BILL ANALYSIS Ó
SENATE JUDICIARY COMMITTEE
Senator Hannah-Beth Jackson, Chair
2015-2016 Regular Session
AB 2693 (Dababneh)
Version: June 22, 2016
Hearing Date: June 28, 2016
Fiscal: No
Urgency: No
TH
SUBJECT
Financing Requirements: Property Improvements
DESCRIPTION
This bill makes certain changes to the Property Assessed Clean
Energy program, including:
granting a property owner the right to cancel a contractual
assessment prior to midnight on the third business day after
executing the contract without penalty or obligation;
requiring a financing estimate document to be completed and
delivered to a property owner at least three business days
before the property owner consummates a voluntary contractual
assessment; and
restricting the ability of public agencies and other parties
to make representations to a property owner regarding the
effect the financed improvements will have on the market value
of the property.
(This analysis reflects amendments to be offered by the author
in committee.)
BACKGROUND
Under existing law, local governments are authorized 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
through what is known as the Property Assessed Clean Energy
(PACE) program. This program allows property owners to repay
their loans through voluntary assessments or parcel taxes, which
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are secured by priority liens and appear annually on property
tax bills until the loans are repaid.
California currently authorizes two distinct statutory
frameworks under which local governments can implement and
administer PACE loan programs. The first -- voluntary
contractual assessments -- allows property owners to finance and
repay costs associated with specific improvements through
special assessments. Improvements covered by this category of
PACE financing include: renewable energy sources or energy
efficiency improvements that are permanently fixed to real
property; water efficiency improvements that are permanently
fixed to real property; electric vehicle charging
infrastructure; and seismic strengthening improvements.
The second form of PACE financing -- Mello-Roos parcel taxes --
allows specially formed community facilities districts (CFD) to
issue bonds against these taxes to finance 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.
Under this arrangement, 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.
Due to their unique financing structure, consumers may not fully
understand their obligations when entering into a PACE program
to finance improvements to their property. This bill would
require public agencies and other participants who participate
in PACE financing to make certain disclosures to consumers,
provide consumers with certain rights of rescission, and
restrict the types of representations that can be made, when
financing improvements through a PACE program.
CHANGES TO EXISTING LAW
Existing law , the Mello-Roos Community Facilities Act of 1982,
sets forth procedures for the establishment of a community
facilities district for the financing of certain public capital
facilities and services, and provides that these districts may
be instituted by a legislative body on its own initiative.
(Gov. Code Sec. 53311 et seq.)
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Existing law states that as an alternate and independent
procedure for forming a community facilities district, a
legislative body may form a community facilities district that
initially consists solely of territory proposed for annexation
to the community facilities district in the future, with the
condition that a parcel or parcels within that territory may be
annexed to the community facilities district and subjected to
the special tax only with the unanimous approval of the owner or
owners of the parcel or parcels at the time that the parcel or
parcels are annexed. Existing law sets forth specific
requirements for the formation of community facilities district
under this alternate procedure. (Gov. Code Sec. 53328.1.)
Existing law establishes an alternate procedure for authorizing
assessments to finance specified improvement work through the
creation of voluntary contractual assessments. (Sts. & Hwy.
Code Sec. 5898.10.)
This bill restricts a public agency from permitting a property
owner to participate in the above community facilities district
and assessment programs, as specified, unless:
the property owner's participation would not result in the
total amount of the annual property taxes and assessments
exceeding 5 percent of the property's market value, as
determined at the time of approval of the property owner's
contractual assessment; and
the property owner receives two copies of a statutory right to
cancel form.
This bill requires a public agency or another party to provide a
statutory "Financing Estimate and Disclosure" form at least
three business days before the property owner consummates a
voluntary contractual assessment or a special tax, as specified.
This bill states that a public agency or other party to a
voluntary contractual assessment or a special tax shall not make
any representations to a property owner regarding the effect
that financed improvements will have on the market value of the
property unless that public agency or other party derives its
estimates of the market value using a specified methodology.
