Green Lending in Credit Unions

Transcription

Finding Sustainable Profits:
W. Robert Hall
Hall Associates Consulting, LLC
ideas grow here
Foreword by Frances A. Dubrowski
Adjunct Professor of Environmental Law, Policy, and Finance
University of Maryland School of Public Policy
PO Box 2998
Madison, WI 53701-2998
Phone (608) 231-8550
www.filene.org
PUBLICATION #249 (8/11)
W. Robert Hall
Copyright © 2011 by Filene Research Institute. All rights reserved.
Printed in U.S.A.
Filene Research Institute
Deeply embedded in the credit union tradition is an ongoing
search for better ways to understand and serve credit union
members. Open inquiry, the free flow of ideas, and debate are
essential parts of the true democratic process.
The Filene Research Institute is a 501(c)(3) not-for-profit
research organization dedicated to scientific and thoughtful
analysis about issues affecting the future of consumer finance.
Through independent research and innovation programs the
Institute examines issues vital to the future of credit unions.
Ideas grow through thoughtful and scientific analysis of toppriority consumer, public policy, and credit union competitive
issues. Researchers are given considerable latitude in their
exploration and studies of these high-priority issues.
Progress is the constant
replacing of the best there
is with something still better!
— Edward A. Filene
The Institute is governed by an Administrative Board made
up of the credit union industry’s top leaders. Research topics
and priorities are set by the Research Council, a select group
of credit union CEOs, and the Filene Research Fellows, a blue
ribbon panel of academic experts. Innovation programs are
developed in part by Filene i3, an assembly of credit union
executives screened for entrepreneurial competencies.
The name of the Institute honors Edward A. Filene, the “father
of the US credit union movement.” Filene was an innovative leader who relied on insightful research and analysis when
encouraging credit union development.
Since its founding in 1989, the Institute has worked with over
one hundred academic institutions and published hundreds of
research studies. The entire research library is available online
at www.filene.org.
iii
Acknowledgments
The author would like to thank George Hofheimer and Ben Rogers
of the Filene Research Institute for the opportunity to conduct this
important research and for their helpful guidance along the way.
iv
Table of Contents
Foreword
Executive Summary and Commentary
vi
viii
About the Author
xi
Chapter 1
Introduction and Methodology
2
Chapter 2
Green Loan Products
13
Chapter 3
From Deciding to Marketing
25
Chapter 4
Partnerships and Profitability
31
Chapter 5
Public Policy Conclusions and
Recommendations
37
Endnotes
43
v
Foreword
Approximately 91 million Americans are credit union members, attracted by the prospect of more accessible, affordable, and
consumer-friendly financing in member-owned not-for-profit
financial institutions. Collectively, these Americans represent over
44% of our economically active population. A host of national policy
objectives—enhancing national security, achieving greater energy
independence, curbing greenhouse gas emissions, improving urban
air quality, creating clean tech jobs, maintaining economic competitiveness, and correcting trade imbalances—depend on motivating
these consumers (and their counterparts who rely on banks rather
than credit unions for financial services) to use less energy.
By Frances A. Dubrowski
Adjunct Professor of Environmental
Law, Policy, and Finance
University of Maryland
School of Public Policy
But trading in a gas guzzler for a cleaner or more efficiently fueled
vehicle, weatherizing an older home, replacing an inefficient appliance, or retrofitting a solar, wind, or geothermal energy system
entails up-front costs. For example, the US Environmental Protection Agency estimates that recently issued emission standards for
new passenger cars and light-duty trucks for model years 2012–2016
will save our nation 1.8 billion barrels of oil and reduce greenhouse
gas emissions by nearly 1 billion metric tons—equivalent to taking
50 million cars off the road. Yet the standards will cost an average
of $950 per model-year 2016 vehicle, and to achieve the projected
benefits, consumers must first be prepared to upgrade their current
vehicles despite recession-induced spending jitters.
States, too, are counting on consumers to change their energyconsumption patterns. Thirty-eight states have adopted either a
standard or a goal to ensure that a certain percentage of electricity
generation comes from renewable or alternative fuels. These measures
vary widely in terms of both ambition and stringency, but they share
a common objective: weaning us off an economy where 83% of our
energy comes from fossil fuels (petroleum, natural gas, and coal—all
sources of greenhouse gas emissions). At the state level, too, achievement of policy objectives will turn, to a large extent, on the actions
of countless individual consumers to pare energy demand by making
short-term changes in expectation of reaping long-term rewards.
Who will finance this transition? Who will reap its benefits? Will
the rewards of more sustainable energy use (e.g., lower utility bills,
reduced gasoline expenses, a cleaner atmosphere, and a cushion
against rising fuel prices) be limited to those affluent enough to
afford higher short-term costs, or will low- and moderate-income
workers also have access to energy efficient cars, homes, and
appliances?
vi
The Filene Research Institute and Hall Associates Consulting, LLC,
deserve kudos for raising these important policy questions. Their
groundbreaking research demonstrates that credit unions of all sizes
are finding it profitable to offer borrowers loans for purchasing
fuel efficient or electric vehicles or for making energy-saving home
improvements. Their report contains key insights for:
• Credit union managers and board members.
• Utilities.
• Nonprofits.
• Green product and service vendors.
• Appliance manufacturers and retailers.
• Energy efficiency and renewable energy system installers.
• Home renovation contractors.
• National, state, regional, and local government officials.
• Private and public sector employers.
• Small-business owners.
• Consumers.
• Community organizations.
• Environmental policy analysts.
• Environmental justice advocates.
In short, anyone who cares about economic growth, consumer services, energy security, and environmental health.
vii
Executive Summary and Commentary
by Ben Rogers,
Research Director
It’s hard to read management literature in 2011 without tripping
over titles such as “Sustainability Strategy 2.0: Next Generation
Driver of Innovation,”1 “Making the Business Case for Sustainability,”2 and “Values vs. Value.”3 Filene has published two significant
reports describing both the potential of a sustainability strategy and
the pitfalls: Back to the Future: Integrating Sustainability into Credit
Union Strategy (2008) and Credit Union Social Responsibility: A Credit
Union Road Map (2010).
Credit unions that ask how they can join the green revolution often
make a quick leap to green lending for cars, home improvements,
energy savings, and more. Lending is, after all, credit unions’ core
business. But, to date, there has been little data on green lending.
This report moves from the theoretical to the practical and finds that
more and more credit unions are discovering that lending for green
purposes is not only a good thing to do but also a 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 on the balance sheet.
What Is the Research About?
This report shows that a growing number of credit unions are offering loans to their members that are specifically focused on helping
them make energy-saving improvements to homes, businesses, and
transportation. In some cases these green loan programs have been
motivated by a concern for the environment, and in others the focus
has been on helping members or increasing loan applications and
spurring new membership growth. The data are limited to a sample
of credit unions, but they are directionally useful. The survey data
on which this report relies represent responses from dozens of credit
unions larger than $50 million (M) in assets, supported by follow-up
interviews. In nearly every instance, the credit unions have reported
that their green loan programs have been profitable. The only ones
that did not affirmatively say the green loans were
Figure 1: Asset Size of Green Lenders
profitable were those that had not yet conducted the
necessary analysis.
Number of
Percentage of
Asset range
respondents
respondents
<$25M
1
3
$25M–$50M
1
3
$50M–$100M
8
21
$100M–$500M
12
32
$500M–$1B
6
16
>$1B
10
26
Total
38
100
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By and large, credit unions offering green loan products
reported that they were not using any special underwriting criteria in connection with reviewing loan applications. In a couple of cases, higher debt-to-income ratios
were available in connection with first and second
mortgage loans; however, credit unions repeatedly noted
during the study’s interviews that special underwriting
criteria were unnecessary because of the high credit scores of the
applicants for the green loans. In one case, a credit union said that
the only applications they had to decline using traditional underwriting were from applicants who were not in the credit union’s field
of membership (FOM) and thus were ineligible to join the credit
union.
The interviewed credit unions also consistently observed that in
many instances there were no delinquencies for any of their green
loans. As it turns out, green loan borrowers are an extremely attractive customer profile for these lenders. Beyond the positive personal
financial profiles of the borrowers, several of the credit unions also
noted that most of their green loan borrowers are in the 20–40 years
of age demographic, which they view as extremely important for
the future of the credit union. If green lending is good for this early
mover group, it holds promise for the rest.
More than one-third of the credit unions that offer at least one of
the tested green loan products said they had entered into partnerships with third-party organizations. Utility companies and nonprofit organizations were the most common types of partners in
these programs. While some partners offered subsidies or assistance
in the form of interest rate buy-downs or loan loss reserve subsidies,
the most frequently identified partner assistance was in marketing
the green loan products. Each interviewed credit union that had a
partnership felt that it was helpful regardless of the type of assistance
provided, and recommended that others considering green loan
products explore these opportunities. Nevertheless, the fact that
nearly two-thirds of the credit unions offering green loan products
did so without entering into partnerships and still reported that
their green loans were profitable suggests that partnerships are not a
precondition for successful programs.
While it appears from the survey that credit unions with assets of
$50M or higher are more likely than smaller credit unions to offer
green loan products, the survey and the subsequent interviews
found that credit unions of all sizes can have success implementing
green loan programs. Indeed, some smaller credit unions view these
products as important in differentiating them from other financial
institutions in their markets and helping them generate important
new member growth and additional loan demand. Many credit
unions offer green loans on an unsecured basis with borrowing limits
of $10,000–$20,000. These loans avoid the problem in many parts
of the country of declining home values and limited home equity to
secure the loans.
Very few of the participating credit unions indicated that they
offered or marketed loans for energy efficiency improvements or
ix
alternative energy improvements to small businesses. Looking forward, this may be an area in which credit unions can identify new
lending opportunities. This may also be an appropriate type of loan
in which underwriting criteria might recognize the cost-avoidance
aspects of loans that are made by lowering the operating expenses of
the businesses through savings on utility bills.
Many of the credit unions that responded that they do not currently offer specific green loan products to their members do market
their electronic services (such as Internet banking, bill payment,
and e-statements) to their members as “green.” Many of these credit
unions have recognized that electronic services can reduce their own
operating expenses and have been active in encouraging adoption by
their members.
