Residential Energy Efficiency Loan Terms
The following terms are important for grantees to understand and use confidently as they discuss, negotiate, and finalize details of the clean energy residential loan product with the selected financial institution partner(s).
Grantees are advised to use the bargaining power that the loan loss reserve affords to negotiate loan origination procedures, interest rates, loan tenors, underwriting guidelines, and other terms to broaden access to their lending programs.
Eligible Borrowers: For the residential sector, single-family residential property owners in the geographic area of the American Reinvestment and Recovery Act (ARRA) grantee. The definition of “single-family residential” can actually include more than one family dwelling in a single building, as long as (1) the building is owner-occupied, and (2) the ownership of the building is held by the owner-occupant as an individual and not a business entity such as a partnership or limited liability corporation. This distinction is crucial for categorical exclusions to the Davis-Bacon Act requirements.
Eligible Projects: All types of energy efficiency and small-scale renewable energy projects and equipment, meeting U.S. Department of Energy (DOE) guidelines.
Loan Application and Origination Procedures: The financial institution provides standard loan application materials and defines full loan origination procedures, including credit screening and analysis/ approval procedures, as well as standard loan documents.
Loan Tenors: For residential energy efficiency/renewable energy projects, 3- to 7-year tenors are typical, with 10 years often the maximum.
Interest Rate: The financial institution’s interest rates will likely be market based for the type of loan product offered to homeowners, but the financial institution will factor in the extra security offered by the loan loss reserve fund (LRF). Rates will be fixed for each loan at the time of loan application approval. One option to consider for setting the interest rate is for the financial institution partner to provide a published interest rate index as a benchmark for loan pricing. In other words, the financial institution will provide grantees a standard, well-known index upon which it bases proposed interest rates. Such an index might be the U.S. prime rate, the London Interbank Interest Rate (LIBOR), or the U.S. Treasury Bond rate for bonds of similar tenor. A grantee could use some of its ARRA funds to buy down interest rates below the level that the financial institution is willing to offer. Another option is for the grantee to specify a desired rate as a start-up rate for the program and then to agree upon a mechanism for future rate adjustments.
Payment Schedule: Monthly payments are standard operating procedure, with constant and level payments of interest and principal.
Loan Size – Minimum and Maximum: The financial institution partner and the grantee determine this through negotiation. Typical minimum loan sizes in the residential sector are $2,500, while the maximum loan size is between $15,000 and $20,000.
Loan Underwriting Guidelines and Security: Loan underwriting guidelines—meaning minimum credit scores and similar measures of borrowers’ willingness and ability to pay—can be the subject of negotiation between lenders and grantees. In general for residential loans, grantees should not expect financial institutions to be comfortable with a credit score below 640 for an unsecured loan, although some financial institutions may be more (or less) stringent in their underwriting standards. In some instances an financial institutions may be willing to lower its risk with less qualified borrowers (i.e., those with lower than 640 FICO scores) by filing a UCC-1 on the installed equipment or some other type of security (see Typical Underwriting Guidelines for details). Higher loan loss reserve amounts (such as those in Indianapolis, mentioned earlier) may also provide lenders with the comfort to be able to lend to individuals with lower credit scores.
Loan Disbursement and Flow of Funds During Project Construction: The grantee and financial institution partner will develop these together. The simplest method is a single loan disbursement authorized by the borrower to the contractor, following completion and acceptance of the energy efficiency or renewable energy project. In some cases, program partners may want to investigate methods for construction advances for larger projects, and grouping multiple projects for implementation. DOE guidelines allow checks to be written to either the contractor or the homeowners, as long as a contract exists between the contractor and the homeowner to demonstrate that the ARRA funds will benefit the homeowner.
Prepayment Option: Energy efficiency and renewable energy loan programs do not typically have a prepayment penalty, and the LRF Agreement should make this explicit.
Sample Loan Term Sheet
As an example, see the guide’s Preliminary/Sample Residential Energy Efficiency Loan Term Sheet and Underwriting Criteria.