Risk Assessment

Fraud: Lender partners abuse the loan loss reserve fund, drawing on the reserve for loans that have not met the strict definition of default, per the loss reserve agreement. 

• Make sure that the loan loss reserve agreement is well constructed, based on sample documents provided elsewhere in this Guide.
• Work closely with lenders to be certain that they understand the program requirements at the outset. 

Installation of nonqualified measures: Contractors use funds to install nonenergy efficiency or nonrenewable energy measures. Examples might be the use of funds to install a swimming pool or a residential room addition. 

• Be sure that the contractors receive a clear explanation of the program guidelines. 
• Review contractors’ business practices and financial health prior to qualifying them to participate in the program. 
• Conduct periodic inspections of contractors’ work. 

Litigation: Poor installations, injury, or other problems result in a lawsuit against a grantee. 

• Review contractors’ business practices and financial health prior to qualifying them to participate in the program. 
• Conduct periodic inspections of contractors’ work. 

Complaints against contractors: Contractors associated with the program perform substandard work that does not yield energy savings or simply does not work. Contractors carry out the work, but damage the property. 

• Develop explicit contractor performance standards. 
• Set up and use contractor monitoring protocols.
• Be sure that a process for receiving and addressing complaints about contractors is in place from the start. 

Note: Many lenders will choose to participate in a clean energy lending program not because they see great potential for profitability from the clean energy loans, but because they hope to cross-sell other products such as home equity loans to customers.  

No loans or very few loans are extended to homeowners or businesses: A grantee establishes a loan program, but no loans are made. 

• Examine the most common barriers to program uptake, which include poor marketing, poor integration with contractor networks, high transaction costs (fees or paperwork) that deter customers from taking out loans, and high transaction costs that deter contractors from participating in the program.  

Contractor refusal to participate: Contractors find the program too cumbersome because of large amounts of paperwork or higher costs than they would incur outside the program. 

• Try to keep paperwork requirements to the necessary minimum so that contractors can fill out paperwork quickly.
• Avoid high fees; but note that in some cases, contractors are accustomed to paying fees to the primary lender to participate in financing programs or to accept credit card payments from customers. Such fees may range from as low as 3% to above 20% of the transaction value (cost of the work). 

Lenders refuse to loan: A loan loss reserve fund is made available to lenders, but the lenders do not make any loans or make very few loans on the basis of that loss reserve. Lenders may sign up for a loan loss reserve program and not make loans, or they may simply decline to sign up for the reserve program. 

• Try to pinpoint the lenders’ hesitancy to participate in the program. Some reasons might be:
  • Concern that financial regulators may require them to set aside significant amounts of money as a reserve, if loans are deemed too risky. 
  • Lack of capital to loan.
  • Concern over high transaction costs to originate loans with a small loan value. 
  • Concern that the credit enhancement may not compensate for the risk that the lender perceives in the target market. 

Excessive loan defaults: Loan defaults, while projected to be low, turn out to far exceed projections. 

• Examine and potentially tighten underwriting standards. 
• Examine loan collection procedures and review whether lenders are given adequate motivation to conduct high-quality collection procedures.