(1)Existing law authorizes applicants, defined as including specified public agencies, entities administering Property Assessed Clean Energy (PACE) financing programs on behalf of and with the written consent of public agencies, or financial institutions, to assist property owners in financing the installation of distributed generation renewable energy sources, electric vehicle charging infrastructure, or energy or water efficiency improvements through the issuance of PACE bonds that are secured by voluntary contractual assessments, voluntary special taxes, or special taxes on property, collectively known as PACE assessments.

When foreclosure actions are ordered by a local agency or legislative body, or when subsequent installments and interest that are also to be made the subject of a foreclosure action thereafter become delinquent, and the foreclosure action is not commenced and a notice of pendency of action is not concurrently recorded, prior to the actual removal of a delinquent installment from the tax roll, existing law requires the local agency or legislative body responsible for the foreclosure action on the delinquent installment to record or cause to have recorded in the county recorders office in the county in which the real property is located a Notice of Intent to Remove Delinquent Special Tax Installment from the Tax Roll.

This bill would authorize the county tax collector to direct the county auditor to remove a delinquent installment based on a PACE assessment from the countys secured tax roll, rolls, if it arises from a contract entered into on or after January 1, 2018. The bill would require the county tax collector, immediately upon that removal and for each parcel for which the delinquent installment was removed, to provide notice on the secured tax roll rolls of the removal.

(2)Under existing law, property taxes, if unpaid by specified dates, incur specified delinquency and redemption penalties.

This bill would require, as to PACE assessments arising from contracts entered into on or after January 1, 2018, except for PACE assessments subject to specified law which requires deposit in a tax losses reserve fund, that specified penalties and costs, whether collected on the secured tax roll or pursuant to a sale or foreclosure, penalties be deposited in a restricted county fund. fund when collected by the tax collector, or that those penalties be remitted to the tax collector for deposit in that fund when collected by any party other than the tax collector. The bill would require the county in possession of the fund to appropriate those moneys only for the purpose of offsetting general fund property tax revenues of local taxing agencies that are lost when a that moneys in the fund be transferred to the delinquent tax sale trust fund for the deficit amount, to be distributed pursuant to specified law if any property subject to a PACE assessment is sold at a tax defaulted land sale for less than a specified minimum price. The bill also would exempt provide that those PACE assessments removed from the tax roll pursuant to paragraph (1), above, from those would not accrue further penalties.

Because this bill would require counties to deposit those penalties and other specified costs in specified funds, this bill would impose a state-mandated local program.

The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.

This bill would provide that, if the Commission on State Mandates determines that the bill contains costs mandated by the state, reimbursement for those costs shall be made pursuant to the statutory provisions noted above.

(1)Existing law authorizes applicants, defined as including specified public agencies, entities administering Property Assessed Clean Energy (PACE) financing programs on behalf of and with the written consent of public agencies, or financial institutions, to assist property owners in financing the installation of distributed generation renewable energy sources, electric vehicle charging infrastructure, or energy or water efficiency improvements through the issuance of PACE bonds that are secured by voluntary contractual assessments, voluntary special taxes, or special taxes on property. property, collectively known as PACE assessments.

When foreclosure actions are ordered by a local agency or legislative body, or when subsequent installments and interest that are also to be made the subject of a foreclosure action thereafter become delinquent, and the foreclosure action is not commenced and a notice of pendency of action is not concurrently recorded, prior to the actual removal of a delinquent installment from the tax roll, existing law requires the local agency or legislative body responsible for the foreclosure action on the delinquent installment to record or cause to have recorded in the county recorders office in the county in which the real property is located, located a Notice of Intent to Remove Delinquent Special Tax Installment from the Tax Roll.

This bill, as an alternative to that notice requirement, bill would authorize the local agency or legislative body to provide notice of the removal of the county tax collector to direct the county auditor to remove a delinquent voluntary contractual assessment or special tax, installment based on a PACE assessment from the countys secured tax roll, if it arises from a contract entered into on or after January 1, 2018, through the adoption of a resolution or ordinance requiring the county tax collector to remove all delinquent voluntary contractual assessments and special taxes securing PACE bonds and arising from contracts entered into on or after January 1, 2018, from the countys secured tax roll during the annual fiscal yearend closing, whether or not a foreclosure action has been ordered. 2018. The bill would require the county tax collector, immediately upon that removal and for each parcel for which the delinquent installment was removed, to provide notice on the secured tax roll of the removal.

(2)Under existing law, property taxes, if unpaid by specified dates, incur specified delinquency and redemption penalties.

This bill would require, as to PACE-related PACE assessments arising from contracts entered into on or after January 1, 2018, that those specified penalties and other specified costs, whether collected on the secured tax roll or pursuant to a sale or foreclosure, be deposited in a restricted county fund. The bill would require the county in possession of the fund to appropriate those moneys only for the purpose of offsetting general fund property tax revenues of local taxing agencies that are lost when a property subject to a voluntary contractual PACE assessment or special tax securing a PACE bond is sold at a tax defaulted land sale for less than a specified minimum price. The bill also would exempt those voluntary contractual assessments and special taxes securing PACE bonds PACE assessments removed from the tax roll pursuant to paragraph (1), above, from those penalties.

Because this bill would require counties to deposit those penalties and other specified costs in specified funds, this bill would impose a state-mandated local program.

The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.

This bill would provide that, if the Commission on State Mandates determines that the bill contains costs mandated by the state, reimbursement for those costs shall be made pursuant to the statutory provisions noted above.

(1)Existing law authorizes applicants, defined as including specified public agencies, entities administering Property Assessed Clean Energy (PACE) financing programs on behalf of and with the written consent of public agencies, or financial institutions, to assist property owners in financing the installation of distributed generation renewable energy sources, electric vehicle charging infrastructure, or energy or water efficiency improvements through the issuance of PACE bonds that are secured by voluntary contractual assessments, voluntary special taxes, or special taxes on property.

When foreclosure actions are ordered by a local agency or legislative body, or when subsequent installments and interest that are also to be made the subject of a foreclosure action thereafter become delinquent, and the foreclosure action is not commenced and a notice of pendency of action is not concurrently recorded, prior to the actual removal of a delinquent installment from the tax roll, existing law requires the local agency or legislative body responsible for the foreclosure action on the delinquent installment to record or cause to have recorded in the county recorders office in the county in which the real property is located, a Notice of Intent to Remove Delinquent Special Tax Installment from the Tax Roll.

This bill, as an alternative to that notice requirement, would authorize the local agency or legislative body to provide notice of the removal of the delinquent voluntary contractual assessment or special tax, if it arises from a contract entered into on or after January 1, 2018, through the adoption of a resolution or ordinance requiring the county tax collector to remove all delinquent voluntary contractual assessments and special taxes securing PACE bonds and arising from contracts entered into on or after January 1, 2018, from the countys secured tax roll during the annual fiscal yearend closing, whether or not a foreclosure action has been ordered.

(2)Under existing law, property taxes, if unpaid by specified dates, incur specified delinquency and redemption penalties.

This bill would require, as to PACE-related assessments arising from contracts entered into on or after January 1, 2018, that those penalties and other specified costs, whether collected on the secured tax roll or pursuant to a sale or foreclosure, be deposited in a restricted county fund. The bill would require the county in possession of the fund to appropriate those moneys only for the purpose of offsetting property tax revenues lost when a property subject to a voluntary contractual assessment or special tax securing a PACE bond is sold at a tax defaulted land sale for less than a specified minimum price. The bill also would exempt those voluntary contractual assessments and special taxes securing PACE bonds removed from the tax roll pursuant to paragraph (1), above, from those penalties.

Because this bill would require counties to deposit those penalties and other specified costs in specified funds, this bill would impose a state-mandated local program.

The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.

This bill would provide that, if the Commission on State Mandates determines that the bill contains costs mandated by the state, reimbursement for those costs shall be made pursuant to the statutory provisions noted above.

 THIRD READING  

Bill No: AB 271

Author:

:

Vote:

SENATE GOVERNANCE & FIN. COMMITTEE: 6-0, 7/5/17

AYES: McGuire, Nguyen, Beall, Hernandez, Hertzberg, Moorlach

NO VOTE RECORDED: Lara

SENATE APPROPRIATIONS COMMITTEE: Senate Rule 28.8

ASSEMBLY FLOOR: 73-0, 5/30/17 - See last page for vote

SUBJECT:

SOURCE: California Association of County Treasurers and Tax Collectors

DIGEST:

This bill allows county tax collectors to direct a county auditor to remove a delinquent property assessed clean energy (PACE) assessment from the tax roll, among other changes to statutes that govern unpaid PACE assessment.

ANALYSIS:

Existing law:

1. Provides, generally, that the maximum amount of any ad valorem tax on real property shall not exceed 1% of the full cash value of such property.
2. Defines an "assessment" as any levy or charge upon real property by an agency for a special benefit conferred upon the real property. "Assessment" includes, but is not limited to, "special assessment," "benefit assessment," "maintenance assessment" and "special assessment tax."
3. Allows public agencies and property owners to enter into voluntary contractual assessments to finance the installation of distributed generation renewable energy sources or energy or water efficiency improvements that are permanently affixed on real property.
4. Establishes a PACE program as a way to help homeowners and small business owners finance voluntary energy and water efficiency and clean energy improvements.
5. Establishes a PACE Reserve Program designed to address the Federal Housing Finance Agency's (FHFA) financial concerns by making first mortgage lenders whole for any losses in a foreclosure or a forced sale that are attributable to the PACE program.

This bill:

1. Authorizes a county tax collector to direct the county auditor to remove any delinquent installment from the county's tax rolls, and provides that this bill only applies to a delinquent installment based on a voluntary contractual assessment, voluntary tax, or special tax that arises from a contract entered into on or after January 1, 2018.
2. Prohibits a PACE assessment that has been removed from a county's tax rolls from accruing further penalties and interest under existing law for delinquent assessments.
3. Requires the county tax collector to provide notice on the tax rolls that the delinquent installment has been removed immediately upon its removal. The notice must be displayed on the secured tax roll in the manner that conveys that the removal has occurred and may include the name and telephone number of the person or entity to be contacted to receive further information.
4. Requires a penalty associated with a delinquency or default on the PACE assessment to be deposited into a restricted county fund. If the penalty is collected through a sale or foreclosure of the property, the lien holder must remit the penalty to the county tax collector within 30 days.
5. Requires, in order to cover a deficit amount, money placed in the restricted fund to be transferred to the delinquent tax sale trust fund if the property is sold at a tax-defaulted land sale for less than the minimum price.
6. Prohibits a property subject to a PACE assessment from being subject to an agreement where the authority to collect a defaulted lien is transferred to, subject to, or contingent upon third-party approval. This applies unless that lien has been removed from the county's tax rolls and the right to collect the PACE assessment and any defaulted lien amount is returned to the PACE administrator. This prohibition does not apply to a PACE assessment made on or before January 1, 2018, a contractual waiver of the right to foreclose, or other arrangement or agreement between a lienholder and a lender.

Background

PACE financing programs allow local governments to offer loans to private property owners to cover the initial costs of renewable energy, energy efficiency, water efficiency, and other improvements to private property that offer public benefits. Property owners repay the loans through voluntary assessments or parcel taxes, which are secured by priority liens and appear annually on property tax bills until the loans are repaid.

State law establishes two distinct statutory frameworks under which local governments can implement and administer PACE loan programs: voluntary contractual assessments or parcel taxes.

