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72 require lending disclosures many borrowers did not understand the extent to which they were increasing their monthly obligations. In fact, many were lured into the often-false belief that, with tax credits and energy savings, the im- provements would virtually "pay for themselves." More often than not, the results were disastrous, because the extra burden of the assessment caused not only default in the payment of the assessment, but potentially in the underlying loan obligation. Also, the PACE assessments created a new category of essentially mandatory advances for mortgage lenders, on par with delinquent property taxes. In a declining real estate market, these advances could potentially become losses, and make reinstatement less likely for the bor- rower. e fact that the PACE liens ran with the land gave rise to another unexpected conse- quence for borrowers: Namely, most borrowers were not informed that the presence of the negative impact of PACE liens on the sale of the property or the refinance of their loans, primar- ily due to the fact that the majority of lenders refuse to finance loans on properties with exist- ing PACE liens. is limitation stemmed in part from the fact that, in 2010, Fannie Mae and Freddie Mac refused to back mortgages with PACE liens on them. In 2015, HUD announced that FHA loans on homes with PACE liens would not be made absent a subordination agreement of the PACE lien. ese limitations thus affected the market- ability of the properties burdened by PACE liens, and in many instances required borrow- ers to pay off the liens before selling the home; something which was not always feasible. THE NEW PACE REGULATION Last fall, California implemented a major overhaul of the PACE program in the form of SB 242 (which took effect January 1, 2018) and AB 1284 (which will take effect on January 1, 2019). ese new laws, which supplemented existing law and will be renamed "California Fi- nance Lenders Laws," are intended to establish a uniform, statewide set of regulations with the dual goal of consumer protection and ensur- ing the future of financing for environmental improvements under an existing financing program. Other states are likely to follow California's lead in regulating PACE loans. e two assembly bills are intended to ad- dress what was seen by the legislature as critical defects in the existing law including, the lack of oversight and regulation in the industry; the lack of proper underwriting requirements, and specifically the lack of concern for the ability to repay; the lack of disclosures and a right of rescission; and fraud prevention, including, false advertising. e most significant modification to address these concerns is the creation under AB 1284 of a licensing and regulatory framework for the PACE industry, under the supervision of the California Department of Business Oversight (DBO). Beginning January 1, 2019, AB 1284 will re- quire, among other things, that PACE Program administrators be licensed, new underwrit- ings standards be established based on income verification, and ability to repay consideration, that includes repayment not only of the PACE obligation, but of all debt, including existing mortgage debt; require PACE providers to un- dergo background investigations and satisfy net worth requirements to obtain a license; require PACE providers to train home improvement contractors and their sales representatives, and will hold PACE administrators responsible for screening and monitoring of contractors and their sales representatives and finally, empower the DBO to take action against noncompliant PACE administrators, by, among other things, prohibiting them from working with certain contractors and their employees who have en- gaged in activity harmful to consumers. In addition, SB 242, required that begin- ning on January 1, 2018, prior to the execution of any assessment agreement, PACE providers engage in a recorded telephone call with the borrower(s), which sets forth a "confirmation" of the terms of the assessment contract, and all of the newly-mandated written disclosures concerning the terms of repayment under the contract, including the monthly and annual costs of the assessment, a notification that the cost may not be offset or reduced by the improvements, and a disclosure regarding the inability to guarantee the existence or amount of any taxable deductions. SB 242 also expands the three-day right of rescission on the PACE financing agreement to the separate home improvement contract. Under the new law, a contractor that commences work prematurely will be responsible for restoring the property to its original condition, at no cost to the homeowner. Finally, SB 242 prevents kickbacks from contractors, requires the same price as cash quote for financed improvements, and prevents the disclosure to the contractor by the PACE provider of the amount of financing for which a homeowner qualifies. SB 242 also includes a foreign language requirement for the confirmation call for five supported languages and beginning on January 1, 2019, will require that confirmation calls in languages other than English, will need to be accompanied by all operative documents in the same language as the call. Currently, the five supported languages include Spanish, Chinese, Korean, Tagalog, and Vietnamese. WEIGHING THE CHANGE While receiving the full support of the mort- gage and servicing industry, many consumer groups claim that the new legislation is still lacking. us the only significant benefits to mortgage lenders would be incidental, at best. One such benefit would likely be that, if applied properly, the new underwriting requirements should reduce the number of overburdened bor- rowers, and the ensuing defaults. However, this reduction will not eliminate the fact that any financing that increases a borrower's obligation while creating a lien that has priority over a prior existing deed of trust, is going to negatively impact the holder of that deed of trust. e new laws still allow residential borrowers to take on additional debt that could potentially increase the risk of default, and still creates a superior lien, without any prior notice to that lender. Even with the most conscien- tious underwriting techniques, new debt creates an additional risk that was not contemplated at the time of the origination of the mortgage as it not only increases the possibility of default but potentially creates an additional obligation to the mortgage lender since it takes the form of a lien that not only places the mortgage lender's security at risk, but that survives the mortgage lender's foreclosure and will have to be repaid even if title reverts to the lender. While overall, these new laws seem like they will a positive impact on mortgage lenders, only time will tell. Increased regulation and a new overseeing entity may create more questions than answers, and possibly a new type of litiga- tion that ties up properties for extended periods of time. As with all new legislation, even the best of intentions can give rise to unanticipated prob- lems. It will also be interesting to see if other states follow California's lead in updating their programs. Hopefully, states without current pro- grams will be cognizant of the issues that arose in California and other pioneer states, and craft laws that will mitigate them from the onset. In the meantime, the DBO has invited com- mentaries and input from the lending industry. Now is the time for the mortgage industry to bring up their concerns, and join forces with the DBO in the hope of finding solutions that are beneficial to lenders and homeowners alike.

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