This bill makes related legislative declarations and findings,
and other conforming changes to existing law.
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COMMENT
1.Stated need for the bill
The author writes:
Homeowners are at risk from two deficiencies in the law
governing PACE financing: A PACE encumbrance jeopardizes
conventional mortgage financing for the home, and PACE
financing extends credit secured by the home without providing
adequate disclosures and without the underwriting safeguards
applicable to other loans. PACE loans present several
challenges for consumers in that they negatively affect future
financial transactions, there is a lack of true underwriting
relative to the borrower's ability to repay the debt, and the
terms and conditions are not adequately disclosed. These
methods of finance have received attention by the Federal
Housing Finance Agency (FHFA), the regulator for the
government-sponsored entities (GSEs) known as Fannie Mae and
Freddie Mac. The FHFA's concerns are rooted in longstanding
lending and underwriting principles.
The GSEs exist as a secondary market providing liquidity,
stability and affordability to the mortgage market. The GSEs
buy mortgages from lenders and the cash raised from selling
loans allows those lenders to engage in further lending. This
process provides a stable supply of funds available for
mortgage loans and makes those loans more affordable for
consumers. The FHFA has issued several memorandum wherein
they "make it 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."
Since the federal government is responsible for backing the
overwhelming majority of all new mortgage originations, the
GSEs' unwillingness to purchase mortgages will have a chilling
effect on the availability of credit and the opportunity for
consumers to purchase or refinance homes.
AB 2693 will make important consumer protection changes to the
PACE law. If enacted, this bill requires that PACE loans be
accompanied by model disclosures, ensuring that all borrowers
receive information about the contractual obligation they are
entering in to and the related financial terms and conditions
of such an agreement. Specifically, AB 2693 requires that
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borrowers receive a standardized disclosure about their PACE
loan in a manner somewhat analogous to the disclosures
provided in connection with any other home loan. There should
be no confusion in the mind of either the committee members or
borrowers -- these encumbrances might be labeled
"assessments," but they are really loans that come at the
expense of the borrower's equity in the property. . . .
Unfortunately for borrowers, if they fail to receive
meaningful disclosures regarding their PACE loan, they cannot
effectively shop for financing of energy conservation
improvements, and cannot make a thoughtful comparison of the
competing loans available to finance the home improvement.
AB 2693 also allows a borrower a three day right to rescind
and provides the form that he or she may use to exercise that
right - just like other home improvement loans. In addition,
recent amendments make it clear that the bill applies only to
single family residential PACE liens, and not commercial or
non-residential loans, and the rule will apply prospectively
to encumbrances agreed to after January 1, 2017.
2.Improved rights and disclosures for consumers
This bill would require public agencies and private sector
partners to give consumers a specified disclosure form three
days before PACE financing is consummated describing the terms
of their PACE obligation, including financing and repayment
terms. This bill would also require that consumers receive a
three-day form describing their right to rescind the obligation.
These disclosures - analogous to disclosures required in real
property transactions - will help consumers understand the
nature of the obligation they are undertaking, and should enable
them to compare the financing terms offered under a PACE program
to the terms available through other forms of financing.
Writing in support, the California Association of County
Treasurers and Tax Collectors states:
We support the need for far greater transparency, disclosure
and accountability in furtherance of consumer protections when
it comes to PACE assessments that are administered through
private parties. Many tax collectors have fielded queries
from angry tax payers who do not understand why their property
tax bill has skyrocketed after entering into a contractual
assessment for PACE financing for solar and other energy
efficiency and water conservation improvements. In the
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continued absence of strict regulation in this area by a state
agency tasked with consumer protection, there will undoubtedly
be untold more angry customers contacting treasurer tax
collectors about their tax bill regarding these assessments
being placed on the tax bill.
. . .
At the outset of the legislation authorizing PACE liens, these
types of third party lenders were not contemplated. In fact,
County Treasurer Tax Collectors initiated some programs,
notably in Placer and Sonoma, which exist to this day and
which do not report the same kind of angry taxpayer calls,
disclosure and other consumer problems. We believe that it is
in the best interest of the public agency to fully and
completely inform the property owner of the consequences of
entering into such an arrangement, as the county tax bill will
be the mechanism by which the assessments will be collected.