Voluntary contractual assessment PACE financing. A benefit assessment is an involuntary charge that property owners pay for a public improvement or service that provides a special benefit to their property. As an alternative to benefit assessments, and only with the free and willing consent of affected property owners, state law lets public agencies use voluntary contractual assessments to finance:

• Renewable energy sources or energy efficiency improvements that are permanently fixed to real property (AB 811, Levine, 2008).
• Water efficiency improvements that are permanently fixed to real property (AB 474, Blumenfield, 2009).
• Electric vehicle charging infrastructure (SB 1340, Kehoe, 2010).
• Seismic strengthening improvements (AB 184, Swanson, 2011).

Mello-Roos parcel tax PACE financing. The Mello-Roos Community Facilities Act allows counties, cities, special districts, and school districts to levy special taxes (parcel taxes) to finance a wide variety of public works, including parks, recreation centers, schools, libraries, child care facilities, and utility infrastructure. A Mello-Roos Community Facilities District (CFD) issues bonds against these special taxes to finance the public works projects. State law establishes an alternative process by which a local government can form a CFD to finance only energy efficiency, water conservation, and renewable energy improvements that are affixed to or on real property and in buildings, whether the real property or buildings are privately or publicly owned (SB 555, Hancock, 2011). Under the alternative formation process, a CFD can initially consist solely of territory proposed for future annexation to the CFD, with the condition that a parcel or parcels within that territory may be annexed to the CFD and subjected to the special tax only with the unanimous approval of the parcel owner or owners at the time of annexation.

In addition to these two statutory frameworks for providing PACE loans, charter cities can establish their own PACE financing programs under the California Constitution’s grant of authority to charter cities to control their own “municipal affairs.”

Federal concerns. In 2010, FHFA, which oversees the nation's largest mortgage finance companies, Fannie Mae and Freddie Mac, raised concerns that residential PACE financing could pose a risk for these companies, because PACE loans are a first-priority lien and outstanding PACE assessments must be paid before mortgage obligations. As a result, Fannie Mae and Freddie Mac stated that they would no longer purchase mortgage loans secured by properties with outstanding PACE loans.

The concerns raised by federal housing finance regulators threatened the viability of PACE financing for residential properties. In response, the Legislature passed SB 96 (Committee on Budget and Fiscal Review, 2013), which required the California Alternative Energy and Advanced Transportation Financing Authority (CAEATFA) to administering a PACE loss reserve program of $10 million. CAEATFA established regulations, and the majority of PACE administrators participate in the program. The PACE Loss Reserve Program compensates first mortgage lenders for losses resulting from PACE liens in a foreclosure or tax sale. The program is intended to cover PACE payments made during foreclosure, or if a county conducts a tax sale on a home for unpaid taxes. The Program seeks to put the first mortgage lender in the same position it would be in without a PACE lien. CAEATFA’s PACE Loss Reserve Program covers more than 56,000 residential PACE financings valued at about $1.2 billion. Through the beginning of June, 2016 CAEATFA, had not received any claims on the loss reserve.

However, the PACE Loss Reserve Program has not resolved federal officials’ concerns about PACE financing. In a May, 2014 letter an FHFA official wrote, “FHFA has carefully reviewed the Reserve Fund created by the State of California and while, I appreciate that it is intended to mitigate these increased losses, it fails to offer full loss protection to the Enterprises. The Reserve Fund is not an adequate substitute for Enterprise mortgages maintaining a first lien position and FHFA also has concerns about the Reserve Fund's ongoing sustainability.” Federal housing officials, mortgage lenders, and other stakeholders in residential real property transactions remain concerned about the complications that priority liens for PACE loans can create for residential property owners who seek to refinance or sell their properties. They worry about a lack of consumer disclosures and protections for residential PACE program borrowers and a lack of financing criteria to protect the equity on homeowners’ properties.

Issues with PACE. Over the last few years, concerns have been raised with the lending practices of private third-parties that have contracts with local governments to carry out of PACE program. To address some of these concerns, the Legislature enacted AB 2693 (Dababneh, 2016), which established disclosure requirements and provided owners with a right to cancel. However, AB 2693 did not address underwriting standards. Under the PACE program, the only financial requirements that must be met for a person to qualify for a PACE loan are the following: the owner must be current on the mortgage; the owner is not in default or in bankruptcy; financing cannot exceed 15% of the value of the property or 10% if property is worth more than $700,000; and the total mortgage-related debt and PACE financing on the underlying property cannot exceed the value of the property. A key factor that is missing within these underwriting standards, and is standard among almost all loans, is an assessment of the borrower’s ability to pay.

The Consumer Financial Protection Bureau recently highlighted loose underwriting standards as a major contributing factor in the recent mortgage crisis. The report noted that many lending institutions at the time failed to verify "consumers’ income or debts" and then qualified consumers for mortgages based on "teaser" interest rates that would rise and make the monthly mortgage payments unaffordable. The issue became such a big problem that "in 2008, the Board of Governors of the Federal Reserve System adopted a rule under the Truth in Lending Act prohibiting creditors from making higher-priced mortgage loans without assessing consumers’ ability to repay the loans."

There are several ongoing disputes as to whether PACE assessments are loans or assessments. In 2010, then Attorney General Brown sued Fannie Mae and Freddie Mac seeking legal clarification that the PACE programs operate through assessments, not loans. The issue has not yet been resolved. Irrespective of the program’s legal characterization, the program functions very much like a loan. Just because the improvements are secured by a contractual assessment that is attached to the property and then repaid through property taxes does not change the fact that people are paying back borrowed funds. The lack of substantive underwriting standards has also prompted the Department of Energy (DOE) to establish "Best Practice Guidelines for Residential PACE Financing Programs." These guidelines recognize that the PACE assessment is an additional financing obligation for the property owner. According to the DOE, the PACE program "should confirm property owners can support the cost of the PACE assessment by collecting and reviewing information from property owners on their household income and debt obligations."

Property tax. Existing law establishes January 1st of each year as the "lien date," or the date upon which the assessor values property, and property taxes are imposed on its owner in the form of a lien against the property. For property on the secured roll, which generally includes real property such as land and buildings, tax collectors must send bills to taxpayers by November 1st. Taxpayers must pay their bills in two installments: the first on November 1st, which becomes delinquent December 10th, and the second on February 1st, with delinquency occurring on April 10th. Taxpayers can pay in full at the first installment. Many other locally-imposed charges, fees, taxes, and assessments, such as Mello-Roos taxes, benefit assessments, and parcel taxes, are also collected as part of the property tax bill, and subject to the same restrictions and penalties.

When taxes become delinquent, state law imposes a 10% penalty on delinquent each amount, and counties can also apply administrative charges. The property becomes tax defaulted if taxes remain unpaid as of June 30th, triggering redemption penalties of 1.5% a month (18% per year) until the full amount is paid. After five years, the tax collector with approval by the board of supervisors can sell a tax defaulted residential property to satisfy back taxes, penalties, costs, and other liens; for commercial property, the tax collector can do so after three years. After the sale, proceeds first pay for the costs of newspaper publishing, and recording fees. Funds are then distributed to taxing agencies with valid claims, and to the tax collector to pay for notices and contacting taxpayers. After that, proceeds satisfy liens held by parties in interest. Any amounts left over, known as "excess proceeds," are then divided up between each taxing entity according to their appropriate share of the property tax, after the county deducts specified costs. If a property fails to sell for a price sufficient to cover all of the debts due, known as a "minimum bid," the amount received by the tax collector in the auction is distributed on a proportional basis.

Comments

Purpose of the bill. According to the author, “The PACE program has proven an effective way to finance energy efficiency and renewable energy upgrades for consumers. Yet as PACE continues to grow, so do opportunities for unscrupulous behavior and the potential for consumers to be taken advantage of by a program otherwise designed to help them. We must ensure that consumer protections are in place, and this bill does that. AB 271 protects counties, schools, and taxpayers, and also protects PACE so it can remain a viable alternative for energy efficiency and renewable energy generation.”

How does it work? AB 271 changes who has to recoup the delinquent assessment amount from the tax collector to the PACE administrator. Currently, a penalty of 10% is applied to property taxes that are delinquent and then interest accrues at 1.5% per month. These apply to both the base property tax amount and the PACE assessment. If a property is delinquent for five years the property goes to a tax sale. This bill allows the tax collector to remove only the delinquent installment of the PACE assessment. By removing the assessment from the secured property tax roll, this bill effectively forces the PACE provider to seek collection of the delinquent debt directly from the taxpayer instead of requiring the tax collector to continue charging a penalty and interest for the unpaid amount. The sponsors state the proposed changes will protect taxpayers and those who rely on local government services by removing delinquent PACE liens from the property tax bill, and that this bill will reduce the chances that counties, schools, other local government entities, and the state will lose revenue as a result of properties with PACE assessments being paid out of the proceeds from tax sales at prices below the original minimum bid amount. Additionally, the sponsors assert that this bill will ensure that the property tax bill is not being used to inappropriately enrich private parties at the expense of consumers who may not realize that tax code related penalties and interest will apply to their delinquent PACE assessments.

Difference of opinion. PACE providers have raised concerns that AB 271 would impose regressive changes that will eliminate current consumer protections and fundamentally undermine the PACE program. They argue that investors have supported PACE through the purchase of PACE securitizations because of the security of the assessment on the property tax roll and the super priority lien status. The PACE providers fear that by removing the delinquent assessment amount, this bill will lead to lower credit ratings and higher interest rates.

Mandate. The California Constitution generally requires the state to reimburse local agencies for their costs when the state imposes new programs or additional duties on them. According to the Legislative Counsel’s Office, AB 271 creates a new state-mandated local program. Ultimately, the Commission on State Mandates determines if a mandate is reimbursable and the amount of reimbursement to be provided.

Related/Prior Legislation

Earlier this year, SB 242 (Skinner) was approved by the Senate Governance and Finance Committee on April 19th with a vote of 6-1 and is currently set to be heard on July 12th. The bill will impose a number of consumer protections by adding contract requirements, placing limitations on the operations of contractors, requiring certain information to be collected and reported, and instituting a forbearance process for property owners that cannot pay their property taxes.

FISCAL EFFECT: Appropriation: Fiscal Com.: Local:

SUPPORT: (Verified 8/28/17)

California Association of County Treasurers and Tax Collectors (source)

California Association of Realtors

California Credit Union League

Santa Clara County

State Association of County Auditors

OPPOSITION: (Verified 8/28/17)

Advanced Energy Economy

Brightline Defense

Build It Green

CalAsian Chamber of Commerce

California Solar Energy Industries Association

Center for Sustainable Energy

Cleantech San Diego

Climate Action Campaign

Renew Financial

Renovate America

Vote Solar

Ygrene Energy Fund

ASSEMBLY FLOOR: 73-0, 5/30/17

AYES: Acosta, Aguiar-Curry, Travis Allen, Arambula, Baker, Berman, Bigelow, Bloom, Bocanegra, Bonta, Brough, Burke, Caballero, Calderon, Cervantes, Chávez, Chu, Cooley, Cooper, Cunningham, Dababneh, Dahle, Daly, Flora, Fong, Frazier, Friedman, Gallagher, Cristina Garcia, Eduardo Garcia, Gipson, Gomez, Gonzalez Fletcher, Gray, Grayson, Harper, Holden, Jones-Sawyer, Kalra, Kiley, Lackey, Levine, Limón, Low, Maienschein, Mathis, Mayes, McCarty, Medina, Melendez, Mullin, Muratsuchi, Nazarian, Obernolte, O'Donnell, Patterson, Quirk, Quirk-Silva, Reyes, Ridley-Thomas, Rodriguez, Rubio, Salas, Santiago, Steinorth, Mark Stone, Thurmond, Ting, Voepel, Waldron, Weber, Wood, Rendon

NO VOTE RECORDED: Chau, Chen, Chiu, Choi, Eggman, Gloria, Irwin

Prepared by:

8/29/17 10:29:25

**** END ****

SENATE COMMITTEE ON GOVERNANCE AND FINANCE

Senator Mike McGuire, Chair

2017 - 2018 Regular

Property Assessed Clean Energy program

Allows county tax collectors to direct a county auditor to remove a delinquent Property Assessed Clean Energy (PACE) assessment from the tax roll, among other changes to statutes that govern unpaid PACE assessments.

