BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                    AB 2693


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          ASSEMBLY THIRD READING


          AB  
          2693 (Dababneh)


          As Amended  May 10, 2016


          Majority vote


           ------------------------------------------------------------------ 
          |Committee       |Votes|Ayes                  |Noes                |
          |                |     |                      |                    |
          |                |     |                      |                    |
          |                |     |                      |                    |
          |----------------+-----+----------------------+--------------------|
          |Banking         |11-1 |Dababneh, Travis      |Ridley-Thomas       |
          |                |     |Allen, Achadjian,     |                    |
          |                |     |Bonilla, Brown, Chau, |                    |
          |                |     |Gatto, Hadley, Kim,   |                    |
          |                |     |Low, Mark Stone       |                    |
          |                |     |                      |                    |
          |----------------+-----+----------------------+--------------------|
          |Local           |9-0  |Eggman, Waldron,      |                    |
          |Government      |     |Mullin, Bonilla,      |                    |
          |                |     |Chiu, Cooley, Jones,  |                    |
          |                |     |Gordon, Linder        |                    |
          |                |     |                      |                    |
          |                |     |                      |                    |
           ------------------------------------------------------------------ 


          SUMMARY:  Adds consumer protections to California's Property  
          Assessed Clean Energy (PACE) Program.  Specifically, this bill:   










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          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 owner's participation would result in the total  
               amount of the annual property taxes and assessments  
               exceeding 5% of the property's fair market value, as  
               determined at the time of approval of the owner's  
               contractual assessment.


             b)   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;  


             c)   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,


             d)   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;









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               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.  


          1)Provides that if a  property owner is a homeowner applicant, a  
            public agency shall not permit the property owner to  
            participate in any voluntary contractual assessment unless  
            both of the following requirements are met:
             a)   The property owner has been provided with a completed  
               financing estimate document or a substantially equivalent  
               document that displays the same information in a  
               substantially similar format.
             b)   The property owner is given the right to cancel the  
               contractual assessment at any time prior to midnight on the  
               third business day after the date of the transaction to  
               enter into the agreement without penalty or obligation.   
               The property owner is deemed to have given notice of  
               cancellation at the moment that the property owner sends  
               the notice by mail or email or at the moment that the  
               property owner otherwise delivers the notice, as  
               applicable.


          2)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.  
          3)Specifies the contents and format of the "Financing Estimate  
            and Disclosure" which must also include a Notice to Homeowners  
            that reads "The financing arrangement described below will  
            result in an assessment against your property which will be  








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            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."  


          4)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.


          5)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.  


          EXISTING LAW:  


          1)Defines "Property Assessed Clean Energy bond" or "PACE bond"  
            as a bond that is secured by any of the following:


             a)   A voluntary contractual assessment on property  
               authorized pursuant to paragraph (2) of the Streets and  
               Highways Code Section 5898.20(a); 
             b)   A voluntary contractual assessment or a voluntary  
               special tax on property to finance the installation of  
               distributed generation renewable energy sources, electric  
               vehicle charging infrastructure, or energy or water  
               efficiency improvements that is levied pursuant to a  
               chartered city's constitutional authority under the  
               California Constitution Article XI Section 5; or, 








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             c)   A special tax on property authorized pursuant to  
               Government Code Section 53328.1(b). [Public Resources Code  
               Section 26054]


          2)Authorizes cities, counties, and other local public agencies  
            and utility districts to provide up-front financing to  
            property owners to install renewable energy-generating  
            devices, make specified water or energy efficiency  
            improvements, or install electric vehicle charging  
            infrastructure on their properties through a system of  
            voluntary contractual assessments which is repaid, with  
            interest, through property tax assessments.  The programs are  
            commonly referred to as the PACE programs.  [Streets and  
            Highways Code Section 5898.10 et seq.]
          3)Requires the California Alternative Energy and Advanced  
            Transportation Financing Authority (CAEATFA) to develop and  
            administer a PACE Reserve program to reduce overall costs to  
            the property owners of PACE bonds issued by an applicant by  
            providing a reserve of no more than 10% of the initial  
            principal amount of the PACE bond.  Requires the CAEATFA to  
            develop and administer a PACE risk mitigation program for PACE  
            financing to increase its acceptance in the marketplace and  
            protect against the risk of default and foreclosure.  [Public  
            Resources Code Section 26060]


