Lending Program Options
This section focuses on lending program options and presents brief profiles of different approaches to clean energy lending. Each profile describes a different way to structure the various elements of a lending program.
Lending programs can fall into one of three large categories:
Self-Administered Programs – Lending programs through which the Energy Efficiency and Conservation Block or U.S. Department of Energy State Energy Program grantee originates, services, and holds loans on its own, without engaging an outside financial institution.
Local Lender Programs – Lending programs through which the grantee engages in a contract with a local financial institution such as a bank, a credit union, or a community development financial institution. That local entity originates and services the loans.
National Lender Programs – Lending programs through which the grantee engages in a contract with a national financial organization that originates and services the loans.
Also see sample state and local lending programs.
Self-administered programs are simple to sit up in the sense that grantees do not need to conduct an RFP process to select a lender; instead they conduct the entire loan origination and servicing on their own. That simplicity is counterbalanced, however, by the fact that grantees need to have the ability to conduct loan origination and underwriting, to service loans, to collect payments, and to deal with uncollected accounts. The challenge with residential lending in the energy efficiency sector is that the loans tend to be small and numerous. Thus, the administrative burden to originate so many small loans is significant, as is the task of conducting billing and collection over the multiyear term of the loans.
Many government entities do, in fact, operate lending programs, which tend to be one of two types:
Programs that focus on smaller numbers of larger loans, in excess of $100,000 or so, that are outside the residential sector.
Programs through which the local or state government contracts with a private entity that can conduct loan origination and servicing. Iowa is developing its SEP-supported residential energy efficiency lending program in that way.
Boulder, Colorado, is one of a small number of local governments operating their own lending programs. The Boulder program (in development at the time of this writing) will focus on microloans of less than $3,000, which is smaller than the loan amount that will be of interest to most lenders.
Local Lender Programs
Local lender programs require a grantee to partner with a local credit union, bank, or CDFI. In general, these partnerships require the lender to put up the capital to make loans, while the grantee covers some of the potential loan defaults through a credit enhancement.
The advantage of these programs is that they usually can attract new capital to a loan program; for example, Michigan’s program put up $3 million to attract $60 million in loan capital from credit unions. The partner financial institution also conducts the loan origination and loan servicing so that the grantee does not need to do so.
The disadvantage can be the time that it takes for a grantee to develop a partnership with a financial institution, and the uncertainty about terms and conditions that the financial institution will agree to for the loan program. Ultimately, in local lender programs, the financial institution is the one that decides whether to make loans or not, so the actual lending process is out of the grantee’s control. Grantees can exert control over the motivations and incentives they offer the lender through the loan loss reserve agreement, described later in this Guide.
Local lender programs can offer the most attractive interest rates to borrowers because lenders tend to be interested in using the residential loan programs as a way to attract new customers—to form new customer relationships that the financial institution hopes will turn into long-term relationships that encompass mortgages or other loan products. However, grantees may find that their local lenders are less familiar with energy efficiency lending programs compared with certain national lenders. The local learning curve may be steep. As a result, local lender programs can be more labor intensive to establish than a national lender program.
One variant of local lender programs involves the utility as a lender or at the least the entity that bills the borrower for principal and interest. A number of rural cooperative utilities in Georgia, for example, are using that approach in their ARRA-funded efficiency programs, through Oglethorpe Power.
National Lender Programs
National lender programs require a grantee to engage one of the national lenders that secure loan capital from national lending sources. Several national lenders now offer their services to grantees.
The basic model in this case is that a lender originates loans for grantees and then sells those loans to an investor. The lender may only hold on to the loans for a few hours or few days prior to selling them. The lender makes money from its loan origination services and, if it continues to service the loans, from its servicing charges. As a general rule, the interest rates for these loans tend to be higher than the rates for loans originated by local lenders; however, the national lenders have a well-established and grantee-friendly process that requires little time and energy on the grantee’s part. Efficiency financing programs can be up and running quickly with such national lender programs. Grantees will need to balance the higher costs (that may require them to add funds to an interest rate buydown) with the ease these pre-established programs offer.