BILL ANALYSIS Ó AB 2693 Page 1 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: AB 2693 Page 2 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; AB 2693 Page 3 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 AB 2693 Page 4 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, AB 2693 Page 5 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 AB 2693 Page 6 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 AB 2693 Page 7 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. AB 2693 Page 8 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 AB 2693 Page 9 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 AB 2693 Page 10 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 AB 2693 Page 11 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 AB 2693 Page 12 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, AB 2693 Page 13 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. AB 2693 Page 14 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 AB 2693 Page 15 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 AB 2693 Page 16 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. AB 2693 Page 17 Analysis Prepared by: Kathleen O'Malley / B. & F. / (916) 319-3081 FN: 0002931