CUs Growing Green
“Modern technology,” environmentalist Alan Eddison has said, “owes ecology an apology.”
If this is indeed the case, credit unions are doing their part to make amends by financing green initiatives such as hybrid vehicles, solar panels, and home improvements. As they do, they’re enhancing their brand, building relationships, and growing their loan portfolios.
Green lending is relatively new at credit unions, and data about it is limited. A recent survey of 144 credit unions by the Filene Research Institute, “Finding Sustainable Profits: Green Lending in Credit Unions,” found that 42% of respondents offered at least one of the green lending products the survey identified (“Green loan products,” p. 29).
The report also revealed that green loans:
► Are low-risk. Borrowers tend to have pristine credit, and most participating credit unions had no delinquencies.
► Require no special underwriting.
► Attract young borrowers. Most members who apply for green loans are 20 to 40 years old.
► Are unsecured.
► Have an average balance of $10,000 to $20,000.
The research also found that secured and unsecured green loans have almost identical loan performance. “Our anecdotal research indicated that unsecured green loans actually had a marginally better delinquency rate than secured green loans,” says W. Robert Hall, president of Hall Associates Consulting and author of the Filene study.
Build portfolios and relationships
At GEMC Federal Credit Union in Atlanta, green loans are a “stepping-off point for a bigger conversation about members’ financial needs,” says Denise Swan, president/CEO of the $89 million asset institution. “They create cross-selling opportunities with auto loans, credit cards, and more.”
Members who apply for green loans tend to be homeowners who’ve lived in their houses for at least 10 years, she says.
For years, GEMC Federal had a modest green loan program, which provided a 50 basis point interest-rate reduction for hybrid car loans. But the invitation to partner with a local electrical membership cooperative (EMC) in February 2010 was the incentive the credit union needed to think bigger.
“The EMC developed a rebate program for certain energy-efficient equipment and asked us to be their funding partner,” Swan says. “We helped develop marketing tools and provided the financing.”
The program’s success drove a larger effort through Oglethorpe Power Corp.—one of the nation’s largest power supply cooperatives. “They received federal stimulus money that allowed them to buy down the loan interest rates on home improvements to 0% and asked us to be their partner,” Swan explains.
That program launched in July 2010 and ran through June 2012. It offered unsecured home improvement loans for up to $5,500 with a three-year term.
As a result, GEMC Federal booked $9.2 million in new loans and gained more than 1,700 members. To date, 26 EMCs have joined the program and Swan anticipates increased participation going forward.
Program administration is handled through the EMC, with loan payments included on the member’s utility bill. Most marketing is done through the utility, although GEMC Federal brainstorms on promotional elements and audits the loans to ensure compliance. The credit union has also co-hosted a number of events, such as home shows, with its program partners.
Some of the program’s most important marketing has been to area contractors, who have embraced the program, says Mark Nofi, GEMC Federal’s marketing director. “Some say this has kept them in business. They’re paid quickly, and cash flow is vital to these small businesses.”
Although the program expired in June, GEMC Federal plans to create a new program with an 84-month term, a $25,000 limit, and an 8.9% rate (with the option of a one percentage point discount for automatic payments or if the payment is included on the member’s utility bill).
The revised program will also relax some of the federal program’s most stringent energy efficiency requirements.
NEXT: Insulation: The new granite countertop
Insulation: The new granite countertop
Many members at the University of Virginia (UVA) Community Credit Union in Charlottesville are improving their homes. But instead of granite countertops and hardwood floors, they’re making changes that save energy, money, and the environment.
“They know that even small investments in energy efficiency deliver an excellent return,” says Rebecca Cardwell, director of community relations at the $590 million asset credit union. “Plus, they’re realizing that the next owner of their house is likely to care about their home’s energy efficiency and utility bills.”
To support members’ desire to go green and save money, UVA Community submitted a proposal to participate in the U.S. Department of Housing and Urban Development’s two-year pilot PowerSaver Loan program through the Federal Housing Administration (FHA).
Moving to Paperless Lending
The benefits—and inevitability—of a paperless society have been bandied about for years. But are credit union loan departments close to achieving this goal?
“I’d venture to guess that 95% would like to be there, but only about 15% are truly paperless,” says Edward Guerin, vice president of credit union development at MeridianLink.
What’s holding many credit unions back is the lack of awareness of how paperless lending works and the perceived cost of technology. “For the most part, it’s not as expensive as most credit unions think,” says Guerin, “and integration with back-office systems has become relatively seamless.”
To establish a paperless—or nearly paperless—process, Guerin says credit unions need three tools:
1. A loan origination system for paperless lending, which is typically a Web application;
A mobile lending application is desirable, but not a must-have at this point.
It’s possible to go green in increments by starting with digital signatures on documents and then adding electronic delivery, Guerin says. “Data safety will be critical—you’ll need to have strict security protocols in place.”
