  
            and Disclosure" which must also include a Notice to Homeowners  








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            that reads "The financing arrangement described below will  
            result in an assessment against your property which will be  
            collected along with your property taxes.  The assessment may  
            jeopardize your ability to sell or refinance your property  
            unless you repay the underlying debt.  There may be cheaper  
            alternative financing arrangements available from conventional  
            lenders.  You should read and review the terms carefully, and  
            if necessary, consult with a tax professional or attorney."  


          8)Changes, in existing law for residential private property  
            units that the number is five not four, to distinguish  
            commercial and nonresidential property from residential  
            dwelling units.  


          9)Requires, in a foreclosure initiated by the noteholder secured  
            by a deed of trust for purchase money or refinanced purchase  
            money obligation or the local government, the purchase money  
            or refinance purchase money holder to be treated as an  
            encumbrance that is senior to any delinquency of a contractual  
            voluntary assessment.  


          10)Requires the seniority of the purchase money obligation to be  
            retained, regardless of whether the delinquency occurred  
            before or after the purchase money obligation was recorded  
            against the property.  


          11)Provides that the Legislature recognizes that the voluntary  
            special assessments, as specified, are unique, and require  
            unique treatment of this secured priority.  


          12)Prohibits this bill from being interpreted or applied to  
            affect the status or priority of any municipal or county lien  
            other than a lien addressed in this section, and prohibits it  
            from creating any implied precedent for the interpretation of  








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            any other remedy or collection mechanism available to a  
            governmental entity.  


          13)States the change in priority affected by this bill applies  
            to assessments agreed to on or after January 1, 2017.  


          14)Requires an assessment levied or a delinquency collected,  
            pursuant to the Mello Roos Community Facilities Act, to  
            finance specified energy improvements be collected using the  
            procedures set out in statutes which govern voluntary  
            contractual assessments.  


          15)Removes a Mello Roos special tax, a voluntary special tax, or  
            authorization granted, pursuant to a chartered city's  
            constitutional authority, under Section 5 of Article XI of the  
            California Constitution, from the types of revenues used to  
            secure a "Property Assessed Clean Energy bond" or "PACE bond"  
            in the definition provided in the PACE and Cleaner Energy  
            Financing Program under the CAEATFA Act.  





          16)Removes the authorization in existing law for a local  
            agency's legislative body to authorize another procedure for  
            the imposition and collection of voluntary contractual  
            assessments, including, but not limited to, lien priority, the  
            timing of collection, and any penalties and remedies in the  
            event of delinquency and default.  


          17)Provides that any voluntary assessment has the force, effect,  
            and priority of a judgment lien, as established by the date of  
            its recordation.  









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          FISCAL EFFECT:  None


          COMMENTS:  


          1)Property Assessed Clean Energy (PACE) Programs.  Utilizing the  
            authority to create a financing district as a charter city,  
            the City of Berkeley, in 2007, established a citywide  
            voluntary program to allow residential and commercial property  
            owners to install solar systems and make energy efficiency  
            improvements to their buildings and to repay the cost over 20  
            years via an assessment on the property tax bill.  Since the  
            inception of PACE as a financing tool in Berkeley, the  
            Legislature has granted the authority to local governments to  
            provide up-front financing to property owners to install  
            renewable energy sources or energy efficiency improvements  
            that are permanently fixed to their properties, which is  
            repaid through the property tax system.  



            Most PACE programs are implemented and administered under two  
            statutory frameworks: AB 811 (Levine), Chapter 159, Statutes  
            of 2008, amended the Improvement Act of 1911 to allow for  
            voluntary contractual assessments to finance PACE projects,  
            and SB 555 (Hancock), Chapter 493, Statutes of 2011, amended  
            the Mello-Roos Community Facilities District Act to allow for  
            Mello-Roos special taxes (parcel taxes) to finance PACE  
            projects.  