Background

Property assessed clean energy (PACE) financing programs allow local governments to offer loans to private property owners to cover the initial costs of renewable energy, energy efficiency, water efficiency, and other improvements to private property that offer public benefits. Property owners repay the loans through voluntary assessments or parcel taxes, which are secured by priority liens and appear annually on property tax bills until the loans are repaid.

State law establishes two distinct statutory frameworks under which local governments can implement and administer PACE loan programs: voluntary contractual assessments or parcel taxes.

Voluntary Contractual Assessment PACE Financing. A benefit assessment is an involuntary charge that property owners pay for a public improvement or service that provides a special benefit to their property. As an alternative to benefit assessments, and only with the free and willing consent of affected property owners, state law lets public agencies use voluntary contractual assessments to finance:

• Renewable energy sources or energy efficiency improvements that are permanently fixed to real property (AB 811, Levine, 2008).
• Water efficiency improvements that are permanently fixed to real property (AB 474, Blumenfield, 2009).
• Electric vehicle charging infrastructure (SB 1340, Kehoe, 2010).
• Seismic strengthening improvements (AB 184, Swanson, 2011).

Mello-Roos Parcel Tax PACE Financing. The Mello-Roos Community Facilities Act allows counties, cities, special districts, and school districts to levy special taxes (parcel taxes) to finance a wide variety of public works, including parks, recreation centers, schools, libraries, child care facilities, and utility infrastructure. A Mello-Roos Community Facilities District (CFD) issues bonds against these special taxes to finance the public works projects. State law establishes an alternative process by which a local government can form a CFD to finance only energy efficiency, water conservation, and renewable energy improvements that are affixed to or on real property and in buildings, whether the real property or buildings are privately or publicly owned (SB 555, Hancock, 2011). Under the alternative formation process, a CFD can initially consist solely of territory proposed for future annexation to the CFD, with the condition that a parcel or parcels within that territory may be annexed to the CFD and subjected to the special tax only with the unanimous approval of the parcel owner or owners at the time of annexation.

In addition to these two statutory frameworks for providing PACE loans, charter cities can establish their own PACE financing programs under the California Constitution’s grant of authority to charter cities to control their own “municipal affairs.”

Federal Concerns. In 2010, the Federal Housing Finance Agency (FHFA), which oversees the nation's largest mortgage finance companies, Fannie Mae and Freddie Mac, raised concerns that residential PACE financing could pose a risk for these companies, because PACE loans are a first-priority lien and outstanding PACE assessments must be paid before mortgage obligations. As a result, Fannie Mae and Freddie Mac stated that they would no longer purchase mortgage loans secured by properties with outstanding PACE loans.

The concerns raised by federal housing finance regulators threatened the viability of PACE financing for residential properties. In response, the Legislature passed SB 96 (Committee on Budget and Fiscal Review, 2013), which required the California Alternative Energy and Advanced Transportation Financing Authority (CAEATFA) to administering a PACE loss reserve program of $10 million. CAEATFA established regulations, and the majority of PACE administrators participate in the program. The PACE Loss Reserve Program compensates first mortgage lenders for losses resulting from PACE liens in a foreclosure or tax sale. The program is intended to cover PACE payments made during foreclosure, or if a county conducts a tax sale on a home for unpaid taxes. The Program seeks to put the first mortgage lender in the same position it would be in without a PACE lien. CAEATFA’s PACE Loss Reserve Program covers more than 56,000 residential PACE financings valued at about $1.2 billion. Through the beginning of June, 2016 CAEATFA, had not received any claims on the loss reserve.

However, the PACE Loss Reserve Program has not resolved federal officials’ concerns about PACE financing. In a May, 2014 letter an FHFA official wrote, “FHFA has carefully reviewed the Reserve Fund created by the State of California and while, I appreciate that it is intended to mitigate these increased losses, it fails to offer full loss protection to the Enterprises. The Reserve Fund is not an adequate substitute for Enterprise mortgages maintaining a first lien position and FHFA also has concerns about the Reserve Fund's ongoing sustainability.” Federal housing officials, mortgage lenders, and other stakeholders in residential real property transactions remain concerned about the complications that priority liens for PACE loans can create for residential property owners who seek to refinance or sell their properties. They worry about a lack of consumer disclosures and protections for residential PACE program borrowers and a lack of financing criteria to protect the equity on homeowners’ properties.

Issues with PACE. Over the last few years, concerns have been raised with the lending practices of private third-parties that have contracts with local governments to carry out of PACE program. To address some of these concerns, the Legislature enacted AB 2693 (Dababneh, 2016), which established disclosure requirements and provided owners with a right to cancel. However, AB 2693 did not address underwriting standards. Under the PACE program, the only financial requirements that must be met for a person to qualify for a PACE loan are the following: the owner must be current on the mortgage; the owner is not in default or in bankruptcy; financing cannot exceed 15% of the value of the property or 10% if property is worth more than $700,000; and the total mortgage-related debt and PACE financing on the underlying property cannot exceed the value of the property. A key factor that is missing within these underwriting standards, and is standard among almost all loans, is an assessment of the borrower’s ability to pay.

The Consumer Financial Protection Bureau recently highlighted loose underwriting standards as a major contributing factor in the recent mortgage crisis. The report noted that many lending institutions at the time failed to verify "consumers’ income or debts" and then qualified consumers for mortgages based on "teaser" interest rates that would rise and make the monthly mortgage payments unaffordable. The issue became such a big problem that "in 2008, the Board of Governors of the Federal Reserve System adopted a rule under the Truth in Lending Act prohibiting creditors from making higher-priced mortgage loans without assessing consumers’ ability to repay the loans."

There are several ongoing disputes as to whether PACE assessments are loans or assessments. In 2010, then Attorney General Brown sued Fannie Mae and Freddie Mac seeking legal clarification that the PACE programs operate through assessments, not loans. The issue has not yet been resolved. Irrespective of the program’s legal characterization, the program functions very much like a loan. Just because the improvements are secured by a contractual assessment that is attached to the property and then repaid through property taxes does not change the fact that people are paying back borrowed funds. The lack of substantive underwriting standards has also prompted the Department of Energy (DOE) to establish "Best Practice Guidelines for Residential PACE Financing Programs." These guidelines recognize that the PACE assessment is an additional financing obligation for the property owner. According to the DOE, the PACE program "should confirm property owners can support the cost of the PACE assessment by collecting and reviewing information from property owners on their household income and debt obligations."

Property Tax. Existing law establishes January 1st of each year as the "lien date," or the date upon which the assessor values property, and property taxes are imposed on its owner in the form of a lien against the property. For property on the secured roll, which generally includes real property such as land and buildings, tax collectors must send bills to taxpayers by November 1st. Taxpayers must pay their bills in two installments: the first on November 1st, which becomes delinquent December 10th, and the second on February 1st, with delinquency occurring on April 10th. Taxpayers can pay in full at the first installment. Many other locally-imposed charges, fees, taxes, and assessments, such as Mello-Roos taxes, benefit assessments, and parcel taxes, are also collected as part of the property tax bill, and subject to the same restrictions and penalties.

When taxes become delinquent, state law imposes a 10% penalty on delinquent each amount, and counties can also apply administrative charges. The property becomes tax defaulted if taxes remain unpaid as of June 30th, triggering redemption penalties of 1.5% a month (18% per year) until the full amount is paid. After five years, the tax collector with approval by the board of supervisors can sell a tax defaulted residential property to satisfy back taxes, penalties, costs, and other liens; for commercial property, the tax collector can do so after three years. After the sale, proceeds first pay for the costs of newspaper publishing, and recording fees. Funds are then distributed to taxing agencies with valid claims, and to the tax collector to pay for notices and contacting taxpayers. After that, proceeds satisfy liens held by parties in interest. Any amounts left over, known as "excess proceeds," are then divided up between each taxing entity according to their appropriate share of the property tax, after the county deducts specified costs. If a property fails to sell for a price sufficient to cover all of the debts due, known as a "minimum bid," the amount received by the tax collector in the auction is distributed on a proportional basis.

Liens. PACE financing provides creditors security that they would be repaid because property tax liens are super priority liens that are senior to mortgage debt. If a house is sold in a foreclosure or tax sale, the PACE lien holder will be paid before other lienholders, like mortgage lenders. In response to FHFA's decision not to purchase mortgages with PACE liens, some third party PACE providers have started offering an option to homeowners who are unable to refinance or sell their homes called "Limited Subordination" or "Contractual Subordination." These contractual lien subordinations are an agreement between the PACE lien holder and a mortgage lender, where the PACE lien holder "subordinates" their right to foreclose on a home for non-payment of PACE assessments, and to the proceeds from foreclosure, until the mortgage lender has been paid in full for amounts due under its mortgage. This practice is not utilized by all PACE providers in the industry, and not addressed in state statute. According to Renovate America, a third party PACE administrator, they have completed over 2,000 subordination contracts.

The DOE stated in its "Best Practice Guidelines for Residential PACE Financing Programs" that, "In the event of a sale of a property with an outstanding PACE assessment, including a foreclosure sale, the obligation remains with the property and the new homeowner will be responsible for paying the remaining PACE financing balance. A PACE assessment should survive the foreclosure process (i.e., the full PACE obligation amount does not become due and payable in the event of foreclosure of the property). After a foreclosure, the subsequent owners are responsible for future assessment payments, and could be responsible for any delinquent amounts that remain if foreclosure proceeds were insufficient to pay-off the delinquent amount."

A PACE assessment does not accelerate upon default, meaning only the amount that is owned is due (not the entire amount of the PACE assessment). Default of PACE assessment triggers a local agency's right (as the PACE lien holder) to request that the defaulted PACE assessment be stripped from the tax roll. This right to strip an assessment from the tax roll and pursue the judicial foreclosure process to recover the defaulted PACE assessment remains with the PACE lien holder. As a result of contractual subordination agreements, some PACE lien holders defer their right to strip a defaulted PACE assessment from the tax roll to the holder of the first mortgage. In other PACE models that do not use or offer any contractual lien subordination, the PACE lien holder identifies if any properties with a PACE assessment are delinquent and maintains the sole discretion to pursue or defer foreclosure proceedings.

In order to protect taxpayers from predatory lending and reduce the ability of PACE providers to profit from defaulted tax penalties and interest, the author wants to give county tax collectors the authority to remove delinquent PACE assessments from the secured tax roll.

Proposed Law

Overview. Assembly Bill 271 authorizes a county tax collector to direct the county auditor to remove any delinquent installment from the county's tax rolls, and provides that this bill only applies to a delinquent installment based on a voluntary contractual assessment, voluntary tax, or special tax that arises from a contract entered into on or after January 1, 2018.

This bill prohibits a PACE assessment that has been removed from a county's tax rolls from accruing further penalties and interest under existing law for delinquent assessments.

Notice Requirements. This bill requires the county tax collector to provide notice on the tax rolls that the delinquent installment has been removed immediately upon its removal. The notice must be displayed on the secured tax roll in the manner that conveys that the removal has occurred and may include the name and telephone number of the person or entity to be contacted to receive further information.

