Resources:

https://www.streetinsider.com/PRNewswire/Two+More+California+Cities+Gain+Access+to+Funding+Option+for+HVAC%2C+Roofing%2C+Renewable+Energy%2C+EV+Charging%2C+Water+Saving+Projects%2C+and+Earthquake+Resiliency+through+Property+Assessed+Clean+Energy+%28PACE/25318535.html

Executive Summary

Within California, AB 1284 requires licensure of PACE program administrators under the California Financing Law, imposes ability‑to‑pay verification (independent of property equity), and establishes contractor enrollment and training rules. California has also recognized wildfire safety measures as PACE‑eligible (notably via SB 645 (2018) and subsequent measures), expanding the eligible project universe in high-hazard zones. This trend complements resiliency priorities but also raises compliance and affordability considerations under the new federal ATR rubric.

1) PACE—How We Got Here

PACE allows property owners to finance eligible improvements through a voluntary property tax assessment secured by a lien that typically has super-priority over existing mortgages. While commercial PACE (C‑PACE) remains governed at the state/local level, R‑PACE has prompted federal scrutiny due to consumer‑protection risks (affordability, disclosures, contractor sales practices) and the lien’s priority. The CFPB’s rule responds by assimilating PACE into the TILA framework, while acknowledging the program’s unique tax‑assessment mechanics.

Historically, only a handful of states (primarily California, Florida, and Missouri) have operated active R‑PACE programs at scale, with California’s DFPI oversight (since 2019) providing the most developed state model for administrator licensing, underwriting, and contractor controls. These state frameworks now sit alongside the new federal obligations, creating a layered compliance environment for 2025–2026 transitions.

2) The Federal Overhaul (CFPB Final Rule) Scope and Effective Dates

The CFPB’s final rule (published January 10, 2025, in the Federal Register; issued December 17, 2024) redefines PACE as “credit” under TILA and applies major mortgage-style rules to RPACE. Effective date: March 1, 2026 (plan implementation through 2025 is key).

Core features (high-impact areas):

·        TILA/Reg Z Coverage: Voluntary tax assessments (PACE) are now credit under Reg Z (the exclusion is narrowed to involuntary liens/assessments). This pulls RPace into the mortgage regulatory perimeter.

·        Ability‑to‑Repay (ATR): Covered parties (including PACE companies “substantially involved” in the credit decision) must make and document a good‑faith ATR determination, considering the eight ATR factors and verifying with third-party records.

·        TRID (Loan Estimate & Closing Disclosure): New model forms tailored to PACE—including Spanish versions—and required qualitative disclosures (assumption, late payment, servicing, liability after foreclosure) adapted to tax‑assessment collection.

·        Exemptions/Nuances:

·        Exempt from periodic statements and HPML escrow requirements.

·        HPML appraisal rules will apply above the annual threshold ($33,500 in 2025; inflation-indexed).

·        No QM status for PACE loans.

·        Mortgage Underwriting Coordination: For new mortgage originations, existing PACE payments are treated as property taxes (mortgage-related obligations). Mortgage lenders must consider and verify PACE in their ATR assessments—tightening refi/purchase underwriting where PACE is present.

Why this matters in 2025: Although the rule is effective in 2026, 2025 is the build year—systems, forms, workflows, vendor contracts, contractor training, and capital markets representations need to be aligned now to avoid enforcement, civil liability, and repurchase exposure.

3) California’s Statutory and Supervisory Framework (AB 1284 + Complementary Laws)

3.1 AB 1284 — The Backbone of California R‑PACE Oversight

AB 1284 (2017) renamed the California Finance Lenders Law to the California Financing Law and required PACE program administrators to be licensed by the (now) DFPI; it also established the state’s ability‑to‑pay determination and contractor enrollment/training regime. Among other criteria, it prohibits relying on home equity for the ability‑to‑pay and imposes LTV‑style caps relative to property value.

DFPI’s public guidance underscores AB 1284’s operational expectations: oral confirmation of key terms before signing; independent income/asset verification; and value-based caps (e.g., 15% up to $700,000 of value and 10% above that amount), which functionally limit over‑leveraging. These sit alongside translation, disclosures, and annual reporting obligations first codified in companion SB 242.

3.2 SB 242 (2017), AB 2063 (2018), and Ongoing DFPI Authority

SB 242 strengthened consumer protections by requiring oral confirmation of terms, limiting contractor incentives, and tightening reporting to local agencies—groundwork for DFPI’s later enforcement. 