            The Legislature has expanded PACE for residential and  
            commercial property owners to pay for renewable energy  
            upgrades, energy or water efficiency retrofits, seismic  








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            improvements, and other specified improvements for their homes  
            or buildings.  Local agencies create PACE assessment districts  
            under AB 811 or establish a CFD under SB 555, allowing the  
            local agency to issue bonds to finance the up-front costs of  
            improvements.  In turn, property owners enter into a voluntary  
            contractual assessment agreement with the local agency or  
            agree to annex their property into a CFD to re-pay the bonds  
            via an assessment or special tax (parcel tax), secured by a  
            priority lien, on their property tax bill.  The intent of the  
            program is that the assessment or parcel tax remains with the  
            property even if it is sold or transferred, and the  
            improvements must be permanently fixed to the property.  





            In California, there are several models available to local  
            governments in administering a PACE program.  Only the  
            counties of Sonoma and Placer administer their own PACE  
            programs.  The majority of local governments contract with a  
            private third-party or join a Joint Powers Authority (JPA),  
            which contracts with a private third-party to carry out their  
            PACE programs.  The cost of third-party administration is not  
            borne by the local agency, but is built into PACE loan  
            financing.  Some of these programs focus on residential  
            projects, others target commercial projects, and some handle  
            both residential and commercial portfolios.  



          2)Federal Housing Finance Agency.  In 2010, the Federal Housing  
            Finance Agency (FHFA), which oversees the nation's largest  
            mortgage finance companies, Fannie Mae and Freddie Mac, raised  
            concerns that residential PACE financing could pose a risk for  
            federal mortgage enterprises (Fannie Mae and Freddie Mac),  
            because PACE loans are a first-priority lien in the case of  
            foreclosure and outstanding PACE assessments would be paid  
            before mortgage costs.  FHFA specifically pointed to the  








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            underwriting for PACE programs which result in  
            collateral-based lending rather than lending based upon  
            ability to pay.  Statements also pointed to the absence of  
            Truth In Lending Act and other consumer protections.  In  
            August of 2010, Fannie Mae and Freddie Mac announced they  
            would not purchase mortgages for homes with first lien  
            priority PACE obligations.  The FHFA's action triggered many  
            local governments to suspend their residential PACE programs.   




            SB 96 (Committee on Budget and Fiscal Review), Chapter 356,  
            Statutes of 2013, sought to address FHFA's decision, and  
            tasked CAEATFA with administering a PACE loss reserve program  
            of $10 million to keep mortgage interests whole during a  
            foreclosure or a forced sale.  CAEATFA established  
            regulations, and the majority of PACE administrators  
            participate in the program.  The PACE Loss Reserve Program  
            will compensate first mortgage lenders for losses resulting  
            from the existence of a PACE lien in a foreclosure or forced  
            sale.  The program will cover PACE payments made during  
            foreclosure, if a mortgage lender forecloses on a home that  
            has a PACE lien, and any losses to a first mortgage lender up  
            to the amount of outstanding PACE payment, if a county  
            conducts a forced sale on a home for unpaid taxes.  The intent  
            of the Program is to put the first mortgage lender in the same  
            position it would be in without a PACE lien.  





            The FHFA issued clarity to their position following the  
            creation of the PACE Loss Reserve Program, in a letter to the  
            Governor dated May 1, 2014, which reads, "I am writing to  
            inform you that FHFA is not prepared to change its position on  
            California's first-lien PACE program and will continue to  
            prohibit the Enterprises from purchasing or refinancing  








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            mortgages that are encumbered with first-lien PACE loans?In  
            making this determination, FHFA has carefully reviewed the  
            Reserve Fund created by the State of California and, while I  
            appreciate that it is intended to mitigate these increased  
            losses, it fails to offer full loss protection to the  
            Enterprises.  The Reserve Fund is not an adequate substitute  
            for Enterprise mortgages maintaining a first lien position and  
            FHFA also has concerns about the Reserve Fund's ongoing  
            sustainability. "  


            


          3)Federal Housing Administration.  In August 2015, the Federal  
            Housing Administration (FHA) announced the development of  
            Single Family FHA PACE guidance.  "The Single Family FHA  
            guidance will address the impact of PACE assessment on  
            purchases, refinances and loan modification options available  
            to borrowers experiencing distress and will require the  
            subordination of PACE financing to the first lien FHA  
            mortgage.  The guidance will address the eligible methods of  
            subordination of existing PACE liens."  The FHFA has not  
            issued anything further following the announcement from FHA  
            regarding the development of guidelines.  



