BILL ANALYSIS Ó
SENATE COMMITTEE ON GOVERNANCE AND FINANCE
Senator Robert M. Hertzberg, Chair
2015 - 2016 Regular
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|Bill No: |AB 2693 |Hearing |6/15/16 |
| | |Date: | |
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|Author: |Dababneh |Tax Levy: |No |
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|Version: |6/6/16 Amended |Fiscal: |No |
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|Consultant| Weinberger |
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Financing requirements: property improvements
Amends statutes governing Property Assessed Clean Energy (PACE)
financing to add consumer notice requirements and tighten
financing standards for PACE loans for residential properties.
Background
Property assessed clean energy (PACE) financing programs allow
local governments to offer loans to private property owners to
cover the initial costs of renewable energy, energy efficiency,
water efficiency, and other improvements to private property
that offer public benefits. Property owners repay the loans
through voluntary assessments or parcel taxes, which are secured
by priority liens and appear annually on property tax bills
until the loans are repaid.
State law establishes two distinct statutory frameworks under
which local governments can implement and administer PACE loan
programs that rely on voluntary contractual assessments or
parcel taxes for repayment of the loans.
Voluntary Contractual Assessment PACE Financing. A benefit
assessment is an involuntary charge that property owners pay for
a public improvement or service that provides a special benefit
to their property. As an alternative to benefit assessments,
and only with the free and willing consent of affected property
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owners, state law lets public agencies use voluntary contractual
assessments to finance:
Renewable energy sources or energy efficiency
improvements that are permanently fixed to real property
(AB 811, Levine, 2008).
Water efficiency improvements that are permanently fixed
to real property (AB 474, Blumenfield, 2009).
Electric vehicle charging infrastructure (SB 1340,
Kehoe, 2010).
Seismic strengthening improvements (AB 184, Swanson,
2011).
Mello-Roos Parcel Tax PACE Financing. The Mello-Roos Community
Facilities Act allows counties, cities, special districts, and
school districts to levy special taxes (parcel taxes) to finance
a wide variety of public works, including parks, recreation
centers, schools, libraries, child care facilities, and utility
infrastructure. A Mello-Roos Community Facilities District
(CFD) issues bonds against these special taxes to finance the
public works projects. State law establishes an alternative
process by which a local government can form a CFD to finance
only energy efficiency, water conservation, and renewable energy
improvements that are affixed to or on real property and in
buildings, whether the real property or buildings are privately
or publicly owned (SB 555, Hancock, 2011). Under the
alternative formation process, a CFD can initially consist
solely of territory proposed for future annexation to the CFD,
with the condition that a parcel or parcels within that
territory may be annexed to the CFD and subjected to the special
tax only with the unanimous approval of the parcel owner or
owners at the time of annexation.
In addition to these two statutory frameworks for providing PACE
loans, charter cities can establish their own PACE financing
programs under California Constitution's grant of authority to
charter cities to control their own "municipal affairs."
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 these companies, because PACE
AB 2693 (Dababneh) 6/6/16 Page 3
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loans are a first-priority lien in the case of foreclosure and
outstanding PACE assessments would be paid before mortgage
obligations. As a result, Fannie Mae and Freddie Mac stated
that they would no longer purchase mortgage loans secured by
properties with outstanding PACE loans.
The concerns raised by federal housing finance regulators
threatened the viability of PACE financing for residential
properties. In response, the Legislature passed SB 96
(Committee on Budget and Fiscal Review, 2013), which required
the California Alternative Energy and Advanced Transportation
Financing Authority (CAEATFA) to 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 tax sale. The program is
intended to cover PACE payments made during foreclosure, if a
mortgage lender forecloses on a home that has a PACE lien. It
will also cover any losses to a first mortgage lender up to the
amount of outstanding PACE payment, if a county conducts a tax
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. CAEATFA's PACE Loss Reserve Program
covers more than 56,000 residential PACE financings valued at
about $1.2 billion. Through the beginning of June, 2016 CAEATFA
had not received any claims on the loss reserve.
The PACE Loss Reserve Program has not resolved federal
officials' concerns about PACE financing. In a May, 2014 letter
an FHFA official wrote:
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.
Federal housing officials, mortgage lenders, and other
stakeholders in residential real property transactions remain
concerned about the complications that priority liens for PACE
AB 2693 (Dababneh) 6/6/16 Page 4
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loans can create for residential property owners who seek to
refinance or sell their properties. They worry about a lack of
consumer disclosures and protections for residential PACE
program borrowers and a lack of financing criteria to protect
the equity on homeowners' properties. They want the Legislature
to expand consumer disclosure requirements for PACE loans
offered to residential property owners and enhance the financing
criteria and other statutory requirements that local governments
must fulfill to provide PACE financing to residential property
owners.
