A lending process also requires a repayment structure, which is a means to repay the loan. That can be through a traditional bill from the lender to the borrower (like a credit card statement in the mail), or through some other means such as a payment on the property owner’s utility bill.
Repayment structures determine how borrowers will pay back the loan principal and interest. Recently, there has been a great deal of discussion about on-bill repayment structures and property tax-based repayment structures. Below are brief descriptions of three repayment structures:
On-bill repayment means that the principal and interest notification (the amount due) appears on the monthly utility bill of the entity responsible for paying the utility bill, and the borrower repays the principal and interest as part of the regular utility bill payment. On-bill repayment is attractive to capital providers if it is tied to disconnection in the event of failure to pay. However, many capital providers are leery of on-bill repayment structures in which the utility collects the funds and then distributes the collections to the lenders because (1) the collection practices of utilities may be quite different from those of the lenders, and (2) utilities might pay themselves before paying the lender if a customer makes only a partial bill payment.
Property Tax-Based Structures
Property tax-based payment mechanisms place the payment obligation on the property tax bill, so borrowers satisfy their repayment obligation as they pay their property taxes. In some communities, an unpaid waste pickup or water bill can be added to the property tax bill, so adding the clean energy loan payment to the tax bill is a variant on that type of repayment mechanism. Property tax-based repayment mechanisms are important in part because they trigger the first lien position in the event of foreclosure. The security that the first lien position creates also makes capital providers comfortable with loan terms that may be much longer than would be available through a traditional unsecured loan. These property tax-based structures are commonly known as property-assessed clean energy, or PACE. Federal regulatory hurdles stand in the way of residential PACE financing, but commercial PACE financing is still a viable option. For more information, see Commercial Property-Assessed Clean Energy Financing.
Traditional (nonutility/nontax bill) repayment structures are the simplest in that a financial institution sends out bills, collects payments, and tracks payments and defaults. The financial institution also manages compliance with any lending regulations like the Truth in Lending Act. The lender typically defines the collection terms as well—for instance, the number of days after which an unpaid bill is declared to be in default.
The repayment structure is important. Lenders want the most secure and robust structure possible—in other words, one that is most likely to yield regular payments in full of the principal and interest. Any new and unfamiliar repayment structure is likely to require grantees to put up a credit enhancement. For more information, see Credit Enhancements.