          4)Liens.  PACE financing provides creditors security that they  
            would be repaid because property tax liens are super priority  
            liens that are senior to mortgage debt.  If a house is sold in  
            a foreclosure or tax sale, the PACE lien holder will be paid  
            before other lienholders, like mortgage lenders.  In response  
            to FHFA's decision not to purchase mortgages with PACE liens,  
            some third party PACE providers have started offering an  
            option to homeowners who are unable to refinance or sell their  
            homes called "Limited Subordination" or "Contractual  
            Subordination".  These contractual lien subordinations are an  
            agreement between the PACE lien holder (third party PACE  








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            program administrator/local government) and a mortgage lender  
            (noteholder of the first deed of trust), where the PACE lien  
            holder "subordinates" their right to foreclose on a home for  
            non-payment of PACE assessments, and to the proceeds from  
            foreclosure, until the mortgage lender has been paid in full  
            for amounts due under its mortgage.  



            This practice is relatively new within the industry, and not  
            all PACE providers offer contractual lien subordination.  The  
            concept of subordinated PACE liens and subordinated PACE bonds  
            is still relatively new to the capital markets.  According to  
            Renovate America, 


            a third party PACE administrator, since last spring they have  
            approved 100% of applications from homeowners seeking to enter  
            into contractual lien subordination agreements and have  
            completed over 400 subordination contracts.  Additionally, the  
            consequences of contractual subordination agreements is  
            untested when it comes to the issues presented to a local  
            government's county tax collector to comply with existing law  
            which governs delinquent assessments, when they are removed  
            from the tax roll, interest penalties, and property sales.  
            


          5)Bill Summary.  This bill makes a number of changes to the  
            statutes governing voluntary contractual assessments and  
            Mello-Roos special taxes which are used to repay "PACE bonds"  
            which finance energy improvements on private property in PACE  
            programs that utilize the AB 811 or SB 555 statutory  
            framework.  This bill is co-sponsored by the California  
            Association of Realtors, California Bankers Association,  
            California Credit Union League, California Escrow Association,  
            California Mortgage Association, California Mortgage Bankers  
            Association, and the United Trustees Association.  









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            Parameters on a Property Owner's Participation in PACE.  This  
            bill establishes uniform criteria that a property owner must  
            meet in order to participate in a voluntary contractual  
            assessment program.  Existing law prohibits a property owner  
            from participating in a voluntary contractual assessment  
            program, if participation would result in the total amount of  
            annual property taxes and assessments exceeding 5% of the  
            property's market value, as determined at the time of approval  
            of the owner's contractual assessment.  This bill specifies  
            that the 5% cap is based on the property's fair market value.   
            This bill also places parameters on a property owner's  
            participation based on the property's total mortgage-related  
            debt and in combination with debt related to the contractual  
            assessments.  This bill also places constraints on a property  
            owner's participation based on financial history relating to  
            late payments on property tax and other related debt secured  
            by the property.  


            If the property owner is a homeowner, this bill places  
            parameters on participation due to recent bankruptcy and  
            requires that homeowners are provided with a completed  
            financing estimate document.  This bill states that failure to  
            comply with any of these requirements renders the contractual  
            obligation of a property owner for a voluntary contractual  
            assessment void.  


