SoFi to sell student loans to small banks through Promontory

SoFi, the online lender that caters to well-heeled millennials, has reached an agreement with Promontory Interfinancial Network to sell student loans to community and regional banks.

The partnership, which was to be announced Feb. 8, is designed to lighten small banks' due-diligence load – and give SoFi an entrée with a new group of bank investors.

Promontory, a provider of deposit-placement services, has begun marketing SoFi loans to its member network, which includes nearly half of the nation’s banks. Later this month the loans will be available on a marketplace Promontory operates.

Interested banks will receive a 40-page report that includes details on SoFi’s underwriting and operating policies. They will also receive access to data on loan characteristics and origination trends.

David Paul Morris/Bloomberg

In the partnership, Promontory, of Arlington, Va., acts as a conduit between two industry players that are often at odds. Through its student loan refinancing business, SoFi has staked a claim on a coveted clientele of high-earning, young professionals. The San Francisco startup has also accelerated its bid to look more like a bank, through its announcement last week that it had agreed to acquire the mobile banking startup Zenbanx.

Still, for community banks looking to diversify or grow their loan portfolios, buying SoFi student loans could be an attractive option, according to the companies. Over the past few months, Promontory has reached out to more than 100 banks about buying SoFi loans, and about a third have expressed interest, said Will Davis, Promontory’s managing director for corporate development.

“Competing financial institutions work together all the time – whether that’s in syndicated loan groups, lending consortia, or underwriting stock and bond issuances – when its mutually beneficial to do so,” Davis said. “Our program that we’re announcing allows our banks to share in SoFi’s success” in refinancing federal student loans.

The first transactions are expected to take place within months, Davis said.

Under the agreement, SoFi will pay Promontory an undisclosed fee for each transaction, based on volume. Banks will face no additional charge for purchasing the loans through Promontory.

For SoFi, the partnership provides a new source of funding. The online lender funds its operations through a mix of securitizations and loan sales to institutional investors, including asset managers, private equity firms and large banks.

“For us, it’s another way to diversify our funding mechanism, and to build more relationships,” said Ashish Jain, senior vice president of capital solutions at SoFi.

Jain noted that compared to securitizations, loan sales are less sensitive to swings in the market.

Last year SoFi originated $8.1 billion in loans – including $4.4 billion in student loans, according to a spokesman. The company also offers mortgages and personal loans.

SoFi securitized $4.8 billion in loans in 2016, mostly from its student loan book. It also sold $2.1 billion in loans to investors, the company spokesman said.

SoFi’s student loans could appeal to banks that are willing settle for lower yields in exchange for a smaller risk of default. As of last year, SoFi reported having just 17 defaults among approximately 100,000 student loan borrowers.

This has been a rocky year for online lenders. In recent months, several of SoFi’s peers – including Lending Club and Prosper Marketplace – have laid off staff and shuffled their executive ranks, amid investor concerns about credit quality.

Broader concerns about the fintech sector were also a factor in SoFi’s decision to delay an initial public offering.

SoFi, established in 2011, describes itself as a “super prime” lender. The average credit score in its student loan book is 770, though its FICO band extends into the lower 700 range, according to Jain.

The Promontory-SoFi partnership could provide banks across the industry a reason to get back into the student loan business, after years of pulling back.

The banking industry has steadily exited the market since a June 2010 law overhauling the student loan market took effect. The law prohibited the federal government from subsidizing banks to issue federally insured student loans.

Meanwhile, student loan debt nationwide has soared, nearly tripling in the past decade, to $1.28 trillion, according to the Federal Reserve Bank of New York. The vast majority of student loan lending is guaranteed by the federal government.

SoFi has made a fast-growing business out of refinancing federal student debt – mostly for borrowers with significant earning power, such as young doctors and lawyers. The average income of its borrowers is $180,000, and most have about $6,000 in free cash flow per month, according to Jain.

The company typically refinances loans down to an interest rate of about 5.5%, from a government rate of about 8%, Jain said.

SoFi also competes for educational borrowers with banks such as the $114 billion-asset Citizens Financial and the $68 billion-asset First Republic, which also refinance student loans.

What sets SoFi apart for consumers – other than its at-times aggressive, anti-bank marketing – is its focus on social events. The company describes its borrowers as “members,” and organizes events such as yoga classes and brewery tours for its borrowers.

Under the new partnership, SoFi loans will be available later this month through Bank Assetpoint, a loan marketplace administered by Promontory.

Promontory’s network includes 47% of the industry’s depository institutions, with an average asset size of $2.8 billion.