Proposed Law
Assembly Bill 2693 prohibits a local agency from permitting the
owner of a residential property with four or fewer units from
participating in a voluntary contractual assessment program if
any of the following apply:
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.
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;
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,
The property owner is unable to meet all of the
following criteria:
o The property owner certifies that the property
taxes are current and that there is no more than one
late payment during a specified time period;
o The property owner certifies that he or she is
AB 2693 (Dababneh) 6/6/16 Page 5
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not currently in default on any debt secured by the
property and that there is no more than one late
payment during a specified time period;
o 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,
o The property owner does not have an
involuntary lien recorded against the property in
excess of $1,000.
AB 2693 prohibits a local agency from permitting the owner of a
residential property with four or fewer units from participating
in a voluntary contractual assessment program unless both of the
following apply:
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.
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 must receive two copies of a right to
cancel document as specified in state law, or a
substantially similar document that displays the same
information in substantially similar format. 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.
AB 2693 directs that a failure to comply with specified
requirements relating to financing estimate documents and
cancellation of the contractual assessment renders the
contractual obligation of a property owner of a residential
property with four or fewer units for a voluntary contractual
assessment void.
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AB 2693 declares that, with a specified exception, nothing in
the statutes governing contractual assessments shall be
construed to void or otherwise release a property owner of a
residential property with four or fewer units from the
contractual obligation incurred by a contractual assessment on a
property.
AB 2693 requires that a "Financing Estimate and Disclosure" must
be delivered to a property owner of a residential property with
four or fewer units at least three business days before the
property owner consummates a voluntary contractual assessment.
This disclosure must be provided to a property owner as a
printed copy, if requested by the property owner. A sample of
the disclosure must be maintained on an Internet Web site
available to property owners.
AB 2693 specifies the contents and format of the "Financing
Estimate and Disclosure" which must also include a Notice to
Property Owners that reads, in part: "The financing arrangement
described below will result in an assessment against your
property which will be collected along with your property taxes.
The lien against your property may jeopardize your ability to
sell or refinance your property unless you repay the underlying
debt. You may request a subordination of the lien in order to
address complications in your ability to refinance or sell your
property. There may be cheaper alternative financing
arrangements available. You should read and review the terms
carefully, and if necessary, consult with a tax professional or
attorney."
AB 2693 requires that the "Financing Estimate and Disclosure"
also must contain specified language relating to priority liens,
including the following statements: "This contractual assessment
will result in a senior lien on your property. The existence of
this senior lien may jeopardize your ability to refinance or
sell your property unless the debt is paid in full or the holder
of the debt agrees to subordinate (allow another lien to take a
higher priority). The foreclosure of a property subject to a
senior lien will terminate all other liens on the property with
a lower priority. A senior lien may be in conflict with the
terms of your mortgage contract with your lender. It is your
responsibility to ensure that you are authorized to enter into
this transaction."
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AB 2693 requires that, before annexing a parcel or parcels to a
community facilities district (CFD) formed pursuant to an
alternative process by which a local government can form a CFD
to finance energy efficiency, water conservation, and renewable
energy improvements, the legislative body of a local agency
must comply with the same requirements that AB 2693 applies to
a property owner who seeks to participate in a voluntary
contractual assessment program for a residential property of
four or fewer units.
State Revenue Impact
No estimate.
Comments
1. Purpose of the bill . AB 2693 responds to concerns that PACE
financing extends credit secured by a home without providing
truth in lending disclosures and without the underwriting
safeguards applicable to other consumer loans. Some consumers
have complained about misleading marketing campaigns related to
PACE and receiving insufficient information about a PACE lien's
interaction with their residential mortgage agreements. AB 2693
adds important consumer protections to the statutes authorizing
PACE financing. The bill will require that consumers entering
into a PACE financing transaction must be provided with
statutory model disclosure forms to ensure that all borrowers
receive information about the contractual obligation they will
assume and the related financial terms and conditions of PACE
agreements. The disclosures required by the bill are intended
to be consistent with an updated universal Truth in Lending
disclosure recently released by the federal Consumer Financial
Protection Bureau. The bill also enacts financial criteria that
build upon the basic requirements that state law has established
for participation in CAEATFA's reserve pool program. These
financial criteria are intended to ensure that PACE transactions
are based upon a sound financial foundation. By requiring more
disclosure and specifying stronger financing criteria that must
be applied to PACE financing, AB 2693 takes important steps to
protect consumers and other stakeholders in the real estate
market.
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2. Disclosure, part I . AB 2693 requires that consumers must be
provided with extensive disclosures that are specified in the
bill. However, advocates for local governments and PACE
financing providers are concerned that some of the disclosure
language required by the bill will predispose consumers to
decide against PACE loans. For example, disclosure language
relating to the senior lien states that the lien "may jeopardize
your ability to refinance or sell your property," a statement
that some providers worry will bias consumers' decisions. The
Committee may wish to consider amending AB 2693 to strike an
appropriate balance in the disclosure requirements between
informing consumers without biasing their decisions about
signing up for a PACE loan.
