Saturday, April 19, 2008

American Banker: Fynanz Seeks to Fill Void in Student Lending

American Banker has featured the new p2p student loan lender Fynanz in a recent article (login required). Here are the highlights:

...The New York company began facilitating private educational loans in two states last month and now offers them in seven states that it says account for a quarter of U.S. student loan volume.

Chirag Chaman, Fynanz's founder, said it is entering the market at the ideal time, in part because student loans are being tarred with a brush better applied to other categories of credit.

"My feeling on this is there was never a problem with the student loan asset class," Mr. Chaman said in an interview Wednesday. "The problem was somewhere else. I personally still believe that if you have good underwriting criteria, the student loan is one of the safest unsecured assets out there."...

There are some differences between his company and other P-to-P loan facilitators, which typically try to attract lenders with attractive returns. Unlike Prosper and Lending Club, which make it clear to lenders that the loans are not guaranteed, Fynanz shares some of the risk by offering to guarantee some or all the principal for every loan originated through its site.

"We have some skin in the game," he said...

Like standard student loans, Fynanz loans are not typically wiped out if the borrower files for bankruptcy protection, Mr. Chaman said...

Bobbie Britting, a senior analyst with the consumer lending practice at TowerGroup Inc., a Needham, Mass., independent research firm owned by MasterCard Inc., said there is a void in the student loan market.

"In general, the student loan industry has just been hit hard as a repercussion of the mortgage market and the tightening up and elimination of the asset-backed securities market," she said. "There's no liquidity there, and what we've seen in the last several months is a number of lenders laying off, a number of lenders suspending operations, going out of business."

This upheaval presents an opportunity for Fynanz, because even though the regular supply for student loans is drying up, people continue to go to school and there is still plenty of demand, Ms. Britting said.

"It's going to fill a void, because there are lenders closing their doors on a regular basis, and students still want to go to school," she said. "And as Americans, we want them to go to school. We want an educated society."


According to Mr. Chaman, in its first month Fynanz generated just over $5,000 of loans and has $25,000 in the pipeline that will be approved. Students have applied for just over $100,000 of loans, but that figure includes repeat applications for those who were not approved the first time around, he said.

There is no shortage on the supply side. Lenders have made about $350,000 available to lend. "There's enough cash to lend," he said. "The borrowers haven't come in yet."
What is striking about that imbalance in supply and demand is that Fynanz has done almost no marketing to lenders. "Once more students start to come in, we see the lender side showing up," Mr. Chaman said.


"You can do it now," he said. "We obviously have put aside a very small amount of cash to buy back loans. Six months ago it was a lot larger when we had a tie-up with a financial institution," which he would not name. He expects to develop another relationship eventually.

Fynanz encourages students to apply for smaller loans than they would through traditional channels, Mr. Chaman said, and to come back over the course of the year as their funds run low.

This not only makes their applications more appealing to lenders, but it also helps combat the inherent seasonality of student loans, he said.

Fynanz began offering loans in mid-March in New York and Florida. It has since expanded to include Massachusetts, New Jersey, Ohio, Georgia, and North Carolina. It plans to go nationwide, Mr. Chaman said.

It is good to know that Fynanz has another $25,000 worth of loan requests in the pipeline. Just yesterday I mentioned that there is currently only one loan available to bid on.

Fynanz says that lenders have made about $350,000 available to lend. I wonder how this figure is calculated. With two days left for bidding, Fynanz's first loan is about 50% funded. I'm sure that Fynanz won't let this request go unfunded. If they need to I bet they cover the rest of the loan.

It's good to know that the loans are protected from bankruptcy and that Fynanz is starting to expand to other states.

Fynanz off to a slow start
Fynanz becomes the first P2P student loan marketplace
Interview with founder Chirag Chaman

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