On-Bill Financing Programs
Overview and Key Considerations for Program Design
Key Challenges to Consider
Operating an on-bill program requires the utility or other program administrator to manage the financial aspects of holding loan risk -- funding loans, repayment and prepayment speeds, delinquencies and defaults, interest-rate risk, among others. It will also require substantial operational efforts -- people, systems, and processes to originate and service loans. The challenges are manageable, as demonstrated by the utilities with existing programs, but it is important for program design to consider how each function will be performed, by whom, with which tools, and how quality will be assured. The challenges also may inform program limitations because the challenges for some utilities may vary by property and customer sectors.
Even if a utility opts to work with a private lender to handle certain loan origination and back-office functions, either on a contract basis or as the funder and holder of the loan, the utility will likely want to remain involved in the origination process, even if only a quality assurance role, if its brand is involved, especially if termination of utility service is possible for non-payment of the loan. Key operational challenges for utilities or loan administrators to consider include:
- Loan Production. Finding qualified customers, determining ability to pay, and managing loan documents, and delivering funds can be a labor intensive and expensive process. It is likely that loan production will be substantially more challenging and riskier in the residential sector given the scale and number of applications that do not result in closed loans.
- Managing Contractor Network. Contractors often actively help customers navigate financing options to fund proposed projects, sometimes in ways not apparent to the lender. This function can provide substantial value to the lender as a marketing channel, but it also presents risks. The experience of residential home improvement lenders suggests on-bill programs must guard against customers being subject to pressured sales tactics or having mistaken impressions of loan terms when contractors may be part of the sales activity. The risks appear to be lower in the commercial property sector due to the nature of the customer and the role of professional building managers.
- Legal Compliance. Lending is governed by a complex web of state and federal legal and regulatory requirements. Compliance can be particularly challenging in the residential property sector -- the Truth in Lending Act, Equal Credit Opportunity Act, Real Estate Settlement Procedures Act, state and federal licensing requirements, plus licensing of loan officers, among other requirements, could apply. Some statutory requirements might not apply to on-bill loans if the loans are not secured by a lien on real property. A loan operation will still raise a number of compliance questions and liability concerns that require ongoing and active management by the utility and could affect the terms of the product.
- Customer Shut-Off. A utility must maintain even higher and more careful controls and processes related to customer service shut-off when it is related to non¬payment of a loan payment. Customers must be able to obtain assistance with complaints, raise legitimate defenses related to the loan and the project funded by the loan, and have access to a dispute-resolution process that does not involve the customer incurring legal expenses. A few instances of customer service shut-off where the customer is in a sympathetic position, such as a person on fixed income with higher total bills after efficiency improvements, could create substantial problems for the utility, any lender involved, and efficiency programs generally.
last revised 7/10/2013
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