MIAMI — An octogenarian and nearly blind, Julnor Jean was a soft target for a salesman with a creative finance gambit: Install solar panels now, pay them off over 20 years through his yearly taxes, and effectively have an energy bill near zero.
The homeowner of Haitian descent speaks broken English and cataracts prevented him from reading the contract for a home improvement project that would be financed through a program called Property Assessed Clean Energy, or PACE.
Nonetheless, he signed the deal, putting himself on the hook for an additional tax bill of more than $2,000 a year for the next two decades. Under the arrangement, the last payment would be due when he was 100.
California pioneered these loan-like products to promote clean energy in 2010, but they ran into a host of problems there, partly because qualification was based on equity built up in the home, not cash flow or ability to repay the debt. Also, homeowners, mesmerized by a contractor's sales pitch, didn't always fully grasp the terms and financial commitment.
Under the PACE program, there are not the same strict federal rules dictating what is disclosed to the customer about interest rates, duration of payback and other financial terms. Since contractors are independent of the financing firms, an unscrupulous salesman might be tempted to misrepresent the true cost.
The appeal of PACE
Jean's paperwork, from a finance firm called Ygrene Energy Fund and supplied by his pro-bono lawyer, is illustrative. Along with the processing and underwriting fee, jurisdiction cost recovery fee, recording and disbursement fee, title and escrow fee and bond trustee fee, it includes a payback schedule and three-page, chicken-scratch document, apparently hand-written by the contractor, that is largely undecipherable.
He got four solar panels on his home at a cost of a little over $21,000, and says he was told it would reduce his monthly electric bill to zero.
His annual tax bill for the solar panels: $2,090.95, meaning a cumulative payback of more than $40,000.
However, since Jean previously used the PACE program to finance other hurricane-proofing projects on his roof and windows, his annual tax bill just from PACE projects stacked up to more than $8,000.
The 82-year-old's only direct income is derived from Social Security.
A year after Jean signed his solar panel agreement, Ygrene adopted "Florida Program Enhancements," a pledge that "formalizes the relationship with the contractor," including "pricing terms, business practices and legal obligations."
Last year, California adopted new "ability to pay" requirements that prevent homeowners from digging themselves too deep a hole. Florida, which joined the PACE program in 2015, has yet to do that.
As it happened, contractor Group Solar USA was not licensed to do business in Florida and has vanished, leaving the inoperable solar panels on Jean's roof.
"Where there clearly is a problem is what happens when the contractors go bad," said Peter Bennett, the Miami lawyer who took up Jean's case free of charge after the solar panels were improperly installed.
"The only thing they wanted to know is do you own the house. If you don't pay, (they) will foreclosure on the house," said Bennett, who discovered the contractor's lack of a Florida license.
California-based Ygrene says it vets its contractors carefully. Because that vetting was less than sufficient in Jean's case, the finance company ultimately agreed to forgive Jean's debt. It was a break not available to most customers. Meanwhile, removing or fixing the solar panels would be Jean's responsibility.
In a statement to the Miami Herald, Ygrene said Jean's problem was not of its making.
"The complaint brought by the homeowner related to contractor workmanship, not the PACE financing," the company said, noting that the company reviews complaints on a case-by-case basis. "Upon learning that the installed solar system did not function properly, Ygrene determined that it was appropriate and in the best interest of all parties to cancel the PACE assessment and relieve Jean of his obligations.
And the unlicensed contractor?
"While the solar company that marketed and sold the system to Mr. Jean did not have a contractor's license, there was a licensed subcontractor listed on the project," Ygrene said.
It has terminated its relationship with the contractor, the company said.
Because it is devoid of any "ability to pay" requirement, the PACE program shares characteristics with other forms of lending deemed potentially predatory by consumer groups. These include Georgia programs that allow borrowing money using a car title as collateral and Mississippi's new small installment loans.
The appeal of PACE is that it allows homeowners to add value to their home without putting any money down. The company fronting the money is protected because payback is done through the homeowner's property tax bill. Although costlier than a bank loan, a PACE debt can be repaid over decades.
But advocacy groups worry about the lack of any solid connection between the contractor and the financing company.
Firms such as Ygrene, Renew Financial and Renovate America actually specialize in packaging the loan-like tax liens into complex securities that are sold to investors. It's a process called securitization.
"That process allows us to try to hold down the interest rate because we're basically tapping the global financial markets to do the financing," said Greg Frost, a spokesman for Renovate America, one of the largest administrators.
This sort of bundling of loan products is not without risk. It fueled the subprime lending boom a decade ago, when poorly underwritten mortgages were sold off to Wall Street firms that didn't much care about loan quality. They were bundling them together into securities and weren't retaining the risk, but passing it on to investors who were eventually left holding the bag.
The trade group PACE NATION estimates there have been at least 220,000 home improvements totaling more than $5 billion funded by PACE through May 2018 in California, Missouri and Florida.
