Home improvement financing now offered in Florida with no money down and no minimum credit score requirement could become more difficult to get under a new federal law recently signed by President Donald Trump.
The law directs the Consumer Financial Protection Bureau to write new rules requiring consumers nationwide to undergo an “ability-to-pay” analysis before they could be approved for Property Assessed Clean Energy (PACE) financing for storm hardening and energy efficiency improvements.
PACE industry officials lauded the new law when it was introduced as legislation back in November, saying it was modeled after a package of reforms, including an ability-to-pay law, passed last year by the California Legislature to protect consumers in that state.
But after the California ability-to-pay law took effect on April 1, applications and approvals for PACE financing dropped sharply in the state, and PACE officials blame an unexpected increase in additional documentation of income, expenses and debt required by the new law.
PACE officials say they’re working with California legislators to make the application process simple again, and they plan to work with federal officials in Washington to make sure the same problems aren’t repeated in Florida and states where they plan to introduce PACE in the future.
The unintended consequence of the California legislation has been that getting approval for PACE financing is now more time-consuming for applicants than traditional consumer loans — reversing the ease of approval and minimal documentation requirements touted when the unique financing program was created in that state.
The new law requires applicants to produce income verification for the past 30 days, which could mean locating two to five pay stubs, or for self-employed applicants, bank statements dating back 60 days, said Mike Lemyre, senior vice president of Ygrene Energy Fund, the largest PACE provider in South Florida. Housing expenses including insurance and taxes, assets and debts must also be checked, making the application process similar to seeking approval for a mortgage loan, Lemyre said.
As a result, an approval process that used to take 20 to 30 minutes now takes days, and would-be customers are instead turning to traditional consumer loans where they can apply online and get an answer in minutes, he said. “If you lay out enough requirements, you can disqualify even the most qualified applicant,” Lemyre said.
Since April 1, the three major PACE providers — including Ygrene, Renovate America and Renew Financial — have experienced 40 percent to 50 percent decreases in applications and 20 percent to 25 percent decreases in approvals in California, Lemyre said.
Greg Frost, communications director for Renovate America, confirmed that “we have seen declines in [business] volumes in California, and we believe ability-to-pay is a component of that. It’s not the only factor, but it certainly is one.”
Whether those declines are playing a role in a recent decision by Ygrene and Renovate America to pursue a merger has not been revealed by the companies. A statement sent separately to the Sun Sentinel by both companies this week said only that they “have entered into discussions with respect to a potential business combination and signed a non-binding term sheet.
“It is too early to comment on the probability that this potential business combination will come to fruition. Any potential business combination is subject to substantial due diligence, government approvals and the specifics of a definitive agreement,” the statement said.
Similar ability-to-pay requirements have not been enacted, nor are they currently proposed, by Florida’s Legislature.
Thousands of dollars for improvements remain available to consumers who need only prove they have equity in their homes, a good history of making their mortgage payments, and enough income to make payments on the debt. Customers repay the loans through a property tax assessment that’s recorded as a lien.
Since PACE financing was introduced in Florida in 2013, participation has soared. Ygrene’s Florida division has funded about 19,900 qualifying projects that include rooftop solar systems, new roofs, impact doors and windows, water heaters, garage door replacement and new air-conditioning systems.
Most of Ygrene’s Florida improvement projects have been in the tricounty region, including so far in 2018, about 1,600 in in Miami-Dade County, about 1,500 in Broward County, and about 336 in Palm Beach County, according to the company.
Renew Financial has completed 665 projects in Florida so far this year, including 450 in the tricounty region, a Renew spokesman said. Frost said he was not in a position to provide a count of projects Renovate America has completed in Florida.
The new federal law requiring ability-to-pay requirements to be drafted for PACE programs nationwide was enacted as part of a broader set of reforms to the Dodd-Frank Wall Street Reform and Consumer Protection Act — a massive set of bank regulations enacted in the wake of the 2008 financial crisis
Federal regulation won’t take place immediately. There’s no deadline for the Consumer Financial Protection Bureau to create the new rules, and stakeholders expect a say in the rulemaking process.
