On December 17, 2024, the Consumer Financial Protection Bureau (CFPB) finalized a rule applying standard mortgage protections to Residential Property Assessed Clean Energy (PACE) loans. The rule amends Regulation Z to clarify that voluntary tax assessments and liens, like PACE financing, are not excluded under the Truth in Lending Act (TILA) and recognizes PACE financing as meeting the definition of “credit” under TILA and Regulation Z. It also introduces ability-to-repay requirements for residential PACE loans. The rule is set to take effect on March 1, 2026.
Residential PACE loans enable homeowners to finance clean energy improvements through their property tax bills and are secured with a lien on the property. The financing is repaid via an assessment added to the property owner’s property tax bill, typically over a 10-to-20-year period. Moreover, the financing is tied to the property, not the property owner, and thus the repayment obligation remains with the property in the event the property is transferred. Finally, PACE liens typically take priority over other mortgages on the property, which has raised concerns among consumer advocates and lenders.
In a 2023 study, the CFPB found that most PACE borrowers could qualify for alternative financing options at much lower costs. The Bureau also found that PACE borrowers were more likely to fall behind on their primary mortgage payments, increasing the risk of foreclosure. Currently, 40 states and the District of Columbia have enacted PACE financing programs but only California, Florida, and Missouri have established PACE programs for residential properties (as opposed to commercial properties).
To address these issues, the final rule now requires lenders to evaluate a borrower’s ability to repay, similar to existing mortgage standards, ensuring loans are not irresponsibly issued. Borrowers will also receive standard mortgage disclosures, allowing them to compare PACE loan costs with other financing options.
Putting It Into Practice: This rule marks a significant step in the CFPB’s ongoing effort to regulate the clean energy financing industry. The Bureau’s 2023 research and this final rule specifically address risks associated with PACE loans. Meanwhile, in August 2024, the Bureau highlighted predatory solar lending practices in an issue spotlight and consumer advisory. As opposed to other rules recently released by the CFPB, this one may stay under the Trump administration. Section 307 of the 2018 Economic Growth, Regulatory Relief, and Consumer Protection Act, signed into law by President Trump, amended TILA to mandate that the CFPB take action on PACE financing. In fact, following the rule’s release, the Mortgage Bankers Association released a statement in support of the rule.