          4)Allows a community facilities district to finance and  
            refinance the acquisition, installation, and improvement of  
            energy efficiency, water conservation, and renewable energy  
            improvements that are affixed, as specified in Civil Code  
            Section 660, to or on real property and in buildings, whether  
            the real property or buildings are privately or publicly  
            owned.  Energy efficiency, water conservation, and renewable  
            energy improvements financed by a district may only be  
            installed on a privately owned building and on privately owned  
            real property with the prior written consent of the owner or  








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            owners of the building or real property.  This chapter shall  
            not be used to finance installation of energy efficiency,  
            water conservation, and renewable energy improvements on a  
            privately owned building or on privately owned real property  
            in connection with the initial construction of a residential  
            building unless the initial construction is undertaken by the  
            intended owner or occupant.  [Government Code Section 53313.5]


          FISCAL EFFECT:  None. 


          COMMENTS:  


          This bill provides enhanced consumer protections by requiring a  
          public agency to provide property owners participating in the  
          PACE program with a "Financing Estimate and Disclosure"  
          document.  This disclosure will provide much needed information  
          to property owners regarding the financial terms and obligations  
          of the PACE loan.  


          Additionally, this bill establishes uniform criteria that a  
          property owner must meet in order to participate in the PACE  
          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.  


          If the property owner is a homeowner, this bill places  
          parameters on participation due to a recent bankruptcy.  This  








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          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.  


          This bill establishes uniform disclosures that must be provided  
          to each homeowner prior to participating in a PACE program.   
          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.  The measure also provides  
          that a property owner is given the right to cancel the PACE loan  
          at any time prior to midnight on the third business day after  
          the date of the transaction to enter into the agreement without  
          penalty or obligation. 



          Background: 

          In 2008, California enacted the first statewide PACE program  
          through AB 811 (Levine), Chapter 159.  Since 2008, at least 31  
          other states have created their own programs with variations.   
          Not all PACE programs carry super-lien status.  PACE is an  
          innovative financing tool that residential or commercial  
          property owners can use to pay for renewable energy upgrades,  
          energy, or water efficiency, or electric vehicle charging  
          stations for their homes or buildings.  Local agencies create  
          PACE assessment districts in their jurisdictions via a  
          resolution of their legislative body, 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 to re-pay the bonds  
          via an assessment on their property tax bill.  The assessment  
          remains with the property even if it is sold or transferred, and  
          the improvements must be permanently fixed to the property.









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          PACE programs typically are more attractive to borrowers and  
          lenders because they can offer a longer pay-back period (up to  
          20 years) with smaller payments than other types of loans, and  
          they are securitized by the property assessment rather than the  
          borrower.  


          Federal Housing Finance Agency (FHFA)


          On July 6, 2010, Fannie Mae and Freddie Mac stated that they  
          would no longer purchase mortgage loans secured by properties  
          with outstanding PACE loans.  The FHFA announcement states,  
          "First liens established by PACE loans are unlike routine tax  
          assessments and pose unusual and difficult risk management  
          challenges for lenders, servicers and mortgage securities  
          investors.  The size and duration of PACE loans exceed typical  
          local tax programs and do not have the traditional community  
          benefits associated with taxing initiatives. 


          "FHFA urged state and local governments to reconsider these  
          programs and continues to call for a pause in such programs so  
          concerns can be addressed.  First liens for such loans represent  
          a key alteration of traditional mortgage lending practice.  They  
          present significant risk to lenders and secondary market  
          entities, may alter valuations for mortgage-backed securities  
          and are not essential for successful programs to spur energy  
          conservation." 


