Financial Innovation: A Q&A with Mary Templeton

Messy pile of one hundred dollar bills

Innovative HandshakeQ: How did Michigan Saves come up with its innovative funding model?

Mary Templeton (MT): In 2009, Michigan Saves launched with a $6.5 million grant from the Michigan Public Service Commission (MPSC), which was put into a trust fund. There was an additional $1.6 million awarded to Public Sector Consultants and the Delta Institute under a competitive bid, for the purpose of researching how Michigan Saves should be structured, and for the initial setup and administration of the fund. That work entailed deep stakeholder engagement to figure out how to most effectively break down barriers to energy efficiency.

What we found is that one of the best ways to help facilitate more energy-efficiency work was to leverage the resources — like a strong contractor network and private lenders — that already existed in the marketplace, and create programs specific to advancing energy efficiency. We authorize a network of contractors that reach all areas of the state, and conduct quality assurance to ensure that our customers are getting the customer experience we expect. We created and utilize a loan-loss reserve fund that protects our lenders when a customer defaults. This financing structure allows us to leverage private lenders to offer very attractive interest rates and longer terms that, in some cases, allow the savings from utility bills to pay for the monthly loan payment.

Q: How exactly does Michigan Saves operate this loan-loss reserve fund?

MT: Our loan-loss reserve fund protects lenders in case of default. If someone defaults on a loan, we pay the lender a percentage of the remaining balance.

The reason it works so well is because we can offer a product that’s specific to energy efficiency and renewable energy. Our loans have better terms, better rates and longer loan periods than any other unsecured loan and even some home equity loans. In addition, the feedback we hear throughout the industry is that for projects to move forward, you’ve got to make it really easy for people to access financing, and we’ve been able to do just that. Loans get approved in minutes through our centralized call center that operates 24 hours a day, seven days a week.

Q: How does using private capital help increase the impact of the MPSC’s original investment?

MT: By using private capital backed by our loan loss reserve, we can leverage the initial investment of the MPSC far beyond its initial value. If we were to use the funding directly, we could only have up to $6.5 million in loans out. But right now, we have loans on the residential side in the range of $30 million.

This works so well because up to 5 percent of loans can default with assurance that Michigan Saves will pay 80 cents on the dollar to cover their loss. If it goes over the 5 percent level, then the lender takes on the risk for those defaults. And we’re doing really well on this front, because our program has an overall default rate of less than 2 percent.

This structure allows our money to go much further. We have over $36 million of loans issued, and have served more than 4,100 residential customers. The original trust fund allows us to issue almost four times the amount of loans we have issued to date, enabling us to serve many more residents throughout the state for years to come.

Q: Does the Business Energy Financing Program work in the same way?

MT: Our commercial program is very similar to the residential program in that we  use private lenders, authorize a contractor network and provide quality assurance. What’s different is that we leverage the private capital dollars at a rate of 10 to 1, and pay out 100 percent of the remaining balance on defaults. We have an excellent track record with our commercial program with no loss claims to date. We’ve served over 175 business customers and have issued close to $6 million in loans.

Q: So how much money in private capital loans is Michigan Saves able to back, in total?

MT: The MPSC issued us that first grant in 2009. In 2010, our loss reserve trust fund was bolstered through two U.S. Department of Energy grants awarded through the Michigan Energy Office. If we keep growing at this rate, our estimates show that we’ll have funding to support the program until at least 2025, if not longer. Our total assets as of our December 31, 2013, tax return were $13.3 million.

Q: How does Michigan Saves support its operational expenses?

MT: The intended purpose of the assets that we received from the MPSC and the Michigan Energy Office through the U.S. Department of Energy is to back projects that encourage energy efficiency. We invest those assets and get a return on those investments. Revenue from the investments pays for a portion of our operations. We also collect a very low service fee from our contractors of 1.99 percent of each loan at the time the loan is closed. Additionally, each year we have funding from grants and program-related income. Overall, we have diverse income streams to meet our operational needs, and we preserve the trust fund for its intended function as a loan-loss reserve.