            Disclosure to Homeowners.  This bill establishes uniform  
            disclosures that must be provided to each homeowner prior to  
            participating in a PACE program (established pursuant to 


            AB 811 or SB 555).  Existing law places requirements on a  
            local agency upon passage of a resolution to use voluntary  
            contractual assessments, including a report which must contain  
            specified information regarding the program and underwriting  








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            standards used.  Under this bill, each homeowner must receive  
            a completed financing estimate document, which contains  
            products and costs, financing costs, other terms, and  
            notification to the homeowner about making payments via the  
            property tax bill, and the potential requirement to pay the  
            remaining balance of the assessment upon sale or refinance.  
            Lien Status.  This bill requires, in a foreclosure initiated  
            by the purchase money or refinanced purchase money holder or  
            local government, the delinquency of a contractual voluntary  
            assessment to be junior to the purchase money.  This bill  
            provides that the seniority of the purchase money obligation  
            remains, regardless of whether the delinquency occurred before  
            or after the purchase money obligation was recorded against  
            the property.  This bill states the changes in priority  
            affected by this bill applies to assessments agreed to on or  
            after January 1, 2017.  


            Unlike the current practice of contractual lien subordination,  
            which is an agreement entered into on a case-by-case basis,  
            when a homeowner tries to refinance or sell their home, this  
            bill changes the lien priority in the event of foreclosure for  
            delinquent PACE assessments to any voluntary contractual  
            assessment agreed to on or after January 1, 2017.  This bill  
            seeks to provide more security to a mortgage lender (note  
            holder of trust deed of trust for purchase or refinance money)  
            by granting their claim to the proceeds in the event of a  
            foreclosure as senior to the claims of a PACE lien holder  
            (third party administrator or local governments) 


            of any delinquent contractual assessment.  
          6)Author's Statement.  According to the author, "Homeowners are  
            at risk from two deficiencies in the law governing so-called  
            PACE financing: (1) A PACE encumbrance jeopardizes  
            conventional mortgage financing for the home; and, (2) PACE  
            financing extends credit secured by the home without providing  
            Truth in Lending disclosures and without the underwriting  
            safeguards applicable to other loans. 








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            "PACE loans present several challenges for consumers in that  
            they negatively affect future financial transactions, there is  
            a lack of true underwriting relative to the borrower's ability  
            to repay the debt, and the terms and conditions are not  
            adequately disclosed.  These methods of finance have received  
            attention by FHFA, the regulator for the government-sponsored  
            entities (GSEs) known as Fannie Mae and Freddie Mac.  The  
            FHFA's concerns are rooted in longstanding lending and  
            underwriting principles.  The GSEs exist as a secondary market  
                                                               providing liquidity, stability and affordability to the  
            mortgage market.  The GSEs buy mortgages from lenders and the  
            cash raised from selling loans allows those lenders to engage  
            in further lending.  This process provides a stable supply of  
            funds available for mortgage loans and makes those loans more  
            affordable for consumers.  





            "Since the federal government is responsible for backing the  
            overwhelming majority of all new mortgage originations, the  
            GSEs' unwillingness to purchase mortgages will have a chilling  
            effect on the availability of credit and the opportunity for  
            consumers to purchase or refinance homes.  One of the GSEs has  
            recently announced that it will allow a "cash out" refinance  
            to include funds to pay off the balance of a pace encumbrance,  
            but the solution is at best a bandaid on a broken situation -  
            homeowners must then demonstrate that they have additional  
            equity to secure the extra debt, they will have to pay  
            increased downpayment and costs, and must qualify to pay the  
            increased mortgage payments.












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            "These consequences are substantial and may preclude a  
            borrower from completing a necessary transaction.  Ultimately,  
            a borrower needing to refinance or sell their property will be  
            forced to pay the entirety of the PACE loan balance.  Concerns  
            have also been expressed that such PACE-like financing  
            mechanisms may reduce the marketability of houses so  
            encumbered.  Prospective purchasers may be reluctant to enter  
            transactions where a PACE loan exists, or find that  
            conventional financing is unavailable.  





            "The level of underwriting conducted by public agencies or  
            their agents when extending PACE loans is deficient.  In fact,  
            PACE loans currently technically trigger a "term default"  
            under uniform deeds of trust wherein they violate clauses  
            prohibiting the borrower from allowing a super-priority lien  
            to attach to the real property.  This is exacerbated by the  
            failure to ask lienholders for consent prior to entering into  
            a voluntary contractual assessment.  





