A lending program begins with a lender. The lender can be one of a number of entities ranging from banks to nonprofits to utilities to government agencies. Lenders procure the funds that they ultimately lend from a number of sources
Types of lenders include:
- Credit unions
- Community development financial institutions
- Government lenders
- Specialized lenders.
These can be large national banks (Wells Fargo or Bank of America), regional or super-regional banks (US Bank or Fifth Third Bank), or banks that operate in a geographically defined area (the National Bank of Arizona or the Bank of Colorado). The latter category tends to be more closely entwined with their communities than the larger banks. For that reason, geographically defined banks may be the most attractive to grantees, despite the fact that those banks lack the broad reach and large number of branches (convenient access for home and business owners) of the large national or super-regional banks.
Any bank that focuses heavily on mortgage lending will be accustomed to closing loans that are well above $100,000, which they, in turn, sell to a secondary market investor. Banks are also familiar with home equity loans or home equity lines of credit through which consumers borrow money and the banks place a lien as security on the homeowner’s primary residence. Those large, secured mortgage loans are quite different from the small consumer-oriented unsecured loans that in many cases support energy efficiency retrofits in homes. The bank departments that are most likely to be comfortable with unsecured residential energy efficiency and renewable energy lending programs are the consumer finance departments that work with unsecured lending. One national bank, EnerBank, now specializes in clean energy loans for consumers.
Larger loans that might rely on home mortgage refinancing, home equity loans, or energy-efficient mortgages will typically be housed in a separate department dealing with home mortgages. Commercial lending, on the other hand, often falls into a different department altogether. Not all banks that make home mortgages or do consumer financing also do commercial lending.
Credit unions are nonprofit organizations with a charter to serve the financial needs of specific parts of a community, whether it is an employer group, a group of graduates of a particular university, or some other defined group of people. Examples are the State Employees Federal Credit Union (SEFCU) in New York or the Navy Federal Credit Union. Like the community banks mentioned above, credit unions tend to be highly community focused, but in some cases they lack the broad geographic reach of a large national or super-regional bank. Credit unions typically focus on lending as a way to support the community or members for which they operate. Many credit unions already do small consumer lending—used car loans offered through used car dealers, for example. Credit unions are often very well-suited candidates for clean energy lending with whom grantees should seriously consider developing partnerships.
Community Development Financial Institutions
Community Development Financial Institutions (CDFIs) are nonprofit lenders that aggregate lending capital from a mix of federal or state government, foundation, and private capital sources and relend that money to targeted groups. Some CDFIs target their lending to small businesses; others target lending to nonprofit institutions; and a very small number of CDFIs target lending to the residential single-family sector. These financial institutions typically operate small offices with only a few staff and tend to make loans (usually larger than $100,000) to organizations that cannot secure lending from banks or credit unions. CDFIs can be ideal partners for grantees because of their community-based missions. Grantees should bear in mind that CDFIs tend to be both capital and capacity constrained; the capacity constraints often mean that they do not have the staff to process the large numbers of small loans that are common in the single-family residential sector.
Utilities can be lenders, but are often reluctant to serve in that role. Their reluctance stems from three concerns: (1) legal and regulatory requirements related to serving as a lender, (2) the cost of developing computer systems to handle principal and interest payments and collections, and (3) any financial liability they may incur as a result of making and holding loans. Some utilities do, nonetheless, offer clean energy lending programs, primarily serving commercial borrowers.
Government lenders can include state energy offices, or state-chartered finance authorities, or their local government equivalent. Many of the first generation energy efficiency lending programs from the late 1980s and early 1990s began with government lenders. As a rule, most government lenders are capacity constrained in the same way as CDFIs and have limited ability or desire to originate and service loans—particularly large numbers of small residential loans.
A number of specialized lenders operate in the clean energy lending space. Such nonbank finance companies have access to capital from a variety of sources. Examples include the three Fannie Mae-qualified energy efficiency loan program lenders and the Electric & Gas Industries Association (EGIA).
AFC First, Viewtech, and Energy Finance Solutions are Fannie Mae certified lenders for the Fannie Mae Energy Loan program. Those three entities originate loans for energy efficiency and then sell them on a daily basis directly to Fannie Mae. As a result, the three lenders themselves are usually not the final source of capital, but instead fund the loans for just the very brief period for which they hold them (a day or so) until the loans are sold to Fannie Mae. In such cases, Fannie Mae is the ultimate capital source. Fannie Mae energy efficiency loans have been among the most important sources of capital in the unsecured residential loan market. No equivalent to the Fannie Mae energy loan program exists on the commercial side.
Some lenders operate largely on the basis of interest rate buydowns that contractors or program sponsors provide—in other words a program sponsor might pay up to 10% of the value of a loan to a lender like EGIA to bring an interest rate down to a level attractive to a borrower.
Different financial institutions will have different criteria for lending, so grantees must do their research and be familiar with those criteria. If the new clean energy loan programs being planned by grantees can build on the financial institutions’ existing loan products, such as home improvement loans, the lenders’ internal new product development process will likely be accelerated. As a result, the grantees’ lending programs can start more quickly than they would otherwise.
The section on Partners and Stakeholders reviews the roles of financial institutions in more detail and also describes additional stakeholders involved in the energy efficiency financing process. The section on Clean Energy Lending from the Financial Institution Perspective provides additional detail on the perspective of different financial institutions with regard to clean energy finance.