RFI Q & A for 26-0005 v2.docx
DOCX document 17 KB Posted
- Attached to
- RFI for Energy Efficiency Revolving Loan
- Solicitation number
- RFI 761 260000000008 2
- Issued by
- Michigan
About this file
This is a Question & Answer document for Request for Information (RFI) 260000000008 regarding the Michigan Energy Efficiency Revolving Loan Fund, involving the Michigan Department of Environment, Great Lakes, and Energy (EGLE). The document addresses borrower and lender participation mechanics, specifically clarifying the loan loss reserve (LLR) structure that serves as a credit enhancement mechanism to reduce lender risk and expand financing access to borrowers who may not meet traditional underwriting standards. The LLR operates as a shared risk tool between lenders and EGLE rather than as a repayment guarantee, with EGLE establishing a reserve fund equal to a percentage of the total loan portfolio to reimburse lenders for a portion of defaulted loan principal amounts.
The LLR mechanism functions through a tiered loss-sharing arrangement in which EGLE reimburses lenders for a specified percentage of eligible loan losses up to the total reserve amount, while lenders retain responsibility for the remaining loss percentage to ensure appropriate underwriting and risk management. The document provides a detailed numerical example wherein EGLE establishes a $100,000 reserve on a $2,000,000 loan portfolio and agrees to cover 80% of defaulted principal amounts, with the lender absorbing the remaining 20%. Claims for eligible loan losses and LLR loss payments are submitted once loans become more than 90 days past due, with the reserve fund continuing to support future defaults until the reserve is exhausted. This structure represents one potential mechanism EGLE is considering to responsibly expand lending access while maintaining appropriate risk allocation between lenders and the program sponsor.
View the file
Other files
| File | Type | Posted |
|---|---|---|
| MI LLR Illustration.xlsx | XLSX spreadsheet | |
| Energy Efficiency - Loan Term Sheet w Loan Loss-draft.docx | DOCX document | |
| RFI 260000000008 Energy Efficiency Revolving Loan Fund.docx | DOCX document | |
| Energy Efficiency - Loan Term Sheet-draft.docx | DOCX document | |
| Energy Efficiency - Loan Term Sheet w Subordination-draft.docx | DOCX document | |
| Revised RFI 260000000008 Energy Efficiency Revolving Loan Fund.docx | DOCX document | |
| Energy Efficiency - Loan Term Sheet w Loan Loss-draft - Copy.docx | DOCX document |
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Text version
RFI 260000000008
Michigan Energy Efficiency Revolving Loan Fund Question & Answer Document
Question 1:
We found the LLR information confusing. Can you provide an example with numbers in it to better understand what that would look like?
Answer:
A loan loss reserve (LLR) is a credit enhancement tool that reduces lender risk by covering a portion of losses if borrowers default. It does not guarantee repayment but instead shares risk between the lender and the program sponsor (EGLE) to encourage lending to borrowers who may not meet traditional underwriting standards.
Here is an example with numbers:
Assume a lender originates $2,000,000 in loans under this program.
· EGLE establishes a loan loss reserve equal to 5% of the total loan portfolio, which would be $100,000.
· EGLE agrees to reimburse the lender for 80% of any defaulted loan principal, up to the total reserve amount of $100,000.
· The lender remains responsible for the remaining 20% of losses, ensuring appropriate underwriting and risk management.
If, over time, borrowers default and the lender experiences $40,000 in principal losses:
· EGLE would reimburse 80% of $40,000, or $32,000.
· The lender would absorb the remaining $8,000 (20%).
· The reserve fund would then have $68,000 remaining available for future defaults.
If total reimbursements eventually reach $100,000, the reserve would be exhausted, and no additional coverage would be available.
This structure helps reduce lender exposure while maintaining shared risk. It is one potential mechanism EGLE is considering to responsibly expand access to financing for borrowers who may not otherwise qualify.
To clarify the mechanics of the funding of the LLR account and the determination of LLR Loss Payments, consider the following example: A lender who issues 1 loan in each of months 1-4. The loan issued in month one (Loan 1) makes its first payment in month 2 but then does not make additional payments. At month 5, the loan is more than 90 days past due, and the lender is able to submit a claim for the Eligible Loan Loss and the requested LLR Loss Payment. The spreadsheet titled MI LLR Illustration (attached) shows what that would look like.
File details come from the government source that posted it. Updated .