Basic Concepts for Clean Energy Unsecured Lending and Loan Loss Reserve Funds
This section of the guide focuses on loan loss reserve funds (LRFs) structured to support single-family residential energy efficiency and renewable energy lending.
When grantees involve third-party commercial lenders in clean energy—energy efficiency and renewable energy—finance programs, they have the opportunity to leverage public funds including American Recovery and Reinvestment Act (ARRA) funds by as much as 10 to 20 times. These public funds can serve as a credit enhancement to decrease risk for lenders. One type of credit enhancement is an LRF.
The loan loss reserve provides partial risk coverage to lenders—meaning that the reserve will cover a pre-specified amount of loan losses. For example, a loan loss reserve might cover a lender’s losses up to 10% of the total principal of a loan portfolio. The financial institution (lender) working with each grantee can draw on the LRF to cover losses on defaulted loans according to the terms of the loan loss agreement between the lender and grantee.
The initial loan loss reserves funded by the U.S. Department of Energy have tended to focus on single-family residential energy efficiency and renewable energy lending programs. However, loan loss reserves can be used in other markets, from commercial lending to multifamily housing lending to nonprofit lending. LRFs or other types of credit enhancements can support other energy efficiency finance mechanisms including utility on-bill financing, bond issues, property-assessed clean energy loans, and more.
Learn more about the:
- Rationale and goals for LRFs
- Primary characteristics of LRFs
- DOE guidance on LRFs
- LRF risk-sharing formula
- Residential energy efficiency loan terms
- Typical underwriting guidelines and the LRF impact on them
- Steps for developing a clean energy financing program with an LRF
- Development and management of vendor/contractor network.
You can download the guide's entire chapter on Basic Concepts for Clean Energy Unsecured Lending and Loan Loss Reserve Funds.