The Consumer Financial Protection Bureau (CFPB) has introduced a significant rule change on December 17, 2024, that extends standard mortgage protections to Residential Property Assessed Clean Energy (PACE) loans. This new regulation clarifies that PACE financing falls under the Truth in Lending Act (TILA) and introduces ability-to-repay requirements for residential PACE loans. The rule aims to address concerns about loan risks and ensure borrowers receive proper disclosures. It will take effect on March 1, 2026. PACE loans allow homeowners to finance clean energy improvements through property tax assessments, with repayment obligations tied to the property rather than the owner. The CFPB's research highlights potential risks, including higher default rates on primary mortgages and limited availability of alternative financing options at lower costs.

Clarifying Regulatory Standards for Clean Energy Financing

The new rule from the CFPB provides clear regulatory guidelines for PACE loans, aligning them with existing mortgage standards. By defining PACE financing as "credit" under TILA, the rule ensures these loans are subject to the same protections as traditional mortgages. Lenders must now assess a borrower’s ability to repay before issuing a PACE loan, which helps prevent irresponsible lending practices. Additionally, borrowers will receive comprehensive disclosures, enabling better comparison of PACE loan costs with other financing options.

Prior to this rule, there was ambiguity regarding the treatment of PACE loans under TILA. The CFPB’s decision to clarify that voluntary tax assessments and liens like PACE financing are not excluded from TILA is a crucial step. This clarification means that PACE loans will now be regulated more strictly, ensuring that consumers are adequately protected. The ability-to-repay requirement is particularly important because it mandates lenders to evaluate borrowers’ financial capacity before extending credit. This measure addresses concerns raised by consumer advocates and lenders about the high risk of foreclosure associated with PACE loans. Furthermore, the detailed disclosures required by the rule will empower borrowers to make informed decisions, reducing the likelihood of financial distress.

Addressing Risks and Ensuring Responsible Lending Practices

The final rule also tackles the risks associated with PACE loans, emphasizing responsible lending practices. Research conducted by the CFPB in 2023 revealed that many PACE borrowers could access alternative financing options at lower costs. The study also found that PACE borrowers were more likely to fall behind on their primary mortgage payments, increasing the risk of foreclosure. To mitigate these risks, the rule mandates that lenders conduct thorough evaluations of borrowers' financial situations before approving loans. This approach aims to ensure that only financially stable individuals receive PACE financing, thereby reducing the likelihood of default.

The rule’s emphasis on responsible lending is further reinforced by the requirement for lenders to provide borrowers with standard mortgage disclosures. These disclosures will include detailed information about loan terms, costs, and repayment schedules, allowing borrowers to compare PACE loans with other financing alternatives. The CFPB’s efforts to regulate PACE loans align with its broader mission to protect consumers from predatory lending practices. In August 2024, the Bureau highlighted issues related to predatory solar lending, underscoring its commitment to safeguarding consumers in the clean energy sector. Moreover, the rule is consistent with Section 307 of the 2018 Economic Growth, Regulatory Relief, and Consumer Protection Act, which mandated the CFPB to address PACE financing. The Mortgage Bankers Association has expressed support for the rule, recognizing its importance in promoting responsible lending and consumer protection.