What Are the Credit Union
Implications?
Credit unions typically think only of the National Credit Union
Administration (NCUA) or state and provincial examiners when
they think of regulators. But, as the author shows, the conversation
about green lending is happening among many branches of government. This report offers excellent preliminary information to those
regulators. It shows that credit unions are not just willing but already
active green lenders. As debates over government expenditures
increase, the report shows that credit unions are already in the green
lending arena, with or without public partnerships.
Moving forward, credit unions should explore “going green” not
just as a cost-cutting strategy but also as a business growth strategy.
Many energy-saving loans are relatively small and can be offered on
an unsecured basis. Historically, this is an important credit union
market niche, and one that many banks have avoided. However, in
the future, with energy costs expected to rise, from the fuel pump
to the electrical outlets in people’s homes, well-structured and
well-marketed green loan programs have the potential to become as
important as car loans have been in the past to credit unions.
x
About the Author
W. Robert Hall
A longtime credit union expert, Bob Hall has extensive experience in
credit union law, regulation, and business operations. As president
of Hall Associates Consulting, LLC, he works with the credit union
community to take innovative ideas and translate them into effective business solutions. In addition to successfully chartering the first
Internet-based credit union (REALTORS FCU), he has worked to
dramatically increase credit unions’ access to the secondary mortgage
market, and he advises credit unions on topics ranging from serving self-employed business owners to field-of-membership expansions, and from the development of new products and services to the
launch of effective advocacy campaigns.
Prior to starting his consulting firm, Hall worked on Capitol Hill for
18 years in a variety of roles, including chief of staff to US Rep. Paul
Kanjorski and staff director of the US House Banking Subcommittee
on Economic Growth and Credit Formation. He also served as chief
of staff to the Chairman of the National Credit Union Administration (NCUA) and as a policy advisor in the Office of the US Secretary of Commerce.
Based in the Washington, DC, area, Hall is a believer in lifelong
learning and recently completed the work for an environmental
finance certificate from the University of Maryland.
xi
CHAPTER 1
Introduction and Methodology
As energy efficiency continues to make news
and show up on policymakers’ agendas, it’s
important to understand the state of green
lending among credit unions. Because traditional call reports do not break out lending for
green purposes, this report relies on a sizable
sample of survey data and in-depth interviews
to describe the current lending landscape and
chart the path forward for credit unions.
In October 2009, the White House Council on Environmental
Quality (CEQ) released Recovery through Retrofit, an analysis of the
opportunities to significantly cut US energy consumption, reduce
emissions of greenhouse gases, and stimulate the economy through
the development of a more robust market for energy efficiency
improvements in homes across the nation.
“There are almost 130 million homes in this country. Combined, they generate more than 20 percent of our nation’s carbon dioxide emissions, making them a significant contributor to global
climate change. Existing techniques and technologies in energy efficiency retrofitting can reduce
home energy use by up to 40 percent per home and lower associated greenhouse gas emissions by
up to 160 million metric tons annually by the year 2020. Furthermore, home energy efficiency
retrofits have the potential to reduce home energy bills by $21 billion annually, paying for themselves over time.”4
The report outlined a series of steps necessary to overcome several
barriers impeding the development of a more robust market for
energy efficiency improvements. One such barrier was that “high
upfront costs and a lack of credit and financing options dissuade
many homeowners from completing or even considering energy
efficiency home retrofits.”5 Building on previous economic recovery
initiatives, such as extending and expanding a 30% tax credit for
investment in residential energy efficient property (which can have
the effect of offsetting some of the up-front costs), CEQ outlined
several steps to address this “lack of credit and financing options”
barrier, including:
• Supporting municipal energy financing, such as Property Assessed
Clean Energy (PACE) programs.
• Improving Energy Efficient Mortgages.
• Expanding state revolving loan funds.
The Recovery through Retrofit report states, “Because home buyers lack information about the payoffs associated with increasing a
3
home’s energy efficiency and because the industry does not properly
incentivize retrofits that pay-off over long periods of time, homeowners often do not recoup the actual value of their energy efficiency
investments when they sell. The solution is to make financing more
transparent, more accessible, repayable over a longer time period, and
overall, more consumer-friendly.”6 This observation by the CEQ—
that US homeowners confront a lack of credit and financing options
for energy efficiency home improvements—was the initial catalyst
for this study. Was this really the case? If so, were the solutions that
were identified the best options?
Some home energy efficiency improvements are relatively inexpensive and result in quick returns through savings on utility bills;
however, these frequently do not require accessing credit or obtaining financing of the type that might be provided through state
revolving loan funds, mortgages, or municipal financing initiatives.
Other kinds of residential energy efficiency improvements, such as
replacing windows or upgrading heating and cooling systems, have
higher up-front costs and are unlikely to produce monthly utility bill
savings that would equal the probable monthly costs associated with
financing these improvements. But does this mean that homeowners do not have sufficient access to affordable credit to make these
investments?
The normal way researchers examine the extent to which financial
institutions are lending is to analyze the call reports that they submit
quarterly to their regulators. These data provide a wealth of information on lending for new or used vehicles, amounts and types of first
mortgages used to purchase or refinance a home, outstanding credit
card balances, home equity loans and lines of credit, and business
and commercial lending. Call reports can also provide important
information on loan performance, borrower delinquencies, and typical interest rates.
Unfortunately, loans for residential energy efficiency improvements
or alternative energy improvements do not fit into any of the standard reporting categories. Did homeowners borrow to install new
windows or more efficient heating/cooling systems? The data do not
tell us. Similarly, we do not know whether these loans were secured
on the basis of the homes’ equity, unsecured, or simply charged to
the homeowners’ credit cards. How many home energy efficiency
loan applications were declined by financial institutions, and for
what reasons (low credit scores, insufficient equity in the property,
or loss of household income)? Once again, normal call report data
do not provide us with this kind of information. Therefore, we do
not really know whether financial institutions are lending for green
purposes, nor do we know whether those financial institutions that
are lending for green purposes are earning a reasonable return.
4
A stated goal in the CEQ analysis was to find ways to access and
leverage private sector capital to promote greater adoption of residential energy efficiency improvements. With significant budget constraints facing all levels of government, the participation of private
sector capital will be vital to the success of efforts to enhance the
access to, and affordability of, the credit necessary for homeowners to
make the required energy efficiency improvements. But, we really do
not know how much private sector capital is already being invested
to support residential energy efficiency improvements.
Most credit unions currently focus their sustainability efforts somewhere between strategic philanthropy and values-based self-regulation
(see Figure 2). But for credit unions that see a strategic match, green
lending moves its practitioners toward the growth platform, to a
niche where sustainable inclinations actually capture profit. Credit
union loan growth is anemic across the system: –1.5% in 2010. Even
under optimistic scenarios, US credit union lending will grow only
2% in 2011, so it is imperative to look at new niches for help.
If proponents of residential energy efficiency improvements want to
leverage or increase the availability of private sector capital in order
to enhance homeowners’ access to affordable credit, it will be necessary to demonstrate that it is possible to earn a reasonable return on
private sector capital investments. This can be facilitated in a variety
of ways, but the essential ingredient must be that this lending is
good business. Without the ability to make a compelling business
case, efforts to encourage significant new investment will be seriously
constrained. The ability to make such a business case is hampered by
a lack of information on the extent to which this type of lending is
Figure 2: Corporate Social Responsibility Value Curve
Growth
platform
Values-based
self-regulation
Strategic
philanthropy
Incorporates the
company’s value
system and/or code
of conduct to guide
Alignment of
charitable activities business behavior
with social issues
that support business
objectives
Legal and
compliance
Efficiency
Measurable cost
savings through
efficient or win–win
scenarios
Adherence to law
in the countries of
production, operation,
and distribution
Source: IBM Institute for Business Value (www-935.ibm.com/services/us/gbs/bus/pdf/gbe03019-usen-02.pdf).
5
Access to new
markets, new
partnerships, or
product/service
innovations that
generate revenue
already occurring and what factors influence its profitability. Starting
the process of gathering this type of information is the purpose of
this report.
Similarly, from a public perspective, the absence of necessary information inhibits the ability to implement effective initiatives necessary to achieve policy objectives. Is promoting new municipal
tax–based financing programs, or helping to capitalize state revolving
loan funds, more likely to leverage private sector capital investment
than guaranteeing energy efficiency loans originated by traditional
financial institutions? Is it more important to subsidize the interest
rate to the consumer or to supplement the lending institution’s loan
loss reserve? How should the costs associated with implementing residential energy efficiency initiatives be allocated among the beneficiaries? What gets the best result at the lowest cost?
Green lending by credit unions was selected for initial research
because credit unions have a history of providing small, fairly priced
consumer loans. Because credit unions are not-for-profit financial
DEFINING “SUSTAINABLE FINANCE”
The concepts of corporate sustainability
sustainable finance refers to the incorpora-
and cooperatives’ concern for community
tion of environmental and social goals into
can be further refined from the perspective
banking, insurance, and asset manage-
of the financial sector. The unique sustain-
ment, including products and services and
ability risks, impacts, and opportunities of
the overall management of the financial
the financial sector, as distinct from other
institution.
industries such as mining, manufacturing,
and retail, become important to under-
Figure 3: The Sustainability Strategy Equation
stand. As financial institutions concerned
with deposit-taking, lending, insurance pro-
Sustainability = Do good + Do no harm
vision, and wealth management services,
credit unions have particular roles to play
when it comes to social and environmental
Strategy = Business case + Goals +
Plans + Monitoring + Reporting
considerations. This is often referred to
as the field of sustainable finance. As with
sustainability, sustainable finance does not
have a universal definition. Indeed, global
From “Credit Union Social Respon-
and regional banks are experimenting with
sibility: A Credit Union Road Map”
the concept, competing on these grounds
(Filene Research Institute, 2010)
in many markets. Essentially, however,
6
cooperatives, the earnings threshold necessary to engage in green
lending may be less steep than at other types of financial institutions.
