As PACE Financing Grows Up, the Industry Grapples With Lending Standards and Consumer Protections

By many measures, the financing programs referred to as PACE — or property assessed clean energy — are among the most successful energy efficiency financing tools in U.S. history.

The programs, which fund building efficiency upgrades and rooftop solar panels through loans paid off with property taxes, are closing in on $4 billion in transactions for over 140,000 American homes, and having created 35,000 jobs.

But if you’ve read any number of headlines on the model in recent months, or been among the seemingly small group of homeowners who’ve had a bad experience with PACE, then you’re not likely applauding the programs’ successes.

Critics contend that residential PACE programs have used questionable lending practices like those that led to the subprime crisis — and lack both consumer protections, and accountability for energy savings.

The major companies that issue the PACE financing and work with local governments to implement the programs are listening to the criticisms, even if they don’t always agree with them.

This year, the industry is heavily focused on improving regulations and implementing more rules around how PACE should operate to protect consumers and potentially achieve energy reduction goals.

In the process, the industry is working closely with legislators. California Senator Nancy Skinner has developed a new bill to add more consumer protections for residential PACE programs in the state, GTM has learned.

By collaborating on regulations, the industry is seeking to bolster its reputation. The sector has seen explosive growth in the last few years, and, in some cases, operated under little oversight in its early days.

“The industry has come a long way. There’s a lot of incentives for investors and providers to push for standards,” said Morningstar credit agency managing director Brian Grow, who co-authored a report on misconceptions of PACE.

PACE programs for residential homes are currently only available in California and two other states, but are expected to emerge in other states in the coming years. PACE programs for commercial buildings are operating in dozens of states, and while smaller in volume, have had little controversy.

PACE “is entering the big leagues and bringing the benefits and requirements that come with that,” said Cisco DeVries, the CEO of PACE provider Renew Financial. He was the creator of the original PACE concept a decade ago while he was the chief of staff to the mayor of Berkeley, Calif.

DeVries estimates that Renew Financial will execute nearly $1 billion in transactions this year, with more than half of that coming from PACE financing.

If providers can soothe fears and make the financing products valuable to more consumers and businesses, PACE could end up emerging as both a big market and an important environmental tool. Ultimately the financing products could help lower the energy use of buildings across the U.S., lowering carbon emissions, and helping states meet environmental goals.

A new era?

The PACE industry is already able to boast of some solid data showing that the model is a relatively low risk way to help homeowners make energy upgrades.

Renovate America, the largest PACE provider, says it has a customer default rate of under 1 percent. DeVries said “there have been zero foreclosures due to PACE.” Morningstar’s report found that PACE financing does “not materially increase the risk to the underlying mortgage.”

Yet with hundreds of thousands of projects, there have been some problems.

There were reports of an elderly homeowner who can’t afford to pay a PACE loan and fears losing her home. Industry watchers say in the early days of PACE, there have been cases of little oversight of contractors and weak protections for consumers.

But the industry points to a series of new rules in recent months that have started to set standards and best practices to try to maintain adequate consumer protections.

Last November, the Department of Energy issued a set of best practices for residential PACE programs that included a number of suggestions like: enhancing the criteria for eligibility in programs by adding reviews of income and existing debt obligations; requiring more transparent disclosures of all PACE financing terms; increasing contractor management and enforcement; and enabling consumers access to dispute resolutions if something goes wrong.

PACE industry group and non-profit PaceNation took those DOE guidelines and in February released an updated set of policies for the industry partly modeled on the federal “Know-Before-You-Owe” disclosures for home mortgages. The PACENation guidelines ask issuers discuss financing terms over recorded phone calls, and request that programs set standards to better govern contractors.

Suggestions, guidelines and best practices can lack teeth if industry doesn’t have to follow them. Charles Harak, a senior energy attorney with the National Consumer Law Center, said that while the new DOE guidelines are an improvement, the industry needs more enforceable protections in place.

One new law, which California Governor Jerry Brown signed last September and was enacted on the first of January 2017, is AB 2693. It gives the property owner the right to cancel a financing contract within three days, and add disclosures that some lenders may require a homeowner to pay off the total amount of the PACE assessment before refinancing or selling a home. That latter piece has become a contested issue for some homeowners as they try to sell their homes years after signing a PACE deal.

