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70 I N D U S T R Y I N S I G H T / T . R O B E R T F I N L A Y A N D S O N I A P L E S S E T E D W A R D S With global warming and other environmental issues at the forefront of national policy, the creation of programs to finance energy-efficient improvements soon followed. In 35 states and the District of Colombia, the primary means of financing these improvements is through Property As- sessed Clean Energy (PACE) programs. Currently, PACE is regulated under the state law of each participating state. However, nationally, PACE programs have been affected by Fannie Mae and Freddie Mac's refusal to back mortgages with PACE liens, and HUD's announcement that PACE liens must be subordinate to any Federal Housing Administration (FHA) guaranteed mortgages. It's not surprising then while PACE regulation varies from state to state common issues arise. Many of the challenges of PACE did not become apparent until its implementation. Cali- fornia, the state in which PACE originated, is no exception and is a good example of concerns experienced nationwide. THE BACKGROUND In 2007, the State of California first intro- duced PACE to provide commercial and resi- dential financing for renewable and clean energy improvements for existing and new structures. e programs enabled homeowners and busi- nesses alike to install a wide range of efficiency- increasing upgrades, such as solar windows and panels, LED lighting, insulation, and, in the commercial context, seismic retrofitting, as well as the installation of vehicle-charging stations for electric cars. e PACE program took off in 2010 when the California Legislature set up the State's Loan Loss Residential Fund for Residential PACE programs. ese programs provide sources of financing, usually through local governments obtaining financing from private lenders in the form of bonds of various duration, ranging from a few months up to 20 years. Once recorded, the assessment contracts become liens against the property that secured repayments that appeared twice a year on the property tax bills of the affected properties as a line item and were repaid through the localities. Like property taxes, PACE assessments created liens that were superior to any existing lien, including senior mortgages. ese liens were not eliminated by foreclosure and could be foreclosed in the same manner as delinquent property taxes. For a senior lender, the consequences were clear: these assessments, if delinquent, had to be advanced by the lender to protect the lender's security interest. e advances could, however, then be added to the balance due on the loan. AT RISK OF DEFAULT It is important to note that, in the residential context, there is no notice requirement to the existing senior lienholder at the time of their creation. us, the liens are created without any consideration of the impact of the assessment on the existing lienholders. ey are in effect, imposed on the lienholders. us, PACE assess- ments created a de facto "super lien." Also, the PACE assessments ran with the land, not the borrower. As a result, before the enactment of the new law, PACE financing decisions were based entirely on the amount of equity in the property, a cursory review of the borrower's payment history of property taxes, and the absence of a recent bankruptcy. No consideration was given to the borrower's cred- itworthiness, his/her income, assets, existing liabilities (including the current mortgage), or overall ability to repay. Moreover, because PACE contracts did not The Property Assessed Clean Energy Program was created to address environmental concerns, but exposed borrowers to higher-risks of default. Now, new changes to the law aim to solve these concerns.

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