The following terms are important to understand and use confidently as you discuss, negotiate, and finalize details of the clean energy loan product with the selected financial institution partners. You will need to negotiate loan origination procedures, interest rates, loan tenors, underwriting guidelines, and other terms outlined below.
- Eligible Borrowers: Eligible borrowers must be defined
- Eligible Projects: Eligible project types and measures must be defined
- Loan Application and Origination Procedures: The financial institution provides loan application materials and defines full loan origination procedures, including credit screening, analysis and approval procedures, as well as standard loan documents
- Loan Tenors: For energy efficiency/renewable energy projects, 3- to 7-year tenors are typical, with 10 to 15 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 (LLR) fund. 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 state and local governments 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, or the U.S. Department of the Treasury bond rate for bonds of similar tenor.
- 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 state or local government determine the loan size through negotiation
- Loan Underwriting Guidelines and Security: Loan underwriting guidelines—minimum credit scores and similar measures of borrowers' willingness and ability to pay—can be the subject of negotiation between lenders and state and local governments. Higher LLR amounts may also provide lenders with the comfort to be able to lend to individuals and businesses with lower credit scores
- Loan Disbursement and Flow of Funds during Project Construction: The state or local government and financial institution partner will develop loan disbursement flow 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 group multiple projects for implementation
- Prepayment Option: Energy efficiency and renewable energy loan programs do not typically have a prepayment penalty; the LLR agreement should make this explicit.
Download the Clean Energy Finance Guide to Residential and Commercial Building Improvements' Preliminary/Sample Residential Energy Efficiency Loan Term Sheet and Underwriting Criteria for an example of a loan term sheet.