Finally, because of their collaborative structure, credit unions might
be more willing to share information on their business strategies and
best practices. The Filene Research Institute’s close ties to the credit
union community and its reputation for innovative, impartial, and
professional analysis make it the ideal forum through which to reach
out to credit unions and seek their voluntary sharing of information
essential to conduct this research.
Methodology
Credit unions and other types of financial institutions do not report
information in call reports to their regulators on most of the purposes for which loans are granted. Although call report data can tell
researchers whether a loan was made to purchase a vehicle or a home,
SURVIVING THE BIG SQUEEZE IN CONSUMER FINANCE
With banks threatening from above and
adults to credit unions a strategic priority.
micro-finance institutions encroaching
Typical credit union members today (aged
from below, credit unions are caught in the
25–44) seek loans (auto, education, home,
proverbial “big squeeze.” In fact, without
etc.). Older members, in contrast, tend to
a distinctive value proposition, the credit
focus more on savings products. Attract-
union industry appears to be stuck in the
ing younger members will clearly require
middle, with serious implications for long-
creative new product offerings. Leveraging
term growth. From 2003 to [2008], for
young people’s interest in the environ-
example, membership in credit unions has
ment and sustainability through products
been stagnant at 29% of the U.S. popula-
and services that address these concerns
tion. To make matters worse, the industry
might provide one such avenue. Moreover,
has an aging membership base with an
tax exemption gives credit unions a cost
average age of 47. Only 6% of credit union
advantage over for-profit players.
members are between the ages of 18
and 24, and 17% between the ages of 25
and 34. Indeed, the highest membership
penetration is among people aged 34–64,
while the lowest penetration level is found
among people aged 18–34.
If credit unions are to overcome this “big
squeeze,” they must revive the same
innovative spirit that triggered their initial
growth and development: They must go
“back to the future” by engaging today’s
underserved, in order to uncover tomor-
Not surprisingly, the Credit Union National
row’s untapped opportunity. By returning to
Association (CUNA) recently recom-
their roots—serving the underserved—and
mended making the attraction of young
7
(continued)
SURVIVING THE BIG SQUEEZE IN CONSUMER FINANCE (CONTINUED)
Figure 4: The Sustainable Value Framework
Tomorrow
Strategy:
Clean technology
Develop the sustainable
competencies of the future
Strategy:
Base of the pyramid
#REATEASHAREDROADMAP
FORMEETINGUNMETNEEDS
Corporate payoff:
Innovation and repositioning
Corporate payoff:
Growth and trajectory
Sample credit union application:
s&INANCINGGREENPRODUCTS
s)NVESTMENTINCLEANTECHNOLOGIES
s2%!,3OLUTIONSINITIATIVESEGPAYDAY
LENDINGSPECIALSAVINGSPRODUCTS
3USTAINABLE
value
)NTERNAL
%XTERNAL
Strategy:
Product stewardship
)NTEGRATESTAKEHOLDERVIEWS
into business processes
Strategy:
Pollution prevention
-INIMIZEWASTEAND
emissions from operations
Corporate payoff:
Cost and risk reduction
Corporate payoff:
Reputation and legitimacy
s3USTAINABILITYREPORTINGINITIATIVE
s)NHOUSESUSTAINABILITY
CONSULTINGSERVICES
s'REENBUILDINGINITIATIVES
s0APERLESSSERVICESEGBILLPAY
ANDORONLINEBANKING
4ODAY
Source: Adapted from S. Hart and M. Milstein, “Creating Sustainable Value,” Academy of Management Executive 17, no. 2 (2003): 56–69.
incorporating environmental concerns into
From “Back to the Future: Integrating
new product offerings, credit unions may
Sustainability into Credit Union Strat-
be able to carve out a unique position in
egy” (Filene Research Institute, 2008)
the financial services market attractive to
the younger demographic.
8
along with the number of home equity loans that were made, they
do not tell whether the loans were used to pay for a child’s education,
go on a family vacation, or install solar panels. The same is true for
most other loan products. Federal and state regulatory agencies have
responsibilities to gather data from financial institutions to evaluate
whether they are operating in a safe and sound manner or to ensure
compliance with various statutory and regulatory requirements.
Gathering this information can require significant time and effort on
the part of both the regulators and the individual financial institutions. Therefore, it is not reasonable to expect regulatory agencies
to impose additional regulatory burdens on financial institutions
by asking questions that do not directly relate to their missions and
responsibilities. In order to analyze credit unions’ lending for green
purposes, it is necessary to seek data directly from credit unions on a
voluntary basis.
Because this research was seeking detailed information on the
number and dollar amounts of loans for various green purposes, as
well as on loan performance, profitability, partnerships, and marketing, it was necessary to provide credit unions with sufficient time to
research responses to various questions. A standard telephone-based
market survey would not yield the type of quantitative or qualitative
information necessary to achieve the objectives of this research so
an online survey was created. It was also necessary to strike a balance between the depth and the precision of the information being
sought and to make it relatively easy for participants to complete
the survey. For this reason, in some instances information was asked
for in ranges (e.g., 10–50 fuel efficient vehicle loans), rather than
requesting the specific amounts. Additionally, in an effort to encourage as many credit unions as possible to participate, respondents were
assured that their answers would remain confidential. This was done
in an attempt to ameliorate any possible concerns over sharing details
that some respondents might view as proprietary or having the
potential to impact their business operations or competitive position.
The survey asked participating credit unions whether they offered
or marketed a series of green loan products. If they responded yes, a
series of questions about the particular product were asked, including
the number and aggregate dollar amount of the loans made in 2010,
the types of subsidies or discounts offered, the kinds of third-party
partnerships used, and whether the loans were profitable. After
exploring the different green loan products, respondents were asked
a series of questions about the ways they marketed the products and
the ability of their operating systems to monitor the performance of
their green loan portfolios. They were also asked a series of demographic questions regarding their asset size, NCUA region, charter
types, and field of membership (FOM) type.
9
Future survey research using this approach should consider asking the demographic questions at the start of the survey. As noted
throughout the discussion of the responses in this analysis, there was
a drop-off in the respondents completing the demographic questions. As a result, while most credit unions that took the survey
answered whether they offered the specific green loan products, in
many instances the ability to identify any possible patterns or trends
was diminished in exploring the extent to which the lending was
occurring at larger versus smaller credit unions or at credit unions in
particular regions, or whether it was based on their types of charters
and FOMs.
Conducting research through voluntary surveys has additional implications. Respondents are, by nature, self-selecting. It is not always
clear why someone chooses to participate. For example, it is possible
that credit unions that do not offer green loans decide that their
participation is not relevant. In the outreach efforts, described below,
credit unions were specifically asked to respond even if they did not
offer any of the products. Nevertheless, with any self-selecting sample, caution must be exercised in reading too much into the results.
Without the ability to require all lenders to respond (i.e., call reports)
or the ability to control the composition of the respondent pool to
ensure that a representative sample is achieved, care is necessary in
extrapolating on the survey’s results.
Despite the limitations, important insights can be gained. While it
might not be possible to conclude that a certain percentage of all
credit unions offer one green-focused product or another, it is possible to obtain useful information on the experiences of the subset
of credit unions engaged in the different types of lending. It is also
possible to begin identifying the different variables impacting upon
the success of these credit unions’ efforts. If public policy seeks to
increase the amount of private sector capital engaged in making
residential energy efficiency improvements, it is useful to know what
private sector lenders think is important and what types of initiatives have yielded the best results. Best practices can be identified and
shared even if we do not know precisely what percentages of financial
institutions are using them.
Following the completion of the online survey, interviews were conducted with a subset of credit unions. The purpose of these interviews was to explore a variety of topics in greater depth, such as the
reasons the credit unions decided to offer green-focused loan products, initial expectations and operational experience, the importance
of partnerships with third-party organizations, and characteristics of
green borrowers and loan performance.
10
As noted above, in conducting this research there was a desire to
encourage as much participation in the survey as possible, regardless of the extent to which credit unions were offering green loan
products. Since responding to the survey was purely voluntary and
participation was outside the normal work and focus of financial
institution staff, a variety of outreach efforts were employed.
The Filene Research Institute issued a press release and prominently
posted an announcement on its website that described the research,
encouraged participation, and included a link directly to the survey.
The Institute then sent an e-mail to the 4,500 credit union e-mail
addresses in its database. These outreach efforts prompted some
credit union trade associations to mention the research on their
websites and encouraged participation. Several days later, Hall Associates Consulting, LLC, issued its own press release and contacted
the editors of credit union trade publications. This resulted in short
articles about the project appearing in Credit Union Times and Credit
Union Journal. Following this, Hall Associates Consulting, LLC,
sent e-mails to the chief executive officers (CEOs) of several hundred credit unions encouraging their participation, and the Filene
Research Institute reposted its blog. Finally, the Institute contacted
its board and advisory members and asked that their credit unions
participate. The Institute also reached out to a sister organization, the
CUNA Lending Council, which agreed to contact its credit union
members to encourage them to take the survey.
Respondent Demographics
Between January 6 and February 23, 2011, 144 credit unions started
the survey, and 112 (78%) completed it. Of the 96 respondents
that answered the location demographic question, 13 were based in
Canada and 83 were based in the United States. Sixteen respondents
did not identify their region.7 To put this in context, as of December 31, 2010, there were 7,491 credit unions in the United States
and at least 427 in Canada; therefore, about 1% of US credit unions
and 3% of Canadian credit unions responded to the location demographic question.
Figure 5: FOM of Respondents
Number
Percentage
Community common bond
FOM type
64
58
Multiple common bond
32
29
9
8
Primarily one occupational group
Primarily one associational group
Responded
5
5
110
100
11
Within the United States, there was a fairly even
distribution of the respondents among geographic
regions as defined by the NCUA. Responding
credit unions were also asked to identify their
FOM type. Credit unions are only allowed to serve
individuals and organizations that have joined (i.e.,
become members of ) the credit union. Membership eligibility is defined in law and regulation
based on shared common bond types (generally
community, occupational, or associational). Eligible membership
groups are specifically identified in each credit union’s charter and
approved by its regulator. These FOM restrictions can have an
important impact on the types of partnerships and marketing activities credit unions pursue.