Restricted Fund. AB 271 requires a penalty associated with a delinquency or default on the PACE assessment to be deposited into a restricted county fund. If the penalty is collected through a sale or foreclosure of the property, the lien holder must remit the penalty to the county tax collector within 30 days.

In order to cover a deficit amount, this bill requires money placed in the restricted fund to be transferred to the delinquent tax sale trust fund if the property is sold at a tax-defaulted land sale for less than the minimum price.

Subordination Agreements. AB 271 prohibits a property subject to a PACE assessment from being subject to an agreement where the authority to collect a defaulted lien is transferred to, subject to, or contingent upon third-party approval. This applies unless that lien has been removed from the county's tax rolls and the right to collect the PACE assessment and any defaulted lien amount is returned to the PACE administrator. This prohibition does not apply to a PACE assessment made on or before January 1, 2018, a contractual waiver of the right to foreclose, or other arrangement or agreement between a lienholder and a lender.

State Revenue Impact

No estimate.

Comments

1. Purpose of the bill. According to the author, “The PACE program has proven an effective way to finance energy efficiency and renewable energy upgrades for consumers. Yet as PACE continues to grow, so do opportunities for unscrupulous behavior and the potential for consumers to be taken advantage of by a program otherwise designed to help them. We must ensure that consumer protections are in place, and this bill does that. AB 271 protects counties, schools, and taxpayers, and also protects PACE so it can remain a viable alternative for energy efficiency and renewable energy generation.”
   
2. How does it work? AB 271 changes who has to recoup the delinquent assessment amount from the tax collector to the PACE administrator. Currently, a penalty of 10% is applied to property taxes that are delinquent and then interest accrues at 1.5% per month. These apply to both the base property tax amount and the PACE assessment. If a property is delinquent for 5 years the property goes to a tax sale. This bill would allow the tax collector to remove only the delinquent installment of the PACE assessment. By removing the assessment from the secured property tax roll, this bill effectively forces the PACE provider to seek collection of the delinquent debt directly from the taxpayer instead of requiring the tax collector to continue charging a penalty and interest for the unpaid amount. The sponsors state the proposed changes will protect taxpayers and those who rely on local government services by removing delinquent PACE liens from the property tax bill, and that this measure will reduce the chances that counties, schools, other local government entities, and the State will lose revenue as a result of properties with PACE assessments being paid out of the proceeds from tax sales at prices below the original minimum bid amount. Additionally, the sponsors assert that this bill will ensure that the property tax bill is not being used to inappropriately enrich private parties at the expense of consumers who may not realize that tax code related penalties and interest will apply to their delinquent PACE assessments.
   
3. Difference of opinion. PACE providers have raised concerns that AB 271 would impose regressive changes that will eliminate current consumer protections and fundamentally undermine the PACE program. They argue that investors have supported PACE through the purchase of PACE securitizations because of the security of the assessment on the property tax roll and the super priority lien status. The PACE providers fear that by removing the delinquent assessment amount, this bill will lead to lower credit ratings and higher interest rates.

1. Related Legislation. Earlier this year, SB 242 (Skinner) was approved by the Senate Governance and Finance Committee on April 19^th with a vote of 6-1 and is currently set to be heard on July 12^th. This bill will impose a number of consumer protections by adding contract requirements, placing limitations on the operations of contractors, requiring certain information to be collected and reported, and instituting a forbearance process for property owners that cannot pay their property taxes.
2. Mandate. The California Constitution generally requires the state to reimburse local agencies for their costs when the state imposes new programs or additional duties on them. According to the Legislative Counsel’s Office, AB 271 creates a new state-mandated local program. Ultimately, the Commission on State Mandates determines if a mandate is reimbursable and the amount of reimbursement to be provided.

Assembly Actions

Assembly Local Government 7-2
Assembly Revenue and Taxation 9-1
Assembly Appropriations 17-0
Assembly Floor 73-0

Support and Opposition

(6/30/17)

Support: California Association of County Treasurers and Tax Collectors (Sponsor), California Association of Realtors; California Credit Union League; Santa Clara County; State Association of County Auditors.

Opposition: Advanced Energy Economy; Brightline Defense; Build It Green; CalAsian Chamber of Commerce; California Solar Energy Industries Association; Center for Sustainable Energy; Cleantech San Diego; Climate Action Campaign; Renew Financial; Renovate America; Vote Solar; Ygrene Energy Fund.

-- END --

ASSEMBLY THIRD READING

ATR Bill Id:

Author:(Caballero)

As Amended Ver:May 10, 2017

Majority vote

SUMMARY: Makes changes to the statutes which govern unpaid Property Assessed Clean Energy (PACE) assessments. Specifically, this bill:

1. Authorizes a county tax collector to direct the county auditor to remove any delinquent installment from the county's tax rolls. Provides that this bill only applies to a delinquent installment based on a voluntary contractual assessment, voluntary tax, or special tax that arises from a contract entered into on or after January 1, 2018, pursuant to existing law which governs contractual voluntary assessments and Mello-Roos special taxes which provide the authorization for Property Assessed Clean Energy (PACE) programs.
2. Requires the county tax collector, immediately upon the removal pursuant to 1), above, to provide notice on the tax rolls that the delinquent installment has been removed.
3. Requires the notice to be displayed on the secured tax roll in the manner that conveys that the removal has occurred and may include the name and telephone number of the person or entity to be contacted to receive further information.
4. Defines "PACE assessment" to mean a voluntary contractual assessment or voluntary special tax that arises from a contract entered into on or after January 1, 2018, pursuant to statutes in existing law which govern contractual voluntary assessments and Mello-Roos special taxes which provide the financing authorization for PACE programs.
5. Requires for a property subject to a PACE assessment that accrues a penalty pursuant to existing law which governs unpaid property taxes that become delinquent and defaulted and are subject to specified penalties, that accrued penalty applicable to the PACE assessment, when collected by the tax collector, to be deposited in a restricted county fund created pursuant to 9), below.
6. Requires any party other than the tax collector to remit the penalty to the tax collector within 30 days for deposit in the restricted county fund created pursuant to 9), below.
7. Prohibits a property subject to a PACE assessment, except as provided in 8), below, from being subject to an agreement wherein the authority to collect a defaulted lien based on a PACE assessment is transferred to, subject to, or contingent upon, third-party approval or another arrangement or agreement by the lienholder, unless that lien has been removed from the county's tax rolls and the right to collect the PACE assessment and any defaulted lien amount is returned to the holder of the PACE lien.
8. Provides that the prohibition in 7), above, does not apply to a PACE assessment made subject to, on or before January 1, 2018, a contractual waiver of the right to foreclose, or other arrangement or agreement between a lienholder and a lender, or a lienholder and another third party, wherein the agreement requires approval by the other party prior to the lienholder's exercise of foreclosure.
9. Requires the county to create a restricted fund to receive moneys described in 5) and 6), above, and requires moneys in the fund to be transferred to the delinquent tax sale trust fund for the deficit amount to be distributed pursuant to existing law for any property subject to a PACE assessment is sold at a tax-defaulted land sale for less than the minimum price described in existing law.
10. Prohibits a PACE assessment removed from a county's tax rolls, pursuant to this bill, from accruing further penalties and interest in existing law for delinquent assessments.
11. Provides that, if the Commission on State Mandates determines that this bill contains costs mandated by the state, reimbursement to local agencies and school districts for those costs shall be made, pursuant to current laws governing state mandated local costs.

FISCAL EFFECT: According to the Assembly Appropriations Committee, this bill contains minor costs to county tax collectors to carry out the provisions of this bill. While these costs are potentially reimbursable, it is unlikely a county would incur enough cost to make a claim to the Commission on State Mandates. In addition, costs incurred from administering the PACE program are recoverable from a third party under other provisions of law.

COMMENTS:

1. History and Statutory Authorization. Utilizing the authority to create a financing district as a charter city, the City of Berkeley, in 2007, established a citywide voluntary program to allow residential and commercial property owners to install solar energy systems and make energy efficiency improvements to their buildings and to repay the cost over 20 years via an assessment on the property tax bill. In 2008, the Legislature granted the statutory authority to cities and counties to provide up-front financing to property owners to install renewable energy sources or energy efficiency improvements that are permanently fixed to their properties, which is repaid through the property tax bill.

Most PACE programs are implemented and administered under two statutory frameworks:

AB 811 (Levine), Chapter 159, Statutes of 2008, which amended the Improvement Act of 1911, to allow for voluntary contractual assessments to finance PACE projects, and SB 555 (Hancock), Chapter 493, Statutes of 2011, which amended the Mello-Roos Community Facilities District Act to allow for Mello-Roos special taxes (parcel taxes) to finance PACE projects.

The Legislature has expanded PACE for residential and commercial property owners as an option to pay for renewable energy upgrades, energy and water efficiency retrofits, seismic improvements, and other specified improvements for their homes or buildings. Local agencies create PACE assessment districts under AB 811 or establish a Community Facilities District (CFD) under SB 555, allowing the local agency to issue bonds to finance the up-front costs of improvements. In turn, property owners enter into a voluntary contractual assessment agreement with the local agency or agree to annex their property into a CFD to re-pay the bonds via an assessment or special tax, secured by a priority lien, on their property tax bill. The intent of the program is that the assessment or parcel tax remains with the property even if it is sold or transferred, and the improvements must be permanently fixed to the property.

1. PACE Models. In California, there are several models available to local governments in administering a PACE program. Only the counties of Sonoma and Placer administer their own PACE programs. The majority of local governments contract with a private third-party or join a Joint Powers Authority (JPA), which contracts with a private third-party to carry out their PACE programs. The cost of third-party administration is not borne by the local agency, but is built into PACE loan financing. Some of these programs focus on residential projects, others target commercial projects, and some handle both residential and commercial portfolios.
2. Messages from the Federal Government. In 2010, the Federal Housing Finance Agency (FHFA), which oversees the nation's largest mortgage finance companies, Fannie Mae and Freddie Mac, raised concerns that residential PACE financing could pose a risk for federal mortgage enterprises (Fannie Mae and Freddie Mac), because PACE loans are a first-priority lien in the case of foreclosure, and outstanding PACE assessments would be paid before mortgage costs. In August of 2010, Fannie Mae and Freddie Mac announced they would not purchase mortgages for homes with first lien priority PACE obligations. The FHFA's action triggered many local governments to suspend their residential PACE programs.

The State of California and several other parties sued FHFA for not conducting a formal rulemaking before its decision; however, the 9th Circuit Court of Appeals ruled in FHFA's favor in March of 2013. (County of Sonoma, et al. v. Federal Housing Finance Agency, 710 F.3d 987 (2013)).

SB 96 (Budget and Fiscal Review Committee), Chapter 356, Statutes of 2013, sought to address FHFA's decision, and tasked the California Alternative Energy and Advanced Transportation Financing Authority (CAEATFA) with administering a PACE loss reserve program of $10 million to keep mortgage interests whole during a foreclosure or a forced sale. The PACE Loss Reserve Program is designed to compensate first mortgage lenders for losses resulting from the existence of a PACE lien in a foreclosure or forced sale. The program covers PACE payments made during foreclosure, if a mortgage lender forecloses on a home that has a PACE lien, and any losses to a first mortgage lender up to the amount of outstanding PACE payment, if a county conducts a forced sale on a home for unpaid taxes.

The FHFA issued clarity to their position following the creation of the PACE Loss Reserve Program, in a letter to Governor Brown dated May 1, 2014, which reads: "I am writing to inform you that FHFA is not prepared to change its position on California's first-lien PACE program and will continue to prohibit the Enterprises from purchasing or refinancing mortgages that are encumbered with first-lien PACE loans… The Reserve Fund is not an adequate substitute for Enterprise mortgages maintaining a first lien position and FHFA also has concerns about the Reserve Fund's ongoing sustainability."

