Top PACE Lender Warns of Rapid Decline in California Applications

A new report from property-assessed clean energy (PACE) financier Renew Financial said a California law passed last year has unintentionally choked business for the energy and water retrofit program.

Renew Financial said its California residential PACE volume in the first half of 2018 dropped 42 percent compared to the same period last year. The firm said overall California residential PACE applications dropped 49 percent since the beginning of this year. 

Cliff Staton, executive vice president for government affairs at Renew Financial, attributes much of that decline to regulatory changes that came into effect in April. 

Assembly Bill 1284 set up “ability to pay” standards and also disqualifies some homeowners, for instance, if the property owner has been party to bankruptcy proceedings in the past seven years or has more than one late payment on a mortgage in the 12 months preceding the application. Those restrictions were set up to protect consumers from predatory PACE practices, where contractors sign up homeowners who are later unable to make payments on retrofits. 

While Renew Financial said the changes to the state’s PACE law were expected to bring a 10 percent decline in activity, the company’s numbers suggest the impact has been much greater. 

The firm supported the California legislation, but now wants changes to amend its unintended consequences.

“It was done in a rush,” said Staton. “It wasn’t perfect.” 

To staunch the application drop, Renew Financial is turning to Sacramento. Lawmakers have so far introduced two bills dealing with PACE, SB 1087 and AB 2063. Staton hopes fixes to last year’s law will make their way into one of them before the legislative session ends on August 31. He said he has plans to attend a meeting on Tuesday called by Senator Richard Roth, the Democrat who introduced SB 1087, along with other PACE stakeholders. 

PACE financing funds retrofits on existing properties, which a property owner then pays off over time as an addition on property taxes. It’s currently up to local and state governments to determine regulations (though some federal regulations and threats to the program have been proposed). In May, President Trump signed a law that directs the Consumer Financial Protection Bureau to craft “ability-to-repay regulations” to protect PACE customers. 

California is one of three states — the group also includes Missouri and Florida — that has residential PACE programs. To date the program has sponsored 220,000 home upgrades, 58 percent of which focused on energy efficiency and 37 percent of which involved renewable energy, according to PACENation. 

Thirty-two states have commercial programs, which have sponsored more than 1,600 projects.

In California, the program has been successful. Lawrence Berkeley National Laboratory found this year that the state's cities that adopted PACE saw an increase in residential PV systems of between 7 percent and 12 percent from 2010 to 2015. According to the state legislature, assessments mushroomed from $350 million in 2014 to over $2.6 billion last year.

But a precipitous decline in applications means less of that money is funneled toward contractors and the companies that liaise the funds, like Renew Financial.

In the past, watchdogs have criticized some of those companies for hastily approving projects for homeowners who are not made familiar with the terms of the financing.    

To prevent predatory PACE assessments, California law also now requires a written disclosure that explains financing terms as well as a presigning phone call from the PACE administrator that verbally explains all the financing terms. 

“Those two things have really helped to ensure that every homeowner does understand their financing,” said Staton, who added that Renew Financial has and continues to support consumer protections. 

But Staton said the more stringent eligibility requirements are also cutting off property owners who should rightfully be included in the program, not only those who cannot afford it but might have signed up anyway with the laxer regulations. 

“If there was a problem with people not being able to afford PACE, it was a very small percentage of all the people who have PACE assessments on their properties,” said Staton. “It was nowhere near 50 percent.”

In developing workable standards, California could serve as an example for other states considering residential PACE programs. According to the Mortgage Bankers Association, over 20 states have enacted some type of legislation to develop residential PACE. 

“It’s important to get this right, on both fronts,” said Staton. “It’s important to get PACE policy right [in a way] that allows homeowners to make these improvements because climate change threatens the earth. It’s also important to get consumer protection right, because you don’t want to have a policy that could allow homeowners to lose their homes.”