            "AB 2693 makes two important consumer protection changes to  
            PACE loan agreements. First, the measure requires that  
            borrowers receive a model, statutory disclosure designed to  
            inform them about the financial terms and conditions  
            associated with a PACE loan. Adopting this standardized  
            disclosure is intended to reflect an effort to achieve  
            compromise in that it is less burdensome than the Truth in  
            Lending/Real Estate Settlement Procedures Act Integrated  
            Disclosure (TRID) that lenders must provide when making  
            real-estate secured loans.  Second, the measure requires PACE  
            loans to be subordinated to purchase money mortgage debt  








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            consistent with what has been described as the PACE industry  
            general business practice. This is a fair compromise giving  
            PACE providers better lien priority compared to other  
            creditors. Other creditors are granted judgment lien status  
            wherein their priority is based upon recordation date.  





            "In furtherance of our effort to achieve compromise, recent  
            amendments make it clear that the bill applies only to  
            single-family residential PACE liens, and not commercial or  
            non-residential loans. In addition, language has been added  
            applying these new provisions prospectively to PACE  
            encumbrances agreed to on or after January 1, 2017."  





          7)April 28th Amendments.  Upon passage in the Banking and  
            Finance Committee, the author significantly amended this bill.  
             The committee amendments sought to remove language in the  
            bill regarding judgment liens and instead add language  
            regarding limited lien subordination.  These amendments did  
            not, however, strike out the judgment lien language.  The  
            Committee may wish to note the bill summary and comments of  
            this analysis focus on the author's intent which does not  
            reference the judgment lien language.  



          8)CAEATFA.  As part of the 2015-16 Budget, the Legislature  
            tasked CAEATFA, in consultation with the California Public  
            Utilities Commission, to create a working group with  
            stakeholders to develop criteria for the comparative  
            assessment of energy efficiency financing programs in  
            California, including PACE financing.  CAEATFA has created a  








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            public process to ensure stakeholder participation and draft  
            criteria for the comparative assessment of energy efficiency  
            financing programs for public comment.  The draft criteria  
            includes energy saving attributable to program financing,  
            cost-effectiveness, and customer experience, which includes  
            customer satisfaction and customer protections.  


          9)Policy Considerations.  The Committee may wish to consider the  
            following:


             a)   The Evolution of PACE and Lien Subordination.  The  
               Committee may wish to consider if it is the best approach  
               to legislate based on the current practice of contractual  
               lien subordination offered by some third party PACE  
               providers.  


               At the inception of the PACE program, the presence of third  
               party administrators and the accompanying complex financing  
               structures were not contemplated by the Legislature.  Very  
               few local governments administer their own PACE programs,  
               and instead, contract out to third party providers.  As  
               PACE continues to evolve and the realities are very  
               different than those imagined at the outset of Legislative  
               authorization, the Legislature has continued to attempt to  
               catch up not only with the advances in energy efficiency  
               technology, but to the evolving methods of financing  
               utilized by these companies in this vastly growing and  
               thriving industry.  The Committee may wish to consider the  
               impact of this bill on PACE programs implemented by local  
               governments that do not offer contractual lien  
               subordination and who argue that the risk to local  
               governments placed in a less secure position behind  
               mortgage lenders in the case of foreclose would prevent  
               them from continuing their PACE program in a responsible  
               manner.  