There has been no direct federal regulation over the industry, nor much government collection of data. State and federal consumer regulators have some jurisdiction but nothing approaching the scrutiny of bank lending.
The closest thing to oversight has come from credit rating agencies, which rate the securities of bundled PACE financing with an eye toward assisting investors, who are making risk-reward decisions. These agencies say the default rate on PACE debts is modest: 2 to 4 percent.
Given the dearth of data on the federal and state level, it's hard to really know how many cases like Jean's are out there. Jean, whose family has helped him with the payments of his prior PACE debts, may be an outlier.
California's experience suggests the industry struggles to find quality contractors, and some try folding other home improvements into the mix with a wink and nod. If a problem arises, homeowners — often on fixed income and elderly — can slide into foreclosure.
Chuck Ramsey saw this from the inside at Ygrene's California headquarters. For more than a year and a half, he worked on internal audits that reviewed approved projects. It often took 60 days or more to get to customers on complaints, he said.
"They had a lot of shoddy contractors. Work was not done right if at all." People were just left holding the bag," Ramsey said in a phone interview. "Their response is, 'We're just a finance company.' "
Ramsey left the company earlier this year, frustrated by what he saw.
Ygrene Senior Vice President Michael Lemyre disputed that assertion, calling Ramsey a "relatively low-level employee." The company, he said, requires that its contractors sign a participation agreement that outlines performance expectations.
Contractors are on probation for the first 10 projects, he said, and public records and social media are searched for lawsuits and complaints, including sites like Yelp.
Similarly, Renovate America says it keeps a close eye on contractors. In 2016 it began using data tools to track contractor quality metrics. Among the things it measures are age of companies, complaint records and resolution of problems.
"We keep track of every contractor who does work with us. We have a massive database and we look at the metrics," said Frost, adding the company has provided PACE funding for 120,000 projects, including about 800 in Florida and 1,800 in Missouri.
Ygrene's Lemyre rejected any comparison with subprime lending, noting most customers have healthy credit scores above 700.
As a Florida lawmaker, Mike Fasano voted against the bill in the Legislature that allowed PACE programs in the state. Now tax collector in Pasco County, he has kept a tight leash on the program after signs that consumers were unaware that their tax bills would leapfrog higher.
"There's absolutely no regulation," said Fasano. "Unfortunately, it takes some horrific stories like we've seen in Florida … before action is taken on behalf of them and future consumers."
Pasco in November got rid of a third-party PACE administrator, Counterpointe Energy Services, saying it resisted the county's efforts to have homeowners sign a disclosure form ensuring they understand how much their monthly escrow payments and annual tax bills will change. The county has begun calling PACE borrowers to ensure they know what they're getting.
"We were having issues with people who were dealing with contractors who were not being honest with them," said Fasano. "These contractors would hire sales people who worked off of commission. They would find out the equity in the home, how much is available, then go out and sell. We said, 'Enough.' "
That is precisely what advocacy groups fear: elderly and immigrant homeowners being sold a product they don't understand.
"People often don't realize they've agreed to their property taxes going up. It takes a while before they get their tax bill," said Lauren Saunders, associate director of the National Consumer Law Center, an advocacy group that has lobbied Congress for more scrutiny on PACE programs.
The Obama administration, through the Consumer Financial Protection Bureau, proposed rules to discourage predatory lending by requiring non-traditional lenders to document some measure of a borrower's ability to repay. Implementation of those rules was delayed by the administration of President Donald Trump, which is rewriting them.
Trump in May signed into law a financial regulation bill that, while loosening requirements on banks, instructed the CFPB to create new rules for PACE financiers to ensure borrowers can actually afford to pay for the improvements.
That will change the status quo in Florida.
"The problem we are seeing is with those on fixed income or low income … they can't pay it, they didn't understand they were going to have to pay so much more," said Alice Vickers, director of the Florida Alliance for Consumer Protection, who predicts a wave of foreclosures.
Mortgage brokers, who put borrowers together with lenders, fervently oppose PACE financing.
"It actually jeopardizes the risk level of our (mortgage) loan … it actually supersedes our loan," said Matthew Goldman, president of the Mortgage Brokers Association of Florida.
Because the PACE lending is a tax assessment, the local taxing authority and third-party administrator become the first in line for repayment when borrowers fall behind. They can initiate foreclosure proceedings. They do not get to take the house, but they can force a homeowner to sell and the first bite of the proceeds goes to them.
Fannie Mae and Freddie Mac, the quasi-government entities that buy mortgages for bundling into securities for investors, have been prohibited from purchasing mortgages that have a PACE assessment attached. In December 2017 the Federal Housing Administration stopped supporting new mortgages that have PACE assessments.
And in a rare move, the National Consumer Law Center joined with the American Bankers Association and seven other groups in October to urge the Trump administration to move expeditiously in bringing PACE providers under the same rules as more conventional lenders.