          The FHFA announcement can be found here: 


           http://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Statement-on-C 
          ertain-Energy-Retrofit-Loan-Programs.aspx 










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          The State of California and several other parties sued FHFA for  
          not conducting a formal rulemaking before its decision; however,  
          the 9th Circuit Court of Appeals ruled in FHFA's favor in March  
          of 2013.  (County of Sonoma, et al. v. Federal Housing Finance  
          Agency, 710 F.3d 987 (2013)).

          On December 22, 2014, the FHFA once again alerted homeowners,  
          financial institutions, and state authorities of FHFA's concerns  
          with state-level that threaten the first-lien status of  
          single-family loans owned or guaranteed by Fannie Mae and  
          Freddie Mac.  FHFA stated, 


              The existence of these super-priority liens increases the  
              risk of losses to taxpayers.  Fannie Mae and Freddie Mac,  
              while operating in conservatorship, currently support the  
              housing finance market by purchasing, guaranteeing, and  
              securitizing single-family mortgages.  One of the bedrock  
              principles in this process is that the mortgages supported  
              by Fannie Mae and Freddie Mac must remain in first-lien  
              position, meaning that they have first priority in receiving  
              the proceeds from selling a house in foreclosure.  As a  
              result, any lien from a loan added after origination should  
              not be able to jump in line ahead of a Fannie Mae or Freddie  
              Mac mortgage to collect the proceeds of the sale of a  
              foreclosed property.  Localities offering these PACE loans  
              threaten to move existing Fannie Mae and Freddie Mac  
              mortgages to a second lien position and increase the risk of  
              loss to the Enterprises and, by extension, to taxpayers.  


              In issuing this statement, FHFA wants to make clear to  
              homeowners, lenders, other financial institutions, state  
              officials, and the public that Fannie Mae and Freddie Mac's  
              policies prohibit the purchase of a mortgage where the  
              property has a first-lien PACE loan attached to it.  This  
              restriction has two potential implications for borrowers.   
              First, a homeowner with a first-lien PACE loan cannot  








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              refinance their existing mortgage with a Fannie Mae or  
              Freddie Mac mortgage.  Second, anyone wanting to buy a home  
              that already has a first-lien PACE loan cannot use a Fannie  
              Mae or Freddie Mac loan for the purchase.  These  
              restrictions may reduce the marketability of the house or  
              require the homeowner to pay off the PACE loan before  
              selling the house.


          California PACE Loss Reserve Program (LRP)



          In 2013, SB 96 (Committee on Budget and Fiscal Review), Chapter  
          356, directed CAEATFA to develop the PACE LRP to mitigate the  
          potential risk to mortgage lenders associated with residential  
          PACE financing.  The $10 million Loss Reserve makes the first  
          mortgage lenders whole for any losses in a foreclosure or a  
          forced sale that are attributable to a PACE lien covered under  
          the LRP.  The goal of the LRP is to put first mortgage lenders  
          in the same position they would be in without a PACE lien.


          PACE administrators can participate in the LRP by applying to  
          CAEATFA and demonstrating that they meet the LRP's minimum  
          underwriting criteria.  Once a PACE program is enrolled, the  
          Loss Reserve will cover assessments issued by that program for  
          their full terms, or until funds are exhausted.  Enrolled PACE  
          programs report their financing activity to CAEATFA  
          semi-annually.  To date, no claims have been made on the LRP.  


          In May of 2014, FHFA responded to California's PACE LRP by  
          stating, "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  








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          Reserve Fund's ongoing sustainability."  

          Department of Housing and Urban Development- Federal Housing  
          Administration (FHA)


          In August, 2015, FHA announced the development of Single Family  
          PACE guidance.  The Single Family FHA guidance will address the  
          impact of PACE assessments on purchases, refinances and loan  
          modification options available to borrowers experiencing  
          distress and will require subordination of PACE financing to the  
          first lien FHA mortgage.  FHA stated the guidance at a minimum  
          will include the following: 


          1)Lien position:  only PACE liens that preserve payment priority  
            for first lien mortgages through subordination;
          2)PACE payment, structure, and term:  PACE financing must be  
            fixed rate, fully amortizing loan; 


          3)Eligible properties:  PACE assessments must be attached to  
            single family properties, as defined by FHA, which are 1 to  
            4-unit dwellings, including detached, semi-detached and  
            townhome properties; 


          4)Equity requirements:  PACE liens that preserve payment  
            priority for first lien mortgages will be eligible for  
            financing that does not exceed FHA's maximum combined  
            loan-to-value ratio; 


          5)Record keeping:  PACE liens must be formally recorded and be  
            identifiable to a mortgage lender through a title search; 


          6)Additional consumer protections:  PACE programs must comply  
            with applicable federal and state consumer laws and should  








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            include disclosures to and training for homeowners  
            participating in the program.  


