Summarize the CFPB’s Residential Property Assessed Clean Energy (PACE) Financing Final Rule, specifically highlighting whether PACE lenders are required to become licensed. In view of the rule, it is feasible for a NY or NJ municipality to implement a “healthy home loan” type program where the loan is paid back through the property tax.
Short answer up front — No, the CFPB final rule does not itself impose a new federal “PACE lender license.”Instead, the rule brings residential PACE (RPACE) transactions squarely under TILA/Regulation Z: it treats PACE as consumer credit, applies mortgage-style ability-to-repay (ATR) rules and TILA disclosure/civil-liability provisions to the creditor and to private “PACE companies” that are substantially involved in credit decisions. Whether a PACE lender or servicer must hold a state mortgage/consumer-credit license remains a matter of state law and of the entity’s role in origination — not a new CFPB licensing mandate. (Consumer Financial Protection Bureau)
What the rule actually does (essentials)
- The CFPB’s December 17, 2024 final rule defines residential PACE transactions as “credit” under TILA/Reg Z and adds model Loan Estimate and Closing Disclosure forms for PACE. It becomes effective March 1, 2026. (Consumer Financial Protection Bureau)
- It requires creditors and PACE companies that are substantially involved in making credit decisions to follow mortgage-type ATR requirements (verify income/obligations, consider escrow effects, use eight ATR factors, etc.). Entities that merely accept applications or perform administrative tasks are generally not “substantially involved.” (Consumer Financial Protection Bureau)
- The rule applies TILA civil liability for ATR violations to the responsible parties, and it makes targeted exemptions (for example, from HPML escrow requirements and some servicing periodic-statement rules) to account for PACE’s unique structure. (Consumer Financial Protection Bureau)
Licensing — the practical effect
- Federal side: CFPB did not create a federal licensing scheme for PACE providers. The rule treats PACE like other closed-end mortgage credit for disclosure and ATR purposes, but licensing is not imposed by this Reg Z amendment. (Consumer Financial Protection Bureau)
- State side: State mortgage, consumer-credit, or specialty PACE-licensing/registration laws still control whether a private PACE lender/administrator must hold a state mortgage or consumer-loan license. Many states already regulate mortgage lenders/servicers and some have PACE-specific rules; in other states private PACE companies have historically operated under administrator/contractor/municipal agreements rather than mortgage licenses. After the CFPB rule, state regulators and attorneys are likely to scrutinize whether certain PACE activities trigger state licensing requirements. (See practitioner analyses for discussion of how the CFPB rule interacts with existing state regimes.) (Mayer Brown)
Is a “healthy-home loan” paid through property tax feasible in NY or NJ now?
Yes — feasible, but with important conditions.
- Both states have legal authority / enabling frameworks that permit PACE-style assessments or local improvement assessments (NY: local PACE statutes and guidance; NJ: P.L.2021, c.201 / A2374 and implementing law for C-PACE). That means a municipality can structure a program where repairs/improvements (including healthy-home measures) are financed and repaid via property tax assessments. (NYSERDA)
- But under the CFPB rule, if the municipality is the creditor (as many sponsors are), the municipality must comply with the ATR and disclosure requirements imposed by Regulation Z for PACE transactions. If the municipality delegates program administration to a private PACE company, and that company is substantially involved in credit decisions, that private company will also be subject to the ATR rules and TILA civil liability. So program design must build in underwriting/verification and the new Loan Estimate/Closing Disclosure mechanics. (Consumer Financial Protection Bureau)
- Practically, municipalities will need to decide whether to: (a) act as the formal “creditor” and build capacity/compliance, (b) partner with licensed private lenders/administrators who can accept the compliance burden, or (c) use a hybrid public-private model where the city issues the assessment but private entities perform origination under subcontract and hold any required state licenses. Each route has different licensing, compliance, and liability consequences. (NCSL)
Key operational/legal issues a NY/NJ municipality should address before launching a “healthy-home” PACE program
- Decide who is the creditor (municipality vs. private lender). That determines who bears ATR/disclosure obligations and civil liability under TILA/Reg Z. (Consumer Financial Protection Bureau)
- Underwriting & verification — implement ATR-compliant ability-to-repay checks, include escrow/escrow-impact considerations, and verify with reliable third-party records as the rule requires. (Consumer Financial Protection Bureau)
- Disclosures & forms — use CFPB model Loan Estimate and Closing Disclosure templates (and translated forms where applicable) adapted for PACE. (Consumer Financial Protection Bureau)
- State licensing review — consult state banking/financial regulators and counsel to determine whether private program partners must hold mortgage or consumer-credit licenses in NY/NJ based on their activities. The CFPB rule increases the chance state regulators will treat certain PACE activity as mortgage origination. (Mayer Brown)
- Mortgage/secondary-market impacts — PACE liens can affect mortgageability/refinance and eligibility for GSE/FHA/VA programs; include procedures to disclose lien effects to homeowners and coordinate with mortgage holders where necessary. (National Mortgage Professional)
- Program documentation & legal counsel — rewrite program contracts, administrative agreements and consumer notices to reflect federal ATR & TILA obligations and to allocate liabilities. (Consumer Financial Protection Bureau)
Bottom line / recommendation
- Is licensing required by CFPB? No — the CFPB rule does not create a federal licensing requirement for PACE lenders. It makes PACE subject to TILA/Reg Z ATR and disclosure rules, and those compliance obligations will drive who needs to be licensed at the state level. (Consumer Financial Protection Bureau)
- Can a NY or NJ municipality run a healthy-home PACE program? Yes — legally feasible under each state’s enabling statutes — but to operate lawfully and prudently the municipality must build a program that implements the CFPB’s ATR and disclosure requirements, decide whether it or private partners will be the “creditor,” and determine whether private partners need state mortgage/consumer-credit licenses. Coordinate early with state regulators and bond counsel and engage consumer-finance counsel to structure underwriting, disclosures, and liability allocation. (NYSERDA)
If you’d like, I can:
- draft a short checklist/flowchart showing choices (municipal creditor vs. private creditor vs. hybrid) and the compliance/licensing implications of each; or
- draft a sample consumer disclosure (Loan Estimate/Closing Disclosure language adapted to a “healthy-home” PACE product) using the CFPB model as a base.
Which would be most useful next?