In July 2016, the Clean Energy Savings for All Americans initiative, included guidelines from the United States (U.S.) Department of Housing and Urban Development and the Department of Veterans Affairs as to how properties with residential PACE assessments can be purchased and refinanced with Federal Housing Administration (FHA) mortgage insurance and VA insured mortgages.

To date, FHFA has maintained its position against first-priority PACE liens.

1. Liens. PACE financing provides creditors security that they would be repaid because property tax liens are super priority liens that are senior to mortgage debt. If a house is sold in a foreclosure or tax sale, the PACE lien holder will be paid before other lienholders, like mortgage lenders. In response to FHFA's decision not to purchase mortgages with PACE liens, some third party PACE providers have started offering an option to homeowners who are unable to refinance or sell their homes called "Limited Subordination" or "Contractual Subordination." These contractual lien subordinations are an agreement between the PACE lien holder and a mortgage lender, where the PACE lien holder "subordinates" their right to foreclose on a home for non-payment of PACE assessments, and to the proceeds from foreclosure, until the mortgage lender has been paid in full for amounts due under its mortgage.

This practice is not utilized by all PACE providers in the industry, and not addressed in state statute. According to Renovate America, a third party PACE administrator, they have completed over 2,000 subordination contracts.

In November 2016, the Department of Energy released the "Best Practice Guidelines for Residential PACE Financing Programs". These guidelines state, "PACE Assessment Non-Acceleration upon Property Owner Default: In the event of a sale of a property with an outstanding PACE Assessment, including a foreclosure sale, the obligation remains with the property and the new homeowner will be responsible for paying the remaining PACE financing balance. A PACE assessment should survive the foreclosure process (i.e., the full PACE obligation amount does not become due and payable in the event of foreclosure of the property). After a foreclosure, the subsequent owners are responsible for future assessment payments, and could be responsible for any delinquent amounts that remain if foreclosure proceeds were insufficient to pay-off the delinquent amount."

A PACE assessment does not accelerate upon default, meaning only the amount that is owned is due (not the entire amount of the PACE assessment). Default of PACE assessment triggers a local agency's right (as the PACE lien holder) to request that the defaulted PACE assessment be stripped from the tax roll. This right to strip an assessment from the tax roll and pursue the judicial foreclosure process to recover the defaulted PACE assessment remains with the PACE lien holder.

As a result of contractual subordination agreements, some PACE lien holders defer their right to strip a defaulted PACE assessment from the tax roll to the holder of the first mortgage. In other PACE models that do not use or offer any contractual lien subordination, the PACE lien holder identifies if any properties with a PACE assessment are delinquent and maintains the sole discretion to pursue or defer foreclosure proceedings.

1. Bill Summary. This bill applies to PACE assessments and delinquent installments based on PACE assessments that arise from a contract entered into on or after January 1, 2018.
   1. Delinquent Installment. This bill authorizes a county tax collector to direct the county auditor to remove a delinquent installment based on a PACE assessment from the tax roll. Under existing law, only the governing body of the local agency (PACE lien holder) may direct the removal of an unpaid installment based on a PACE assessment from the tax roll.
   2. Limited Subordination Agreements. This bill prohibits a property with a PACE assessment from being subject to an agreement where the authority to collect a defaulted lien based on a PACE assessment is transferred to, subject to, or contingent upon third party approval, unless the priority lien has been removed from the county's tax rolls and the right to collect the PACE assessment and any defaulted lien amount is returned to the PACE lien holder.
   3. County Reserve Fund. Under existing law, unpaid property taxes that become delinquent and defaulted are subject to specified penalties, including unpaid PACE assessments. This bill requires any penalties applicable to the delinquent PACE assessment to be deposited into the restricted fund. This bill requires counties to create a restricted fund and to appropriate moneys from the fund to offset any losses in property tax revenue to local governments as a result of properties with PACE assessments being sold at tax defaulted property sales for less than the minimum prices established by existing law.
2. Author's Statement. According to the author, "The PACE program has proven an effective way to finance energy efficiency and renewable energy upgrades for consumers. Yet as PACE continues to grow, so do opportunities for unscrupulous behavior and the potential for consumers to be taken advantage of by a program otherwise designed to help them. We must ensure that consumer protections are in place, and this bill does that. AB 271 protects counties, schools, and taxpayers, and also protects PACE so it can remain a viable alternative for energy efficiency and renewable energy generation."
3. Property Tax. Existing law establishes January 1st of each year as the "lien date," or the date upon which the assessor values property, and property taxes are imposed on its owner in the form of a lien against the property. For property on the secured roll, which generally includes real property such as land and buildings, tax collectors must send bills to taxpayers by November 1st. Taxpayers must pay their bills in two installments: the first on November 1st, which becomes delinquent December 10th, and the second on February 1st, with delinquency occurring on April 10th. Taxpayers can pay in full at the first installment. Many other locally-imposed charges, fees, taxes, and assessments, such as Mello-Roos taxes, benefit assessments, and parcel taxes, are also collected as part of the property tax bill, and subject to the same restrictions and penalties.

When taxes become delinquent, state law imposes a 10% penalty on each amount, and counties can also apply administrative charges. The property becomes tax defaulted if taxes remain unpaid as of June 30th, triggering redemption penalties of 1.5% a month (18% per year) until the full amount is paid. After five years, the tax collector with approval by the board of supervisors can sell a tax defaulted residential property to satisfy back taxes, penalties, costs, and other liens; for commercial property, the tax collector can do so after three years. After the sale, proceeds first pay for the costs of newspaper publishing, and recording fees. Funds are then distributed to taxing agencies with valid claims, and to the tax collector to pay for notices and contacting taxpayers. After that, proceeds satisfy liens held by parties in interest. Any amounts left over, known as "excess proceeds," are then divided up between each taxing entity according to their appropriate share of the property tax, after the county deducts specified costs.

1. Pending Issues. Last session, AB 2693 (Dababneh), Chapter 618, Statutes of 2016, established a number of consumer notice requirements and sought to tighten financing standards for PACE assessments for residential properties. This Committee, jointly with the Banking and Finance Committee, held an oversight hearing, to provide oversight on the current administration of PACE programs and to gain a better understanding on concerns expressed over residential PACE and the impacts on the financial market. Following a series of news articles in the Wall Street Journal, the filing of two class action lawsuits, and the introduction of legislation at the Federal level, the topic of residential PACE and expression of concerns over the lack of oversight and protections for consumers continue. PACE administrators and supporters of PACE programs continue to point to energy savings and the fact that the industry is still relatively new and experiencing growing pains.

SB 242 (Skinner) of the current legislative session, pending in the Senate Governance and Finance Committee, contains several provisions which seek to address a number of these issues that have been raised about PACE programs administered by third party providers.

1. Policy Consideration. The Legislature may wish to encourage the author to continue to work with stakeholders to ensure adequate notification that a defaulted PACE assessment has been removed from the tax roll.
2. Arguments in Support. The California Association of County Treasurers and Tax Collectors argue, "The proposed changes will protect tax payers and those who rely on local government services by removing defaulted PACE liens from the property tax bill. The proposed changes will reduce the chances counties, schools, other local government entities and the State will lose revenue as a result of properties with PACE assessments being sold at tax defaulted land sale at prices below the original minimum bid amount. It will also ensure that the property tax bill is not being used to inappropriately enrich private parties at the expense of consumers who may not realize that tax code related penalties and interest will apply to their delinquent PACE assessments."
3. Arguments in Opposition. Renovate America states, "Removing delinquent installments from the secured tax rolls changes PACE from a secured financing instrument, increases consumer costs, and reduces the availability of PACE financing. Removing delinquent installments from the secured tax rolls will increase foreclosures of property owners. The legislation would prohibit contractual subordination, limiting homeowner options at time of sale or refinance."

Analysis Prepared by: Misa Lennox / L. GOV. / (916) 319-3958 FN: 0000486

Date of Hearing: May 24, 2017

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Lorena Gonzalez Fletcher, Chair

ABPCA Bill Id:AB 271

Author:(Caballero) – As Amended Ver:May 10, 2017

Urgency: No State Mandated Local Program: Yes Reimbursable: Yes

SUMMARY: Allows county tax collectors to direct a county auditor to remove a delinquent Property Assessed Clean Energy (PACE) assessment from the tax roll, requires that penalties and costs applicable to a defaulted PACE assessment be deposited into a restricted fund, and limits subordination agreements, as specified. Specifically, this bill:

1. Allows the county tax collector to direct the county auditor to remove the delinquent installment from the county’s secured tax roll. Delinquent installments include those based on a voluntary contractual assessment, voluntary special tax, or special tax that arises from a contract entered into on or after January 1, 2018.
2. Requires the county tax collector to provide a notice on the secured tax roll that the delinquent installment has been removed immediately upon removal. The notice must be displayed on the secured tax roll in a manner that conveys that the removal has occurred, and may include the name and telephone number of the person or entity to be contacted to receive further information.
3. Requires that penalties or costs accrued by a property subject to a PACE assessment be deposited in the restricted county fund, whether collected on the secured tax roll or pursuant to a sale or foreclosure. If the funds are collected pursuant to a sale or foreclosure, the holder of the lien based on the PACE assessment must remit the penalty or cost to the county tax collector within 30 days of the sale or foreclosure.
4. Requires the county to create a restricted fund to receive accrued penalties and costs, and requires counties to appropriate those funds for the purpose of offsetting general fund property tax revenues of local taxing agencies that are lost when a property subject to a PACE assessment is sold at a tax-defaulted land sale for less than the total amount necessary to redeem the amount of defaulted taxes, delinquent penalties and costs, redemption penalties, and redemption fees.
5. Prohibits a PACE assessment that has been removed from the county’s secured tax roll by the county auditor from being subject to penalties and interest for delinquent assessments.

FISCAL EFFECT:

Minor costs to county tax collectors to carry out the provisions of this bill. While these costs are potentially reimbursable, it is unlikely a county would incur enough cost to make a claim to the Commission on State Mandates. In addition, costs incurred from administering the PACE program are recoverable from a third party under other provisions of law.

COMMENTS:

1. Purpose. According to the author, "The PACE program has proven an effective way to finance energy efficiency and renewable energy upgrades for consumers. Yet as PACE continues to grow, so do opportunities for unscrupulous behavior and the potential for consumers to be taken advantage of by a program otherwise designed to help them. We must ensure that consumer protections are in place, and this bill does that. AB 271 protects counties, schools, and taxpayers, and also protects PACE so it can remain a viable alternative for energy efficiency and renewable energy generation."
2. Background. In 2008, the Legislature granted the statutory authority to cities and counties to provide up-front financing to property owners to install renewable energy sources or energy efficiency improvements that are permanently fixed to their properties, which is repaid through the property tax bill.

Local agencies either create PACE assessment districts or establish a Community Facilities District (CFD) allowing the local agency to issue bonds to finance the up-front costs of improvements. In turn, property owners enter into a voluntary contractual assessment agreement with the local agency or agree to annex their property into a CFD to re-pay the bonds via an assessment or special tax, secured by a priority lien, on their property tax bill. The intent of the program is that the assessment or parcel tax remains with the property even if it is sold or transferred, and the improvements must be permanently fixed to the property.