          Concerns with PACE:

          Refinancing:  A person with a traditional PACE lien which has  
          super priority status will not be able to obtain refinancing  
          with a loan which conforms to current Fannie Mae or Freddie Mac  
          guidelines, which represents the vast majority of conventional  
          refinancing.  Fannie Mae and Freddie Mac policies prohibit them  
          from purchasing a mortgage with a PACE lien on it (discussed  
          further below).  This greatly limits, if not eliminates, the  
          ability of a borrower to refinance the property if there is a  
          PACE super priority lien.  Certain programs have advertised that  
          many homeowners have been able to refinance their property with  
          PACE liens, but it is likely most of those were done prior to  
          July 6, 2010 or the homeowners are using non-conventional  
          financing which may carry higher interest rates.  


          However, a number of PACE programs are offering to subordinate  
          the liens at the request of a homeowner.  While the FHFA has not  
          yet taken a stance on the subordination agreements being offered  
          by these PACE programs it is possible that if the PACE lien is  
          subordinated the homeowner may be able to then refinance their  
          homes with conventional financing. 


          Selling:  A homeowner with a PACE lien will have difficulty  
          selling his or her property to buyers with conventional loans.   
          Fannie Mae and Freddie Mac are prohibited from purchasing a  
          mortgage with a PACE lien on it.  Therefore a buyer who is using  
          conventional financing will likely be unable to purchase a home  
          with the lien, as most conventional mortgages will conform to  
          Fannie Mae and Freddie Mac guidelines.


          Sellers would be limited to those persons who are cash buyers,  








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          or buyers who have loans from lenders who make loans which do  
          not conform to Fannie Mae or Freddie Mac guidelines and only  
          where such loans omit provisions restricting the ability to  
          borrow with the super priority lien.

          Lack of consumer protections:  The current PACE program lacks  
                     disclosure requirements in statute.  Borrowers should fully  
          understand these restrictions prior to taking out a first-lien  
          PACE loan.  PACE loan underwriting conducted by public agencies  
          or private entities lacks basic standards with federal lending  
          laws.  Potential borrowers are not evaluated for their ability  
          to repay, there are insufficient parameters for debt-to-income  
          or loan-to-value ratios, and consumer disclosures are  
          inadequate, failing to clearly identify the terms and conditions  
          of the loan and the subsequent impact such loans have on  
          existing mortgages and the consumer's ability to sell or  
          refinance their home.  


          Number of PACE Loans:  It is also unclear how many PACE loans  
          can be made on a single parcel.  A single property may therefore  
          have a super-priority lien established for a loan made for solar  
          efficiency, a separate loan for water efficiency and a third  
          loan for seismic strengthening improvements.  The potential  
          stacking of these PACE loans further complicates title and the  
          rights of other prior lienholders. 


          PACE:


          Generally, PACE programs begin with a local public agency (such  
          as a city, county or municipal utility district) adopting a  
          resolution to create a Joint Power Authority (JPA) to authorize  
          the creation of a PACE loan program.  The JPA administers the  
          program directly or may contract with a private entity to  
          administer it.  The JPA may authorize either local governments  
          or third parties to make loans to homeowners for the  
          conservation improvements.








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          When created, it was presumed that public agencies would run the  
          PACE program themselves; instead the majority of cities or  
          counties have contracted out the services to new unregulated  
          private entities to administer the PACE program.  Only two  
          programs run their own PACE program internally:  Sonoma County  
          and Placer County.  