3.Opposition concerns
Although the author and sponsors have worked extensively with
opponents to this bill to address their concerns, some technical
matters in the proposed statutory notices still divide the
parties. The California Solar Energy Industries Association
(CALSEIA), writing in opposition, states:
CALSEIA is the state's largest voice for the solar industry,
representing 375 contractors, manufacturers, distributors, and
other members of the state's solar industry. PACE is an
innovative financing tool that allows property owners to
finance energy-efficiency, water-efficiency, and renewable
energy generation improvements as a voluntary property tax
assessment. Over 70,000 PACE program participating homeowners
will save 9.1 billion kWh of energy, 3.4 billion gallons of
water and $2.5 billion in homeowners' utility bills - while
creating 13,124 new California jobs. PACE is already the most
successful energy- and water-financing improvement program in
California history - administered and funded almost
exclusively with private capital ($2+ billion to date).
We strongly support openness and transparency. We agree that
industry standard disclosure practices are vital to the
ongoing attractiveness and sustainability of PACE in
California, and we will work with the supporters to reach
consensus on specific language. We support a strong and
robust disclosure bill. However, several technical, but
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critical issues still remain. California must continue to
lead the Nation in creating and sustaining innovative policy
to combat the impacts of climate change. Water-efficiency,
energy-efficiency, and renewable energy upgrades to
residential properties are integral to furthering the State's
goals of reducing greenhouse gas emissions; insulating the
state from the impacts of dwindling water resources; and
helping Californians save money.
Support : California Association of County Treasurers and Tax
Collectors; California Coast Credit Union; California Community
Banking Network; Central Valley Community Bank; Comercia Bank;
Commonwealth Central Credit Union; Community West Bank; El
Dorado Savings Bank; Farmers and Merchants Bank of Central
California; First Choice Bank; First Northern California Credit
Union; 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;
Valley First Credit Union; Valley Republic Bank; Two Individuals
Opposition : California Solar Energy Industries Association;
Renew Financial; Renovate America
HISTORY
Source : California Association of Realtors; California Bankers
Association; California Credit Union League; California Escrow
Association; California Land Title Association; California
Mortgage Association; California Mortgage Bankers Association;
United Trustees Association
Related Pending Legislation : AB 2618 (Nazarian, 2016) would
add seismic improvements to the types of improvements that can
be financed on publicly or privately owned property by a
community facilities district (CFD) that is formed through an
alternative process that allows property owners to voluntarily
annex their property into the CFD. This bill is pending on the
Senate Floor.
Prior Legislation :
SB 692 (Hancock, Ch. 219, Stats. 2013) made several changes to
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the Mello-Roos Community Facilities Act and the Mark-Roos Bond
Pooling Act, including authorizing Mello-Roos Act special taxes
to pay for maintenance and operation of specified real property,
and adding leases to the list of property interests that Joint
Powers Authorities can use to finance public capital
improvements.
SB 555 (Hancock, Ch. 493, Stats. 2011) authorized Mello-Roos
community facilities districts to finance renewable energy,
energy efficiency, and water efficiency improvements on private
property.
SB 279 (Hancock, 2009) would have added the acquisition,
installation, and improvement of energy efficiency, water
conservation, and renewable energy improvements to the types of
facilities that a community facilities district may finance, or
refinance, regardless of whether the buildings or property are
privately or publicly owned. This bill was vetoed by Governor
Schwarzenegger.
AB 1709 (Hancock, 2007) was substantially similar to SB 279
(Hancock, 2009), and was also vetoed by Governor Schwarzenegger.
Prior Vote :
Senate Governance and Finance Committee (Ayes 6, Noes 0)
Assembly Floor (Ayes 75, Noes 0)
Assembly Local Government Committee (Ayes 9, Noes 0)
Assembly Banking and Finance Committee (Ayes 11, Noes 1)
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