Only the counties of Sonoma and Placer administer their own PACE programs. The majority of local governments contract with a private third-party or join a Joint Powers Authority (JPA), which contracts with a private third-party to carry out their PACE programs. The cost of third-party administration is not borne by the local agency, but is built into PACE loan financing. Some of these programs focus on residential projects, others target commercial projects, and some handle both residential and commercial portfolios.

PACE financing provides creditors security that they would be repaid because property tax liens are super priority liens that are senior to mortgage debt. If a house is sold in a foreclosure or tax sale, the PACE lien holder will be paid before other lienholders, like mortgage lenders. In response to a Federal Housing Finance Agency (FHFA) decision not to purchase mortgages with PACE liens, some third party PACE providers have started offering an option to homeowners who are unable to refinance or sell their homes called "Limited Subordination" or "Contractual Subordination." These contractual lien subordinations are an agreement between the PACE lien holder and a mortgage lender, where the PACE lien holder "subordinates" their right to foreclose on a home for non-payment of PACE assessments, and to the proceeds from foreclosure, until the mortgage lender has been paid in full for amounts due under its mortgage.

A PACE assessment does not accelerate upon default, meaning only the amount owned is due (not the entire amount of the PACE assessment). Default of PACE assessment triggers a local agency's right (as the PACE lien holder) to request that the defaulted PACE assessment be stripped from the tax roll. This right to strip an assessment from the tax roll and pursue the judicial foreclosure process to recover the defaulted PACE assessment remains with the PACE lien holder.

As a result of contractual subordination agreements, some PACE lien holders defer their right to strip a defaulted PACE assessment from the tax roll to the holder of the first mortgage. In other PACE models that do not use or offer any contractual lien subordination, the PACE lien holder identifies if any properties with a PACE assessment are delinquent and maintains the sole discretion to pursue or defer foreclosure proceedings.

1. Arguments in Support. The California Association of County Treasurers and Tax Collectors argue, "The proposed changes will protect tax payers and those who rely on local government services by removing defaulted PACE liens from the property tax bill. The proposed changes will reduce the chances counties, schools, other local government entities and the State will lose revenue as a result of properties with PACE assessments being sold at tax defaulted land sale at prices below the original minimum bid amount. It will also ensure that the property tax bill is not being used to inappropriately enrich private parties at the expense of consumers who may not realize that tax code related penalties and interest will apply to their delinquent PACE assessments."
2. Arguments in Opposition. Renovate America states, "Removing delinquent installments from the secured tax rolls changes PACE from a secured financing instrument, increases consumer costs, and reduces the availability of PACE financing. Removing delinquent installments from the secured tax rolls will increase foreclosures of property owners. The legislation would prohibit contractual subordination, limiting homeowner options at time of sale or refinance."
3. Related Legislation. SB 242 (Skinner), contains several provisions which seek to address a number of these issues that have been raised about PACE programs administered by third party providers. This bill is pending on the Senate Floor.

Analysis Prepared by: Jennifer Swenson / APPR. / (916) 319-2081

Date of Hearing: April 24, 2017

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Sebastian Ridley-Thomas, Chair

ABPCA Bill Id:AB 271 (

Author:Caballero) – As Amended Ver:April 4, 2017

Majority vote. Fiscal committee.

SUBJECT: Property Assessed Clean Energy program

SUMMARY: Allows county tax collectors to direct a county auditor to remove a delinquent Property Assessed Clean Energy (PACE) assessment from the tax roll, requires that penalties and costs applicable to a defaulted PACE assessment be deposited into a restricted fund, and limits subordination agreements, as specified. Specifically, this bill:

1. Allows the county tax collector to direct the county auditor to remove the delinquent installment from the county’s secured tax roll. Delinquent installments include those based on a voluntary contractual assessment, voluntary special tax, or special tax that arises from a contract entered into on or after January 1, 2018.
2. Requires the county tax collector to provide a notice on the secured tax roll that the delinquent installment has been removed immediately upon removal. The notice shall be displayed on the secured tax roll in a manner that conveys that the removal has occurred, and may include the name and telephone number of the person or entity to be contacted to receive further information.
3. Defines a "PACE assessment" as a voluntary contractual assessment, voluntary special tax, or special tax, as described in Public Resources Code (PRC) Section 26054.
4. Requires that penalties or costs accrued by a property subject to a PACE assessment pursuant to Revenue and Taxation Code (R&TC) Sections 2617, 2618, 2621, or 4103 and that are subject to Government Code Section 53340 and Streets and Highway Code (S&HC) Section 5898.3, be deposited in the restricted county fund, whether collected on the secured tax roll or pursuant to a sale or foreclosure. If the funds are collected pursuant to a sale or foreclosure, the holder of the lien based on the PACE assessment shall remit the penalty or cost to the county tax collector within 30 days of the sale or foreclosure.
5. Prohibits, except as specified, a property subject to a PACE assessment from being subject to an agreement wherein the authority to collect a defaulted lien based on a PACE assessment is transferred to, subject to, or contingent upon, third-party approval or another arrangement or agreement by the lienholder, unless that lien has been removed from the county’s secured tax roll and the right to collect the PACE assessment and any defaulted lien amount is returned to the administrator of the PACE program. This prohibition does not apply to a PACE assessment made, on or before January 1, 2018, and subject to a contractual waiver of the right to foreclose, or other arrangement or agreement between a lienholder and a lender, or a lienholder and another third party, wherein the agreement requires approval by the other party prior to the lienholder’s exercise of foreclosure.
6. Requires the county to create a restricted fund to receive accrued penalties and costs, and requires counties to appropriate those funds for the purpose of offsetting general fund property tax revenues of local taxing agencies that are lost when a property subject to a PACE assessment is sold at a tax-defaulted land sale for less than the total amount necessary to redeem the amount of defaulted taxes, delinquent penalties and costs, redemption penalties, and redemption fees.
7. Prohibits a PACE assessment that has been removed from the county’s secured tax roll by the county auditor from being subject to penalties and interest for delinquent assessments.
8. Provides that, if the Commission on State Mandates determines that this bill contains costs mandated by the state, reimbursement to local agencies and school districts for those costs shall be made, pursuant to current laws governing state mandated local costs.

EXISTING LAW:

1. Provides, generally, that the maximum amount of any ad valorem tax on real property shall not exceed 1% of the full cash value of such property. (Cal. Const., Art. VIII.)
2. Defines an "assessment" as any levy or charge upon real property by an agency for a special benefit conferred upon the real property. "Assessment" includes, but is not limited to, "special assessment," "benefit assessment," "maintenance assessment" and "special assessment tax." (Cal. Const., Art. VIII.)
3. Allows public agencies and property owners to enter into voluntary contractual assessments to finance the installation of distributed generation renewable energy sources or energy or water efficiency improvements that are permanently affixed on real property. (S&HC Section 5898.2.)
4. Establishes a PACE program as a way to help homeowners and small business owners finance voluntary energy and water efficiency and clean energy improvements. (PRC Section 26050.)
5. Establishes a PACE Reserve Program designed to address the Federal Housing Finance Agency's (FHFA) financial concerns by making first mortgage lenders whole for any losses in a foreclosure or a forced sale that are attributable to the PACE program. (PRC Section 26060.)

FISCAL EFFECT: Unknown

COMMENTS:

1. The author has provided the following statement in support of this bill:

The PACE program has proven an effective way to finance energy efficiency and renewable energy upgrades for consumers. Yet as PACE continues to grow, so do opportunities for unscrupulous behavior and the potential for consumers to be taken advantage of by a program otherwise designed to help them. We must ensure that consumer protections are in place, and this bill does that. AB 271 protects counties, schools, and taxpayers, and also protects PACE so it can remain a viable alternative for energy efficiency and renewable energy generation.

1. Supporters argue, "The proposed changes will protect tax payers and those who rely on local government services by removing defaulted PACE liens from the property tax bill. The proposed changes will reduce the chances counties, schools, other local government entities and the State will lose revenue as a result of properties with PACE assessments being sold at tax defaulted land sale at prices below the original minimum bid amount. It will also ensure that the property tax bill is not being used to inappropriately enrich private parties at the expense of consumers who may not realize that tax code related penalties and interest will apply to their delinquent PACE assessments."
2. Opponents state that "[t]he legislation proposed by Assemblywoman Caballero is intended to address a problem that does not presently exist. Renovate America’s HERO program has a 98.75% on time payment rate. To date, there has not been a single foreclosure initiated on a home as a result of a PACE assessment. PACE is working, and we believe that there are mechanisms that can be effectively incorporated into statute to protect homeowners and the program itself." Opponents further state that "[c]hanging the fundamental nature of PACE as a secured assessment will have an immediate and adverse impact on the capital markets that support the private capital that has fueled the growth of PACE in California. Capital markets have supported PACE through the purchase of PACE securitizations because of the secured interest in the property. The removal of security for the PACE assessment will lower credit ratings of securitizations, and will decrease and make more expensive the availability of capital – resulting in higher interest rates for property owners. The shortage of capital and increased costs to property owners will be a detriment to the state’s ability to meet the public policy goal of increasing energy efficiency, renewable energy, and water conservation to combat climate change."
3. Committee staff comments:
   1. Background. The PACE program, which began in 2007, is a financing tool that residential and commercial property owners can use to pay for renewable energy upgrades, energy or water efficiency retrofits, or electric vehicle charging stations for their homes or buildings. Most PACE programs are implemented and administered under two statutory frameworks: AB 811 (Levine), Chapter 159, Statutes of 2008, which amended the Improvement Act of 1911 to allow for voluntary contractual assessments to finance PACE projects; and SB 555 (Hancock), Chapter 493, Statutes of 2011, which amended the Mello-Roos Community Facilities District Act to allow for Mello-Roos special taxes to finance PACE projects. Local agencies create PACE assessment districts in their jurisdictions via a resolution of their legislative body, allowing the local agency to issue bonds to finance the up-front costs of improvements. In turn, property owners enter into a voluntary contractual assessment agreement with the local agency to re-pay the bonds via an assessment on their property tax bill. The assessment remains with the property even if it is sold or transferred.

The FHFA first raised concerns in 2010 that residential PACE financing could pose a risk for federal mortgage enterprises (Fannie Mae and Freddie Mac) because PACE loans are first-priority liens in the case of foreclosure and lenders would have to pay outstanding PACE assessments before paying mortgage costs. In August 2010, Fannie Mae and Freddie Mac announced they would not purchase mortgages for homes with first lien priority PACE obligations. The FHFA’s action triggered many local governments to suspend their residential PACE programs.

To address the concern raised by Fannie Mae and Freddie Mac back in 2010, the Legislature enacted SB 96 (Committee on Budget and Fiscal Review), Chapter 356, Statutes of 2013. This budget trailer bill tasked CAEATFA with administering a PACE loss reserve program that would use a $10 million reserve fund to keep mortgage interests whole during a foreclosure or a forced sale. In order to receive the benefits of the state's PACE loss reserve program, local PACE administrators must first apply and meet a specified set of underwriting standards.

The FHFA issued a statement clarifying their position following the creation of the PACE Loss Reserve Program in a letter to Governor Brown dated May 1, 2014:

I am writing to inform you that FHFA is not prepared to change its position on California's first-lien PACE program and will continue to prohibit the Enterprises from purchasing or refinancing mortgages that are encumbered with first-lien PACE loans…In making this determination, FHFA has carefully reviewed the Reserve Fund created by the State of California and, while I appreciate that it is intended to mitigate these increased losses, it fails to offer full loss protection to the Enterprises. The Reserve Fund is not an adequate substitute for Enterprise mortgages maintaining a first lien position and FHFA also has concerns about the Reserve Fund's ongoing sustainability.^[1]

To date, FHFA has maintained its position against first-priority PACE liens.

