In order to drive meaningful energy efficiency projects in your community, a Loan Loss Reserve Fund (LRF) can make it easier for borrowers to access financial resources. Establishing an LRF is an innovative way to utilize time-limited American Recovery and Reinvestment Act (ARRA) funds.

An LRF is a credit-enhancement mechanism that entices financial institutions to lend capital at a lower-interest rate or with more flexible terms than they might otherwise do. LRFs make lending opportunities more attractive by providing partial risk coverage to third-party lenders in the event of a loan default. 

LRFs leverage public funds with private capital, resulting in indirect leverage ratios as high as $10 in loan capital for every grantee dollar. In a difficult economic market, LRFs make credit more readily available, enabling energy-conscious individuals to implement energy efficiency improvements to their homes or businesses. Loan payments by borrowers will eventually be offset by the energy cost savings in invested projects — decreasing overall energy consumption and reducing electricity bills. 

Examples

In cases where LRFs are applied, they perform best when a portfolio approach is taken. A variety of community programs are using Energy Efficiency and Conservation Block Grant (EECBG) money to fund LRFs:

• Keystone Help provides homeowners in Pennsylvania with special financing and rebates for energy efficiency improvements 
• Michigan Saves utilizes ARRA funds to provide partnering financial institutions with a loss reserve for loans that finance residential energy efficiency
• Community Energy Challenge gives Washington residents quality information on ways to improve their energy usage and how to access preferential energy-efficiency loans 

Program Guidance: Under the ARRA, EECBG funds can be used to support and leverage private commercial and residential lending for eligible projects. It is the grantee’s responsibility to ensure the following conditions are met in an LRF program:

• Right to review and monitor loans to ensure they support eligible activities
• No legal or financial obligation beyond funds committed to the reserve
• Unused loan loss funds must be used for other eligible EECBG program use
• Funds may only be released to lenders for loan losses

Keep in mind, in the implementation of any LRF program, a loan loss reserve agreement governs the terms and conditions of the deal between grantees and lenders. This agreement covers such things as program targets and deadlines, providing the grantee with certain control points that ensure proper management of funds. 

For support and guidance, the Technical Assistance Program is available throughout the program development cycle. If you are in the process of developing or implementing an LRF program in your community, please, share your experiences with us! 

Content for this Blog post courtesy of Scott Regenthal, National Renewable Energy Laboratory