Missouri homeowners may lose a low-cost option for financing energy efficiency upgrades under proposals advancing in the state’s General Assembly.
State House and Senate committees have passed bills (HB 814, SB 105) that would require property assessed clean energy, or PACE, programs to undergo an examination by the state’s Division of Finance every 24 months — with the lending programs paying an estimated $50,000 fee each time.
Another bill in the House (HB 697) would give mortgage loan holders veto power over any PACE loans, which critics say could be fatal to the programs because of mortgage companies’ opposition to the specialized clean energy loans.
PACE loans differ fundamentally from mortgages and home equity loans. The financing is repaid as a line item added to borrowers’ property tax bills and is processed by county collectors. When a borrower sells their property, the repayment obligations transfer to the next owner. They typically range between $10,000 and $15,000 and cannot exceed projected utility bill savings.
The programs offer lower interest rates and have less-exacting standards for creditworthiness, meaning people with lower incomes or less-sterling credit histories can often qualify for the programs.
Ygrene Energy Fund is one of three PACE lenders in Missouri. Managing director Byron DeLear shared a story of a woman who operates an in-home daycare center, and whose furnace died during last month’s deep freeze.
“If PACE was not available,” DeLear said, “she’d be putting that system on her credit card which has an 18% interest rate. PACE fills in the gap for homeowners who may not have the wherewithal to get a second mortgage or equity line of credit but are still responsible homeowners.”
The bills under consideration only target PACE lending for residential improvements. While the vast bulk of PACE lending in Missouri goes to commercial projects, to date about $40 million in loans have gone to 2,900 residential projects across the state.
Supporters of the legislation present it as consumer protection. They say some homeowners don’t understand the nuances of PACE loans and may be vulnerable to manipulation or at least misunderstanding. Opponents say the bills would mostly protect banks that don’t want competition from low-interest PACE loans.
“They want to fix the fact that they see this as competition,” said James Owen, who is lobbying against the bills on behalf of Renew Missouri.
DeLear said oversight is already built into the system. Current law allows PACE loans only in cities and counties that pass ordinances authorizing the lending. In 2019, the city of Springfield and adjacent Greene County terminated their PACE programs, thereby demonstrating, DeLear said, that “local guardrails are in place. We have to do right by the communities we serve.”
The Springfield programs were terminated because a few borrowers “were confused about how it would be paid back,” said Richard Ollis, a Springfield city councilor. “Some got caught with their escrow not being properly administered and so had a big bill they weren’t prepared for. There was also some confusion in the collector’s office about how to adequately collect for it.”
The city has resurrected commercial PACE loans and will likely consider resuming residential loans but with a different PACE lender, Ollis said.
The lending industry has lined up in favor of stiffer PACE oversight. Speakers on behalf of the recent bills include the Missouri Bankers Association, the Heartland Credit Union Association and Missouri Realtors.
Max Cook, president and chief operating officer of the Missouri Bankers Association, said one concern is that in some cases the outstanding mortgage debt plus a PACE loan has been too high, occasionally exceeding the market value. Proposed legislation would limit a PACE loan plus the outstanding mortgage debt to no more than 80% of a property’s appraised value plus the value of improvements made.
More troubling to lenders, Cook said, is the fact that in the case of a default, PACE lenders get their money before mortgage-holders do. That’s because county collectors process PACE payments as though they were a tax.
“That is a real problem, not only for lenders but for borrowers,” Cook said. “If traditional lenders in the mortgage business run the risk of losing the first lien position, they are not likely to make those loans.”
He pointed out that federal mortgage lenders Freddie Mac and Fannie Mae don’t allow PACE loans on top of mortgages they hold.
This is the third consecutive year that Missouri legislators have considered bills to impose more regulations on PACE lending. Owen, of Renew Missouri, said he expects some sort of language to pass the House. Members of the Senate are less supportive, he said.