A new bill, SB 242, has been drafted by California Senator Nancy Skinner. It adds even more consumer protections and some nods to energy accountability. SB 242, which will likely be heard by first committee in the coming weeks, adds requirements to help determine if a homeowner has the ability to pay off the PACE assessment, sets standards for the type of projects that can be funded by PACE, and requires contractors to be licensed with the California State Licensing Board.

In addition, the bill mandates that PACE issuers need to report energy savings and environmental benefits (at least annually) and makes sure that program administrators don’t take kickbacks from contractors.

Senator Skinner — whose hometown of Berkeley was also the birthplace of PACE — told GTM in an interview that the new bill is meant to ensure appropriate consumer protections as PACE grows. “We [California] were the start of the PACE program and we want to continue to be the national leader.” said Skinner.

Meanwhile, PACE issuers have been developing new corporate programs that they say will manage contractors better, add transparency for consumers, and use technology to track and ensure the energy savings of projects.

Renovate America has developed a new contractor rating and management system that screens, rates and bars contractors that underperform. The new contractor system “helps find who the good actors are and who aren’t providing good experiences,” said Renovate America CEO JP McNeill.

Renovate America, which is backed by venture capital and private equity investors, appears to have the most reputation cleanup to do. The company was hit with lawsuits last year from three homeowners accusing it of charging excessive and deceptive fees.

The suits were more recently consolidated into one, which is seeking class-action status. Renovate America and co-defendant Western Riverside Council of governments (the local government that administered the accused PACE program) have filed a motion to dismiss the suit. Renovate America says it finds “no merit” in the allegations of the complaints and says it intends to “defend PACE, our company and the program vigorously.”

Renovate America’s other bugaboo was a Wall Street Journal article from earlier this month reporting that the company had paid off some debts from some struggling borrowers and hid those moves from investors who buy bonds backed by the company’s loans.

Renovate America confirmed to GTM that it assisted 83 homeowners out of 90,000 customers on payments, for a total dollar figure of less than $175,000 out of $2.2 billion.

The company also said it discontinued the practice in 2016 after it implemented new disclosures, confirmations of term calls, and other measures intended to close the “understanding gap.”

“I don’t think Renovate America is trying to hurt anyone,” says NCLC attorney Harak, adding the industry doesn't have a long history with consumer protection programs.

“We want to see PACE become a broader, better, safer product in 2017,” said Renovate America’s McNeill. “None of this will occur overnight but we’ve had great progress.”

Energy accountability

Adding in new consumer protections for homeowners is pretty straightforward. There are a lot of examples to follow from other industries and government programs.

But finding the best practices to ensure that PACE-funded energy and water upgrades are actually delivering savings is trickier. Solar panel systems can do this pretty easily, but what about new insulation or windows?

Utilities might provide some help. Last year Renew Financial created a pilot program where a group of its customers made their real-time energy data available from smart meters.

Combining that data with other modeling and financing information, the company was able to get a good picture of how much energy was being saved and during what times of day. The company is now working with PG&E and other utilities to grow the program and add more energy transparency.

Last year, Renovate America acquired energy software startup CakeSystems to help it better model home energy use and savings of its customers. McNeill said that the company is incorporating the technology into its products this year.

Tracking energy savings is “the hardest thing to do,” for the PACE providers as there are a variety of models to rely on and factors to consider, said PaceNation Executive Director David Gabrielson.

Morningstar’s Brian Grow agreed: “We’ve had trouble finding data on energy savings. We talked to the issuers about it and they said they are starting internally to track it.”

It’s still early days when it comes to energy accountability for PACE.

In fact, the entire financing product is pretty new.

“There might be 140,000 homes and $3.5 billion of financing through PACE, but there’s 40 million people that live in California,” said PaceNation’s Gabrielson.

That immaturity has likely contributed to some of the worries around the risks. “There’s some fear because this is new and different,” said Renew Financial’s Devries.

DeVries, the godfather of the industry, takes doing the right thing for PACE very seriously.

“We need to learn from issues that come up, address people’s fears and concerns and go above and beyond other financing projects. Those of us involved with PACE need to execute at a very high standard,” said DeVries.

from GTM Solar


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