On the surface, it seems unfathomable, unethical: the idea that any lender would loan money without first evaluating the applicant’s ability to repay. Yet it happens. Student loans are a prime example. Another example is Property Assessed Clean Energy (PACE) loans.
Lack of concern about credit history on the part of the lender isn’t the only thing that PACE loans have in common with student loans. Both are also being defaulted on with increasing frequency.
What are PACE Loans?
PACE loans are intended to help homeowners pay for sustainable upgrades such as energy-efficient HVAC systems and solar panels. No credit check is necessary and the loan can fully fund these projects (meaning the homeowner pays no money down to the lender), making them an attractive option for lower-income applicants who would not normally qualify for financing.
Here’s the Catch
The (very big) downside is that PACE loans can be as risky as they are appealing. Credit history is not an issue because the loan is tied to the property, not its owner. If an applicant has sufficient home equity they can qualify for a PACE loan, even if their current income and expenses call their ability to pay into question.
PACE loans are treated like assessments attached to a property and incorporated into the homeowner’s tax bill. This means that if the homeowner sells the property before the loan is paid off, the obligation to pay is then transferred to the buyer.
Another issue is the fact that they typically take precedence over a mortgage. This means that if the owner is current on their mortgage payments but defaults on the PACE loan, they can lose their home. When this happens, local governments have to oversee the seizure and sale of the property, as the defaults are basically a failure to pay taxes.
Congress Steps In
The rules surrounding PACE loans could be changing, as Congress is considering legislation that will enable the Consumer Financial Protection Bureau to regulate PACE loan providers and protect consumers from sales tactics that frequently lead to exploitation.
Some Congress members have expressed concern that PACE lenders provide these loans to homeowners without making them fully aware of the consequences. They point out that financially vulnerable borrowers such as seniors are taking out high-interest rate loans, in exchange for liens on their homes, for green energy technology that could very well be obsolete before the loan is paid off.
As a result, a bill has been introduced that would place PACE loans under the Truth in Lending Act (TILA). Titled the Protecting Americans from Credit Exploitation Act (or PACE Act), it would require a total disclosure of the loan terms and details—a condition that usually applies to traditional lenders, such as mortgage providers. Homeowners will be made to understand that by taking the loan, they are essentially taking a lien on their home.
California recently took a similar initiative when its governor signed two bills that introduce a number of consumer protections. They include a requirement for borrower income to factor into loan underwriting, a ban on kickbacks, and a training requirement for contractors who often sell PACE loans.
Until such legislation officially becomes law at the federal level, however, homeowners should resist the temptation to take out more money that they can pay back simply because it is offered to them. They literally have too much to lose, namely their home.
If you have questions about PACE loans in Missouri or are worried that you may have been offered a loan under questionable terms, contact Missouri consumer protection attorney Bryce Bell at Bell Law today. Attorney Bell can review the terms and conditions of the loan and give you an honest assessment of its impact on your future.