Federal suit says PACE home improvement loan program fails to disclose risks, costs

April 12–A company that finances home improvement projects in South Florida with no credit checks and no money down is the subject of a federal court lawsuit charging it fails to adequately disclose important limitations of the loans to its consumers.

The defendants, Ygrene Energy Fund and Ygrene Energy Fund Florida, are among the nation's leading providers of financing for Property Assessed Clean Energy (PACE) energy efficiency and hurricane-hardening upgrades, such as new roofs, solar energy systems, impact windows or water heaters.

Over the past two years, Ygrene and other PACE programs have been approved by dozens of local governments in South Florida to seek repayment through assessments on borrowers' property tax bills. Ygrene has approved hundreds of loans in the region since 2015, including about 1,600 in Broward County, according to the county's official records.

The suit, filed in the Northern District of California, where Ygrene Energy Fund is headquartered, accuses the company of fraudulent inducement, negligence, unjust enrichment, negligent misrepresentation, and violation of consumer protection laws in Florida and California.

It seeks damages for the plaintiffs and prominent disclosure of risks the suit asserts are inadequately disclosed to borrowers, including that their loans are recorded as liens against their properties and that in nearly all cases must be repaid in full before a lender will approve a new loan on the home.

Ygrene, through its public relations agency, issued a statement saying that it acknowledges the seriousness of the allegations but vowed to "vigorously defend ourselves as the suit lacks merit.

"Complete transparency and a commitment to consumer disclosure, protection, and education are of utmost importance to Ygrene," the response states. "In partnership with more than 350 state and local governments, we hold ourselves to the highest ethical standards."

The suit states that Ygrene incorrectly markets its loans as transferable with the house, and in marketing materials "goes so far as to say, 'It's as if your house is borrowing the money.'"

Not only will almost all consumers be required to pay off their loans, some will be required to pay a 5 percent prepayment penalty while others will be charged a "pre-payment waiver fee" at closing to avoid the penalty, the suit charges.

Prepayment will be necessary, the suit says, because conventional lenders refuse to provide loans on properties encumbered by Ygrene's PACE loans. The loans occupy "first lien" status — meaning that if a foreclosure occurs, PACE lenders are in line to get paid off before mortgage lenders.

The Federal Housing Finance Agency, which regulates mortgage financiers Fannie Mae and Freddie Mac, has made it clear that Fannie and Freddie will not back loans for properties with PACE liens, the suit states.

Fannie, Freddie and other banks regulated by the FHFA backed nearly 60 percent of mortgages in 2013, according to a Reuters report.

Another federal lender, the Federal Housing Authority, last year announced it would begin insuring properties with PACE assessments. But in an interview, Manuel Hiraldo, a Fort Lauderdale attorney serving as co-counsel for the plaintiffs, said FHA loans, which typically come with higher interest rates and require the buyer to buy mortgage insurance, are more costly overall than FHFA loans..

Four initial plaintiffs in the case include a Hollywood couple, Grachian and Mary Jane Smith, who took out a PACE loan through Ygrene in late 2016 to replace 11 windows at their home.

The other plaintiffs are a San Diego County couple, Alejandro and Felicia Marcey. The California law firm for the plaintiffs is Kasdan Lippsmith Weber and Turner LLP.

The Smiths heard about the program — and that they could get their windows replaced with no money down — from a contractor who was repairing their roof, the suit states.

They ultimately found a window replacement contractor and agreed to finance $16,778 to replace the 11 windows, the suit states.

Disclosures in two documents signed by the couple were misleading because they state the "FHFA appears to have instructed [Fannie Mae and Freddie Mac] not to purchase residential loans where there is a superior lien" and that to refinance or sell the property, the borrower "may need to remove the assessment lien by prepaying the assessment obligation in full."

The suit states the statement "is at pains to downplay the possibility that the PACE loan will definitely create an obstacle to sale."

The suit also asserts that PACE loans are offered with less favorable conditions than conventional loans, including interest rates of 7 percent to 8.25 percent.

The company charges $4,000 in fees for the average loan, the suit states, including an application fee, processing and underwriting fee, miscellaneous county costs, record and disbursement fees, escrow and title insurance, a closing fee, capitalized interest and in some cases, a pre-payment waiver fee.

With fees, a 20-year term and a 7.11 percent interest rate, the Smiths will end up paying $31,946 — "almost $3,000 per window," the suit states.

Hiraldo said he found the Smiths after contacting fewer than 50 consumers listed with PACE liens in Broward County's official records database. The couple was among about 10 borrowers who responded to his inquiry of whether they were aware a PACE loan would result in a lien against their homes, he said.

PACE programs, because they offer homeowners with equity an easy way to qualify for financing, have met with praise from local government leaders who view property improvements as a overall positive development for their communities.

In a column posted Monday on the website Florida Politics, Pembroke Pines Mayor Frank Ortis praised PACE programs as "a great tool that empowers homeowners to invest in their homes in a way that makes them more prepared for the next storm and lowers their long-term energy costs."

But a November news release by the Boston-based National Consumer Law Center warned that an absence of federal protections are leading to complaints that elderly and low-income property owners in California are being targeted by third-party PACE contractors for expensive improvements and being extended credit they cannot afford to pay.

State and national political leaders are calling for expanded consumer protections.

A state law enacted in California last year requires disclosures modeled after federal "Know Before You Owe" standards and gives consumers the right to cancel PACE loans within three days. A proposed law would require PACE providers to confirm all loan terms over the phone with borrowers.

Last week, Florida Sen. Marco Rubio co-sponsored a bill with Sen. Tom Cotton of Arkansas that would require PACE loan providers to adhere to federal Truth in Lending Act disclosure laws.

A release by Cotton called residential PACE loans a "scam" that targets low-income and elderly Americans "with predatory home loans."

rhurtibise@sun-sentinel.com, 954-356-4071, twitter: twitter.com/ron_hurtibise

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