A lien on property, in the form of a first mortgage lien or a tax lien, establishes the right of the lien holder (almost always the lender) to make a claim on the proceeds from the sale of foreclosed property. The best lien position to be in is "the first priority lien." It means that, if a bank holds a mortgage on a home for $250,000 and a foreclosure sale yields $270,000, the bank with its first position lien gets the full $250,000, and any other creditors (lenders) in second or third position must fight for the remaining $20,000. That would include the lenders who provided capital for clean energy improvements.
In weighing various financing options for a clean energy program, state and local governments must understand that an unpaid property tax always trumps the first lien position of a bank mortgage. In other words, the property tax is paid first out of the proceeds from a foreclosure sale, then the mortgage holder is paid, and then all of the other creditors must fight for any remaining funds.Fixture filings allow the entity that holds a loan to repossess the property in the event of foreclosure. Fixture filings are most useful when the property is easy to repossess; for example, equipment that could be easily reused elsewhere. But in the case of most clean energy installations, fixture filings do not provide much security because, for example, it is difficult to repossess insulation. Even so, the filings can be useful to the lender because a title search will bring them to light upon sale of the property and may trigger some kind of settlement.
Soft lien/lien at the meter refers to the threat to disconnect utility service in the event of nonpayment. This threat can be a powerful incentive to settle a debt, although both the utilities and their state regulators must feel comfortable with this approach.
Unsecured Loans
Unsecured loans have none of the above types of security and rely instead on careful loan underwriting and origination processes. Unsecured lending is usually less expensive and faster than secured lending, which takes time and money to carry out the appropriate filings and searches.
If a borrower defaults on an unsecured loan, the lender typically "charges off" the loan on its books, and sends that loan to a collection agency for further action. If the collection agency manages to recover some or all of the amount due, that agency typically keeps the majority of what it collects. The borrower, meanwhile, receives a bad mark on his or her credit report. In some cases, the lender inserts an intermediate step of offering to renegotiate principal and interest payments on the loan.