Figure 6: Survey Responders by Asset Size
Asset range
<$25M
# survey
responders
3
% survey
responders
3.6
$25M–$50M
5
6.0
$50M–$100M
17
20.5
$100M–$500M
30
36.1
$500M–$1B
12
14.5
>$1B
16
19.3
Total
83
100
As shown in Figure 6, the asset size demographics of
the responding credit unions do not reflect the asset
size distribution of the overall credit union community.
On average, responding credit unions were more likely
to be larger-asset institutions. This is not surprising, as
smaller-asset credit unions frequently do not have the
staff resources to participate in nonoperational essential
activities such as this survey. The extent to which larger
credit unions are more apt to offer green loan products
is explored later in this report in the analysis of the individual green loan products.
Finally, the survey asked respondents if they would be willing to
respond to additional questions. Twenty agreed and provided contact
information. Through this contact information it was possible to
identify these credit unions and compare some of their responses
with data submitted to regulators through call report submissions.
While the survey results cannot be viewed as a representative sample
for “census” purposes, important insights are possible in exploring
lending partnerships, profitability, and best practices.
12
CHAPTER 2
Green Loan Products
Credit unions’ self-described green products
take on various faces, from auto loans to
e-statements. The most popular green loan is for
fuel efficient vehicles, followed by various loans
for home energy efficiency improvements. Green
lending is not limited to larger credit unions;
respondents range from under $50M to over
$1 billion in assets.
The survey identified 12 specific loan products that it presented to
the respondents and asked whether each was offered or marketed by
the credit union. Of the 144 credit unions that started the survey,
61 (42%) said they offer at least one of the identified products. The
specific loan products are shown in Figure 7, along with how many
respondents indicated the product was offered or marketed by the
credit union.
Interestingly, while fuel efficient and/or electric vehicle loans are
the most frequently offered of the green products tested, 13 of the
96 credit unions that indicated they do not offer green vehicle loans
responded that they do offer at least one of the other green loan
products. The next most common product is home energy efficient
windows (5), followed by Energy Efficient Mortgages (4).
Only two credit unions with assets under $50M (6%) responded
that they offer green loan products. As noted earlier, it is possible
that these smaller credit unions simply were less likely to have participated in the survey, and their smaller green loan offerings may be
understated in the survey results.
Figure 7: Green Loan Products Offered
Yes
No
% Yes
Fuel efficient and/or electric vehicles
Loan product offered/marketed
48
96
33
Home energy efficient windows
17
110
13
Home EnergySTAR appliances
13
110
11
Home insulation or weatherization
12
109
10
Home solar hot water systems
12
108
10
Energy Efficient 1st Mortgage (EEM)
12
116
9
Home energy efficient heating/cooling systems
11
109
9
Home solar electric systems
10
108
9
Home geothermal systems
4
114
3
Home wind energy systems
3
115
3
Home water conservation improvements
2
115
2
Business energy efficiency improvements,
solar or wind improvements
2
115
2
14
Figure 8: Asset Size of Green Lenders
Asset range
Number of
respondents
Percentage of
respondents
<$25M
1
3
$25M–$50M
1
3
$50M–$100M
8
21
$100M–$500M
12
32
$500M–$1B
6
16
>$1B
10
26
Total
38
100
Fuel Efficient and/or Electric
Vehicle Loans
Loans for fuel efficient and/or electric vehicles are the
green products most frequently offered by responding
credit unions. This is not necessarily surprising given
the importance of vehicle lending to credit unions
overall. In 2010, more than 95% of all US credit unions
made new and used vehicle loans, which accounted for
22.5% of the total dollar amount lent by all US credit
unions for any purpose.
All of the 144 credit unions that began the survey responded to the
question, Do you offer/market loan products specifically for fuel efficient or electric vehicles? Thirty-three percent responded yes. Among
the respondents, non–community credit unions are more likely to
offer green vehicle loan products (30%) than communityIn no cases did any respondents indicate that they used any
chartered credit unions (20%).
special underwriting factors in analyzing whether to approve
Of the 144 that responded to
the green vehicle loans, and in all cases the green vehicle loans
this question, only 111 comwere kept in the credit unions’ portfolios and not sold.
pleted the credit union asset
size demographics question.
Among these 111, the “yes” responses (i.e., they offer green vehicle
loans) dropped from 33% to about 26%. Except for those in the
smallest asset size category, the percentage of credit unions offering
green vehicle loans is fairly consistent across asset groups
(20%–30%).
Figure 9: Credit Unions Offering Green
Vehicle Loans by Asset Category
Asset range
Yes
No
5
0
0.0
$25M–$50M
4
1
20.0
$50M–$100M
14
6
30.0
$100M–$500M
30
10
25.0
$500M–$1B
15
5
25.0
<$25M
% Yes
>$1B
15
6
28.6
Total
83
28
25.2
Of the 48 credit unions that said they offer a green
vehicle loan product, 30 responded to the follow-up
question, Does your credit union offer its members any
special subsidies or assistance in connection with this
loan product? Twenty-nine of the 30 indicated that they
offer interest rate discounts for green vehicle loans. The
one credit union that does not offer an interest rate discount noted that a utility rate rebate is offered through a
partnership that it had established. In another instance,
one credit union responded that it plants a tree for each
green vehicle loan made.
In no cases did any respondents indicate that they used any special
underwriting factors in analyzing whether to approve the green
vehicle loans, and in all cases the green vehicle loans were kept in the
credit unions’ portfolios and not sold.
Rather than asking whether these credit unions offer their green
vehicle loans in partnership with a third-party organization, the
15
Figure 10: Types of Partners in Offering
Green Vehicle Loans
Number
Percentage
Other financial institutions
Partner
0
0
Local government
1
9
State government
0
0
Federal government
0
0
Utility company
3
27
Dealer or vendor
7
64
Nonprofit organization
3
27
Select employee group
1
9
survey instead asked respondents to identify the types
of organizations with which they partner in offering
the product. Only 11 of the credit unions indicated the
types of organizations with which they partnered. Since
32 credit unions answered the other detailed questions,
presumably the other 21 (66%) offer the green vehicle
loans without partners.
Of the nine credit unions that responded whether their
partners provide any assistance in connection with these
green vehicle loans, all nine indicated that their partners
provide marketing assistance. Other types of assistance
from partners include:
• Interest rate discount (1).
• Loan loss reserve subsidy (1).
• Rebate (1).
In the survey, 29 of the 32 respondents said that their green vehicle
loan programs are profitable. Two responded that they are not
sure, and one indicated that the green vehicle loans are not profitable. However, the one credit union provided contact information
and stated during a follow-up
interview that its green vehicle
Despite the business success that each of these three is achievloans are profitable (just not as
ing through a green lending focus, senior management stressed
much as other loan products or
in each interview that the impetus for the credit unions’ green
car loans that do not receive the
lending orientation was not strictly (or even primarily) driven
interest rate discount).
by a desire to generate new business.
As noted earlier, 20 of the credit
unions that responded to the
survey provided contact information from which it was possible to
examine their individual quarterly call report submissions. Nine of
these credit unions offer green vehicle loans. Data on those credit
unions are shown in Figure 11.
Figure 11 demonstrates that even among those credit unions that
offer green vehicle loans, this loan product accounts for only a small
portion of their overall vehicle lending. Nevertheless, in three of the
nine cases, green vehicle loans account for at least 3% of the total
amount of funds lent for vehicles. Interestingly, these three credit
unions cover a broad asset size spectrum. In the case of Credit Union
A, with assets of $25M and about 600 vehicle loans in 2010, it is
clear that a relatively small number of green vehicle loans can quickly
change its share of the total. However, Credit Union I has aggressively priced its green vehicle loans and is achieving a much higher
penetration of its overall vehicle lending than its greater-than-onebillion-in-assets peers. Credit Union C’s assets fall in between these
16
Figure 11: Green Vehicle Loans as a Percentage of Overall Vehicle Lending
Assets
# green
loans
made
Amount of
green loans
made (2010)
Total #
vehicle
loans
Percent #
green loans
to total loans
Percent $
green loans
to total loans
A
24,984,273
26–50
$100,001–
$500,000
603
5,438,625
4.31–8.29
6.78–33.89
B
102,937,198
6–10
$100,001–
$500,000
1,878
21,000,763
0.32–0.53
1.36–6.78
C*
327,855,630
151
$1,750,477
3,301
24,342,581
4.57
7.19
D
344,308,723
51–100
$500,001–
$1,000,000
8,356
77,639,230
0.61–1.20
3.87–7.73
E
854,111,237
26–50
$100,001–
$500,000
7,130
74,090,968
0.36–0.70
0.47–2.37
F
1,444,690,313
51–100
$1,000,001–
$5,000,000
24,067
289,492,430
0.21–0.42
0.85–4.23
G
1,783,385,449
51–100
$500,001–
$1,000,000
39,498
398,834,674
0.13–0.25
0.42–0.83
H
2,034,668,704
26–50
$100,001–
$500,000
12,148
139,405,813
0.21–0.41
0.09–0.44
I**
21,463,166,674
>500
$10,000,001–
$50,000,000
127,259
1,144,149,046
2.00
3.00
Credit
union
Total $ vehicle
loans
* 2010 data provided by credit union
** 3-year aggregate data provided by credit union
two extremes, and more than 7% of its total vehicle loan dollar
amount is accounted for by its green auto loan program. In a marketplace characterized by stiff competition for vehicle lending, this
accomplishment is not insignificant.
During the course of the research for this project, telephone interviews with senior staff were held with a subset of the credit unions
that responded to the survey, including Credit Unions A, C, and I.
After these interviews, and after examining the website of each credit
union, it became clear that they all embrace green lending across a
range of loan products and are actively marketing a suite of green
loan products to both current and potential members. Despite the
business success each of these three is achieving through a green
lending focus, senior management stressed in each interview that
the impetus for the credit union’s green lending orientation was not
strictly (or even primarily) driven by a desire to generate new business. Instead, in the interviews they raised topics of environmental
sustainability and of enhancing the financial ability of their members
to make environmentally friendly product decisions.
