Regulatory Clouds on the Horizon for Solar Financing? Programs Face Headwinds, but the Future Still Looks Bright

In its quarterly market insight report for Q4 2024, the Solar Energy Industries Association (SEIA) reported a 26% average annual growth rate in the overall US solar industry over the past 10 years.¹ While rapid growth in the solar market largely has been a positive for consumers, providers, and investors, 2024 brought a notable uptick in negative press for certain aspects of the industry. Recent developments in complaints, lawsuits, and regulatory inquiries and enforcement initiations will not cool the market entirely, but they present considerations with which market participants will have to grapple in the coming year.

Below, we summarize some of the key regulatory pressures facing the residential solar financing industry. The pressures reflect underlying concerns from regulators regarding consumer misunderstanding of loan pricing, energy cost and tax credit savings, and implications of security interest filings—all heightened by a belief, among certain regulators that some parties selling solar products and services (“Dealers” for the purpose of this summary) use aggressive sales tactics that may place higher pressure on consumers. Regardless of whether any particular regulatory pressure is grounded in firm understandings of applicable law or program-specific facts, regulatory actions in aggregate suggest heightened scrutiny of the residential solar financing industry. Market participants should monitor the increased potential for regulatory action this year, and remain nimble and ready to address.

Consumer Financial Protection Bureau Report

The Consumer Financial Protection Bureau’s (“CFPB” or “Bureau”) Office of Markets issued a report in August 2024 identifying consumer regulatory risks in the solar financing industry. The report is based on the Bureau’s market analysis and consumer complaints and outlines the following potential issues:

Dealer Fees

Solar loans frequently involve “dealer fees” that regulators assert increase the amount of the loan principal above the “cash sale price,” which is the price at which the same products and services would be available in the absence of financing programs. These fees represent costs that the Dealers who sell consumers the solar systems pay the lender or sales finance company to be able to offer financing to consumers or to be able to offer particular financing terms. The Bureau asserts that “dealer fees” typically range between 10% and 30% of the cash price and are not disclosed to consumers as part of the annual percentage rate (APR) calculated pursuant to the federal Truth in Lending Act (TILA).

The CFPB’s report does not address the relationship between typical “dealer fee” structures and commentary regarding the treatment of “seller’s points” under TILA’s implementing regulation, Regulation Z. Regulation Z requires disclosure of the “finance charge” and an APR reflecting an annualization of the finance charge. Official Staff Commentary, however, expressly excludes “seller’s points” from the finance charge. “Seller’s points” include “any charges imposed by the creditor upon the non-creditor seller of property for providing credit to the buyer or for providing credit on certain terms,” and commentary indicates they are excluded from the finance charge even if those points are passed on to the buyer in the form of a higher sale price for the financed property.

Some states expressly use the TILA and Regulation Z definitions of “finance charge” and “APR” for licensing and other regulatory purposes; others have case law or guidance connecting state-specific terms such as “interest,” “charges,” “compensation,” or “consideration” for a loan to TILA and Regulation Z concepts. That said, not all states expressly address this issue in their lending or sales finance laws.

Statements Concerning Federal Tax Credits

Homeowners who purchase and install solar panels may receive a 30% Investment Tax Credit (ITC) under current federal tax law, but the consumer’s eligibility for tax credits depends on the consumer’s federal tax liability. The CFPB reports that many Dealers market solar loans presuming that all consumers will receive the ITC and use marketing materials that present a lower “net cost” to consumers by deducting the federal tax credit from the total loan amount. However, not all consumers are eligible to receive the ITC. The CFPB asserts that presenting the “net cost” may overshadow the true cost of a loan by obscuring the conditionality of tax credits, notwithstanding that some lenders may provide additional disclaimers or disclosures regarding tax credit eligibility during loan solicitation or application processes.

Repayment Structures

Solar loans are often structured so that a borrower’s monthly payments will increase after a certain date unless the borrower prepays a percentage of the loan principal (typically 30%, which is the ITC that borrowers are presumed to receive). The CFPB asserts that many borrowers either do not understand this repayment structure or do not qualify for the ITC and therefore do not expect what may be a substantial increase to their monthly payment obligation if they—for any reason—do not make the presumptive prepayment.

Savings Claims

The Bureau asserts that homeowners may receive misleading claims from some Dealers or solar finance companies about energy savings from solar systems—claims based on overstatements related to the future cost of energy or the amount of electricity that the panels will produce, for example. The actual financial benefits from the solar panels vary significantly depending on several factors, including geographic location, system design, and weather.

