Step 3: Identify and Engage Financial Partners
Learning from Lenders
The Environmental Finance Center of UNC Chapel Hill conducted a series of interviews with different types of financial institutions to gauge the institutions' interests in participating in a federally sponsored loan program and to discuss the roles they would play in helping the program succeed. Some key findings included:
- The ability to sell loans on a secondary market was important for large banks and Fannie Mae lenders.
- A 10% to 20% loan loss reserve would not have as great an impact on interest rates and access to credit as has been found in other markets.
- All institutions interviewed were concerned about the administrative burden of making small loans.
Review the North Carolina market assessment report―Expanding North Carolina Energy Efficiency and Renewable Lending Programs: Market Snapshot.
A financial institution partner is a critical component of any energy efficiency upgrade program. After defining program objectives, you can begin the process of identifying potential financial partners and engaging them in a discussion about energy efficiency financing options.
Identify Financial Partners
The financial industry comprises a diverse set of lending institutions, including:
- National banks
- Local banks
- Credit unions
- Community development finance institutions
- Housing development agencies
- Utility ratepayer funds
- Large institutional investors.
Each potential financial partner will have its own goals and unique perspectives. Some will want to participate because they are looking for ways to comply with their Community Reinvestment Act requirements. Others may be seeking out niche markets, while some may simply want to service loans for a fee and not assume any risks. To encourage financial institutions to participate in your program, take their interests and concerns into consideration from the beginning.
Local banks, credit unions, and community development finance institutions are often the types of financial partners most likely to be interested in participating in energy efficiency financing programs. These institutions are focused on providing products that serve their customers, so they may be more willing to consider the secondary benefits of attracting new customers—such as improving the overall financial health of their local market—and cross-selling other financial products. Local lenders are often more responsive to their customer's needs and are more inclined to create a niche lending product if they believe it will provide value to their customers.
National and large regional lenders can offer larger lending programs, but they may want to see more detailed loan performance data than would typically be available in new markets. On the other hand, national lenders can more easily package loans to sell on the secondary market and can therefore replenish the pool of lendable funds.
Developing a matrix like the one shown below can help program administrators identify the key interests and concerns of potential financial partners. Once such interests and concerns have been identified, mapping out the roles of the financial partners should be a fairly straightforward process.
Key Areas of Interest
Roles Best Suited to Execute
|Large Commercial Banks||
|Credit Unions and Community Banks||
|Fannie Mae Approved Energy Lenders||
Engage Financial Partners
Engage with potential financial partners during the early phase of program development to create a shared sense of each other's roles and responsibilities. This approach will give you insight into the financial community's objectives and motives for participating in your program.
Learn more about partnering with a financial institution. View a case study about Austin Energy's partnership with Velocity Credit Union.
Work with a team of "champions" representing each stakeholder group during informal meetings. These sessions will help you assess the financial community's level of comfort in lending to the targeted market(s). For example:
- Some partners may be willing to provide loans with private capital and assume all of the risks. In these instances, there is no need for public funding.
- Other financial institutions may want to provide the capital for loans but without assuming too much risk (see below).
Negotiating the level of risk will be an essential task of the program design team, as risk exposure will determine the structure of the program. Preliminary loan term sheets can help guide discussions with potential financial partners about product terms and agreement.
For more information on this topic, see Chapter 3 of DOE's Clean Energy Finance Guide for Residential and Commercial Building—Risk Assessment.
View example preliminary loan term sheets.
Some potential financial partners will want to limit their role to servicing loans. In these cases, program administrators will need to use all public grant money, if available, to originate loans, while contracting with the financial partner to service the loan portfolio. This structure is often found with a revolving loan fund.
The final program design will need to be consistent with the financial partners' level of comfort and the program administrator's objectives.
For more information on this topic, see Chapter 8 of DOE's Clean Energy Finance Guide for Residential and Commercial Building—Clean Energy Lending from the Financial Institution Perspective.