• 1. How does PACE work? In California, there are several models available to local governments in administering a PACE program. Only the counties of Sonoma and Placer administer their own PACE programs. The majority of local governments contract with a private third-party or join a Joint Powers Authority (JPA), which contracts with a private third-party to carry out their PACE programs. The cost of third-party administration is not borne by the local agency, but is built into PACE loan financing. Some of these programs focus on residential projects, others target commercial projects, and some handle both residential and commercial projects.
  2. Problems with PACE: Over the last few years, concerns have been raised with the lending practices of private third-parties that have contracts with local governments or JPAs to carry out of PACE program. To address some of these concerns, the Legislature enacted AB 2693 (Dababneh), Chapter 618, Statutes of 2016, which established disclosure requirements and provided owners with a right to cancel. However, a major concern of the PACE program, which has yet to be addressed, is with the underwriting standards. Under the PACE program, the only financial requirements that must be met for a person to qualify for a PACE loan are the following: the owner must be current on the mortgage; the owner is not in default or in bankruptcy; financing cannot exceed 15% of the value of the property or 10% if property is worth more than $700,000; and the total mortgage-related debt and PACE financing on the underlying property cannot exceed the value of the property. A key factor that is missing within these underwriting standards, and is standard among almost all loans, is an assessment of the borrower’s ability to pay.

The Consumer Financial Protection Bureau recently highlighted loose underwriting standards as a major contributing factor in the recent mortgage crisis. The report noted that many lending institutions at the time failed to verify "consumers’ income or debts" and then qualified consumers for mortgages based on "teaser" interest rates that would rise and make the monthly mortgage payments unaffordable^[2]. The issue became such a big problem that "in 2008, the Board of Governors of the Federal Reserve System adopted a rule under the Truth in Lending Act prohibiting creditors from making higher-priced mortgage loans without assessing consumers’ ability to repay the loans."

There are several ongoing disputes as to whether PACE assessments are loans or assessments. In 2010, then Attorney General Brown sued Fannie Mae and Freddie Mac seeking legal clarification that the PACE programs operate through assessments, not loans. The issue has not yet been resolved. Irrespective of the program’s legal characterization, the program functions very much like a loan. Just because the improvements are secured by a contractual assessment that is attached to the property and then repaid through property taxes does not change the fact that people are paying back borrowed funds. Without stronger underwriting standards, loose lending that led to the mortgage crisis a decade ago may cause similar problems within the PACE program. The lack of substantive underwriting standards has also prompted the Department of Energy to establish "Best Practice Guidelines for Residential PACE Financing Programs." These guidelines recognize that the PACE assessment is an additional financing obligation for the property owner. As such, the PACE program "should confirm property owners can support the cost of the PACE assessment by collecting and reviewing information from property owners on their household income and debt obligations." One key reason why lenders are not currently assessing a borrower’s ability to pay is that the assessment runs with the land even after a foreclosure. This allows a lender to make riskier loans because if a property owner who took on a PACE loan fails to make payments, the subsequent buyer will become liable for the assessment. In the end, the PACE provider and the bondholders always get paid.

• 1. What problem does this bill hope to address? When taxes become delinquent, state law imposes a 10% penalty on each amount and counties can also apply administrative charges. The property becomes tax defaulted if taxes remain unpaid as of June 30th, triggering redemption penalties of 1.5% a month (18% per year) until the full amount is paid. After five years, the tax collector, with approval by the board of supervisors, can sell a tax defaulted residential property to satisfy back taxes, penalties, costs, and other liens; for commercial property, the tax collector can do so after three years. After the sale, funds are distributed to taxing agencies with valid claims and to the tax collector to pay for notices and contacting taxpayers. After that, proceeds satisfy liens held by parties in interest. Any amounts left over, known as "excess proceeds," are then divided up between each taxing entity according to their appropriate share of the property tax. If a property fails to sell for a price sufficient to cover all of the debts due, known as a "minimum bid," the amount received by the tax collector in the auction is distributed on a proportional basis.

The sponsors of this bill want to ensure that local government services are protected by minimizing the chance of having a property sell for below the minimum bid amount due to the property having a PACE assessment. Third-party providers may not necessarily be worried about property going into default or being sold at a tax sale because, as mentioned earlier, the new buyer becomes liable for the assessment. Additionally, some third-party providers may actually look forward to delinquencies and defaults because it may substantially increase penalties and interests collected by bond holders. A third-party provider was recently quoted as saying that "[i]f a homeowner doesn’t pay their taxes, they’re subject to a penalty - which in California is 10% of the tax due – and after a certain number of months interest begins accruing at 1.5% a month. In the event of delinquencies, there’s actually more cashflow available to a PACE deal than if the property owner defaults on their mortgage payment.^[3]"

This bill would address the concern of having penalties and interest being remitted to bond holders by either allowing the county tax collector to remove the delinquent installment from the county’s secured tax roll or by ensuring that all interest and penalties that accrue from a PACE assessment be deposited into a restricted fund if the property sells for below the minimum bid. The first solution effectively forces the PACE provider to seek collection of the delinquent debt directly from the taxpayer. The priority of the lien is not modified when the tax collector removes the delinquent assessment from the secured tax roll. The lien continues to be on the property even if removed from the secured roll. The second provision ensures that the penalties and interest will be deposited into a restricted account used only to offset general fund property tax revenues of local taxing agencies when a property fails to meet the minimum bid.

• 1. Double-referral: This bill was heard in Assembly Committee on Local Government and passed out of Committee with a vote of 7 to 2.

REGISTERED SUPPORT / OPPOSITION:

Support

California Association of County Treasurers and Tax Collectors

Opposition

RenovateAmerica

Analysis Prepared by: Carlos Anguiano / REV. & TAX. / (916) 319-2098

1. Melvin L. Watt. Letter to Governor Edmond G. Brown, California Property Tax Assessed Clean Energy Program, Office of the Director, FHFA. May 1, 2014. ↑

2. Ability to Repay and Qualified Mortgage Rule: Small entity compliance guide, Consumer Financial Protection Bureau, March, 2016. ↑

3. Craig Braun of Renovate America, Structured Credit Investor, June 13, 2016. ↑

Date of Hearing: April 19, 2017

ASSEMBLY COMMITTEE ON LOCAL GOVERNMENT

Cecilia Aguiar-Curry, Chair

ABPCA Bill Id:AB 271 (

Author:Caballero) – As Amended Ver:April 4, 2017

SUBJECT: Property Assessed Clean Energy program.

SUMMARY: Makes changes to the statutes which govern unpaid Property Assessed Clean Energy (PACE) assessments. Specifically, this bill:

1. Authorizes a county tax collector to direct the county auditor to remove a delinquent installment from the county's secured tax roll. Provides that this bill only applies to a delinquent installment based on a voluntary contractual assessment, voluntary tax, or special tax that arises from a contract entered into on or after January 1, 2018, pursuant to existing law which governs contractual voluntary assessments and Mello-Roos special taxes which provide the authorization for Property Assessed Clean Energy (PACE) programs.
2. Requires the county tax collector, immediately upon the removal pursuant to 1), above, to provide notice on the secured tax roll that the delinquent installment has been removed.
3. Requires the notice to be displayed on the secured tax roll in the manner that conveys that the removal has occurred and may include the name and telephone number of the person or entity to be contacted to receive further information.
4. Defines "PACE assessment" to mean a voluntary contractual assessment or voluntary special tax that arises from a contract entered into on or after January 1, 2018, pursuant to statutes in existing law which govern contractual voluntary assessments and Mello-Roos special taxes which provide the financing authorization for PACE programs.
5. Requires for a property subject to a PACE assessment that accrues a penalty or cost pursuant to existing law which governs unpaid property taxes that become delinquent and defaulted and are subject to specified penalties, that accrued penalty or cost applicable to the PACE assessment, whether collected on the secured roll or in a sale or foreclosure, to be deposited in a restricted county fund created pursuant to 9), below.
6. Requires the holder of the lien based on the PACE assessment to remit the penalty or cost, if collected pursuant to a sale or foreclosure, to the county tax collector within 30 days of the sale or foreclosure.
7. Prohibits a property subject to a PACE assessment, except as provided in 8), below, from being subject to an agreement wherein the authority to collect a defaulted lien based on a PACE assessment is transferred to, subject to, or contingent upon, third-party approval or another arrangement or agreement by the lienholder, unless that lien has been removed from the county's secured tax roll and the right to collect the PACE assessment and any defaulted lien amount is returned to the administrator of the PACE program.
8. Provides that the prohibition in 7), above, does not apply to a PACE assessment made subject to, on or before January 1, 2018, a contractual waiver of the right to foreclose, or other arrangement or agreement between a lienholder and a lender, or a lienholder and another third party, wherein the agreement requires approval by the other party prior to the lienholder's exercise of foreclosure.
9. Requires the county to create a restricted fund to receive moneys described in 5) and 6), above, and requires counties to appropriate moneys from the fund only for the purpose of offsetting general fund property tax revenues of local taxing agencies that are lost when a property subject to a PACE assessment is sold at a tax-defaulted land sale for less than the minimum price described in existing law.
10. Prohibits a PACE assessment removed from a county's secured tax roll, pursuant to this bill, from being subject to penalties and interest in existing law for delinquent assessments.
11. Provides that, if the Commission on State Mandates determines that this bill contains costs mandated by the state, reimbursement to local agencies and school districts for those costs shall be made, pursuant to current laws governing state mandated local costs.

FISCAL EFFECT: This bill is keyed fiscal and contains a state mandated local program.

COMMENTS:

1. History and Statutory Authorization. Utilizing the authority to create a financing district as a charter city, the City of Berkeley, in 2007, established a citywide voluntary program to allow residential and commercial property owners to install solar energy systems and make energy efficiency improvements to their buildings and to repay the cost over 20 years via an assessment on the property tax bill. In 2008, the Legislature granted the statutory authority to cities and counties to provide up-front financing to property owners to install renewable energy sources or energy efficiency improvements that are permanently fixed to their properties, which is repaid through the property tax bill.

Most PACE programs are implemented and administered under two statutory frameworks:

AB 811 (Levine), Chapter 159, Statutes of 2008, which amended the Improvement Act of 1911, to allow for voluntary contractual assessments to finance PACE projects, and SB 555 (Hancock), Chapter 493, Statutes of 2011, which amended the Mello-Roos Community Facilities District Act to allow for Mello-Roos special taxes (parcel taxes) to finance PACE projects.

The Legislature has expanded PACE for residential and commercial property owners as an option to pay for renewable energy upgrades, energy and water efficiency retrofits, seismic improvements, and other specified improvements for their homes or buildings. Local agencies create PACE assessment districts under AB 811 or establish a Community Facilities District (CFD) under SB 555, allowing the local agency to issue bonds to finance the up-front costs of improvements. In turn, property owners enter into a voluntary contractual assessment agreement with the local agency or agree to annex their property into a CFD to re-pay the bonds via an assessment or special tax, secured by a priority lien, on their property tax bill. The intent of the program is that the assessment or parcel tax remains with the property even if it is sold or transferred, and the improvements must be permanently fixed to the property.