The Bureau’s press release accompanying the report states that the Bureau, along with the Federal Trade Commission (FTC) and other government agencies, intends to target what it deems “abuses” in the solar financing market. Accordingly, the Bureau’s report may lead to additional scrutiny of solar finance. While the CFPB report focuses on solar loans, some of the issues highlighted by the Bureau related to savings claims and Dealer sales practices also may apply to solar leases and Power Purchase Agreements (PPAs) that are originated through Dealers. Some may also be relevant in the context of non-solar home improvement financing.

Center for Responsible Lending Report

The CFPB’s report comes on the heels of an article issued by the Center for Responsible Lending (CRL), a consumer advocacy organization, titled “The Shady Side of Solar System Financing.” The CRL report alleges that some solar financing companies and Dealers engage in practices that violate state or federal law in the marketing, origination, and servicing of solar loans and calls for greater regulation and enforcement activity in the solar loan industry.
The CRL article identified the following practices that the CRL asserts are widespread in the solar loan industry:

• Improper or misleading sales practices with respect to energy savings or tax credits, including the likelihood that consumers will benefit from receiving tax credits
• Poor installation or workmanship
• Underwriting loans without properly assessing a borrower’s ability to repay
• Failing to properly monitor installers and customer-facing salespersons
• Installers passing “dealer fees” charged by the lender for participating in the lender’s program onto the borrower in the form of a higher sale price for the financed equipment
• Not accommodating borrowers with limited English proficiency by providing translations of contracts or other documents
• Filing UCC-1 financing statements that cloud title on the borrower’s property

Some of these issues have formed the basis of the pending lawsuits against solar financing companies by state attorneys general (AGs), and negative press relating to the CRL report and similar consumer advocacy pieces may further increase scrutiny in the space over time.

State Attorney General Scrutiny

States have entered the residential solar financing fray as well. Their actions have involved increased examination pressure from some state licensing regulators, but state AGs arguably have led the charge on aggressive claims against industry participants. Below, we describe two actions brought by AGs in Minnesota and Connecticut that highlight this trend.

In March 2024, the Minnesota AG filed a lawsuit against four large solar financing companies, alleging that the lenders engaged in deceptive sales practices in violation of the state Consumer Fraud Act and Unfair Deceptive Trade Practices Act. Specifically, the lawsuit alleged that the lenders collected “hidden fees” from borrowers by marketing loan products with low interest rates while their Dealers inflated the cost of solar systems by 10%-30% or more by passing on the dealer fees to consumers. The complaint asserts that these dealer fees are not included in sales proposals describing available financing, are not included in disclosures of financing costs provided by solar lenders, and that the solar lenders do not permit Dealer fees to be identified or explained by underlying Dealers during the sales process. Like the CFPB report, the Minnesota AG lawsuit does not address the treatment of dealer fees as “seller’s points,” which may be excluded from the “finance charge” under TILA and Regulation Z.

In October 2024, the Connecticut AG settled a lawsuit with another (now-bankrupt) solar company for $5 million alleging that the company engaged in misleading marketing practices, failed to obtain required permits before commencing work, made misrepresentations concerning tax benefits of installing solar systems, and performed installation without duly licensed agents. In the associated press release, the Connecticut AG stated that the settlement is intended to “set[ ] clear expectations for solar companies operating in Connecticut, including accuracy of disclosures, contract protocols, permitting procedures, and use of licensed contractors. The settlement prohibits use of tablets and phones for signing contracts, and bars signing of contracts on the same day of a salespersons’ first visit to a home.” The AG’s announcement suggests ongoing investigation into solar company practices as well as the importance of Dealer oversight to mitigate compliance risk.

Another lawsuit by the Connecticut AG highlights how the risks presented by alleged Dealer misconduct in solar lending are also applicable to solar leases and PPAs. In July 2024, the Connecticut AG filed a lawsuit against a solar lessor and two of its Dealers, alleging that the Dealers and individuals engaged in unfair or deceptive high-pressure in-home sales tactics for solar leases. The lawsuit cited examples in which a sales agent allegedly forged the consumer’s signature on a lease agreement and impersonated the consumer over a verification call, sales pitches in which the agent did not disclose an annual escalator on the lease agreement, failure to provide copies of lease agreements to consumers, and Dealers failing to obtain required local permits prior to system installation.

¹ “Solar Data Cheat Sheet,” SEIA, (Dec. 2024). The “Cheat Sheet” is a publicly available summary of a “US Solar Market Insight” report developed quarterly by SEIA and Wood Mackenzie and offered for purchase.