For example, one credit union (with no ties to the automotive industry) initially offered interest rate discounts for the financing of alternative fuel vehicles (primarily ethanol-based). But once the credit
union realized that very few service stations in its market area offered
alternative fuels, it shifted its focus to hybrid vehicles. Recognizing
17
that hybrid vehicles can be more expensive to purchase than comparable nonhybrid models, the credit union offered an aggressive 1%
interest rate reduction (compared to its already-low interest rates for
traditional vehicle loans) in order to make it financially easier for its
members to purchase the hybrid models. In this case, the determination on how large of an interest rate discount to offer was based
on an analysis of the economic factors needed to encourage more
members to purchase hybrid vehicles, rather than on the amount of
interest rate discount necessary to attract borrowers who had already
decided to purchase a hybrid vehicle.
This focus on making an environmental difference through its
green vehicle loan program was raised by another credit union in its
description of the internal difficulty it had encountered in defining the types of incentives it would offer its members to purchase a
green vehicle. In this case, the credit union staff were skeptical that
a 25–50 basis point reduction on the loan’s interest rate would really
change the members’ decisions on the type of automobile to purchase. While they anticipated that such a discount would differentiate the credit union within its market area and generate additional
loan volume, this approach was shelved because it was not perceived
as likely to change the purchasing decisions of its members.
Some credit unions raised concerns that senior management’s interest
in offering green loan products was unclear or questionable. In these
cases, the question of whether to offer a green vehicle loan was being
approached from a purely financial earnings perspective. Staff felt the
need to present management with an analysis of why forgoing a certain amount of interest income (if rate discounts were offered) could
reasonably be expected to be offset by increased earnings from greater
vehicle loan volume. In these instances, there was interest in whether
a green vehicle loan program would help differentiate the credit
union from other vehicle lenders in their market areas and drive up
overall lending volume. In addition, there was interest in whether the
characteristics of green borrowers might improve the performance of
green vehicle loans held on the credit union’s books.
Energy Efficient 1st Mortgages
Of the 144 credit unions that started the survey, 128 (89%)
responded to the question, Do you offer/market loan products
specifically for Energy Efficient 1st Mortgages—EEMs (i.e., products offered by FHA, Fannie Mae, or Freddie Mac)? Among these,
12 (9%) said they offer EEMs.
Each of the originated EEMs was secured by the property. Several
of the responding credit unions indicated that they provide some
form of subsidy or assistance in connection with their EEMs. One
18
answered that interest rate discounts are offered, and two said they
apply special underwriting criteria for these loans. In three cases,
reductions in origination or closing costs were provided by the credit
union. Only one credit union indicated that it offers its EEMs in
partnership with a third party. In this case, the partner is a vendor
that offers an interest rate subsidy in connection with the loans.
Unlike other green loan products tested in the survey, EEMs originated by the credit unions were not held in their own portfolios;
75% said they sold the mortgages on a whole-loan basis. Additionally, 7 of the 8 respondents said their EEM originations are profitable, while one was unsure.
In a telephone interview with one of the credit unions offering EEMs, a senior staff member stated that the credit union had
initially decided to offer the product in an effort to encourage area
homebuilders to adopt EnergySTAR or Leadership in Energy and
Environmental Design (LEED)
certification standards into their
construction. In the four years
Even before the recent decline in real estate values, many
that the loan has been offered,
homebuilders were reluctant to build homes to the Energy
the credit union has originated
Efficient Mortgage standards because they believed it would
107 such loans, with balances of
increase the property’s initial build-out cost.
about $26.6M. This represents
a very small share of this credit
union’s 1st mortgage business (0.18% of all 1st mortgage originations over these four years, and 0.25% of its 1st mortgage balances
outstanding).
While the credit union does not have specific numerical goals in its
business plan for its EEMs, two senior staff officials expressed disappointment that homebuilders have not been more active in building
homes to the standards required for members to be eligible for the
credit union’s EEM. They indicated that even before the recent decline
in real estate values, homebuilders were reluctant to build homes to
the necessary standards because the homebuilders believed this would
increase the property’s initial build-out cost.
Home Energy Efficiency Improvements
Home improvement loans are a common credit union product.
Depending on the amount borrowed, these loans may be offered on
a secured or an unsecured basis. For the purposes of this research,
the focus was on home improvement loans that were specifically
focused on green purposes. The survey asked credit unions whether
they offered or marketed loans for several kinds of residential energy
efficiency improvements, including:
19
Loans for energy efficient windows were the most commonly
identified of the home energy efficiency improvements, and
heating/cooling systems were the least frequently offered
product.
•
Energy efficient windows.
•
EnergySTAR appliances.
•
Energy efficient heating/
cooling systems.
•
Insulation/Weatherization.
Of the 127 credits unions that
responded, 22 (17%) said they offer at least one of the four products.
As noted earlier, 61 credit unions responded that they offer at least
one of the 12 green products tested in the survey. Of this group,
36% said they offer at least one
of the home energy efficiency
Most of these credit unions offer interest rate discounts as part
loan products.
of their green home energy efficiency improvement loans. The
Energy efficient windows were
interest rate reductions are typically 0.25% below the rate for a
the most commonly identified
non-green-focused loan.
of the home energy efficiency
improvements, and heating/
cooling systems were the least frequently offered product; however,
there is only limited variation in the frequency of offering the four
product types. Specific results are shown in Figure 12.
Many of the credit unions that have home energy efficiency improvement loan products offer them as unsecured loans (75%–80%).
In fact, 33%–42% offer these only as unsecured loans. In most
instances, these credit unions have set caps on the maximum amount
Figure 12: Type of Green Home Improvement Loan Offered
% yes of 1+ green
product (61)
% yes of 1+ home
energy efficiency
product (22)
28
77
# yes
# no
% yes of all
response (127)
Energy efficient windows
17
110
13
EnergySTAR appliances
13
110
11
21
59
Energy efficient heating/cooling systems
11
109
9
18
50
Insulation or weatherization
12
109
10
20
55
Offered product
Figure 13: Secured versus Unsecured Loans
# offering
# only
unsecured
% only
unsecured
# only
home
equity
seecured
14
5
36
2
1
6
11
79
12
5
42
1
2
4
9
75
Energy efficient heating/
cooling systems
12
4
33
2
1
5
9
75
10
4
40
1
1
4
8
80
Offered product
20
# only
other
secured
# both
secured
and
unsecured
# with
unsecured
option
% with
unsecured
option
that can be lent under these special programs (typically either
$10,000 or $20,000).
As seen in Figure 14, most of these credit unions offer interest rate
discounts as part of their green home energy efficiency improvement
loans. The interest rate reductions are typically 0.25%
Figure 14: Interest Rate Discounts
below the rate for a non-green-focused loan. One
Offered
respondent noted that its secured green home improvement loans allow loan-to-value (LTV) ratios of up to
Offered product
Percentage
100%, letting homeowners finance the full cost of the
91
improvement (in this case the loans were home equity
83
secured).
Energy efficient heating/cooling systems
75
92
The survey asked credit unions that responded that
they offered each green loan product to identify any
third-party partnerships in which they were engaged in offering the
loans. Ten of the respondents said they had partners for their loans
for energy efficient heating/cooling systems. Four identified utility companies as their partners for these loans, and three identified
vendors. Utility company partnerships were the most frequently
identified overall for the credit unions’ home energy efficiency
loan products; utility companies were named as the partner in four
instances for energy efficient windows, two times for EnergySTAR
appliances, and two times for insulation and weatherization loans.
Several partnerships with local government, state government, nonprofits, and vendors were also identified in the survey.
Responding credit unions were also asked whether their partners
offered any assistance or subsidy in connection with these home
energy efficiency loans. Marketing assistance was the most frequently
identified and was noted by some credit unions for each of the four
tested loan products. Three credit unions said that their partners in
offering energy efficient heating/cooling systems provided interest
rate subsidies, and three responded that interest rate subsidies were
provided by their partners for the energy efficient window loans. No
credit union responded that its partners provided loan loss reserve
subsidies in connection with any of the home energy efficiency
improvement loan products.
None of the responding credit unions indicated that they have made
a large number of any of the four home energy efficiency improvement loan products. All of the responding credit unions said they
held all of these loans in their own portfolios and did not sell them.
In addition, most credit unions responded that the loans were profitable, but a few credit unions were unsure of the loans’ profitability.
21
Home Alternative Energy
Improvements
The survey asked credit unions whether they offered or marketed
loans for several different kinds of residential energy efficiency
improvements, including:
• Solar hot water systems.
• Solar electric systems.
• Geothermal systems.
• Wind energy systems.
Of the 120 credits unions that responded, 15 (11%) said they offer
at least one of the four products. As noted earlier, 61 credit unions
responded that they offer at least 1 of the 12 green products tested
in the survey. Of this group, 25% said they offer at least one of the
home energy efficiency loan products.
As shown in Figure 15, credit union respondents are more likely to
offer loans for solar hot water or solar electric systems than for geothermal or wind energy systems.
All but one of the credit unions that offer home alternative energy
loans offer an interest rate discount as an incentive. In two cases
(including the one credit union that does not offer interest rate
discounts), the credit unions offer special underwriting criteria such
as 100% LTV on home equity–secured loans. In addition, as shown
in Figure 16, credit unions used partners to assist with the marketing
of these products.
Figure 15: Home Alternative Energy Loan Product Offered
Offered product
% yes of all
responses
% yes of 1+
green product
# yes
# no
Solar hot water systems
12
108
10
20
Solar electric systems
10
108
8
16
Geothermal systems
4
114
3
7
Wind energy systems
3
115
3
5
Figure 16: Types of Assistance Offered by Partners
Assitance offered by partners
Solar water
Solar electric
Geothermal
Wind electric
Interest rate subsidy
4
2
1
0
Loan loss reserve subsidy
1
0
0
0
Vendor discount
1
1
0
0
Marketing assistance
2
3
1
1
# responses
7
4
2
1
22
Other Green Loan Products
In addition to the green loan products discussed above, the survey
asked about two other environmentally focused categories:
• Loans specifically for home water-conservation improvements.
• Loans specifically for business energy efficiency improvements, or
solar or wind energy improvements.
