Solar lending – Six steps to mitigate exposure in a dynamic marketplace
By Suzie Neff, Senior Enterprise Sales Executive, Wolters Kluwer Compliance Solutions
No matter how you look at it, the solar market is hot. The $36 billion industry not only logged its 6th consecutive record year in 2021 ―growing 30% over 2020 ― but it is projected to nearly triple by 2027. Fueled by lucrative federal and state tax credits, as well as rebates, the rapid growth of residential solar represents a bright opportunity for lenders.
In order to thrive in this dynamic, growing market, credit unions must take steps to proactively minimize their risk so their solar business can grow, as well. Consider the following:
1. Define your goals. Establishing a long-term strategy will help you determine your filing preferences, best practices, and the solutions or services that will enable you to optimize portfolio management. Is it your intent to hold the portfolio until all loans mature, use it as collateral, or securitize and sell the portfolio to investors?
2. Evaluate your staffing. Because solar scales rapidly, it is essential for lenders to plan ahead. Be sure to forecast your expected monthly loan volume at least 12 months out; it’s not uncommon to quickly gain as many as 200 new customers per month. For lenders who are not properly prepared, the rapid scaling can produce an overwhelming volume of transactions, which in turn opens the door to potential errors and other missteps that require even more time and bandwidth to correct. Solar filings are high-touch loans where alterations often occur constantly ― and begin immediately ― and lenders must be prepared to respond accordingly.
3. Understand the UCC process. Financing solar equipment begins with thoroughly understanding the Uniform Commercial Code (UCC), Article 9, which applies to transactions where assets or collateral such as solar panels are used to secure a financial obligation. It is essential for solar lenders to maintain sufficient bandwidth and jurisdictional knowledge to oversee the voluminous data entry requirements of UCC filings, including inserting complex legal descriptions; initiating UCC continuations every five years; and handling rejections. While some lenders may be able to complete these processes manually, in most cases- automation or outsourcing are the most efficient options.
4. Perfect and protect solar financing. Although the growth within the solar market creates valuable opportunities for lenders, it also opens the door to risk. The key is to take proper steps to protect your interests against the many known and unknown events that can impact loan repayment. Filing a public notice of one’s right to the asset through the appropriate state and county authorities must be completed to perfect interest. This can be a complex undertaking; in addition to performing due diligence, you must also file correctly and at the right places and times.
5. Effectively manage loans through the life cycle. Unfamiliarity with the steps needed to maintain a consumer loan portfolio can compromise your ability to properly manage the process, putting your portfolio at risk. It’s not only crucial to uncover any risks associated with a borrower before you agree to finance a loan, but to complete due diligence searches to ensure that the risk level is acceptable for lending. Keep in mind that while most solar loans extend an average of 20-30 years, a UCC-1 filing expires after just five years, necessitating the filing of multiple UCC continuations and ongoing maintenance to keep active.
6. Recognize the value of a knowledgeable partner. When it comes to the complexities of solar lending, credit unions frequently encounter challenges. Working with an experienced vendor can help lenders to mitigate risk, preserve portfolio value, improve efficiencies and ensure smooth operations. The right vendor can help you determine and deploy the optimal platform and services for your specific needs, which is often more cost-effective than having to maintain a team of highly trained subject matter experts and doing everything “in-house.”