Some people just don’t get it.
The Filene Research Institute released a new report, “Finding Sustainable Profits: Green Lending in Credit Unions.” It explores the successes many credit unions are achieving in serving their members and increasing loan volumes by offering loan products specifically designed to cut members’ energy costs in their homes, businesses and transportation. And, the credit unions offering these loans are making money doing so.
As the author of this study, early on I met a number of senior credit union managers, consultants and regulators to see what things they would like to know about credit unions that are offering green loans, their performance and risk-management strategies.
I remember one person asking why someone would want to make loans to homeowners so that they could install better insulation and more energy efficient windows in order to lower their utility bills. “How can you make sure the homeowner doesn’t get careless, leave the windows open and waste the potential savings.”
I wanted to reply, “How can you be sure someone you’ve just made a car loan to doesn’t get careless and drive off a cliff?” But, I didn’t. The person was serious. They just didn’t get it.
Happily, the research for the Filene report found that many credit unions do get it. The report notes, “More and more credit unions are discovering that lending for green purposes is not only the right thing to do but also the smart thing to do. It is good business in its own right. The loans are profitable. They attract financially strong borrowers, spur membership growth and lead to new growth in solidly performing loans.”
So, is this something that is just interesting and another example of credit unions finding new ways to serve their members? Or does this also represent an important new opportunity for credit unions to grow and make a real difference in the lives of their members and for the nation?
A careful analysis suggests that green lending can be as important to credit unions in the future as car loans are today, as long as the borrower doesn’t drive off a cliff.
Take a look at the potential from just lending for residential energy efficiency improvements. Today, there are more than 130 million homes in the U.S.; if they each made whole-house energy efficiency improvements (estimated to cost $8,000 to $10,000), that would require $1 trillion to $1.3 trillion. What will it take for credit unions to capture 25% of this potential market?
Of course, not all homes will make these energy efficiency improvements, but a growing number are doing so. Also, most home HVAC systems have a lifetime of about 15 years or less. Every day, new systems are being bought and financed. Add to this the growing number of homes and businesses installing solar panels.
Until the dramatic decline in the values of homes across the country, credit unions were perfectly happy to offer home equity lines of credit that would allow their members access to credit to install energy-saving windows, upgrade their kitchen appliances with new Energy STAR units or replace aging HVAC systems. Now, with home equity values having evaporated in many places, can credit unions find new ways to provide credit to their members for these improvements that do not add unacceptable risk to their balance sheets?
Filene’s study said yes. “Many of the credit unions that have home energy efficiency improvement loan products offer them as unsecured loans (75%–80%).” From my research, unsecured energy-saving home improvement loans have delinquency rates that are nearly identical to those of home equity secured loans. This fact alone, when combined with the fact that the unsecured loans carry significantly higher interest rates than home equity loans, suggests a compelling case can be made for pursuing this market.
But, what about the homeowner’s ROI payback period? Why spend (borrow) the money to make these energy-saving improvements if they are planning to sell the home in five or seven years, sometimes before they’ve hit the payback period in the form of lower utility bills? The Filene report references other studies that have found that people looking to buy homes are willing to spend more on a property that has lower utility costs than comparable homes. When these higher sales prices are amortized over a 30-year mortgage, the utility bill savings often more than cover the higher mortgage payment.
Many of the credit unions offering green loan products are doing so in partnership with a variety of third-party organizations. Sometimes the partners are utility companies, sometimes they are local nonprofit organizations, sometimes they are state and local governments, and sometimes the partnerships are with local businesses that sell windows, appliances and HVAC systems–the places your members go to when they are thinking about making home energy-saving improvements (or just replacing broken units).
The Filene Research Institute’s new study isn’t about tree-hugging, nor is it about some exotic, complicated new product. It is about ways credit unions today are meeting the needs of their members by providing fairly priced financing for energy-saving improvements and investments. In the process, credit unions may be laying the groundwork for something that is as significant in the future as car lending is today.
Some people just don’t get it, but others do. They are the ones that will succeed.
W. Robert Hall is president of Hall Associates.
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