Reaching Middle Market Homeowners Through Finance Programs and the Contractor Network

by Peter J. Krajsa

Contractors have a tremendous influence on a customer’s decision about how to pay for an energy efficiency upgrade. Contractors must be trained how to make affordability of energy efficiency an effective part of every sales proposal and evaluation. Many homeowners are reluctant to make the investment in energy efficiency upgrades if the only payment options they are offered by a contractor is a large cash payment or the type of variable payment or “teaser” rate plan that converts to a much higher payment or rate when the promotional period is over.

Although many of us in the energy efficiency world would love to think that homeowners can’t wait to insulate their attics or install new high-efficiency gas furnaces, the reality is that these kinds of projects do not top most wish lists of enticing home improvements. Couple that with high project costs and you wind up with a tough market to crack. Middle-market consumers have higher financial and emotional priorities, ranging from college tuition payments to kitchen remodels, with limited resources to address these needs. Squeezing energy efficiency projects into a household’s budget with affordable financing is key to helping state and local programs achieve their goals.

Rebates are helpful, but they only scratch the surface of project costs that can reach $10,000 or more. As evidenced by successful programs such as Pennsylvania’s Keystone HELP, consumers prefer the stability and certainty of a fixed monthly payment that can be offset, to some degree, by energy savings.

Successful residential energy efficiency loan programs combine several key elements.

The first element is a focus on middle-market homeowners. For these homeowners, access to affordable financing is playing an increasingly large role in their decision to make energy efficiency home improvements such as HVAC upgrades, air sealing and insulation, energy-efficient windows and doors, and solar hot water.

The second element is an approved contractor network authorized to perform the work. Recruitment, monitoring, and training of a qualified contractor network is essential. Contractors who qualify to meet the program’s standards for financial and ethical stability will greatly mitigate any issues regarding consumer satisfaction for work performed. Contractors are also the marketing drivers on point-of-purchase finance programs. They become the most cost-effective method of marketing the program to consumers, as well as for delivery of the end product.

The third key element is streamlined loan origination procedures. Financing programs for smaller home improvements (from $1,000 to $20,000) cannot be complicated. If a program involves too much red tape and is not user friendly, consumers and contractors will often take a more expensive path of least resistance, such as high-rate credit cards, to finance these kinds of improvements. For maximum program uptake, the loan must be a simple point-of-purchase transaction with ease of use for consumers and contractors.

The fourth element is effective underwriting and loan servicing. The principal key to program acceptance is simple, fair, and consistent loan underwriting coupled with effective “consumer friendly” loan servicing. When combined, these mitigate losses and promote program sustainability.

The fifth key element to a successful loan program is qualification of installed improvements and energy-saving tracking and management. A program’s effectiveness can only be measured by judiciously monitoring qualifying improvements and the resultant energy savings.

Successful financing programs address both “reactive” and “proactive” improvements, providing greater incentives (such as lower interest rates) for proactive improvements.

Reactive energy improvements address an immediate need. A customer must act quickly to address an immediate need, such as faulty or inefficient heating and cooling, or defective windows or air sealing. These kind of improvements account for 90% of all energy-related improvements. The typical size of these improvements, $2,500 to $15,000, often falls within a consumer’s financing “twilight zone”—too big to put on a credit card but too small to go through a time-consuming home equity loan process. Consumers end up not making the upgrades, succumbing to “bait and switch” programs such as 0% financing that morphs into 18% to 32% APR, or settling for less expensive, lower efficiency items. The most appropriate and, in our programs’ histories, the most successful type of financing for this kind of improvement is a simple, unsecured loan with minimal paperwork for both the contractor and consumer, with eligible measures being clearly defined using Energy Star or advanced-performance standards. Banks and other lenders typically limit loan size and terms on these types of loans. Most successful energy efficiency programs not only offer lower rates for unsecured financing that targets this type of reactive improvement, but longer terms and larger loan sizes than those available from conventional lenders.

Proactive energy improvements are part of a comprehensive plan to save energy. Typically these are the result of an energy audit and may include whole-house air sealing and insulation, more sophisticated and higher efficiency heating and cooling, and significant structural repairs falling under the “Home Performance with Energy Star” model. These kinds of improvements have historically been financed with home equity loans (both because of the larger and riskier loan size for which collateral is a requirement as well as the customer’s desire to have tax-deductible interest). In today’s economy, however, the customer is faced with a double-edged sword: Banks have restricted the level of loan-to-value on homes they will lend to, and customers have seen a rapid erosion in their home equity. Some energy efficiency programs are addressing this dilemma by providing “lower than bank” rates to attract consumers with equity, as well as an additional suite of higher loan-to-value products (such as the FHA PowerSaver loan) limited to consumers making these kinds of proactive energy improvements.

Financing programs must be consumer friendly—simple, fast, and easily communicated. To promote higher efficiency (and sometimes more expensive improvements), there must be a clear differentiation with “better” financing for high-efficiency improvements driven through lower rates, longer loan terms, and lower payments than those available for lower-efficiency products. A successful energy efficiency program faces many impediments—from consumer malaise to contractors’ rejection of overly complex program standards and processes. Implementing a simple, fair, and affordable financing program helps alleviate many of these hurdles and paves the way for sustainable program success.

Peter J. Krajsa is Chairman/CEO of AFC First Financial Corporation, a specialty residential energy efficiency lender and program administrator founded in 1947 which operates programs nationally in association with states, municipalities, utilities, manufacturers and contractors. He is responsible for the creation of AFC First’s EnergyLoan® program, the Keystone Home Energy Loan Program in cooperation with the Pennsylvania Treasury Department and DEP and the CT Solar Lease program in cooperation with the Connecticut Clean Energy Fund among others. Under his leadership, AFC First was named the nation’s first non-utility Home Performance with ENERGY STAR sponsor and a national pilot HUD PowerSaver lender.