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 AB 2693 (Dababneh) Page 2 of ? 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.) AB 2693 (Dababneh) Page 3 of ? 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. AB 2693 (Dababneh) Page 4 of ? 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 AB 2693 (Dababneh) Page 5 of ? 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 AB 2693 (Dababneh) Page 6 of ? 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 AB 2693 (Dababneh) Page 7 of ? 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 AB 2693 (Dababneh) Page 8 of ? 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) **************