Lending platform CommonBond is executing the securitization of $US100 million of student loans, making it the latest peer-to-peer lender to find a much bigger marketplace for its assets.
Because banks are bailing on the student loan market left and right, it couldn’t come at a better time.
Like other peer-to-peer lenders (or ‘marketplaces’) SoFi and LendingClub, CommonBond is taking lending opportunities that used to go straight to banks directly to consumers instead.
For the institutional investors about to pile into the $US100 million offering, CommonBond can offer them more peace of mind than other student loan securitization sales. The lender has gone out of its way to tap into the most reliable segment of student borrowers — graduate students, instead of undergrads. It is expected ratings agencies Moody’s will rate the debt Baa2 and DBRS will rate it A, he said.
“These are folks who are older,” says co-founder and CEO David Klein, adding that those who “get graduate degrees are more likely to pay off debt than the average bear.”
In creating the first in what is expected to be a series of its SLABS (Student Loan Asset Backed Securities), CommonBond is taking the first steps that aims to expand its portion of the lending marketplace.
Even as these offerings become more prevalent, some on Wall Street fret that a growing balance of student debt poses a threat to the US economy. At current levels, the $US1.2 trillion to $US1.3 trillion in US student loans is still a tiny fraction of the size that American mortgages represented before losing more than $US6 trillion of their paper value in the last financial crisis.
A new class of loan facilitators has taken over from Wall Street firms like US Bancorp, Bank of America and JP Morgan that decided to stop originating new student loans as federal subsidies were eliminated. With IPOs few and far between in 2015, some investors think CommonBond’s ABS offerings could pick up traction with investors looking to take on a reduced risk profile.
CommonBond hasn’t had a default or a 30-day delinquency among 2,000 credit-worth borrowers, Klein said. This is in part due to his company being picky. Currently, CommonBond is only doing loans in its marketplace for graduate students. However, Klein thinks this could change.
The company could move into other areas of lending, like refinancing existing undergraduate loans, Klein said. Klein points out that the average age of a CommonBond borrower (32 years) and the typical income and credit score of his customers (about $US140,000 in salary and a FICO score in the 760-770 range). And that likely has a lot to do with why none of CommonBond’s borrowers have defaulted so far.