While bankers are exiting the student lending market, a person-to-person loan facilitator is taking a run at the niche.
With banks and other lenders backing away from the student market as a result of narrowing margins and a dearth of liquidity, Fynanz Inc. sees an opportunity to market to individuals willing to offer loans to students and hold on to the debt.
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."
Web sites that facilitate P-to-P loans, such as those operated by Prosper Marketplace Inc. and Lending Club Corp., have tried to establish themselves as viable alternatives for people looking for unsecured loans, and the companies have said that demand has increased in recent months as banks have cut back their lending.
Mr. Chaman said the same model will work for student loans, especially by encouraging lenders to offer money to people attending their alma maters. "A big portion of the people who come to lend, they have some affinity for or believe in students."
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.
Mr. Chaman said the loans originated through Fynanz are considered private student loans.
Fynanz borrowers do not have to make payments while they are in school, but the interest does accrue, and is eventually added to the principal. Fynanz encourages borrowers to pay the interest while in school, and those payments go to the lenders.
Like standard student loans, Fynanz loans are not typically wiped out if the borrower files for bankruptcy protection, Mr. Chaman said.
Fynanz gives borrowers one of six ratings, using a proprietary system that evaluates both their credit history and their academic background.
Those with higher scores are a lower risk for borrowers, and the company guarantees 100% of the principal for borrowers with the highest rating. The guaranteed amounts falls by 10% for each tier, to 50% for the bottom rating.
Fynanz verifies borrowers' grade point averages and checks to make sure they are enrolled. It also notifies schools when loans are granted, and the school's name is printed alongside borrowers' names on the checks issued by Fynanz.
Mr. Chaman said these assurances, and the loan guarantees, could help persuade skeptical lenders to use his site.
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."
The unusual name might help appeal to young borrowers, Ms. Britting said.
"I think the goofy name is fine, because college kids like goofy stuff," she said. "As far as marketing to them," Mr. Chaman is "probably doing the right thing." (Fynanz said its name is one way someone might spell the word "finance" in a text message.)
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.
The loans are longer-term than those offered on other P-to-P sites; whereas Prosper and Lending Club offer three-year loans, those made through Fynanz can go up to 20 years and can be deferred for the time the borrower is attending school, plus a six-month grace period.
Fynanz will even buy loans at a discount from people who do not want to hold on to them, and it plans to sell them to willing banks.
"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.
