Dodd-Frank Rollback to Impact PACE ABS Market

An analysis of the Dodd-Frank Act modifications by Moody’s has found that the amendment to the federal Truth in Lending Act (TILA) passed by the U.S. Senate last week will help clarify certain federal consumer protection responsibilities for participants in the Property Assessed Clean Energy (PACE) markets and reduce the uncertainty around legal risks for future asset-based securities (ABS) in this sector.

The analysis, which was released on Monday said that it was likely the legislation would only directly affect new PACE assessments as changes to TILA are part of the Economic Growth, Regulatory Relief, and Consumer Protection Act, which would roll back portions of the Dodd-Frank Act. “To become law, the TILA provision must survive any further debate about it in the US House of Representatives or Senate,” the analysis said.

Despite this step in the right direction, lenders in the PACE market remain concerned on two counts.

Firstly, under the new legislation, the Consumer Financial Protection Bureau (CFPB) will prescribe and enforce regulations requiring PACE assessment originators to make a good faith determination that homeowners have the ability to repay the assessments before originating them. But, the details and timings of CFPB’s actions are not specified.

Secondly, it remains unclear whether certain federal and state consumer protection laws apply to PACE assessments as there is legal uncertainty about whether PACE assessments are “consumer credit transactions” and therefore subject to TILA. The report said that although a federal court recently found that TILA does not apply to PACE1, the lower court ruling was vulnerable to challenge on appeal or in fresh litigation. “The continued uncertainty gives rise to the risk that PACE assessments may inadvertently be originated in violation of TILA,” the Moody’s report said.

Looking at the future the analysis found that if lawmakers revised the TILA ability-to-repay provisions to explicitly apply to new PACE assessments, originators in this market would take additional steps to determine homeowners’ ability to repay for the assessments, thus reducing potential avenues for future lawsuits. These changes could reduce incentives for homeowners to sue by lowering their perceived likelihood of success.