AB 2063 further barred execution of PACE or commencement of work before the ability‑to‑pay and other criteria are verified, and refined the definitions and enrollment rules for PACE solicitors/agents. These measures are now the state “floor” that must harmonize with the CFPB’s new “ceiling.”

DFPI maintains FAQs, licensee lists, and supervision protocols, and has emphasized during exams that compliance will be tested against the plain language of statute as operative at the time—meaning California’s rules continue to apply pending the federal effective date and thereafter in tandem.

3.3 Wildfire Safety & Resiliency Eligibility (SB 645 and Related Policy)

California extended PACE eligibility to wildfire safety improvements in high fire hazard zones, applying the same procedures used for seismic retrofits and EV charging infrastructure (via SB 645 (2018)). Legislative activity has also sought to refine definitions and expand eligible work (e.g., AB 2258 (2022), addressing defensible‑space measures), reflecting a policy trend toward climate and resilience upgrades within PACE.

4) Underwriting Standards in 2025 — Signals from the Market

While underwriting is ultimately program-specific and governed by state/local program rules, 2025 best‑practice updates (e.g., TX‑PACE’s coalition guidance) are noteworthy: recommended LTAV increase to 35%, revised SIR (excluding financing costs), limits on capitalized interest/interest-only periods, and clearer eligibility for “developed” property status. These are not California mandates but indicate where commercial PACE norms are trending, and they inform investors’ expectations for disciplined risk management.

In California, the statutory caps and ability‑to‑pay metrics from AB 1284/SB 242/AB 2063 remain controlling for RPACE; the federal ATR overlay in 2026 will require documenting income, debts, housing expenses (including property taxes and insurance), and considering escrow impacts when calculating the consumer’s capacity—effectively tightening affordability screens beyond earlier California practices.

5) Operational & Capital Markets Implications (2025 Planning Priorities)

For PACE Administrators & Program Sponsors (2025):

·        Licensing & Oversight: Ensure DFPI licensure, solicitor/agent enrollment, and training are current; map California requirements to the CFPB rule to avoid duplicative or conflicting workflows.

·        ATR & Verification: Build or procure third-party verification pipelines (income, assets, debts); document eight-factor ATR logic; store evidence consistent with Reg Z recordkeeping.

·        TRID Readiness: Implement CFPB’s PACE-specific LE/CD forms (including Spanish), calibrate timing and waiting periods, and align vendor/DocGen stacks.

·        Contractor Channel: Treat contractor‑solicitors as loan originators for qualification/compensation rules where applicable; retrain sales to avoid UDAAP risks and high‑cost/HPML pitfalls.

·        Product/Eligibility: Update matrices for wildfire safety/seismic/EV measures; confirm local program authorizations and any county recorder requirements.

For Mortgage Lenders (first‑ and second‑lien):

·        Underwriting Policy: Treat existing PACE assessments as property tax obligations and verify them in ATR; adjust DTI and escrow estimates accordingly.

·        Valuation/Appraisal: Anticipate HPML appraisal triggers for a subset of PACE loans (CFPB estimates ~25% exceed threshold) and reconcile with collateral policy when PACE coexists with mortgages.

For Investors/ABS Sponsors:

·        Disclosure & Representations: Expect expanded reps & warranties around ATR, TRID, high‑cost tests, and contractor compliance; diligence needs to verify program-level controls and archived consumer files.

6) Compliance Timeline (2024–2026)

·        Dec 17, 2024: CFPB issues final rule for RPACE; model TRID forms released.

·        Jan 10, 2025: Rule published in Federal Register; effective March 1, 2026. Begin 2025 build: policy drafting, system changes, contractor retraining, and capital partner alignment.

·        2025: California DFPI rules remain operative; continue AB 1284/SB 242/AB 2063 compliance while phasing in federal documentation standards.

·        Mar 1, 2026: Federal rule effective; concurrent state + federal compliance required; early enforcement/civil liability risk profile increases.

7) Practical Checklist (Administrators & Lenders)

Policy & Governance

·        Map California (DFPI) requirements to CFPB ATR/TRID; resolve conflicts; approve revised policies at the governance committee.

Data & Verification

·        Implement third-party income/asset/debt verification; embed audit trails; ensure Spanish‑language disclosures and oral confirmation logs.