1. PACE Models. In California, there are several models available to local governments in administering a PACE program. Only the counties of Sonoma and Placer administer their own PACE programs. The majority of local governments contract with a private third-party or join a Joint Powers Authority (JPA), which contracts with a private third-party to carry out their PACE programs. The cost of third-party administration is not borne by the local agency, but is built into PACE loan financing. Some of these programs focus on residential projects, others target commercial projects, and some handle both residential and commercial portfolios.
2. Messages from the Federal Government. In 2010, the Federal Housing Finance Agency (FHFA), which oversees the nation's largest mortgage finance companies, Fannie Mae and Freddie Mac, raised concerns that residential PACE financing could pose a risk for federal mortgage enterprises (Fannie Mae and Freddie Mac), because PACE loans are a first-priority lien in the case of foreclosure, and outstanding PACE assessments would be paid before mortgage costs. FHFA specifically pointed to the underwriting for PACE programs, which result in collateral-based lending, rather than lending based upon ability to pay. FHFA statements also reference the absence of Truth in Lending Act and other consumer protections. In August of 2010, Fannie Mae and Freddie Mac announced they would not purchase mortgages for homes with first lien priority PACE obligations. The FHFA’s action triggered many local governments to suspend their residential PACE programs.

The State of California and several other parties sued FHFA for not conducting a formal rulemaking before its decision; however, the 9th Circuit Court of Appeals ruled in FHFA’s favor in March of 2013. (County of Sonoma, et al. v. Federal Housing Finance Agency, 710 F.3d 987 (2013)).

SB 96 (Committee on Budget and Fiscal Review), Chapter 356, Statutes of 2013, sought to address FHFA's decision, and tasked the California Alternative Energy and Advanced Transportation Financing Authority (CAEATFA) with administering a PACE loss reserve program of $10 million to keep mortgage interests whole during a foreclosure or a forced sale. CAEATFA established regulations, and the majority of PACE administrators participate in the program. The loss reserve currently supports 81,707 PACE financings with an outstanding value of over $1.8 billion from 14 PACE programs. The PACE Loss Reserve Program is designed to compensate first mortgage lenders for losses resulting from the existence of a PACE lien in a foreclosure or forced sale. The program covers PACE payments made during foreclosure, if a mortgage lender forecloses on a home that has a PACE lien, and any losses to a first mortgage lender up to the amount of outstanding PACE payment, if a county conducts a forced sale on a home for unpaid taxes. The intent of the Program is to put the first mortgage lender in the same position it would be in without a PACE lien.

The FHFA issued clarity to their position following the creation of the PACE Loss Reserve Program, in a letter to Governor Brown dated May 1, 2014, which reads:

"I am writing to inform you that FHFA is not prepared to change its position on California's first-lien PACE program and will continue to prohibit the Enterprises from purchasing or refinancing mortgages that are encumbered with first-lien PACE loans…In making this determination, FHFA has carefully reviewed the Reserve Fund created by the State of California and, while I appreciate that it is intended to mitigate these increased losses, it fails to offer full loss protection to the Enterprises. The Reserve Fund is not an adequate substitute for Enterprise mortgages maintaining a first lien position and FHFA also has concerns about the Reserve Fund's ongoing sustainability."

In July 2016, the Clean Energy Savings for All Americans initiative, included guidelines from the U.S Department of Housing and Urban Development and the Department of Veterans Affairs as to how properties with residential PACE assessments can be purchased and refinanced with Federal Housing Administration (FHA) mortgage insurance and VA insured mortgages. Key requirements include: (1) the PACE obligation is collected and secured by the creditor in the same manner as a special assessment against the property, pursuant to state law; (2) only the delinquent PACE assessment payments take a first lien position ahead of the mortgage; and, (3) the assessment transfers from one property owner to the next, including through a foreclosure sale.

To date, FHFA has maintained its position against first-priority PACE liens.

1. Liens. PACE financing provides creditors security that they would be repaid because property tax liens are super priority liens that are senior to mortgage debt. If a house is sold in a foreclosure or tax sale, the PACE lien holder will be paid before other lienholders, like mortgage lenders. In response to FHFA's decision not to purchase mortgages with PACE liens, some third party PACE providers have started offering an option to homeowners who are unable to refinance or sell their homes called "Limited Subordination" or "Contractual Subordination." These contractual lien subordinations are an agreement between the PACE lien holder and a mortgage lender, where the PACE lien holder "subordinates" their right to foreclose on a home for non-payment of PACE assessments, and to the proceeds from foreclosure, until the mortgage lender has been paid in full for amounts due under its mortgage.

This practice is not utilized by all PACE providers in the industry, and not addressed in state statute. According to Renovate America, a third party PACE administrator, they have completed over 2,000 subordination contracts. The consequences of contractual subordination agreements are untested when it comes to the issues presented to a county tax collector to comply with existing law which governs defaulted assessments, interest penalties, and tax defaulted property sales.

In November 2016, the Department of Energy released the "Best Practice Guidelines for Residential PACE Financing Programs". These guidelines state, "PACE Assessment Non-Acceleration upon Property Owner Default: In the event of a sale of a property with an outstanding PACE Assessment, including a foreclosure sale, the obligation remains with the property and the new homeowner will be responsible for paying the remaining PACE financing balance. A PACE assessment should survive the foreclosure process (i.e., the full PACE obligation amount does not become due and payable in the event of foreclosure of the property). After a foreclosure, the subsequent owners are responsible for future assessment payments, and could be responsible for any delinquent amounts that remain if foreclosure proceeds were insufficient to pay-off the delinquent amount."

A PACE assessment does not accelerate upon default, meaning only the amount that is owned is due (not the entire amount of the PACE assessment). Default of PACE assessment triggers a local agency's right (as the PACE lien holder) to request that the defaulted PACE assessment be stripped from the tax roll. This right to strip an assessment from the tax roll and pursue the judicial foreclosure process to recover the defaulted PACE assessment remains with the PACE lien holder.

As a result of contractual subordination agreements, some PACE lien holders defer their right to strip a defaulted PACE assessment from the tax roll to the holder of the first mortgage. In other PACE models that do not use or offer any contractual lien subordination, the PACE lien holder identifies if any properties with a PACE assessment are delinquent and maintains the sole discretion to pursue or defer foreclosure proceedings.

1. Bill Summary. This bill applies to PACE assessments and delinquent installments based on PACE assessments that arise from a contract entered into on or after January 1, 2018.
   1. Delinquent Installment. This bill authorizes a county tax collector to direct the county auditor to remove a delinquent installment based on a PACE assessment from the property tax roll. Under existing law, only the governing body of the local agency (PACE lien holder) may direct the removal of a defaulted installment based on a PACE assessment from the secured property tax roll.
   2. Limited Subordination Agreements. This bill prohibits a property with a PACE assessment from being subject to an agreement where the authority to collect a defaulted lien based on a PACE assessment is transferred to, subject to, or contingent upon third party approval, unless the priority lien has been removed from the county's secured tax roll and the right to collect the PACE assessment and any defaulted lien amount is returned to the administrator of the PACE program.
   3. County Reserve Fund. Under existing law, unpaid property taxes that become delinquent and defaulted are subject to specified penalties, including defaulted PACE assessments. This bill requires a PACE assessment lien holder to remit any penalties and costs applicable to the defaulted PACE assessment collected, pursuant to a tax defaulted land sale or a foreclosure be deposited into the restricted fund. This bill requires counties to create a restricted fund and to only appropriate moneys from the fund to offset any losses in property tax revenue to local governments as a result of properties with PACE assessments being sold at tax defaulted property sales for less than the minimum prices established by existing law.
2. Author's Statement. According to the author, "The PACE program has proven an effective way to finance energy efficiency and renewable energy upgrades for consumers. Yet as PACE continues to grow, so do opportunities for unscrupulous behavior and the potential for consumers to be taken advantage of by a program otherwise designed to help them. We must ensure that consumer protections are in place, and this bill does that. AB 271 protects counties, schools, and taxpayers, and also protects PACE so it can remain a viable alternative for energy efficiency and renewable energy generation."
3. Property Tax. Existing law establishes January 1st of each year as the “lien date,” or the date upon which the assessor values property, and property taxes are imposed on its owner in the form of a lien against the property. For property on the secured roll, which generally includes real property such as land and buildings, tax collectors must send bills to taxpayers by November 1st. Taxpayers must pay their bills in two installments: the first on November 1st, which becomes delinquent December 10th, and the second on February 1st, with delinquency occurring on April 10th. Taxpayers can pay in full at the first installment. Many other locally-imposed charges, fees, taxes, and assessments, such as Mello-Roos taxes, benefit assessments, and parcel taxes, are also collected as part of the property tax bill, and subject to the same restrictions and penalties.

When taxes become delinquent, state law imposes a 10% penalty on each amount, and counties can also apply administrative charges. The property becomes tax defaulted if taxes remain unpaid as of June 30th, triggering redemption penalties of 1.5% a month (18% per year) until the full amount is paid. After five years, the tax collector with approval by the board of supervisors can sell a tax defaulted residential property to satisfy back taxes, penalties, costs, and other liens; for commercial property, the tax collector can do so after three years. After the sale, proceeds first pay for the costs of newspaper publishing, and recording fees. Funds are then distributed to taxing agencies with valid claims, and to the tax collector to pay for notices and contacting taxpayers. After that, proceeds satisfy liens held by parties in interest. Any amounts left over, known as “excess proceeds,” are then divided up between each taxing entity according to their appropriate share of the property tax, after the county deducts specified costs.

1. Pending Issues. Last session, AB 2693 (Dababneh), Chapter 618, Statutes of 2016, established a number of consumer notice requirements and sought to tighten financing standards for PACE assessments for residential properties. This Committee, jointly with the Banking and Finance Committee, held an oversight hearing, to provide oversight on the current administration of PACE programs and to gain a better understanding on concerns expressed over residential PACE and the impacts on the financial market. Following a series of news articles in the Wall Street Journal, the filing of two class action lawsuits, and the introduction of legislation at the Federal level, the topic of residential PACE and expression of concerns over the lack of oversight and protections for consumers continue. PACE administrators and supporters of PACE programs continue to point to energy savings and the fact that the industry is still relatively new and experiencing growing pains.

SB 242 (Skinner), pending in the Senate Governance and Finance Committee, contains several provisions which seek to address a number of these issues that have been raised about PACE programs administered by third party providers.

1. Policy Considerations. The Committee may wish to encourage the author to continue to work with the Committee to address several issues moving forward:
   1. Level of Notification. Ensure adequate notification that a defaulted PACE assessment has been removed from the secured property tax roll.
   2. County Reserve Fund. Clarify what happens with any excess proceeds in a county's restricted fund.
   3. Terminology. Clarify the use of the term "delinquent" instead of "defaulted" installments, and "PACE administrator" instead of "PACE lien holder".
2. Arguments in Support. The California Association of County Treasurers and Tax Collectors argue, "The proposed changes will protect tax payers and those who rely on local government services by removing defaulted PACE liens from the property tax bill. The proposed changes will reduce the chances counties, schools, other local government entities and the State will lose revenue as a result of properties with PACE assessments being sold at tax defaulted land sale at prices below the original minimum bid amount. It will also ensure that the property tax bill is not being used to inappropriately enrich private parties at the expense of consumers who may not realize that tax code related penalties and interest will apply to their delinquent PACE assessments."
3. Arguments in Opposition. Renovate America states, "Removing delinquent installments from the secured tax rolls changes PACE from a secured financing instrument, increases consumer costs, and reduces the availability of PACE financing. Removing delinquent installments from the secured tax rolls will increase foreclosures of property owners. The legislation would prohibit contractual subordination, limiting homeowner options at time of sale or refinance."
4. Double Referral. This bill is double-referred to the Revenue and Taxation Committee.

REGISTERED SUPPORT / OPPOSITION:

Support

California Association of County Treasurers and Tax Collectors [SPONSOR]

California Credit Union League

Opposition

Renovate America

Ygrene

Analysis Prepared by: Misa Lennox / L. GOV. / (916) 319-3958