Spinoff Highlights Why Small Banks Struggle with Online Lending

Jack Zoeller had to leave the banking industry to build his ideal online lending platform.

Zoeller, as chief executive of Cordia Bancorp in Midlothian, Va., launched CordiaGrad, an online student lending platform, in late 2014. The business quickly took off, establishing a niche of refinancing loans across the country for young professionals.

As CordiaGrad grew, Zoeller realized that its growth prospects were limited because it was owned by a community bank. So he resigned from the $348 million-asset Cordia, bought the platform and joined a growing legion of nonbanks that are giving traditional banks a run for their money.

CordiaGrad needed to be independent to fully tap into growing demand, Zoeller said, adding that "there are both written and unwritten rules for concentration limits for community banks."

The move provides further evidence that smaller banks, which run the risk of amassing large loan concentrations, could face hurdles building substantial online lending platforms in areas such as student loans.

At the same time, competition has heated up, as bigger players — such as the marketplace lender SoFi and the $108 billion-asset Citizens Financial — target professionals who had racked up big college debt, said Andy Josuweit, chief executive of Student Loan Hero, a platform that helps student loan borrowers manage payments. Such loans typically have higher rates, around 8%, providing larger demand for refinancing.

Spinning off the platform may have also helped Cordia and its bank reduce their regulatory risk, given recent regulatory scrutiny of student loan servicing.

The Consumer Financial Protection Bureau is considering new rules for student lending, as the ballooning market starts to draw comparisons to the pre-crisis mortgage bubble. In a recent report, the CFPB said it found problems with loan servicing, including payment processing issues and the mishandling of consumer information.

Calls to Cordia were not immediately returned.

Cordia, however, had been steadily cutting back on student lending, as the total number of guaranteed loans on its books fell 17% last year, to $53.8 million. Student loans made up 22% of Cordia's total loans at Dec. 31, compared with 30% a year earlier.

As for CordiaGrad, the firm gets a new start with Zoeller, five transferred bank employees and ownership of various marketing agreements, internet domains and intellectual property. No loans were transferred, though Cordia's bank will originate student loans for CordiaGrad over an interim period.

Zoeller declined to discuss projections for CordiaGrad's growth, though said the company is originating about $5 million in loans each month. He said the company could easily handle four times that amount.

Zoeller's enthusiasm stems from broader trends that underpin the fast-growing student loan market.

Total student debt topped $1.2 trillion last year, according to the Federal Reserve Bank of New York. It's a market that has withstood broader economic downturns, rising alongside a growing demand for graduate degrees.

CordiaGrad plans to target borrowers with advanced degrees, potentially putting it in competition with marketplace lenders such as SoFi and Earnest. The company's clientele has an average age of 31, and most of them took out loans to finance law school, business school or medical school, Zoeller said.

It's a segment of the market with strong credit metrics, Zoeller added.

"These are borrowers who are high achievers," Zoeller said. "They are highly employable. The likelihood of having a problem of them not repaying their loans is much lower than a consumer loan pool."

CordiaGrad loans range from $20,000 to $350,000, with periods of up to 10 years. The company says on its website that it does not charge fees for applications, originations or prepayments.

"I think it's a smart move" for CordiaGrad to separate from the bank, because it will help the online lender grow, Josuweit at Student Loan Hero said.

Zoeller could still face challenges as more companies fight for market share, Josuweit said. Competition is making it harder for upstarts to distinguish their brands, and consumers now have several options to choose from — particularly among online lenders.

Zoller said he believes CordiaGrad has a unique approach, including interest rate transparency and process where borrowers can quickly get an estimate by using a tool on the company's website.

CordiaGrad also promises a more personal touch than other online lenders. The company assigns a loan adviser to answer questions and address concerns from all of its applicants.

"Can I lower my rate by having my spouse on the loan? Gosh, I've been turned by three lenders, and I don't know why," Zoeller said, describing common questions the company receives.

Zoeller's ambition will be tested as CordiaGrad looks to expand on its own. Still, the veteran banker said he is confident he can hack it in the nonbanking realm.

"Anything we can do to innovate, offer more loans to people — it's just a tremendous service to the community, particularly to millennials and young professionals," Zoeller said.