What is an “Energy Loan?”
Tuesday, December 1st, 2009
I am often asked to describe an innovative “energy loan” product created by ShoreBank. My answer may seem surprising. In my opinion, one of our most innovative “energy loan” products is the same conventional single-family mortgage product we’ve offered to customers for more than 30 years!
My retort is contrary to what most people think. For many in the energy efficiency industry, “energy loans” have features that distinguish them from conventional loans. “Energy loans” may have different underwriting guidelines (such as higher debt-to-income or loan-to-value limits), more generous terms (such as longer amortization periods) or, may be originated and serviced by unconventional “lenders,” such as utilities or municipalities.
This existential question about what makes an “energy loan” was the focus of a panel at last month’s Behavior, Energy, and Climate Change Conference. Interestingly, a common theme among myself and my fellow panelists was the idea that “energy loans” are not categorically different from other loan products we each have offered for decades. What is different is how we engage with customers to guide them towards choosing more energy efficient products. We all recognized that our existing loan products could be used for energy projects. We didn’t need to create novel loan products – but we did need to create novel lending programs.
For each of the panelists, “energy lending” involves developing ways to prod our customers into choosing energy efficient products. For instance, AFC First Financial Corp (AFC), one of the largest non-bank lenders for energy efficiency projects, discovered it had to focus on educating contractors. Contractors interact with customers at key times, such as when a customer’s furnace stops operating and he or she needs a new one immediately. According to AFC, 80% of consumer choices are reactionary. As a result, AFC needs to be sure consumers are making smart choices at these critical moments. Although having a flexible loan available to consummate the deal and a reduced interest rate for an energy efficient model can help to steer the consumer towards a more efficient product, without the contractor making the consumer aware of the benefits of the efficient model at this decisive time, the consumer is not likely to choose the ENERGY STAR qualified furnace over a conventional one, irrespective of the financing options. So, AFC spends a lot of time working with its contractor network to ensure contractors are able to accurately and articulately explain why efficient models are better choices.
For ShoreBank, our energy lending programs similarly focus on ensuring that our customers choose more efficient products. For example, we provide a free energy audit at the time of loan application to help customers understand the benefits of completing air sealing, adding insulation, and choosing ENERGY STAR qualified windows, HVAC systems, and appliances
The key is to drive consumer behavior towards more efficient outcomes, not necessarily to create “energy loan” products. While the current financial crisis has necessitated a need for unconventional approaches to lending (whether for energy efficiency projects or more mundane credit needs), I hope this crisis does not cause us to focus too much attention on the creation of new “energy loan” products at the expense of creating more effective “energy lending” programs.
