Welcome to Week 23 of Be the Change!

This week we're going to take a look at how much of the solar loan industry engages in practices that are deceptive, if not downright predatory, and explore what that means for the prospects of a so-called "just transition" to a green economy.

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Say It Ain't So, Solar Lenders!

Say It Ain't So, Solar Lenders!

Go on the website of any environmental nonprofit worth its salt, and you will see language about the imperative to ensure a "just transition" to a green economy. The Climate Justice Alliance defines a just transition as "a place-based set of principles, processes, and practices that build economic and political power to shift from an extractive economy to a regenerative economy." In other words, if all we do is take our current economic and political paradigm and power it with renewable instead of fossil fuel energy, we will fail to override a system in which, for instance, wealthy countries offer their citizens COVID-19 vaccine booster shoots while only "1.4% of people in low-income countries have received at least one dose."

Residential solar is a perfect case study in the importance of a just transition. Capital Good Fund is getting ready to launch a $1 - $2 million pilot program in which we will help moderate-income homeowners finance rooftop solar panels, as well as battery backup systems and other green upgrades. Throughout my market research into the solar lending industry, I have been puzzled and confused by one thing in particular: many of the nation's largest solar lenders tout interest rates that seem implausibly low. Having run a lender for 12+ years, I know that when these firms offer rates of 0%, 1.99%, and 2.99%, they have to be making their money some other way. What I didn't suspect was just how unsavory, if not downright deceptive, their money-making tactics are.

Before I explain their tactics, I want to note that the largest lenders--one of them accounts for 41% of the market--are not depository institutions (banks or credit unions) but rather venture capital-backed fintechs. This has a very practical implication. Because the money banks lend out comes from government-insured deposits, their "cost-of-capital"--that is, the interest rate they pay on the money they borrow--is very low. By paying such low interest rates--often well below 1%--banks can pass those savings on to their borrowers.

In contrast, when a venture-backed firm raises capital for lending, it has to pay much higher rates: without government insurance on the funds, the investor assumes the risk of default, and that risk is priced into their return requirements. (Many of these firms don't even finance the loans themselves; rather, they originate and then bundle, package, and sell them to investors.)

So how are these solar lenders not passing that higher cost-of-capital onto their borrowers? Is it that they are so focused on a clean energy revolution that they aren't seeking to achieve massive profits for themselves and their investors? Lol. Of course not. Last week I finally figured it out: most solar lenders hide the true cost of the loan by charging a "dealer fee" of anywhere from 10% to 25%, which is then either added as a closing fee on the loan, or, perhaps worse, simply tacked on to the cost of the system.

Confusing? Let me give you an example. For the sake of simplicity, I'll assume a typical 20% dealer fee. Suppose you have excellent credit, are looking to finance a 10 kilowatt solar system, and qualify for a solar loan at 1.99% with a 20-year term. That system should cost roughly $30,000 before federal tax credits; and if you are lucky enough to pay for it with cash, that is what it'll end up costing you. But if you don't happen to have $30,000 burning a hole in your pocket, then one of two things will happen. In the first scenario, the solar installer will simply inflate the cost of the system by 20%--meaning that you'll have to take out a loan for $36,000 instead of $30,000. In the second scenario, the $6,000 dealer fee will be added as a closing cost on the loan: you are borrowing $30,000 but financing $36,000.

Either way, you are not actually paying 1.99% on the loan. In fact, if you borrow $30,000 at 1.99% with a $6,000 closing fee, then your Annual Percentage Rate, or APR, comes to 4.631%. A more likely example (since the 1.99% rate is limited to those with perfect credit and high income), would be as follows: if you are offered the loan at 4.99%, your APR soars to 7.972%. In practice, you are paying over $11,000 more than you would have expected based on the interest rate.

A few more things to note. First, these lenders are often quoting an interest rate, not the APR. While there's nothing inherently wrong with this, it matters because the interest rate does NOT include closing fees. Second, if they are adding the dealer fee as a closing cost, then the Truth In Lending Act requires that it be disclosed in the loan contract: when signing, the borrower should see both the interest rate and the APR (and I would be even more stunned if they were violating federal law by not disclosing this). However, people rarely read their closing documents in full, and if they don't realize how high the APR is until they've made it all the way to closing, they are unlikely to back out at that point.

Third, the worse your credit, the higher your dealer fee. Because FICO score is correlated with income and race, once again historically disadvantaged communities are being further penalized. And finally, if the dealer fee is added to the system cost and NOT disclosed as a closing fee, then in theory the lender can claim that the interest rate IS the APR. While it's not clear to me that this is legal, it is certainly unethical, and reminds me of sleazy tactics in the auto lending business. To be clear, what I mean is that if someone is financing the solar system, it's possible installers are inflating the quoted cost by 20%. If this is true, then the customer doesn't even know that there is a dealer fee: as far as they know, they are paying 1.99% or whatever on the loan. In full disclosure, I am unable to determine how often this happens, nor can I tell from lenders' websites what their typical dealer fees are; I can only speak to what I have learned from my research and from speaking to several installers. (Another possibility, by the way, is that the installer "eats" the dealer fee--that they take the cost out of their profits. I imagine that's less common, if it happens at all.)

Think about that. Well over half of all solar loans in America include a hidden fee that may or may not be disclosed and may or may not be fully understood by the homeowner. This is what we mean by a just transition. If you are a wealthy homeowner and pay cash for your solar system, you will save about 20%; if you pay for it with a home equity loan, you will save 20% AND get to write off the interest expense. Is it any surprise, then, that the owners of solar panels tend to be white and affluent?

We cannot avoid a climate catastrophe if we maintain catastrophic inequities. By allowing the same people that got rich off fossil fuels to get rich off renewables, we will be missing an opportunity to remake the world for the better. Even worse, we will make it that much harder to truly tackle the climate crisis, for if profit comes at the expense of accessibility, we will only "go green" to the extent that doing so can make rich people richer. As I've noted elsewhere, only solving those problems that can be profitable to solve invariably leads to a failure to deal with the root causes of social and environmental justice. A new model is needed.

In the case of solar lending, Capital Good Fund is ready to step in by offering a product at 2.99% - 5.99%--with no other fees of any kind. And we're going to force the other guys to change their ways, or we'll put them out of business! Bit by bit, through good public policy (like making the solar tax credit refundable), equitable business models, and public / private partnerships, we can forge a world we'll be proud to bequeath to our grandchildren and subsequent generations.

To read more about this topic, read my recent post We're In a Climate Emergency, Part II: Going Solar
There's a Tropical Storm headed to New England. Stay safe. Keep up the fight.

- Andy