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               Additionally, the Committee may wish to obtain a fuller  
               picture of the use of contractual lien subordination by  
               third party providers before concluding that there would be  
               no consequences to the viability of PACE programs.  The  
               Committee may wish to consider the implications of  
               subordination to any degree either statutorily or  
               contractually not only because the security is provided by  
               assessments or special taxes collected on the property tax  
               roll, but because the rules governing tax collection,  
               default, and property sale do not address the types of  
               unique PACE financing structures.  Further, the Committee  
               may wish to consider the implications on the market of more  
               frequently used contractual subordination and legislatively  
               mandated subordination.  


             b)   Disclosures.  The Committee may wish to note the  
               consensus from stakeholders around the increased  
               disclosures provided by this bill and contemplate whether  
               disclosures may address some of the potential issues of  
               homeowners becoming delinquent on their assessment payments  
               and help to avoid foreclosure.  The Committee may wish to  
               ask the author to expand these efforts by requiring PACE  
               providers to offer a three-day right of rescission.  


             c)   Broader Oversight.  Beyond the scope of this individual  
               bill, the Committee may wish to consider a few other  
               elements in consideration of PACE programs.  A number of  
               articles provided by the author point to aggressive  
               contracting techniques, misinformation and misunderstanding  
               on the part of the homeowner, a lack of savings due to high  
               interest rates, and challenges for homeowners seeking to  
               refinance or sell their properties.  The Committee may wish  
               to more closely examine the oversight that is being  
               provided by local governments, including JPAs, on the  
               practices of contractors, the relationship between third  
               party providers and contractors, the outcomes of CAEATFA's  








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               working group, and the use contractual lien subordination  
               and effects on local governments in the event of a default,  
               foreclosure, and property sale.  


             d)   Local Government Requirements.  Current law establishes  
               a number of requirements for a local agency upon passage of  
               a resolution to use voluntary contractual assessments.  One  
               of these requirements is a report which must include  
               specified information regarding the contractual assessment  
               program.  For example, the report must include a brief  
               description of criteria for determining the underwriting  
               requirements and safeguards that will be used to ensure  
               that the total annual property tax and assessments on the  
               property will not exceed 5% of the property's market value,  
               and a plan for raising a capital amount required to pay for  
               work performed pursuant to contractual assessments.  


               As the statutes to expand flexibility to financing  
               structures utilized by PACE have been amended, the  
               requirements of what should be included in a local  
               governments resolution has not.  For example, local  
               agencies that transfer all rights to any voluntary  
               contractual assessments, if bonds have not been issued, to  
               a third party capital provider are not required to include  
               these types of agreements in their report on a contractual  
               assessment program.  Similarly this bill does not require  
               any of the criteria, disclosure, or information regarding  
               the lien status to be included in the report.  The  
               Committee may wish to consider if this information should  
               be provided to homeowners on an individual basis if there  
               should also be increased disclosure provided in the report  
               produced by local governments.  


             e)   Clarity and Consistency.  The Committee may wish to  
               encourage the author to further clarify which provisions of  
               the bill impact residential versus commercial property  








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               owners.  The author may also wish to clarify the amendments  
               to the definition of a PACE bond under CAEATFA's Act and  
               the Mello-Roos Act to ensure that special taxes collected  
               for PACE programs are correctly referenced to ensure the  
               bill's provisions apply to PACE programs administered  
               utilizing both the AB 811 and SB 555 statutes.  Further,  
               because local agencies utilize voluntary contractual  
               assessments to pay for other improvements besides PACE, the  
               author may wish to clarify that the disclosure and  
               limitations on participation apply to other programs  
               established under existing law which authorizes voluntary  
               contractual assessments.  


          10)Committee Amendments.  In order to address issues raised in  
            the Policy Considerations under (a), (b), and (c) above, the  
            Committee amendments would do the following:



             a)   Remove the language contained in Section 6 of the bill  
               regarding liens and the priority 


             of the encumbrance of a note holder of a deed of trust over a  
               PACE lien holder of a delinquent assessment.  
             b)   Retain all disclosure requirements and parameters for  
               participation in PACE programs and add a three day right to  
               rescission that must be provided to homeowners.  


             c)   Remove the judgment lien language in Section 7 of the  
               bill that was inadvertently kept in the April 28th  
               amendments.  