Forms & Disclosures

·        Deploy PACE-specific Loan Estimate/Closing Disclosure; calibrate waiting periods and closing workflow; update adverse action notices if applicable.

Sales/Originator Controls

·        Certify contractor‑solicitors meet loan originator standards (qualification and compensation); reinforce prohibitions on kickbacks/incentives.

Eligibility & Underwriting

·        Enforce CA value-based caps and ability‑to‑pay; incorporate wildfire/seismic eligibility where authorized; monitor emerging 2025 underwriting norms.

Mortgage Interface

·        For mortgage lenders, surface PACE in tax/escrow modules; train underwriters on treating PACE as tax obligations in ATR; adjust DU/LP overlays as needed.

8) Strategic Considerations for 2025

·        Affordability & Access: ATR will constrain marginal borrowers; program design (terms, fees, and eligible measures) should target positive net cash‑flow outcomes and verifiable savings.

·        Channel Optimization: Administrator‑contractor networks must evolve toward compliance-grade loan origination capabilities—expect fewer, better-trained partners and stronger QC.

·        Resiliency Demand: Wildfire/seismic eligibility can drive volume in hazard-exposed counties; pricing and terms must reflect insurance and property‑market frictions in those geographies.

·        Litigation/Enforcement: Expanded civil liability under TILA and DFPI’s examination authority raises stakes for documentation, vendor management, and complaint resolution.

Appendix A — Key Sources & Statutes

·        CFPB: PACE compliance resources & model forms; Final Rule summary and materials.

·        Federal Register: “Residential Property Assessed Clean Energy Financing (Regulation Z)” (Published Jan 10, 2025; effective Mar 1, 2026).

·        Legal Analyses: Husch Blackwell client update; Consumer Finance Monitor overview of scope, exemptions, and effective date.

·        California DFPI: PACE consumer page, FAQs, and links to AB 1284, SB 242, AB 2063, and SB 645.

·        Legislative Text & Analyses:

• AB 1284 (2017): licensure, ATR, contractor rules.
• AB 2063 (2018): sequencing of ATR before work; solicitor enrollment.
• SB 242 (2017): consumer protections, oral confirmations, reporting.
• Wildfire Safety: SB 645 (2018) procedures; AB 2258 (2022) definitional updates.
• Underwriting Trends: 2025 TX‑PACE coalition underwriting guidance (LTAV/SIR/capitalized interest).

Appendix B — Quick Glossary

·        R‑PACE: Residential Property Assessed Clean Energy—subject to CFPB’s TILA/Reg Z rule.

·        C‑PACE: Commercial PACE—outside the CFPB rule; governed by state/local enabling laws.

·        ATR: Ability‑to‑Repay (Reg Z §1026.43)—now applies to R‑PACE with PACE-specific adjustments.

·        TRID: TILA‑RESPA Integrated Disclosures—PACE-specific Loan Estimate/Closing Disclosure models provided by CFPB.

9) California Case Study — Wildfire Hardening + Solar in a VHFHSZ Under AB 1284 and the 2026 CFPB Rule

Use case: A single-family homeowner in a Very High Fire Hazard Severity Zone (VHFHSZ) in California seeks PACE financing for wildfire‑hardening measures (ember-resistant vents, Class A roof, fiber‑cement siding, defensible‑space landscaping) plus solar + main‑panel upgrade. The project proceeds within a statewide open PACE program administered by a DFPI-licensed program administrator and a registered contractor network. The case illustrates how California’s statutory controls (AB 1284/SB 242/AB 2063) integrate with the CFPB’s 2026 TILA/Reg Z rule.

·        Wildfire eligibility context. California has expressly recognized wildfire safety improvements as PACE‑eligible. It has aligned procedures with those used for seismic retrofits and EV charging—a policy trajectory reinforced by subsequent efforts to clarify and expand defensible‑space measures (e.g., AB 2258 (2022) analysis). These measures must still be permanently affixed and otherwise authorized by the local program. 

·        Consumer‑protection & licensing context. AB 1284 requires PACE program administrators to be licensed under the California Financing Law, conduct an ability‑to‑pay analysis (independent of equity), orally confirm key terms before signing, and enforce contractor enrollment/training, with SB 242 adding additional consumer‑protection mechanics and AB 2063 sequencing ability‑to‑pay before any work begins. 

