PACE Loans: Consumers Beware

PACE loans, or Property Assessed Clean Energy loans, are a way to borrow money for clean energy projects. California has many providers of PACE programs. A consumer may see them in the marketplace as HERO, (Home Energy Renovation Opportunity), YGrene, or CaliforniaFIRST. These loans get people’s attention because they finance green energy projects with no down payment, and it is pretty easy to qualify. However good they look on paper, they are dangerous for most homeowners and those buying or selling homes need to be especially aware of what they entail. PACE loans are secured by the home, meaning that if the property owner fails to make payments it is possible to lose the home in foreclosure. Which is of particular concern because payments can be more costly than a property owner anticipated.

Although the borrower pays nothing upfront, payments aren’t cheap. They become part of your property tax bill with a repayment period of 5 to 25 years, charging 8% to 9% interest plus a fee. Local governments make PACE funding available, then the contractor will be paid by the third-party organization providing the PACE loan, such as Renovate America, Ygrene Works, and Renew Financial. They are commonly sold by these private contractors’ door-to-door. This can present a possible conflict of interest. Although most contractors are honest, there have been sad stories in the news of elderly homeowners or those who don’t quite understand what they are signing up for losing their homes over PACE loans for home upgrades they did not necessarily need.

PACE liens may not be covered by the Real Estate Settlement Procedures Act (RESPA) or the Truth in Lending Act (TILA), which provide the ability-to-repay requirements, a 3-day advance review of documents with the right to cancel and enforceable remedies for violations and a ban on forced arbitration clauses. These exclusions substantially diminish a consumer’s rights and legal options.

If you, a client, or someone you know does decide to look into getting a PACE loan, here are some tips to do so in the safest way:

  • Compare other types of loans: Shop among online lenders, credit unions, and local banks in the area. FHA 203K loans can also be used to fund home improvements and don’t require a huge down payment. These alternative products often have a lower interest rate and no prepayment penalties.
  • Talk directly to the lender: After hearing about a PACE loan, have a discussion with the lender or financing organization for the PACE program. This will better assure you are getting all the information from every party involved.
  • Get quotes from different contractors: By not having to pay upfront, these jobs can seem more affordable than they really are. It is best to take advantage of the opportunity to save money, which will ultimately lower your payments. Many times prices for projects done through a PACE loan are much higher for the same work with a different financing mechanism.
  • Understand the terms: Find out the rate you can realistically expect as well as the closing costs you’ll be required to pay. It is pivotal that you find out if you’ll end up with a lien on your home, which will happen if you use PACE financing or a traditional second mortgage. Understand what a prepayment penalty is, and if this is part of any loan you may consider.

PACE loans are different than other loans because they stay with the property instead of the original borrower. This comes into play when selling or buying a property with a PACE loan. If a homeowner still owes money when they decide to sell, the buyer will be responsible for repaying. This makes it extremely important that the new property owner make assessments prior to purchase and is fully aware of what they are agreeing to. In some instances, it makes sense for a buyer despite the additional loan because the house may be worth more with the improvements and have cheaper monthly energy bills. The alternative is that the seller pays off the loan, which may mean they list their home for a higher asking price to make up for the loss. Paying off PACE loans early is not easy. It can result in onerous fees that may delay or prevent the selling of a home in the instance that the buyer doesn’t want to acquire the loan themselves.

Critics have continued to argue that these loans are similar to subprime mortgage loans, which as we know caused devastation nationwide. SAR believes it is important to share details on PACE loans, so that our Members know to watch out for them and to be aware of what comes with them. For the right consumer, they may present a good opportunity to decrease their impact on the environment, however it may be best to purchase those improvements on your own, explore other loan opportunities or look into cheaper options.