Two credit unions indicated that they offer/market waterconservation loans (115 responded that they do not). Both credit
unions offer the loans on a secured basis, and one of the credit
unions also offers these loans on an unsecured basis. Only one of the
two credit unions provided additional information about its experience with this product.
In this instance, the credit union reported that it had made between
1 and 5 water-conservation loans in 2010 and that the aggregate dollar amount of the loan(s) was less than $50,000. No special underwriting was used in conjunction with this product, but an interest
rate discount was offered. The credit union did not identify any
partners with whom the product was offered. The loan(s) was kept in
the credit union’s portfolio, and the credit union reported that it was
profitable.
Two credit unions said they offer/market loans specifically for
business energy efficiency improvements, or solar or wind energy
improvements (115 responded that they do not). Both indicated that
they offer these loans on a secured basis, and one of these also offers
this loan on an unsecured basis. One credit union indicated that it
had made between 1 and 5 of these loans in 2010; the other reported
making between 6 and 10 of these loans. Each said that the aggregate
dollar amount of the loans was between $100,000 and $500,000.
Each of the credit unions offering the green business loans said they
did so with a vendor partner that offered only marketing assistance.
Both also reported that they used special underwriting criteria in
conjunction with the loans, and one also offered an interest rate
discount. Each said they made the loans “wholly in-house” and not
in conjunction with a credit union service organization (CUSO) or
other third-party entity. The loans were not guaranteed by the Small
Business Administration (SBA), and they were held in the credit
unions’ portfolios.
Finally, one credit union reported that the loans were profitable; the
other respondent was not sure whether the loans were profitable.
23
Green Deposit Products/Services
Figure 17: Market
Electronic Services as Green
Number
Percentage
Yes
81
74
No
23
21
N/A
5
5
The survey also asked credit unions, Do you market/promote electronic services (e-statements, electronic account information/transactions, etc.) as green? As shown in Figure 17, of the 109 credit unions
that responded, 74% answered yes.
In interviews with several of the credit unions it was mentioned that
marketing their electronic deposit services as green was seen as the
first step in exploring options to offer green-focused loan products.
Interviewees also recognized that encouraging greater member adoption of electronic services can result in important operational cost
reductions for the credit unions themselves.
24
CHAPTER 3
From Deciding to Marketing
CEOs, board members, and even rank-andfile members are behind the decision to begin
offering green loans. Because the loan category is new and often unfamiliar, marketing
approaches vary significantly among credit
unions.
Why Are Some Credit Unions Offering
Green Loans?
In addition to the survey described earlier, telephone interviews were
conducted on a range of topics, including (when it applied) why
credit unions were offering green loans. A range of responses were
offered. Often, the convergence of several factors was mentioned.
The following section outlines some of the primary impetuses for
credit unions launching their green loan programs.
Board Initiated
In several cases, the initial impetus came from a member of the
credit union’s board of directors. For example, at one credit union
a board member was familiar with an area utility company that was
interested in finding lending partners to promote residential energyconservation improvements. The board member raised the possibility with the credit union’s manager, and senior staff were directed
to look into the utility’s program and evaluate whether there was an
appropriate role for the credit union in focusing on residential energy
efficiency loans. By expressing an interest in the general area, the
board member catalyzed the necessary business assessment and an
evaluation of whether a green lending focus would be beneficial to
the members of the credit union. It was mentioned that some members of the staff had independently been contemplating the creation
of a suite of green loans; however, the inquiry from the board member was seen as legitimizing a serious exploration of the options.
In another instance, the board played a key role by adopting an environmental mission statement for the credit union. This action, while
reportedly independent of any staff recommendation to this effect,
was implemented at about the same time that the professional staff
was developing ideas for offering a suite of green loan products.
Approached by Third Parties
In other cases the initial impetus came from the credit union’s CEO
being contacted by outside parties. In one instance, the CEO of a
26
community credit union was approached by the county executive
and asked to help in a program to finance energy efficiency improvements in older housing stock within the community. In other cases,
the credit unions were contacted by representatives of important
select employee groups within their FOMs. For example, one credit
union was approached by city officials who were initiating a program
to encourage the installation of solar panels on the homes of city
employees. The credit union’s FOM included the city employees,
and it agreed to provide financing with discounted interest rates.
The credit union has since expanded its solar loan program to the
employees of all of its select employee groups.
Commitment to Sustainability and Environmental
Concerns
In another case, the credit union’s decision to offer green loans was
piqued by an interest in issuing a Sustainability Report detailing
its financial, environmental, and social impacts. It chose to prepare its report in accordance with the Global Reporting Initiative’s
(GRI) G3 Sustainability Reporting Framework, which the credit
union describes as “the world’s most used sustainability reporting
framework, [which] provides a standardized approach to ensure we
are meeting the highest degree of technical quality, credibility and
relevance in our report.” Because one aspect of the GRI framework
focuses on environmental impacts of organizations, the credit union
initiated an internal review “to systematically identify, assess and
reduce our environmental impacts.” As a starting point, the credit
union “calculated an annual inventory of our carbon emissions. This
allows us to understand where our emissions come from, develop
reduction goals and to implement actions to better manage and
reduce our climate impacts.” Through a series of facilities and workforce actions, over a three-year period the credit union reduced its
overall carbon emissions by 13%.
The credit union also calculated the greenhouse gas emissions
generated from its auto and home loans. According to its 2009
Sustainability Report, the credit union is “currently developing such
products to help our members make more sustainable choices and
plans to introduce these loan options in 2010 and 2011.” Interestingly, when asked about these loan options earlier in 2011, the credit
union indicated that it had not yet put them in place. The implementation of the loans had been delayed because the credit union
was still attempting to identify the types of incentives or discounts
that would motivate its members to make the most environmentally
conscious selection. For example, would a 0.25%–0.50% interest
rate reduction for the purchase of a hybrid vehicle really motivate
the purchase of a hybrid or merely reward the member for a decision
27
already made? It will be interesting to see how the credit union
answers this question.
Another credit union that was an early adopter of a green lending
focus was also motivated by its CEO to implement a suite of loans
that would achieve an environmental result. In this case, alternative
fuel and hybrid vehicles were the initial focus in the credit union’s
green vehicle loan program. The credit union analyzed the higher
purchase price for these vehicles and offered an extremely aggressive
1% interest rate reduction as a way to help its members afford the
higher purchase price. It has since extended its green vehicle loan
program to vehicles that achieve a minimum fuel economy rating.
This same credit union also was aggressive in promoting loan programs to encourage greater residential energy efficiency. In addition
to significant discounts in loan
origination and closing costs
for its EEM program, the credit
While several of the credit unions identified growth opportuunion has established special
nity potential associated with green lending, none had estabunderwriting criteria for energy
lished specific green lending goals for their various products by
efficient homes that extend
which their success could be measured and marketing activities
qualifying ratios. It has also proadjusted.
moted its green first mortgages
to homebuilders. Finally, for its
secured energy efficiency home equity loans, the credit union allows
up to 100% LTV in calculating qualifying amounts.
Opportunity to Generate New Members and Business
In yet another instance, one credit union’s CEO was seeking ways to
differentiate the credit union from the other financial institutions in
its highly competitive market area. There was a perception that the
area’s population has a high degree of environmental consciousness
and that offering a suite of green products would appeal to many of
these people and help elevate the credit union’s positive name recognition. The CEO reported that the strategy has been successful and
has been the source of important loan growth to the relatively small
credit union.
While several of the credit unions identified growth opportunity
potential associated with green lending, none had established specific
green lending goals for their various products by which their success
could be measured and marketing activities adjusted.
Green Loans Seen as Good for Members
Another credit union stressed that it had concluded that green loans
are often good for the financial health of its members, and this was a
key motivator in making these products available. It was noted that
28
driving more fuel efficient vehicles and lowering monthly home utility bills can increase members’ disposable incomes. In another case,
a senior staff member initiated a brainstorming session at the credit
union to try to identify new opportunities to serve its members. It
was suggested that at a time of rising energy prices, the credit union
could assist its members by offering interest rate discounts for the
purchase of more fuel efficient vehicles or to make home improvements that would help lower utility bills. It was reported that these
loan products were developed and have been well received by the
members.
Not all green lending programs have been internally initiated. Several
credit unions replied that credit union members themselves contacted them to inquire whether any special incentives were offered
for green-focused loans, and to encourage the credit union to
become involved in this type of lending.
Marketing Green Loans
The survey also asked credit unions whether their operating systems
allow them to segregate and track the performance of their green
loan products. Of the 103 that responded, only 39 (38%) said yes.
However, given that many of the credit unions that responded to this
question indicated that they do not offer any green loan products,
a more useful approach is to analyze the answers of only those with
a green loan product. In this case, 38 (62%) of the 61 credit unions
responded that their operating systems allow them to segregate and
track the performance of their green loan products.
In telephone interviews, a couple of credit unions indicated that they
periodically gather these data manually from their operating systems,
but the volume of these loans has been so low that the systems have
not been set up to generate this information automatically. Two
credit unions stated that they had manually gathered information on
the volume of their green lending for the first time in order
Figure 18: Green Loan Marketing
to respond to the survey’s questions.
Tool Use
Marketing tool
The survey asked respondents whether they used several different, specific tools to market their green loan products; the
results are reported in Figure 18.
% green loan
responders
Website
84
Statement inserts
59
Print advertisement
59
Radio/TV advertisement
13
Through third-party partners
31
Vendors’ stores/websites
16
# responders
100
As can be seen in Figure 18, 84% of the credit unions that
responded they offered at least one of the tested green loan
products said that they marketed the green loan product
on their own website. Also of interest is the relatively small
number of credit unions that market their green product
on radio or television. This could reflect the fact that credit
unions may simply not advertise at all on radio or television
29
because of its cost. However, as seen in Figure 19, there was no relationship between the asset size of responding credit unions and the
fact that they advertise on radio
or television.
Marketing the green loan products at vendors’ stores or on
In the earlier discussion of the
websites was also seen as effective by those credit unions to
individual green loan products,
which this was applicable.
it was noted that a number
of credit unions have entered
into different types of partnerships with third-party organizations
in connection with some of these loans. Marketing assistance by
the partners for the credit unions’ green loan products was the most
frequently mentioned type of assistance provided. As can be seen in
Figure 19, responding credit unions view this as their single most
effective marketing tool for the product.