3. Disclosure, part II . Among the elements that must be
included in the "Financing Estimate and Disclosure" required by
AB 2693 are the "Estimated market value of [the] home without
the improvement" and the "Estimated market value of [the] home
with the improvement." Some PACE providers worry that requiring
them to provide these estimates to consumers may expose
providers to litigation and liability for subsequent consumer
claims challenging the accuracy of those estimates. To preserve
the value that these estimates may offer to consumers while
avoiding liability exposure to PACE financing providers, the
Committee may wish to consider amending AB 2693 to establish
that providers' estimates are valid as long as they are
conducted in accordance with specified standards.
4. Financing criteria . The state law authorizing CAEATFA's
PACE program specifies criteria that the authority must require
for participation in its program and other eligibility that the
authority must consider an applicant's eligibility to
participate. CAEATFA has adopted regulations that further
specify criteria that applicants must meet. The financing
criteria specified in AB 2693 may be duplicative of some
standards that state law applies to participants in CAEATFA's
PACE reserve program and, in some cases, may create
inconsistencies and confusion about what standards a PACE
financing provider must use to determine a consumer's
eligibility for financing. The Committee may wish to consider
whether sufficient minimum financing criteria could be
established by amending AB 2693 to cross-reference the
regulatory standards that CAEATFA has adopted for participation
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in its PACE reserve program.
5. Subordination clarification . AB 2693's required disclosures
include references to the consumer's ability to request that
their PACE lien be subordinated without mentioning that the lien
holder must agree to the subordination. While, in practice,
subordination requests may typically be agreed to, the bill's
disclosure language could give consumers the mistaken impression
that their lien must be subordinated upon their request. The
Committee may wish to consider amending AB 2693 to specify that
lien subordination is subject to approval of the lien holder.
6. Let's get technical . To clarify AB 2693's language, the
committee may wish to consider amending the bill to delete the
cross-reference to subdivision "(b)" on page 12, line 14 and
replace it with a reference to subdivision "(c)."
7. Related legislation . AB 2618 (Nazarian) would allow local
governments to use the Mello-Roos parcel tax PACE financing
model to provide loans for improvements to bring buildings or
real property, including privately owned buildings or real
property, into compliance with seismic safety standards or
regulations.
8. Double-referred . The Senate Rules Committee has ordered a
double-referral of AB 2693 -- first to the Senate Governance &
Finance Committee, which has jurisdiction over bills relating to
assessments and parcel tax financing mechanisms, and then to the
Senate Judiciary Committee, which has jurisdiction over bills
relating to liens and real property ownership.
Assembly Actions
Assembly Banking & Finance Committee:11-1
Assembly Local Government Committee: 9-0
Assembly Floor: 75-0
Support and
Opposition (6/9/16)
Support : California Association of Realtors; California Bankers
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Association; California Credit Union League; California Escrow
Association; California Land Title Association, California
Mortgage Association; California Mortgage Bankers Association;
United Trustees Association; 1st Northern California Credit
Union; America's United Bank; Bank of America; California
Association of County Treasurers & Tax Collectors; California
Coast Credit Union; California Community Banking Network;
California Land Title Association; Central Valley Community
Bank; Comerica Bank; CommonWealth Central Credit Union;
Community West Bank; El Dorado Savings Bank; F&M Bank; First
Choice Bank; Heritage Community Credit Union; Neighborhood
National Bank; Patelco Credit Union; Provident Credit Union;
Sacramento Credit Union; SAFE Credit Union; San Diego County
Credit Union; San Francisco Federal Credit Union; Schools
Financial Credit Union; Sierra Central Credit Union; Star One
Credit Union; Star One Credit Union; Valley First Credit Union;
Valley Republic Bank.
Opposition : Applied Building Science; Brower Mechanical, Inc.;
California Chapters of the National Electrical Contractors
Association; California Energy Efficiency Industry Council;
California League of Conservation Voters; California Legislative
Council of the Plumbing, Heating and Piping Industry ;
California State Association of Counties; Center for Climate
Protection; Clarke & Rush; Climate Action Plan; Community Action
Agency of Butte County; Eco Performance Builders; Efficiency
First California; Energy Masters; Energy Resolutions, Inc.;
Environmental Defense Fund; J R Construction - SOL SOLUTIONS; JR
Putman Inc.; League of California Cities; McClelland Air
Conditioning; PACE Equity; PACE Funding Group; PACENation;
Placer County Contractors Association; Placer County
Treasurer-Tax Collector; PROgressive Insulation & Windows;
PROS360; Renew Financial; ReNewAll; Renovate America; South Bay
Cities Council of Governments; Syntrol; Vote Solar; Western
Riverside Council of Governments;Ygrene Energy Fund.
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