·        Federal overlay (effective March 1, 2026). The CFPB final rule applies ATR and TRID to R‑PACE, introduces PACE-specific Loan Estimate/Closing Disclosure forms (including Spanish), and narrows the tax‑lien exclusion to involuntary liens—making R‑PACE “credit” under TILA/Reg Z. HPML appraisal rules may apply above the applicable threshold; periodic statements and HPML escrow are exempted. 

Step‑by‑Step Walkthrough (Program, Contractor, and Lender Touchpoints)

Step 1 — Program eligibility & measures.
The administrator confirms the property lies in a VHFHSZ and that proposed measures (ember-resistant vents, Class A roofing, non-combustible siding, defensible‑space landscaping) fall within authorized wildfire safety improvements; solar and panel upgrades are already within standard PACE energy measures. All measures must be permanently attached and conform to the local program list. 

Step 2 — Pre-origination consumer protections (California controls).
Before any contract execution or work commencement, the administrator:

·        Enrolls/validates the contractor (as a PACE solicitor/agent where applicable).

·        Conducts the oral “key terms” confirmation with the homeowner in the appropriate language.

·        Performs the ability‑to‑pay using third-party records of income/assets/debts and does not rely on home equity.

·        Applies California value caps (e.g., DFPI guidance references 15% of the first $700,000 of value and 10% above that amount) to limit over‑leveraging.

·        Verifies taxes, mortgage, bankruptcy history, and other statutory criteria. 

Step 3 — Documentation & disclosures (2025 → 2026 transition).

·        Through 2025, TRID is not yet mandatory for PACE, but leading administrators begin adopting CFPB PACE-specific LE/CD early (with Spanish versions) to smooth 2026 compliance and reduce legal friction.

·        On/after March 1, 2026, the transaction must use the PACE Loan Estimate/Closing Disclosure, observe TRID timing/waiting periods, and evidence ATR with eight-factor analysis and third-party verification. 

Step 4 — Underwriting guardrails & value tests.

·        The administrator underwrites the assessment against California’s ability‑to‑pay criteria (income, debts, housing expenses, including existing taxes/insurance).

·        Applies California’s value-based caps and any local program LTAV/LTV guardrails. At the same time, some 2025 best‑practice updates (e.g., TX‑PACE LTAV shift, SIR adjustments) are not binding in CA R‑PACE, investors increasingly expect disciplined savings logic and limits on capitalized interest/IO periods. 

Step 5 — Coordination with mortgage lenders.

·        If the homeowner later seeks a refi or sale, the existing PACE line‑item must be treated by mortgage lenders as a property‑tax obligation in their ATR (mortgage-related obligations), potentially affecting DTI and escrow analyses.

·        If the new PACE transaction (or a subsequent PACE on the collateral) crosses HPML appraisal thresholds, be prepared for appraisal requirements post‑2026; periodic statements and HPML escrow remain exempt. 

Step 6 — Funding, recordation, and tax roll.

·        Upon final approval, the assessment contract is recorded, and the amount is placed on the property tax bill as a separate line item. The lien’s super‑priority status persists under state law—one reason federal ATR/Disclosure protections were extended to RPACE. 

Case Study Outcomes & Lessons

·       Affordability First.
Under AB 1284/AB 2063, the ability‑to‑pay must be satisfied before any work starts; under the CFPB rule, this expands into a whole ATR regime with third-party verification and consideration of escrow impacts where the owner pays property taxes through escrow. Programs should design projects yielding defensible net cash‑flow/savings and avoid “payment shock” from tax‑bill spikes. 

·       Disclosures Reduce Friction.
Mandated oral confirmation (California) plus TRID LE/CD (federal, 2026) materially reduces misunderstanding and later disputes, particularly in LEP (limited English proficiency) households; administrators should operationalize Spanish forms and multilingual support. 

·       Contractor Channel = Loan Origination.
Contractors who solicit R‑PACE must meet enrollment and training standards today (California), and may fall under loan originator qualification/compensation frameworks once TILA is in force for PACE, demanding stronger oversight, scripts, and QC. 

·       Wildfire Hardening as a Growth Vector—With Controls.
VHFHSZ projects support insurance and resiliency goals and are now squarely in the eligibility set, but they must pass the ability‑to‑pay and value‑cap tests; programs should build standardized wildfire packages (vents, roofing, siding, landscaping) with verified performance characteristics and documented savings/resiliency benefits. 

