Our last post outlined the three key pieces to creating a sustainable finance program, namely:
- Prove clean energy finance as a profitable line of business for financial institutions.
- Arrange additional sources of funds.
- Build the secondary market for energy efficiency (EE) and renewable energy (RE) loan portfolios.
This post will tackle the first of those three strategies in detail: Prove that EE/RE finance is a profitable line of business for financial institutions.
Achieving sustainable financing in the clean energy field will require a continuous flow of capital to support EE/RE investments. In the long run, that capital will need to come from the private market, specifically from financial institutions (FIs), which include credit unions, banks, and other capital providers. In order for FIs to be interested in clean energy lending, they will need to view it as a profitable, creditworthy, and sizable business.
At the moment, only a small number of FIs operate in the clean energy lending space. For example, AFC First in Pennsylvania has a successful business originating and servicing clean energy loans in many different states, and Wells Fargo and US Bank both offer home equity green lending products in several geographic markets. In the long run, FIs need the comfort of knowing that two primary issues will be resolved before they jump fully into the clean energy lending field. Those two issues are transaction costs and deal flow, as described below.
- Transaction Costs: The costs to originate a loan (e.g. verification of income, examination of credit scores, etc.) can range from $200 to $500 per loan. Loan servicing costs may be between $7 and $15 per loan per month. Those costs make it hard for FIs to make a profit on small loans of say, less than $5,000 each. Loan origination processes must be easy, streamlined, and standardized so that FIs can review each loan quickly and with a satisfactory amount of documentation. Most loans in the residential home improvement market can be closed on the basis of the borrower’s credit scores, debt-to-income ratio, and proof of employment. Grantees can examine ways to work with their partner FIs and support them in using a streamlined process that is based more on “consumer finance” rather than mortgage finance or other more complex underwriting processes.
- Deal Flow: The clean energy lending market is still relatively nascent. This means there are just a few successful loan products in existence to prove to FIs that it is well worth their effort to establish a lending program, which targets this market. Many lenders require a bare minimum $1 million of potential new lending to even begin to consider setting up a program—but most FIs will not consider programs to be cost-effective until they reach annual levels in excess of $3 million to $5 million. Large national banks may even prefer annual loan levels of closer to $20 million before they develop a customized program. If your particular program falls below these thresholds, consider partnering with other communities to pool resources and stimulate lender interest.
For questions about achieving sustained financial support for clean energy initiatives, please comment to this post or contact a Technical Assistance Services provider. Additionally, keep checking back to our site to learn more about the other main strategies involved when trying to make your clean energy finance program sustainable.
Content for this Blog post courtesy of Energy Efficiency Finance Corporation and The Cadmus Group