Loan type drops in year’s 1st half

Rules tighten on improvement liens after abuse complaints

A form of financing for environmentally friendly home improvements in California has plunged after legislation to overhaul it kicked in.

So-called PACE loans grew in recent years as a way to pay for solar panels and energyefficient air conditioners. Homeowners in the state took out more than $1 billion worth of them in 2017. However, critics say unscrupulous contractors frequently signed up borrowers with loans they neither understood nor could afford. That helped lead to state legislation that sharply tightened underwriting standards.

In the first half of 2018 — the latest data available — PACE lending plunged by 32 percent from a year earlier, according to the state treasurer’s office, which tracks the vast majority of the loans.

Lenders blame much of the recent drop-off on a new underwriting law they say blocks too many qualified applicants. Consumer groups say it’s too early to know the exact effect. But they don’t deny regulation is having an effect. It was, they note, designed to have one.

“It’s a positive development that people don’t get trapped in financing that they can’t afford,” said Nicholas Levenhagen, an attorney with pro-bono law firm Bet Tzedek.

“To the extent there has been a reduction following recent legislation,” he said in a later email, “it is telling that this has occurred following the implementation of basic consumer protections.”

Property Assessed Clean Energy programs, first started in 2008, are typically established by local governments to reduce greenhouse gases. Loans are financed through private lenders such as Renovate America, Renew Financial and Ygrene that use contractors to market their products and sign up consumers. Local governments, which collect fees for their services, then secure the loans to the home through a lien, allowing them to be repaid as line items on property tax bills.

If the loans go unpaid, a homeowner can be foreclosed upon.

The unique product got off to a slow start, but by 2015, the market was exploding. In the second half of 2014, lenders issued $148.7 million worth of new loans in California, according to state data; during the same period a year later, volume was nearly fourfold, at $553.9 million, as more counties added the program. A year later, loan volume rose nearly 50 percent.

Helping drive growth was an approval process built for speed. Approval was largely based on home equity — with income not a factor. Contractors could get people approved on the spot by handing over a tablet computer and asking for signatures. Lenders sent the financing contracts to borrowers via email, making it possible for borrowers to sign up within hours and in some cases after they spoke only with the contractor.

As PACE grew, consumer groups said, homeowners who couldn’t afford payments inundated them with phone calls. Many of them were senior citizens who found the online approval process confusing. A common complaint was that contractors misrepresented how the loans worked.

“I was out-talked and sweet-talked,” said Lawrence Linthicum, a 90-year-old Inglewood, Calif., resident who said it wasn’t until after he took out two PACE loans that he discovered the cost: nearly $8,300 annually.

PACE companies say the majority of their customers come away happy and foreclosures on homes with PACE are extremely rare. But as stories of distressed borrowers increased, companies took steps to add more protections, including calling all homeowners to confirm loan terms — something not all did at first.

The state Legislature also passed a series of overhauls. The most significant came in October 2017 when Gov. Jerry Brown signed into law a requirement that lenders check income and other debt obligations to ensure people could repay their loans. Another law barred kickbacks to contractors and prohibited lenders from telling contractors the amount of financing homeowners were eligible for.

Lenders were also now required, by law, to call homeowners to confirm terms, and the state Department of Business Oversight was given authority to regulate the industry.

The lending decline started before the laws kicked in. In the first half of 2017, loan volume fell 17 percent from a year earlier. In the second half, it dropped 18 percent. Part of that could just be that the market grew saturated, with fewer consumers left to sign up.

Mike Lemyre, senior vice president with Ygrene, said the new ability-to-repay rule increased approval time from hours to days or even weeks, pushing people toward quicker options such as unsecured personal loans. In many cases, Lemyre said, contractors ditched PACE before the income rules kicked in on April 1, anticipating it would take longer to close a deal. “They have their sales cycles,” he said. “They just looked at PACE as extremely difficult.”