At present, the adoption of paperless lending largely depends on geography and demographics. “A credit union with an older membership might get pushback if paperless lending is the only option while a Silicon Valley member will likely demand it,” he says.
To Guerin, strong member pushback could be a sign of bigger problems. “If the average age of your members is 60, you’re not positioning yourself to attract younger members and you’re not replenishing your membership pipeline.”
This program offers unsecured loans up to $7,500 and home equity-secured loans up to $25,000 for home upgrades and repairs that meet certain energy saving criteria. Terms are up to 10 years for unsecured loans, 15 years for secured loans, and 20 years for secured loans for projects involving renewable energy, such as solar panels.
Loan rates currently start at 2.99% for a two-year unsecured loan and 3.99% for a three-year secured loan. They can go up to 6.99% for both categories.
UVA Community was one of 18 lenders selected nationwide to participate in the program. It launched its PowerSaver program in September 2011.
In December, the credit union entered into a relationship to offer 0% FHA PowerSaver loans for select terms through a rate buy-down program sponsored by the Local Energy Alliance Program (LEAP).
LEAP is the local, nonprofit sponsor of Energy Star—a program of the Environmental Protection Agency and the Department of Energy.
The program’s initial success was due to coordinated marketing and educational programs. These include both the practical—educational seminars on energy and financing—and the fun, such as home energy makeover contests.
UVA Community also co-sponsors a Saturday morning radio show with LEAP called “The House Doctor.” The credit union entered into a partnership with the City of Charlottesville, LEAP, and Charlottesville Gas to provide 250 free home energy reviews to local homeowners to celebrate the city’s 250th anniversary.
Relationship-building has been critical to the program’s success. UVA Community has reached out to realtors, contractors, and consumers.
“Contractors love PowerSaver,” Cardwell says. “Some have associations with big banks’ loan and credit card programs, but the rates are prohibitively high. The PowerSaver rates make it possible for their customers to comfortably afford their energy efficiency improvements.”
The program also provides some much-needed work for contractors, she adds, and has provided cross-selling opportunities for the credit union’s business services program.
NEXT: Good stewards
Voted the most walkable city in the Pacific Northwest by The Daily Green, it’s no surprise that green auto loans are an important part of Seattle Metropolitan Credit Union’s green loan portfolio.
Although the $569 million asset credit union also offers green home equity loans and first mortgages, its $5 million green auto loan portfolio is the largest segment of its eco-friendly loan offerings.
To qualify for a 0.25% loan rate discount, borrowers must purchase a hybrid electric vehicle or one that averages at least 25 miles per gallon in the city. The average size of its green car loans is $13,500.
To gain access to auto buyers who value energy savings, Seattle Metropolitan partnered with a local energy company and an electric car dealership. Both companies refer their customers to the credit union for financing.
The credit union also installed an electric vehicle charging station at its main branch in downtown Seattle that members can use for free. Seattle Metropolitan uses in-branch signage, its member newsletter, and its website to spread the word about its green loans.
Credit quality on these loans has been excellent. “The average FICO score for our overall auto portfolio is about 705, while our green loans are at 750,” says Lee Pierce, the credit union’s assistant vice president of consumer lending.
“We believe it’s our obligation to give back to the community where we do business,” Pierce says, “and we felt this program would encourage our members to be good stewards of the environment.”
Pierce says it’s important to specify what types of improvements or purchases qualify as “green” so loan officers don’t have to do that on a case-by-case basis.
Other best practices green lenders and Filene suggest:
► Find a partner. Although only one-third of Filene’s survey respondents say they work with a partner, doing so helps spread the word about the credit union’s green offerings, Hall says.
Just be careful to “align yourself with high-quality partners,” he advises.
► Determine the best way to label your program. “ ‘Green’ has become a highly polarized word,” Hall cautions. “Understand whether your members are more likely to value energy savings as a way to protect the environment or to save money, and promote your program accordingly.”
► Piggyback when possible. Government-sponsored programs typically support interest-rate buy-downs or tax incentives.
An uptick in these programs tends to drive consumer interest in green loans.
► Account for program cycles. Consumer interest can ebb and flow based on the availability of government incentives and the state of the economy.
Be ready to ramp up and down accordingly. Also recognize that it can take months for consumers to learn about and respond to green lending offers.
► Ensure multilevel compliance. If your program is linked to a government subsidy, you’ll need to ensure compliance with both the program and regulations covering credit unions.
This could include the language you’re allowed to use in marketing materials, ensuring that contractors understand which products allow their customers to reap program benefits, and the verification of installation (which often is handled by a program partner).
► Focus on education. You’ll need to educate members, your partners, and the general public about program elements and benefits.
Also, involve staff in your credit union’s green initiatives.
“I’d love all of our employees to have energy assessments of their homes,” Cardwell says. “Once you understand the value of energy-efficient choices, you’re our best advocate.”