BILL ANALYSIS Ó
AB 2693
Page 1
ASSEMBLY THIRD READING
AB
2693 (Dababneh)
As Amended May 10, 2016
Majority vote
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|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 | |
| | | | |
| | | | |
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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