          The programs are funded by either private or public sources, or  
          a combination of both.  For example, Sonoma County has generally  
          used public funds for their residential PACE program.  The  
          residential PACE program in Sonoma County, Sonoma County Energy  
          Independence Program, borrows money from the County, which is  
          then paid back with interest as the lien is paid off by the  
          homeowner.  In other areas, it is primarily private funding.  In  
          PACE programs administered by private entities the bonds are  
          typically issued to private investors to pay the cost of the of  
          the conservation improvements. 


          How does PACE work?  Although details vary between the programs,  
          generally a homeowner who is interested in adding a conservation  
          improvement to his or her home is first advised and sometimes  
          required to have an energy audit conducted on the property to  
          identify areas of potential conservation improvements.  After  
          that, a homeowner contacts a contractor, who typically has to be  
          approved or certified by the PACE program to be eligible to work  
          on the project.  The contractor provides an estimate of the  
          costs of the conservation improvement(s) the homeowner wishes to  
          add.  The homeowner then applies to the program for approval.   
          Typically there are costs associated with the application.  Only  
          once the improvement application is approved, will the work  
          begin. 


          If the project is approved, the entity administering the program  








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          will enter into an agreement with the property owner where the  
          entity agrees to pay the cost of the improvement.  An assessment  
          lien is placed on the property for the amount owed plus  
          interest.  After the work is performed, the PACE program entity  
          pays the contractor.  The property owner repays the entity for  
          the improvements as a special tax assessment on the property tax  
          bill, generally over a five to 20 year period.  The property  
          owner pays the lien in the same manner as he or she would pay  
          property taxes.

          Who uses PACE?  PACE financing is available to property owners  
          in certain cities or counties that have adopted a program.  In  
          California, over 400 cities and counties participate in PACE.   
          To qualify, homeowners need to have equity in their home.  The  
          homeowner must have no judgment liens or federal or state tax  
          liens.  The homeowner cannot be in bankruptcy.  The property  
          cannot be subject to a bankruptcy proceeding.  The homeowner  
          must not be delinquent on any mortgages.


          PACE Financing:


          PACE was created as a financing alternative for homeowners in  
          hopes of encouraging energy efficiency across the state.   
          Homeowners can use PACE for various energy efficiency  
          improvements such as solar panels; irrigation components;  
          windows; heating, ventilation, and air conditioning systems,  
          etc.  PACE allows a homeowner to apply for PACE financing, if  
          approved the money financed runs with the property rather than  
          the homeowner for up to 20 years.  PACE providers encourage  
          homeowners to participate by telling them PACE is: 


          1)Easy and simple to qualify
          2)Financing is not based on the owner's annual income 


          3)Assessments do not appear on your credit report - personal  








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            credit score has no impact on funding eligibility or interest  
            rate


          4)Assessments are paid semi-annually along with your property  
            taxes 


          5)Assessments may be passed to subsequent property owners


          6)0% down- 100% financing- no payment until December 2017


          7)Terms and tax advantages deliver the lowest monthly payments -  
            saving you 50% or more over traditional financing.


          Prepayment penalties:  According to the Sonoma County program:   
          initial bond financing for improvements is held by the Sonoma  
          County Treasury, and there is no penalty while the County  
          Treasury holds the note.  However, in order to continue to  
          provide funding for Program growth, this investment will at some  
          point be converted to long-term bonds.  Bond purchasers  
          generally require an early payment penalty/premium of up to 3%,  
          based on current conditions.  Please note that while a homeowner  
          can pay off the assessment completely, the County of Sonoma  
          cannot accept partial prepayments.  Because PACE Financing is  
          through the sale of bonds, any early payoff would need to  
          include interest due until the next semi-annual bond payment  
          date, which under state law is either March 2 or September 2. 



          Interest rates:  Interest rates vary depending on the program,  
          but tend to be higher than they would be for home equity loans.   
          A review of various programs showed rates in a range from 6.95  
          to 9.25% which varied on a number of factors including the  
          amount borrowed, and the duration of the assessment.








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          Analysis Prepared by:                                             
                          Kathleen O'Malley / B. & F. / (916) 319-3081   
          FN: 0002931