Compliance Artifacts Checklist (California R‑PACE + Federal TRID/ATR)

·        Administrator licensure (DFPI) + solicitor/agent enrollment records. 

·        Oral key‑terms confirmation recording/log + language of transaction. 

·        Ability‑to‑pay file: income/asset/debt verification (third‑party), housing expenses, tax/insurance, bankruptcy & mortgage‑status checks; no equity-based qualification. 

·        Value‑cap calculation worksheet (DFPI cap logic) and program LTAV/LTV guardrails (if applicable). 

·        Measure eligibility confirmations for wildfire/seismic/EV + product specifications. 

·        TRID package (LE/CD + timing) starting Mar 1, 2026; Spanish versions where applicable. 

·        HPML appraisal screen and high-cost mortgage tests; note exemptions (periodic statements, HPML escrow). 

·        Post‑closing: recordation evidence; tax‑roll placement; consumer closing book and servicing contacts. 

Here’s the South Orange County localized case study you can append to the white paper:

9B) South Orange County Case Study — VHFHSZ Retrofit + Solar in San Juan Capistrano

Scenario:
A homeowner in San Juan Capistrano, within a Very High Fire Hazard Severity Zone (VHFHSZ) near the Ortega Highway corridor, seeks PACE financing for:

·        Wildfire hardening ember-resistant vents, Class A roof, ignition-resistant siding, defensible-space landscaping.

·        Energy upgrades: 6 kW solar PV system + main panel upgrade.

The property is in an HOA community with CC&Rs requiring architectural approval for exterior changes. The county tax collector is the Orange County Treasurer-Tax Collector, who processes PACE assessments for inclusion on the property tax roll.

Local Context & Risk Factors

·        Wildfire Exposure: South OC’s foothill communities (San Juan Capistrano, Rancho Mission Viejo, Ladera Ranch) are in CAL FIRE VHFHSZ maps, making wildfire-hardening measures highly relevant for insurance retention and premium mitigation.

·        Insurance Market Pressure: Many carriers have non-renewed policies in these zones; homeowners increasingly seek retrofit credits to maintain coverage.

·        HOA Dynamics: HOA approval timelines can delay project start; PACE administrators must confirm HOA consent before funding.

Compliance Workflow (California + Federal Overlay)

Step 1 — Eligibility & HOA Coordination

·        Confirm property is in a PACE-participating jurisdiction (Orange County participates via WRCOG and other JPA programs).

·        Validate HOA approval for exterior work; retain HOA consent letter in compliance file.

Step 2 — California Statutory Controls (AB 1284, SB 242, AB 2063)

·        Ability-to-Pay: Verify income, assets, and debts using third-party records; exclude equity as a factor.

·        Apply value-based caps: 15% of the first $700,000 of value, 10% above that.

·        Conduct oral confirmation of key terms in English or Spanish (per homeowner preference).

·        Ensure contractor enrollment and training compliance.

Step 3 — Federal TRID/ATR (Effective March 1, 2026)

·        Use PACE-specific Loan Estimate and Closing Disclosure forms (Spanish version if applicable).

·        Document eight ATR factors and verification evidence.

·        Screen for HPML appraisal triggers if assessment exceeds threshold (~$33,500 in 2025).

Step 4 — Tax Roll & Recordation

·        Coordinate with the Orange County Recorder for lien recordation.

·        Submit assessment to Orange County Treasurer-Tax Collector for inclusion on the following property tax bill.

Localized Challenges & Best Practices

·        Insurance Synergy: Pair wildfire-hardening PACE projects with insurer verification to secure premium credits.

·        HOA Compliance: Build HOA approval into the origination timeline to avoid funding delays.

·        Language Access: South OC has a significant Spanish-speaking population; ensure oral confirmation and TRID forms are available in Spanish.

·        Escrow Awareness: Many South OC borrowers pay taxes via escrow; mortgage lenders must account for the PACE line item in DTI and escrow analysis.

Sample Compliance Artifacts for South OC

·        HOA approval letter.

·        CAL FIRE VHFHSZ map excerpt for property file.

·        DFPI-required oral confirmation log (language noted).

·        ATR worksheet with income verification (pay stubs, SSA, or tax transcripts).

·        TRID LE/CD package (English + Spanish).

·        Recordation receipt from Orange County Recorder.

·        Tax roll confirmation from Orange County Treasurer-Tax Collector.