          11)Arguments in Support.  Co-sponsors of the bill argue, "AB  
            2693 requires that borrower receive a model, statutory  
            disclosure designed to inform them about the financial terms  








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            and conditions associated with a PACE loan.  There should be  
            no confusion in the mind of the Committee Members or  
            homeowners - these encumbrances might be labeled "assessments"  
            but they are really loans and they come at the expense of the  
            homeowner's equity in the property.  Unfortunately for  
            homeowner, if they don't receive a disclosure that adequately  
            describes the terms and conditions of the underlying agreement  
            they are entering, they cannot effectively shop for financing  
            of energy conservation improvements, cannot make a thoughtful  
            comparison of the loan to finance the home improvement, and  
            may not have the opportunity to consider the effect of placing  
            a lien on their home for that purpose.  


            "Existing law treats PACE liens as an opt-in tax assessment.   
            This is a huge difference from most financing.  As a tax  
            assessment, they have 'super-priority' over other liens, like  
            mortgages, in part because they are collected by county tax  
            assessors.  If there is a delinquency, it jumps ahead of other  
            obligations (like a mortgage or mechanic's lien) secured by  
            the property.  This jumping ahead in line means the PACE  
            obligation is paid first, even if it was attached to the  
            property long after the mortgage or other lien, and even if it  
            was done without the consent of the senior lenders.  


            "The super-priority of PACE liens has caused the secondary  
            mortgage market (Fannie Mae and Freddie Mac; and soon FHA as  
            well) to refuse to finance or re-finance a property with a  
            PACE lien.  The rejection by the secondary mortgage market  
            will dramatically impair the California real estate market.  


            "As, amended, AB 2693 will now make a delinquency in the PACE  
            assessment junior to a purchase money mortgage in priority.   
            However, the underlying assessment will be preserved, and only  
            the delinquent payment will be affected by a mortgage  
            foreclosure.  In addition, recent amendments make it clear  
            that the bill applies only to single-family residential PACE  








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            liens, and not commercial or non-residential loans.  Finally,  
            language has been added making it clear that these new  
            provisions will apply prospectively to encumbrances agreed to  
            after January 1, 2017."  


          12)Arguments in Opposition.  The League of California Cities and  
            California State Association of Counties argues, "To date,  
            over 400 local government in California have voted to enable  
            PACE programs to operate in their communities, and at their  
            discretion.  Sonoma County's Energy Independence Program, a  
            pioneer of the PACE movement, to date, funded thousands of  
            projects, totaling $73 million in energy and water efficiency  
            improvements, which equates to a reduction of 10,505 metric  
            tons of CO2 equivalent per year.  AB 2693 would seriously  
            undermine this progress.  Eliminating the senior lien status  
            of PACE assessment would essentially prohibit the use of  
            property tax assessments to secure the financing, the major  
            attractant of the program.  AB 2693 creates a financing  
            structure that would make PACE unaffordable, unsustainable and  
            unavailable.  Not only does that structure attack the very  
            foundation of PACE, it does so without regard to options  
            already available in the marketplace enabling PACE contractual  
            assessment to be limitedly subordinated to a first deed of  
            trust.  As California continues to work with FHFA to develop  
            resolution on the property lien status issue, we strongly  
            believe that this bill would impair this process and  
            potentially undermine the effort."  


            The California Association of County Treasurers and Tax  
            Collectors argues, "The reality is that oftentimes, taxpayers  
            don't understand that repayment of these assessments are  
            collected on the annual property tax bill and that they should  
            contract their lender to increase their monthly impound, or  
            set aside additional funds to pay for their higher tax bill.   
            In the continued absence of strict regulation in this area by  
            a state agency tasked with consumer protection, there will  
            undoubtedly be untold more angry consumers contacting  








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            treasurer tax collector...   We believe the bill should also  
            be amended to place private party PACE lenders under the  
            jurisdiction of an agency with regulatory authority such as  
            the Department of Business Oversight to eliminate further  
            disclosure - related and other consumer problems.  We would  
            recommend that industry standards for disclosure, training,  
            and ethics be required, and standardized disclosure forms be  
            developed and required for future PACE transactions.  


