Loan Loss Reserve
The purpose of MnCIFA’s loan loss reserve product is to reduce risk for financial institutions that are seeking to underwrite loans that they would typically not otherwise underwrite and that fit the criteria for MnCIFA qualified projects.
MnCIFA’s loan loss reserve product is a credit enhancement tool defined by MnCIFA’s statute (Minn.Stat. 216C.411) as a pool of capital, set aside by MnCIFA, to reimburse a private lender if a borrower defaults on a loan, up to an agreed-upon percentage of loans originated by the private lender.
As result, the loan loss reserve product enables MnCIFA to leverage private capital for impactful climate-related projects throughout Minnesota.
Application process
Our application process begins with a preliminary review of the financial institution’s proposal for loan loss reserve financing.
The pre-application form will help MnCIFA staff understand your proposal and the extent MnCIFA financing could support the loan loss reserve proposal. Our staff will request a brief virtual meeting with the financial institution to better understand the project characteristics.
After our preliminary assessment, we may invite you to submit a full application. In the comprehensive loan loss reserve application, you will be asked about labor and development impacts, as well as documentation for due diligence, such as business plans and audited financial statements.
Proposals that move forward with a full application move through a process similar to a commercial loan from a traditional bank, with due diligence and detailed financials.
Learn more: MnCIFA’s application and lending process
Pre-application form: Loan loss reserve
Underwriting considerations and terms
Financial institution operations and track record
Financial institutions seeking to apply to MnCIFA for loan loss reserve financing must be a federal- or state-chartered financial institution, or provide evidence of charter exception, including non-bank financial institutions with relevant licenses. In certain situations, the applicant may itself not be a financial institution, but an organization applying on behalf of a formalized partnership with a financial institution for the purpose of underwriting loans as part of the proposed loan loss reserve facility.
As part of our underwriting analysis, MnCIFA staff will evaluate the applicant, and if applicable the partnering financial institution, to determine suitability for MnCIFA’s loan loss product, including the ability to underwrite impactful loans while limiting loan losses. More specifically, MnCIFA’s evaluation includes, but is not limited to:
- Organizational capacity: Staffing, governance, internal controls, policies and procedures, risk management system(s), compliance and reporting
- Lending experience: Track record in originating, underwriting, closing, servicing, and monitoring loans, including loans related to decarbonization
- Financial performance: Audited financial statements, liquidity, lending limits and related controls, portfolio performance, and debt service capacity
Loan loss reserve size
MnCIFA’s statute (Minn.Stat. 216C.411) requires that MnCIFA “leverage private investment in qualified projects, with the aim of achieving a high ratio of private to public money invested through funding mechanisms that support, enhance, and complement private lending and investment.”
MnCIFA seeks to underwrite loan loss reserve facilities in which MnCIFA’s reserve amount is no less than $250,000 and no more than 10% of the proposed financial institution’s loan portfolio.
Term
The duration of a MnCIFA loan loss reserve facility is up to 10 years, depending on the characteristics of the loans underwritten by the financial institution.
Parameters for underwritten loans
For loans that are originated and underwritten as part of MnCIFA’s loan loss reserve, the financial institution must ensure that the projects meet the statutory definition of projects that qualify for MnCIFA financing.
That includes requirements that the projects are:
- Located in Minnesota
- Pay prevailing wage for projects over $100,000
Additionally, each loan originated and underwritten by the financial institution must:
- Have an interest rate of no more than 5%.
- Be no longer in term than remaining duration of the loan loss reserve facility.
- Be no more than $50,000 in principal value.
Costs
MnCIFA can offer flexible terms for loan loss reserve financing. Interest and fees will vary depending on multiple factors. Included as costs for MnCIFA financing:
- Loan loss reserve facility origination fee: A one-time fee of 1.0% on loan loss reserve amounts up to $2,000,000 plus 0.5% on any amount exceeding $2,000,000.
- Financial institution loan fee: For every loan originated and underwritten by the financial institution, MnCIFA requires a nominal per loan fee to be covered by MnCIFA’s loan loss facility. The per loan origination fee will be determined by MnCIFA based on the loan portfolio characteristics (e.g., borrower profile, technology, geographic concentration, interest rate, etc.) of the loan portfolio to be covered by the MnCIFA loan loss facility.
- Financial institution loan default reimbursement: For each loan loss reserve facility, MnCIFA will reimburse an agreed upon percentage of the outstanding principal value of each defaulting loan. Depending on the annual rate of defaults, MnCIFA may reimburse up to 95% of the principal value of each defaulting loan. Reimbursement for the remaining principal value of each loan would be the financial institution’s responsibility. In general, the lower the rate of annual loan defaults, the higher reimbursement percentage from MnCIFA. Conversely, the higher the rate of annual loan defaults, the lower the reimbursement percentage from MnCIFA.
Questions?
Send us an email: info.mncifa@state.mn.us.