The financial industry includes a range of lending institution types. These include community banks, credit unions, non-bank finance companies (leasing company or specialized financial institutions), national energy efficiency lenders, community development financial institutions, utility-partnering lenders, and state-chartered (state-level) bond authorities. Each lender type will have its own goals and unique perspectives with respect to financing residential energy efficiency upgrades.
Loan loss reserves (LLRs) are funds provided by third parties that offer partial risk coverage to lenders. LLRs cover a pre-specified amount or percent of losses from loans that default on payments. This loss coverage typically allows financial institutions to offer a lower interest rate or longer term to borrowers, as well as less restrictive underwriting requirements (e.g., higher application approval percentages) or both. LLRs have been used successfully to encourage financial institutions to offer products for financing energy efficiency and renewable energy projects.
A loan is created through a series of procedural steps called origination. Steps include assembling the application file, issuing disclosures, underwriting the loan, processing the loan, producing required documents, collecting data, closing or settling the loan, and funding the loan. After a loan is closed, it is “boarded” (loaded into a database) and “serviced”. Servicing consists of sending monthly statements or invoices to the borrower, processing “remittances” (payments), updating the loan information, and performing collection activities for loans that do not pay on time.
Loan performance refers to the rate at which loaned funds return to the lender, taking into account pre-payments (e.g., partial or complete payoffs made prior to their due date), delinquencies (e.g., late payments), and defaults (e.g., losses or payments late enough to be considered losses by the lender). Expected loan performance will drive lenders’ decisions regarding interest rate, loan terms, and underwriting criteria, all of which influence customer uptake.
Loan underwriting is the process performed by a lender to decide if an applicant should be approved for a loan. The process typically involves confirming the eligibility of a borrower and the property and project, and an evaluation of the borrower’s ability and perceived willingness to repay. Typical criteria lenders review include borrowers’ loan payment performance history, credit score, income, debt, and employment.
Low-income households make up roughly one-third of the population nationally. These households tend to have older, less efficient appliances and equipment, making them good candidates for energy efficiency programs. They also have energy costs that account for a higher percentage of household income than in non-low income households.