Getting Priorities Straight
Solar panels are hot right now (pun intended), and they are likely to get even hotter as costs go down and financing options become more readily available to homeowners looking to reduce their energy bills. In fact, thanks to Fannie Mae’s new HomeStyle Energy program the installation of solar panels may be getting even easier and cheaper. You can read more about the program here.
Currently though banks are giving loans, and installers are giving leases, to homeowners looking to upgrade their homes with solar panels. And in order to protect themselves and their loans they are filing UCC Financing Statements, otherwise known as UCC-1s or simply Financing Statements. While there is generally nothing wrong with doing so, it rightly has some Register of Deeds’ concerned because the filing of a UCC-1 can lead to some complicated results that can affect both buyers and mortgage lenders.
A comprehensive analysis of those results and the many situations that could lead to them are a bit too complicated for me to get into here though. For now, let’s stick to the basics.
What is a UCC-1?
A UCC-1 is a simple form which is filed with a state to inform the “world” (that is, inform other potential creditors) about another creditor having a security interest in a particular item. There are many items that can be covered by a UCC-1, such as consumer goods in a home, inventory in a store, equipment in a factory, fixtures in (or on) a home, and even timber and other resources on land, to name just a few. A UCC-1 is a way of making sure a creditor who takes a security interest in a particular item get priority over a competing creditor’s interest in that property. The general rule is the first to file the UCC-1 is the first in line to be paid back, though that general rule comes with many exceptions.
They are very basic forms though. They generally only require 3 things to be valid:
Debtor’s name and address
Creditor’s name and address
A description of the collateral
That’s it. The forms can be found online, and completed online, and filling them out should be quick and easy. For example, in Massachusetts they can be found here: http://www.sec.state.ma.us/cor/corpdf/ucc1.pdf.
What does this have to do with solar panels, and what’s the problem?
I snuck it in above in the middle of a list, but remember I said it covers fixtures in or on a home? While it’s very difficult to say what is and is not a fixture until a court rules that something is a fixture, there is a very strong argument that solar panels would be fixtures. After all, they are literally affixed to a home. This also likely increases the value of the property, which means that potentially a bank holding a mortgage to the real property is now competing with a creditor holding a security interest in the solar panels that are attached to the real property. Generally, the mortgage wins this battle of priority.
But not always!
If a bank gives a loan to a borrower for the purpose of installing solar panels, the bank will likely be deemed to have a special kind of interest called a purchase-money security interest. If that bank also properly files a UCC-1 fixture filing (which just requires an addendum to the UCC-1), then the bank can take priority even over a mortgage. This is called a super-priority purchase-money security interest.
This can be a problem for the bank holding the mortgage, and for the homeowner when it comes time to sell or refinance the home, because now there is a senior lien on the property. Unfortunately, whether it is even a problem is something that is determined on a case-by-case basis, which is especially true when it’s an installer with a lease on the panels.
My goal here though was to spread awareness about some potential pitfalls to watch out for when lending to install solar panels. And of course I’m not trying to discourage the making of the loans or installation of solar panels, but in compliance we are in the business of making sure it’s done right. My inkling is that new programs and products like the Fannie Mae one will emerge that will make these concerns a relic of the past, but for now I just want everyone to make sure they have their priorities in line (again, pun intended).