The PACE reforms followed calls from two interest groups. One is the National Consumer Law Center, which contends that consumers — particularly elderly and low-income people — are too easily approved for loans they cannot repay. In 2016, the nonprofit watchdog group released a report calling for federal regulation over PACE providers and saying the absence of oversight made it too easy for contractors to mislead consumers into approving loans that later show up as overwhelmingly large assessments on their property tax bills.
The other group calling for the federal reforms is the Mortgage Bankers Association, which objects to the “super priority” status of PACE loans — meaning if a borrower defaults on a home, any outstanding PACE improvement loan would be repaid first in the foreclosure process, ahead of the lender financing the home. The association has been one of the leading voices for increased federal oversight over PACE programs, which some PACE supporters have said is motivated by a desire to protect the market for second mortgages, which consumers use to fund home improvements.
Spokesmen for the two interest groups called the reforms a good first step but want to see more stringent protections.
John Rao, attorney for the National Consumer Law Center, wants to ensure that ability-to-pay reviews are conducted before contracts are signed. The Mortgage Bankers Association wants primary PACE loans to be given secondary lien status under mortgage loans, said Pete Mills, the association’s senior vice president of residential housing policy.
Asked whether Ygrene is concerned that a federal ability-to-pay requirement could have a similar effect to PACE programs nationwide as it has in California, Lemyre said it’s too early to tell. PACE providers plan to participate in the Consumer Financial Protection Bureau’s rulemaking process to ensure PACE-qualified financing remains accessible to consumers, he said.
Officials of Ygrene and the other major PACE providers say they are working with California legislators on tweaks that would eliminate redundant ability-to-pay checks. Colin Bishopp, a Renew Financial vice president, said he hopes to see a legislative vote on the fixes by fall.
PACE providers and advocates say they are optimistic their input will also lead to sensible federal rules that will protect consumers and the ability to access PACE financing.
“We are supportive of ability-to-pay [reforms],” said Renovate America’s Frost. “What’s important is that it be implemented in a way that enables PACE to thrive as a point-of-sale product — and keeps in mind that the average monthly PACE payment is the size of a family cellphone bill and not a mortgage.”
With residential PACE programs currently available in just three states — California, Florida and Missouri — Renew Financial CEO Cisco DeVries said in an email that the company views passage of the federal rulemaking requirement “as a key milestone toward residential PACE becoming available to American homeowners in all 50 states.”
Jay Neal, president of the Fort Lauderdale-based watchdog group Florida Association for Insurance Reform and its spinoff PACE advocacy group, Clean PACE, said Florida differs from California because about 90 percent of PACE projects approved here involve storm hardening, including roof and window replacements.
A larger share of California projects involve solar systems, and solar contractors are more “aggressive,” he said.
Neal also noted that PACE providers have added numerous consumer protection and awareness measures over the past few years to ensure consumers don’t take on too much debt, and that they understand how much money they are agreeing to repay. Florida market leader Ygrene conducts extensive training with affiliated contractors to ensure they do not mislead consumers, Neal said, and place welcome phone calls to consumers to answer questions about the program.
All three major PACE providers said they have voluntarily added practices required in California to its Florida operations, including disclosing all project costs, fees, interest rates, annual and monthly payback terms in a document patterned after “truth in lending” disclosures required from mortgage lenders in home sales. They also review all terms with borrowers in live phone calls before contracts are signed.
While PACE is still in its infancy in Florida, the low default rate among borrowers so far is proof that the program’s protections are working, Neal said.
He said he hopes the federal government doesn’t create rules that do more harm than good.
“There’s always going to be a contractor who does what he’s not supposed to do,” he said. “But you can put the number of foreclosures [in Florida] on the head of a pin. The fact is, PACE has enabled thousands of people with bad credit to harden their homes who otherwise wouldn’t be able to. If it’s not broke, I don’t know why we should jump in and fix it.