Financing Partners – Following the Money
The different roles involved in residential clean energy loan programs typically include the:
- Property owner/borrower/customer
- Loan originator
- Loan servicing agent
- Third-party collection agent
- Warehouse facility agent/administrator
- Loan loss reserve program sponsor
- Loan loss reserve fund escrow agent.
The number and diversity of financing partners varies across residential loan programs. At one end of the spectrum, a local or regional financial institution may provide direct loans to existing customers with few if any other financial intermediaries. On the other end of the spectrum, a program such as Pennsylvania’s Keystone Home Energy Loan Program (HELP)—which is designed to access the secondary market, leverage public funds, and provide a highly marketed “point of sale” loan product—depends on multiple organizations with direct financing and financial oversight roles.
One way to illustrate the different financing actors involved in a program such as Keystone HELP is to “follow the money” and examine all of the different roles involved in moving money from the public sector and the capital markets to the residential consumers taking on clean energy retrofit projects.
- Property Owner/Borrower/Customer
- Typically, the direct recipient of a loan. In some cases, however, the loan may be made directly to the contractor/installer on behalf of the borrower. The borrower is responsible for making the loan payments for the life of the loan (the term) and normally receives the financial benefit (the savings on energy bills) associated with the financed energy improvement.
- Entity responsible for using loan proceeds to make an energy improvement that reduces energy consumption and provides comfort and financial benefit to the borrower. In many cases, the contractor plays a key role in marketing energy efficiency and renewable energy loans on behalf of financial institutions, including helping the borrower with the loan application process.
- Loan Originator
- Entity that approves loan and issues funds to the borrower. The loan originator role may be played by a variety of financial institutions including banks, community development financial institutions, credit unions, and nonbank financing companies. Some loan originators are investors interested in the investment value of the loans they originate, while many other originators are primarily interested in origination service fee revenues (in the form of a flat fee).
- Loan Servicing Agent
- Entity that collects recurring loan payments from the borrower. Often the loan originator will service the loan even after it is sold to another party. Loan servicing agents typically rely on servicing fees (either in the form of flat fees or interest surcharges) to cover their costs.
- Third-Party Collection Agent
- Normally, the loan servicing agent responsible for the administrative system of collecting loan payments. Some loan programs have, however, experimented with delegating certain collection responsibilities to third-party entities that have an existing relationship with the customer. For example, a utility that is currently collecting funds (monthly payments) from the borrower for an existing service, such as water or electricity, may agree to incorporate loan payment billing into its existing service payment infrastructure
- Warehouse Facility Agent/Administrator
- Entity that purchases loans from loan originators with the intent to resell the loans to the capital market. One of the developing warehousing agents for unsecured residential energy products in the country at this time is the Pennsylvania State Treasurer (PAST).
- Any entity that views the loan payment stream from loans as a desirable medium- or long-term investment for its capital. In some cases, loan originators are the final and only investors; some lenders such as credit unions may originate loans with the intent of keeping them until maturity. In other cases, the loan originators will seek to resell the loans so that they have relatively little of their own funds invested in these energy efficiency/renewable energy lending programs. While a warehouse agent such as PAST certainly views these loans as an investment, it typically will have limits on how much of its capital can be committed long term to these loans and will resell aggregated loans to long-term investors. Fannie Mae, better known for its role in the home mortgage secondary market, currently plays a major financial role in the unsecured residential loan market as well. Over the past 10 years, Fannie Mae has been the largest purchaser of residential unsecured energy loans, thereby serving as one of the largest capital sources for most of the existing unsecured energy loans. The Fannie Mae energy loan program has not, however, been supported by a loan loss reserve fund credit enhancement; and those loans have been priced relatively high on the market (12%–15% charged to the loan originator).
- Loan Loss Reserve Program Sponsor
- Typically, a public body/entity for new financing programs supported by a loan loss reserve fund (LRF). In some cases, vendors, contractors, or investor-owned utilities also contribute monies to establish loan loss reserve funds. Many Energy Efficiency and Conservation Block Grant and State Energy Program grantees are considering using a portion of their program funds to seed an LRF. A program sponsor will allocate public funds to loan programs to meet public policy objectives. Sponsors have different public policy priorities that will influence the terms they place on the use of their funds. For example, a public entity primarily interested in local economic development may push a loan program to be designed in a way that maximizes local workforce development (more training, more jobs). When LRF funds originate from an entity interested in the environment, the program may be designed primarily to maximize energy efficiency. If LRF funds come from or are controlled by a community assistance entity, then they may be used to expand loan access to lower income borrowers.
- Loan Loss Reserve Fund Escrow Agent
- Whoever owns the energy loan at a given moment in time and is assigned access to the LRF fund. Ideally, the majority of these funds should “sit untouched” during the life of the loan and be returned to the program sponsor. Procurement and financial oversight considerations will typically influence the choice of escrow agent, which can be a private bank or any public entity capable of maintaining and distributing funds.
- In the residential sector, the Michigan SAVES LRF product is designed to have a central LRF pool of funds, monies from which are distributed directly to lenders as energy loans are made to homeowners. Under this model, LRF funds not assigned to loans are managed by a central escrow agent, while the funds assigned to individual lenders are managed by the lenders themselves until all of their loans are retired, at which time they are required to return the unused LRF funds. Program officials in Michigan envision that many of the approved lenders will hold their loans to maturity and not necessarily seek to sell them on the secondary market.
- In the case of Keystone HELP, the LRF funds are held in escrow by the Pennsylvania State Treasurer (PAST), based on the idea that PAST will quickly warehouse/purchase loans originated by its approved lender. In most cases, the escrow agent is simply a fund manager who follows the LRF access terms as dictated under the program design and enabling documents (agreements between the lenders and program sponsors).