Policy Proposal: Bank Regulatory Reform - Asset Risk Weighting to Enable Broader Access to Residential Solar Financing
Lead Agency: Federal Deposit Insurance Corporation (FDIC), in coordination with the Office of the Comptroller of the Currency (OCC) and Federal Reserve System
Objective:
This proposal recommends reducing the risk weighting of residential solar loans to 0% to align banking asset risk management with national energy goals, broaden access to affordable solar financing, and increase consumer protections. Additionally, it advocates for residential solar loans to qualify as Community Reinvestment Act (CRA) investments, encouraging banks to finance high-value solar projects in underserved communities.
Current Landscape and Problem Statement:
The U.S. residential solar financing market is dominated by unregulated, non-bank lenders who often impose excessive fees and profit margins, averaging 30% on residential solar loans. Due to high risk-weighting requirements, banks have hesitated to enter this market. This lack of bank participation reduces competition, leaving consumers with limited options, high costs, and fewer protections.
Rationale for Regulatory Change:
Residential solar loans are exceptionally credit-safe assets with several unique characteristics that justify a reduced risk-weighting classification:
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Collateralization: Residential solar loans are secured by the solar equipment itself, with an additional lien on the home, providing strong collateral for these loans.
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Consumer Priority on Payment: The significant savings from solar panels make them an essential household asset. Even in economic downturns, consumers are likely to prioritize solar payments, as they reduce dependency on more expensive utility companies.
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High-Performance Loan Characteristics: Residential solar loans are consistently high-performing with low default rates, largely due to the cost savings they provide, making them resilient and attractive assets for banks.
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Alignment with National Energy Goals: Reducing the risk weighting aligns financial regulations with energy and climate objectives, fostering a faster transition to clean energy.
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CRA Investment Qualification: Designating residential solar loans as CRA-eligible would allow banks to meet CRA requirements by financing projects that support energy access and economic resilience in underserved communities.
Supporting Data and International Comparison:
Internationally, reduced capital requirements for sustainable investments in the European Union led to a 15% increase in renewable energy project lending within two years. Similar reductions in the U.S. for specific sectors, such as small business and housing, have historically resulted in lending surges between 10-20%, demonstrating the positive impact of regulatory adjustments on bank participation.
Projected Impact:
- Enhanced Consumer Access: Banks would compete in the solar financing market, lowering costs and increasing consumer choice.
- Energy Independence: Increased solar financing would expedite adoption, reducing reliance on grid energy and stabilizing costs for American households.
- Consumer Protections: Regulated banks would offer a safer alternative for consumers currently vulnerable to predatory lending.
Implementation and Oversight:
The FDIC, alongside the OCC and Federal Reserve, would lead the adjustment of asset risk weightings for residential solar loans. Coordination with the Department of Energy would ensure alignment with energy objectives, and regular reporting to Congress would maintain transparency and accountability.