Fannie Mae, Freddie Mac, and the Federal Home Loan Banks.” In particular, PACE liens were deemed to “run contrary to the Fannie Mae-Freddie Mac Uniform Security Instrument….” —i.e., the standard mortgage contract.
The FHFA letter was specific to home mortgage lending and did not directly address or challenge commercial PACE programs. Regulatory hurdles for commercial PACE are distinct from those for residential PACE. In addition, commercial PACE programs require that the property owner obtain the consent of the mortgage lender before a PACE assessment can be placed upon the property. Such lender consent protocols address the contractual encumbrance clause issues (see Section 1.2).
On the same day the FHFA released its statement, the Office of the Comptroller of the Currency (OCC) also issued PACE guidance. The OCC regulates national banks. This statement raised additional concerns by specifically mentioning commercial properties in its statement that “safety and soundness concerns” exist.
“The Office of the Comptroller of the Currency (OCC) is issuing this guidance to alert national banks to concerns and regulatory expectations regarding certain state and local lending programs for energy retrofitting of residential and commercial properties*, frequently termed a Property Assessed Clean Energy (PACE) program. PACE or PACE-like programs use the municipal tax assessment process to ensure repayment. Under most of these programs, such loans acquire priority lien, thereby moving the funds advanced for energy improvements ahead of existing first and subordinate mortgage liens. This lien infringement raises significant safety and soundness concerns that mortgage lenders and investors must consider.” [*Note: emphasis added]
Most of the OCC statement addressed residential mortgage issues, but it gave specific guidance regarding commercial PACE in one section.
“National bank lenders should take steps to mitigate exposures and protect collateral positions. For existing mortgage and home equity loans, actions may include the following in accordance with applicable law:… In the case of commercial properties, securing additional collateral*.” [*Note: emphasis added]
The U.S. Department of Energy (DOE) and industry experts are seeking clarification on what this statement means. One possible interpretation is that commercial lending standards2 may be increased throughout a community that undertakes a commercial PACE program. Another interpretation is that OCC would simply require banks to more carefully underwrite commercial properties that request permission for a PACE lien.
Generally speaking, there is no reason to assume that commercial PACE programs with lender and owner consent provisions—both the existing lender and property owner must give their written consent and acknowledgement for the PACE financing—create unsafe or unsound lending practices. With consent provisions in place, lenders can protect their investment, and property owners are not subject to unwanted debt. However, it appears that regulators have not drawn a firm line between commercial and residential PACE programs.
2 Lending standards are typically criteria used by a lender to determine the credit worthiness of a potential borrower, and whether or not to lend to that person or entity. This can include financial ratio thresholds that a borrower must meet, such as a payment-to- income ratio or a debt-to-income ratio.
Chapter 13 —