            "At the outset of the legislation authorizing PACE liens,  
            these types of third party lenders were not contemplated.  In  
            fact, County Treasurer Tax Collectors initiated some programs,  
            notably in Placer and Sonoma, which exist to this day and  
            which do not report the same kind of angry taxpayer calls,  
            disclosure, and other consumer problems.  As public agencies,  
            we have the responsibility to operate prudent and responsible  
            programs not only for those who participate, but for all of  
            our constituents.  Third party providers do not have the same  
            incentive.  


            "Contractual subordination does not belong in the  
            statute?those amendments were crafted with no input from the  
            very government body tasked with making those collections, and  
            they pose an incredible threat to the import and integrity of  
            the tax collection system.  It is our sincere hope that your  
            committee, charged with crafting and considering legislation  
            that will directly impact local government, will reject this  
            preposterous language."


            Renovate America argues, "The contractual subordination model  
            has proven successful for Renovate America, but ensconcing it  
            in statute at this point and typing the hands of local  
            governments who operate PACE programs without private capital  
            is not necessary so long as clear and transparent disclosures  
            are in place.  The existence of a - yet untapped - $10 million  
            fund to compensate first mortgage lenders for any losses in a  








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            foreclosure for forced sale due to the PACE lien, and the  
            market response by actors such as Renovate America in  
            assigning their rights to initiate a foreclosure and to  
            collect proceeds from a foreclosure further underscore this  
            point."  


          13)Double Referral.  This bill was heard by the Banking and  
            Finance Committee on April 25, 2016, where it passed with an  
            11-1 vote.


          REGISTERED SUPPORT / OPPOSITION:




          Support


          California Association of Realtors [CO-SPONSOR]


          California Bankers Association [CO-SPONSOR]


          California Credit Union League [CO-SPONSOR]


          California Escrow Association [CO-SPONSOR]


          California Mortgage Association [CO-SPONSOR]


          California Mortgage Bankers Association [CO-SPONSOR]


          United Trustees Association [CO-SPONSOR]








                                                                    AB 2693


                                                                    Page  24







          California Community Banking Network 


          Central Valley Community Bank


          Community West Bank


          Valley Republic Bank




          Concerns




          California Municipal Finance Authority




          




          Opposition


          California Association of County Treasurers and Tax Collectors  
          (unless amended)


          California Solar Energy Industries Association








                                                                    AB 2693


                                                                    Page  25







          California State Association of Counties (unless amended)


          CleanFund Commercial PACE Capital, Inc.


          Ecosystem Integrity Fund


          Placer County Treasurer-Tax Collector Jenine Windeshausen  
          (unless amended)


          League of California Cities (unless amended)


          PACE Equity


          PACE Funding


          Placer County Board of Supervisors (unless amended)


          Renew Financial


          Renovate America


          Sonoma County Board of Supervisors


          Sonoma County Water Agency










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          Urban Counties of California


          Western Riverside Council of Governments


          


          Opposition to the previous version of the bill:


          


          ABS Applied Building Science


          Apperson Energy Management


          Brower Mechanical, Inc.


          California Energy Efficiency Industry Council


          California League of Conservation Voters (unless amended)


          City of San Diego


          Clarke & Rush


          Climate Action Plan










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          Community Action Agency of Butte County, Inc.


          Eco Performance Builders


          Efficiency First California


          Energy Masters


          Energy Resolutions, Inc.


          Environmental Defense Fund (unless amended)


          Gary Dobson Construction


          JR Construction - SOL Solutions, Inc.


          JR Putman, Inc.


          Kevel Home Performance


          McClelland Air Conditioning


          PACENation


          Placer County Contractors' Association (unless amended)










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                                                                    Page  28





          Progressive Insulation & Windows


          Pros360


          RBB Architects, Inc.


          ReNewAll


          Rising Design & Construction


          Seagate Properties, Inc.


          South Bay Cities Council of Governments


          Opposition to previous version of the bill (continued)


          


          Syntrol


          Ultimate Home Performance


          Vote Solar


          Ygrene










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                                                                    Page  29





          Individual letters (5)




          Analysis Prepared by:Misa Lennox / L. GOV. / (916) 319-3958