Figure 19: Perceived Effectiveness of Marketing Tools for Green Loans
# least
effective
% least
effective
# somewhat
effective
% somewhat
effective
# most
effective
% most
effective
Website
0
0
20
74
7
26
Statement inserts
1
6
14
78
3
17
Print advertisement
1
6
14
82
2
12
Radio/TV advertisement
3
75
1
25
0
0
Through third-party partners
0
0
3
38
5
63
Vendors’ stores/websites
0
0
3
60
2
40
Marketing tool
30
CHAPTER 4
Partnerships and Profitability
Partnerships with local government or nonprofit organizations often provide impetus and
support for green lending. But fully two-thirds
of the surveyed credit unions offer the loans
without outside help. Nearly all respondent
credit unions reported that their green loans are
profitable.
A recurring finding throughout the survey is that credit unions offering green loan products view them as profitable. Since normal loan
underwriting criteria and processes were typically used in the underwriting of green loan applications (i.e., those employed to approve
comparable loans for non-green purposes), this finding of profitability is not in itself surprising. However, this perception of profitability
is unchanged in those cases in which interest rate discounts were
offered (thus reducing the potential profitability).
During several interviews the question of special underwriting
criteria was explored. While several credit unions indicated that they
had internally discussed the possibility of adjusting required debt-toincome ratios or other ratios to take into consideration the likelihood
that disposable incomes may increase for members who purchase
more fuel efficient vehicles (i.e.,
lower monthly gasoline costs) or
make energy efficiency improveOne credit union said that when a member applies for a green
ments to their homes (i.e., lower
home energy efficiency improvement loan, the credit union is
monthly utility bills), in the
often also able to generate an application to refinance a vehicle
overwhelming majority of cases
loan originally made by another financial institution (whether
(in several instances, in every
or not the vehicle is green).
case), none of the applicants
needed any special underwriting
adjustments to qualify for the loans. In fact, it was repeatedly noted
that the green loan applicants were financially sound and had strong
credit scores. One credit union observed that only one application
for any of its several green loan products had been denied using its
standard underwriting criteria (and in that one case, the loan was
denied because the applicant was not in the credit union’s FOM).
Several credit unions reported that they had not fully anticipated
this characteristic of green borrowers. In retrospect, they speculated
that people interested in borrowing for green purposes were typically those that were already financially conscious and responsible.
The credit unions also reported that the ongoing performance of the
loans was extremely strong with few, if any, delinquencies. The fact
32
that individuals who are motivated to borrow for green purposes also
turn out to be a highly desirable class of borrowers to lenders (regardless of the type of loan) may be one of the most important findings
of this study.
Several of the credit unions also reported in the interviews that
offering a suite of green loan products has helped differentiate them
from other lenders in their market areas and has generated both new
membership growth and new loans to existing members. As a result,
the minor loss of interest income on individual green loans (when
green discounts were offered) was more than offset through increased
loan volume. In addition, some interviewees noted they are achieving
some success in cross-selling additional loan products. For example,
one credit union said that when a member applies for a green home
energy efficiency improvement loan, the credit union is often also
able to generate an application to refinance a vehicle loan originally
made by another financial institution (whether or not the vehicle is
green).
Partnerships Generate Loan and
Membership Growth
As noted in the analyses of the individual products tested in the
survey, 61 credit unions responded that they offer at least one green
loan. Of these, 23 (38%) had established partnerships with one or
more third-party organizations in connection with these loans. The
most frequently identified partnerships were with utility companies,
vendors, and nonprofit organizations. Local government programs
were named in nine instances, and state government programs were
identified in five instances. While interest rate subsidies were provided in some cases, the most common form of assistance credit
unions named was marketing assistance.
One partnership with a state-created nonprofit was initially implemented as a 3.5% interest rate
buy-down program. When this program was combined with a 5% interest rate reduction provided
by a program offered by the credit union’s electric co-op partner, the credit union was able to offer
interest-free loans for qualifying home improvements. This resulted in 95 loans aggregating about
$800,000 (averaging over $8,400 per loan).
In some cases credit unions have entered into more than one partnership in offering their green loan products. For example, one
interviewed credit union has three different partners: a state-created
nonprofit corporation in which all state utilities participate to support energy efficiency improvements, an individual electric co-op,
and a traditional nonprofit organization. The partnership with the
33
state-created nonprofit was initially implemented as a 3.5% interest
rate buy-down program. When this program was combined with
a 5% interest rate reduction provided by a program offered by the
credit union’s electric co-op partner, the credit union was able to
offer interest-free loans for qualifying home improvements. This
resulted in 95 loans aggregating about $800,000 (averaging over
$8,400 per loan). The program offered by the state-created nonprofit
shifted away from the interest rate buy-down approach and replaced
it with cash credits of up to $2,500 on the costs associated with
qualifying improvements. The credit union reported this resulted in
a decline in the overall demand for the loans.
This credit union has established a partnership with a traditional
nonprofit organization to assist its members in financing improvements to their homes. Under this partnership, the credit union offers
a 1% interest rate discount for all unsecured EnergySTAR appliance
loans, and for the costs of installing solar systems the credit union
discounts the interest rate by 0.25% (compared to its regular home
equity loan rates) and has zero closing costs. Under each program,
interested borrowers are referred to the credit union, and it handles
all aspects of the loan application, underwriting, closing, and servicing. The credit union said that in addition to generating new loans,
the partnerships have also brought new members to the credit union.
In another example of these partnerships, one of the credit unions
reported that it works with a consortium of utility companies in
conjunction with a state agency.
Under the program, homeowners can receive home energy
One credit union CEO observed that the types of partnerships
audits and recommendations
that are possible with green lending programs are a good match
on home improvements. The
for credit unions with community FOMs.
program allows participating
financial institutions to make
interest-free loans for these improvements. Specifically, the present
value of the interest payments is calculated as if the loan has gone to
maturity, and the program pays this amount to the credit union up
front when the loan closes. The credit union reported that this has
resulted in both loan growth and new member growth.
In yet another example, a small credit union has partnered with a
local utility company to offer home energy-saving loans. Under the
program, a home energy audit is conducted for $50 and recommendations are made for energy-saving improvements. A coupon for a
loan from the credit union for these improvements is also provided
to the homeowner. The utility provides a loan loss reserve subsidy
to the credit union in connection with these loans. The financing
offered by the credit union is unsecured loans. The credit union
reported that the partnership has been in operation for less than a
34
year and has already generated about $200,000 in loans (an average of three new loans per month). While this may seem a small
amount, it represents 39% of the credit union’s total non–credit
card, unsecured loans in 2010. The CEO reported that in addition
to the loan growth, this program has generated new member growth
for the credit union. The CEO also reported that the credit union is
currently organizing a partnership program with area home improvement contractors and vendors to generate additional loan growth.
One credit union CEO observed that the types of partnerships that
are possible with green lending programs are a good match for credit
unions with community FOMs. This CEO stated that the credit
union became involved when it was approached by the local county
executive to assist in a new program to help finance energy efficiency
retrofits in an area with older housing stock with poor insulation and
aging heating systems. Beyond the considerations of structuring a
program that was financially sound and good for the borrowers, the
CEO noted that the program has provided opportunities to work
with the local utility company, a nonprofit organization, and local
home improvement contractors. In addition, the local media have
taken a strong interest in the project. All of these factors led to the
creation of a stronger program supported by multiple local organizations. These factors provided the credit union with an opportunity to
further strengthen its ties to the community while conducting sound
business.
The credit union’s initial program was offering home equity–based
loans for residential energy efficiency improvements predicated on
the recommendations of a home energy audit provided by a local
nonprofit organization. The CEO noted that because area home
values had declined as a result of problems in the broader national
real estate market, the credit union has more recently begun to offer
unsecured loans for residential energy efficiency improvements. Similar to the results of other credit unions interviewed in this study, the
performance of both the secured loans and the unsecured loans has
been strong, and the CEO speculated that lending for green purposes
appears to attract borrowers with stronger credit histories.
One final observation is that in the time since the onset of the
program, the local utility has been purchased by a large national and
international energy company. This has led the credit union CEO to
believe that the local utility’s interest in the project has diminished
somewhat. The financial incentives provided by the utility have been
reduced, and it was speculated that this may be related to the utility
becoming less community-focused. Nevertheless, the need to defer
the construction of new generation facilities and the ongoing interest
of the state’s public utility commission have resulted in continuing support from the utility. It was speculated that with anticipated
35
increases in the costs of energy generation, the utility will continue to
look for ways to encourage conservation.
All of the credit unions described above have indicated they are
pleased with the partnerships; however, others have experienced
difficulties in establishing them. For example, one large credit union
reported that it is exploring entering into such a partnership with
nonprofit organizations or county partnerships to launch a green
loan program, with the possibility of the partners providing interest rate buy-downs or loan loss reserve subsidies. The credit union
responded to a request for proposal (RFP) from a nonprofit for a
home energy efficiency program but was not selected. It has since
responded to an RFP from a county program but does not yet know
the outcome of that proposal.
In another case, a credit union reported that it had been approached
about the possibility of entering into a partnership to offer home
energy-saving loans; however, it chose not to pursue the opportunity
because its occupation-based FOM would make managing the process more difficult due to the expected inflow of applications from
individuals not eligible to join the credit union. While it was noted
that the credit union could refer these people to other financial institutions participating with the prospective partner, the credit union
was not comfortable making such referrals to lenders offering terms
over which it had no control.
The FOM issue was addressed by another credit union whose primary select employee group is employees of a pharmaceutical company. In this case, the credit union entered into a partnership with a
sponsor in which the sponsor subsidizes loans to its employees as part
of its efforts to promote healthy lifestyles among its employees.
36
CHAPTER 5
Public Policy Conclusions
and Recommendations
The strong performance of credit union green
loans indicates that credit unions can be excellent partners in public lending initiatives. It
also means that credit unions, even absent
outside support, should strongly consider green
lending programs as a profitable part of their
loan portfolio and a competitive differentiator.
