Credit enhancements are a class of tools that reduce lender or investor risk by delivering a level of protection against losses in the event of borrower default or delinquency.

 

Loan Loss Reserve (LLR)

A loan loss reserve fund is an expense pool that is reserved to cover costs in the event that a borrower defaults on a loan. Generally, a financial institution takes in deposits and makes loans against its deposits. However, there are instances where borrowers may not pay back their loans, or pay them on time. Financial institutions can utilize a loan loss reserve fund for the specific purpose of covering defaults on a particular class of loans.  As energy efficiency loans are relatively new offerings for most financial institutions, loan loss reserves can provide extra assurance against defaults.

Interest Rate Buydown (IRB)

An interest rate buy-down is a financing technique where the borrower gains the benefit of a lower interest, which saves a considerable amount of money on the cost of the total loan. The bank receives a payment(s) from a third party organization, which effectively subsidizes the borrower’s loan costs. The intent of this technique is to make the financing more attractive to prospective borrowers.

Loan Guarantee

A loan guarantee covers the entire amount of a capital provider’s potential losses on a portfolio of loans. A guarantee differs from an LLR in that it is not capped at the amount of money set aside in the reserve.

 

Featured Resources

BlueArrow SEE Action Network’s Credit Enhancement Overview Guide

GreenArrow Yale Center for Business & The Environment Online Webinar “Energy Efficiency Finance 201”

OrangeArrow DOE webpage “Loan Loss Reserve Funds and Other Credit Enhancements”

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