Since at least the 1973–1974 Arab Oil Embargo, the US government has adopted various programs designed to promote energy
efficiency. These programs have been motivated by several policy
objectives, such as reducing dependence on foreign energy sources,
reducing greenhouse gas emissions, assisting low-income households,
and stimulating job creation. Recurring themes in these policies
have been finding ways to educate homeowners about the benefits
associated with energy efficiency and finding ways to make energy
efficiency improvements more affordable. Examples include various
tax incentives, programs to assist low-income people in weatherizing
their homes, the creation of new financing entities (such as revolving
loan funds, PACE programs, and Energy Efficient Mortgages), and
the development of energy-use ratings such as the Environmental
Protection Agency’s (EPA) Energy Start program.
More recently, the Federal Housing Administration (FHA) launched
a Power Saver Loan pilot program to facilitate the creation of a
mainstream mortgage product for home energy retrofits.8 Under the
pilot program, approved lenders can offer home equity–secured loans
of up to $25,000, with up to 100% LTV for alterations, repairs, and
site improvements on single-family homes. FHA insures the lender
against loan losses for up to 90% of the value of the loan. In addition, approved lenders are eligible for federal grants for the costs of
staffing and systems, marketing, underwriting, and servicing associated with providing these loans.
Key objectives are to lower risks and costs to lenders in order to
stimulate new lending, and to lower interest rates to borrowers. The
program is based on the earlier-described assumption that there is
a lack of credit at affordable rates for home energy-saving improvements. However, as shown in Figure 20, the results of the research
on credit union green lending described in this report raise questions
about this and other assumptions upon which the Power Saver Loan
pilot is based.
A key finding of this research for policymakers is that prior to
launching new initiatives, a careful analysis of existing activity is
38
Figure 20: Comparison of Credit Union Energy Efficiency
Loans and FHA’s Power Saver Pilot
Credit union
project research
FHA PowerSaver
Unsecured loan limit
$7,500
Typically $10,000–$20,000
Secured loan limit
$25,000
Typically $25,000–$50,000
Maximum term
15 years
10–20 years
Additional borrower fees
1% of loan times # years
None
Interest rate discount
Permitted use of grant $
Typically 0.25%–0.5%
FHA-approved lenders
Yes
No
Lender risk mitigation
90% FHA insurance
Little/no delinquencies
Minimum credit score
660 FICO
No set minimum
Energy audit required
No
Audit required for some credit
union programs
needed. In addition, discussions should be held with lenders to better assess what motivates decisions to develop energy efficiency loan
programs and to get their view of where market barriers may exist.
No such analysis or discussions were identified in the background
research associated with this project. This study found that credit
union green lending is profitable, with strong performing loans and
few delinquencies. Therefore, it is unclear that reducing loan performance risk needs to be a major focus of government programs;
however, sharing this type of information with financial institutions
may be very effective in catalyzing greater lending.
A study comparing the sales price difference for homes with certified energy-performance ratings
found that “certified homes in the Seattle metro area sold at a price premium of 9.6% when compared to noncertified counterparts. . . . In the Portland metro area, certified homes sold at a price
premium ranging between 3% and 5%. In addition, the certified homes stayed on the market for
18 days less than noncertified homes.”
The research associated with this project also identified some important factors that credit unions and other lenders should incorporate
into their marketing campaigns for residential energy efficiency
loan programs. While the savings homeowners might realize in their
monthly utility bills may be less than the monthly costs they might
incur in borrowing funds to make the improvements, the economic
benefits to the homeowner in making energy efficiency improvements may be much greater than can be measured solely against their
monthly energy bills. “Evidence suggests that green home owners
expect a market premium, as 73 percent of green homeowners report
39
their expectation of a higher resale value as an important factor during their purchase process.”9
Another analysis found that this expectation may be well founded
in at least some real estate markets. A study comparing the sales
price difference for homes with certified energy-performance ratings
found that “certified homes in the Seattle metro area sold at a price
premium of 9.6% when compared to noncertified counterparts. . . .
In the Portland metro area, certified homes sold at a price premium
ranging between 3% and 5%. In addition, the certified homes stayed
on the market for 18 days less than noncertified homes.”10
The possibility that home energy efficiency improvements may result
in higher home resale values can have a significant effect on the way
homeowners view the economics associated with borrowing funds
to make these investments. Understanding this potential can also
greatly expand homeowner interest in obtaining the energy audits
and the certification for the property. This will allow real estate
agents to promote the energy-saving investments that homeowners
have made and reinforce consumers’ understanding of the economic
benefits of increasing energy efficiency. This information can also
provide an important focus for financial institutions to market their
products for home energy-improvement financing.
Conclusions
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 on the balance sheet.
A growing number of credit unions are offering loans to their
members that are specifically focused on helping them make energysaving improvements to homes,
businesses, and transportation.
In some cases these green loan
Credit unions interviewed also consistently observed that in
programs have been motivated
many instances there were no delinquencies for any green
by a concern for the environloans. As it turns out, green loan borrowers are an extremely
ment, and in others the focus
attractive customer profile for these lenders.
has been on helping members
or increasing loan applications
and spurring new membership growth. In nearly every instance, the
credit unions have reported that their green loan programs have been
profitable. The only ones that did not affirmatively say the green
loans were profitable were those that had not yet conducted the
necessary analysis.
40
By and large, credit unions offering green loan products reported
that they were not using any special underwriting criteria in connection with reviewing loan applications. In a couple of cases, higher
debt-to-income ratios were available in connection with first and
second mortgage loans; however, credit unions repeatedly noted
during the study’s interviews that special underwriting criteria were
unnecessary because of the high credit scores of the applicants for the
green loans. In one case, a credit union said that the only applications they had to decline using traditional underwriting were from
applicants who were not in the credit union’s FOM and thus were
ineligible to join the credit union. Credit unions interviewed also
consistently observed that in many instances there were no delinquencies for any green loans. As it turns out, green loan borrowers
are an extremely attractive customer profile for these lenders. Beyond
the positive personal financial profiles of the borrowers, several of
the credit unions also noted that most of their green loan borrowers
are in the 20–40 years of age
demographic, which they view
Some smaller credit unions view these products as important in
as extremely important for the
differentiating them from other financial institutions in their
future of the credit union.
markets and helping them generate important new member
More than one-third of the
growth and additional loan demand.
credit unions that offer at least
one of the tested green loan
products said they had entered into partnerships with third-party
organizations. Each interviewed credit union that had a partnership
felt that it was helpful, regardless of the type of assistance provided,
and recommended that others considering green loan products
explore these opportunities. Nevertheless, the fact that nearly
two-thirds of the credit unions offering green loan products did so
without entering into partnerships and still reported that their green
loans were profitable suggests that partnerships are not a precondition for successful programs.
While it appears from the survey that credit unions with assets of
$50M or higher are more likely than smaller credit unions to offer
green loan products, the survey and the subsequent interviews
found that credit unions of all sizes can have success implementing
green loan programs. Indeed, some smaller credit unions view these
products as important in differentiating them from other financial
institutions in their markets and helping them generate important
new member growth and additional loan demand. Many credit
unions offer green loans on an unsecured basis with borrowing limits
of $10,000–$20,000. These loans avoid the problem in many parts
of the country of declining home values and limited home equity to
secure the loans.
41
Very few of the participating credit unions indicated that they
offered or marketed loans for energy efficiency improvements or
alternative energy improvements to small businesses. Looking forward, this may be an area in which credit unions can identify new
lending opportunities. This may also be an appropriate type of loan
in which underwriting criteria might recognize the cost-avoidance
aspects of loans that are made by lowering the operating expenses of
the businesses through savings on utility bills.
Many of the credit unions that responded that they do not currently offer specific green loan products to their members do market
their electronic services (such as Internet banking, bill payment,
and e-statements) to their members as “green.” Many of these credit
unions have recognized that electronic services can significantly
reduce their own operating expenses and have been active in encouraging adoption by their members.
Moving forward, credit unions should explore “going green” not
just as a cost-cutting strategy but also as a business growth strategy.
Many energy-saving loans are relatively small and can be offered on
an unsecured basis. Historically, this is an important credit union
market niche, and one that many banks have avoided. However, in
the future, with energy costs expected to rise, from the fuel pump
to the electrical outlets in people’s homes, well-structured and
well-marketed green loan programs have the potential to become as
important as car loans have been in the past to credit unions.
42
Endnotes
1. Deloitte Development, LLC, “Sustainability Strategy 2.0: Next
Generation Driver of Innovation,” www.deloitte.com/assets/
Dcom-UnitedStates/Local%20Assets/Documents/us_scc_
SustainabilityStrategy_061311.pdf.
2. Dhiraj Rajaram, “Making the Business Case for Sustainability,”
Harvard Business Review, May 2, 2011, http://blogs.hbr.org/
cs/2011/05/making_the_business_case_for_s.html.
3. Strategy + Business, “Values vs. Value,” www.strategy-business.
com/article/11103?pg=all.
4. Council on Environmental Quality, Recovery through Retrofit
(Washington, DC, 2009), 1.
5. Ibid, p. 7.
6. Ibid.
7. Overall, 96 of the respondents completed the demographic
question identifying whether they were based in one of the five
National Credit Union Administration (NCUA) regions or
responded N/A. Since the survey was promoted only to US and
Canadian credit unions, those responding N/A are assumed to
be Canadian.
8. Two of the 18 lenders selected to participate in the pilot program are credit unions: University of Virginia Community CU
and SOFCU Community CU.
9. H. Bhkl Choi Granade, J. Creyts, A. Derkach, Ph. Farese,
S. Nyquist, and K. Ostrowski, Unlocking Energy Efficiency in
the U.S. Economy (McKinsey & Co., July 2009), 37.
10. Ann Griffin and Ben Kaufman, Certified Home Performance:
Assessing the Market Impacts of Third Party Certification on Residential Properties (Earth Advantage Institute, May 29, 2009), 5.
43
W. Robert Hall
ideas grow here
PO Box 2998
Madison, WI 53701-2998
Phone (608) 231-8550
www.filene.org
PUBLICATION #249 (8/11)

Green Lending in Credit Unions

Transcription

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