Credit-scoring pioneer Fair, Isaac & Co. is lending a hand to Lori Mae, a company that plans to securitize small business loans.
Fair, Isaac is linking its credit scoring system to loan underwriting software developed by Portland, Ore.-based CFI Proservices, co-owner of Lori Mae.
The Fair, Isaac credit scoring system gives investors a way to gauge the risk in a pool of loans, and CFI's underwriting software ensures that the loans are made in a uniform way.
"The more homogeneous you can make a pool of loans, the more attractive it is to the market," said Latimer Asch, vice president of commercial products for Fair, Isaac. "This is a giant leap."
Lori Mae-formally the Loan Origination Management and Exchange Corp.-is one of several companies trying to expand the nascent market for securities backed by small-business loans.
The Portland, Ore.-based company, also owned by TIS Financial Services, a San Francisco company that securitizes mortgages and other loans, is targeting loans made by community banks.
Thomas A. Sidley, chief operating officer for Lori Mae, said the company is working with 15 banks to develop standardized pools of loans. By the end of 1998, the company plans to securitize a $75 million pool of credit lines and a $75 million pool of term loans.
The agreement with Fair, Isaac will let bankers use the credit-scoring system simultaneously with the underwriting software. Right now bankers have to enter a borrower's financial information twice to use both programs.
Participating banks could buy both packages at the same time. About 250 banks now use Fair, Isaac's credit scoring system, though only 20 use the latest version of CFI's underwriting software, introduced in August.
Fair, Isaac is not limiting its securitization efforts to Lori Mae. Mr. Asch said the company wants to join other projects to expand the market and ensure that its credit scoring system is used to gauge the risk in loan pools.
Several former Fannie Mae executives formed a company this summer called Small Business Funding Corp. to securitize small-business loans. Banks such as Salt Lake City-based Zions Bancorp. and SierraWest Bancorp in Truckee, Calif., have bought Small Business Administration loans from other banks and securitized them.
Still, some bankers are skeptical that securitization will take off soon. Lew Stone, president and chief executive officer of California's Goleta National Bank, said that small-business loans not made through the Small Business Administration's programs are simply too diverse to securitize.
"This is a very minor first step," Mr. Stone said.
Nearly half of all loans made through the SBA's programs are securitized, but the market for other loans has been hampered by a lack of consistent loan documentation and terms.
Often used by nonbank lenders with no access to deposits, securitization allows lenders to raise money for new loans and to generate fee income from loan servicing.
But Gary Youmans, executive vice president and chief operating officer for Fallbrook National Bank in Fallbrook, Calif., said community bankers will not embrace securitization or credit scoring.
"Credit scoring would take away from the personal touch that community banks rely on to set ourselves away from the big banks," he said.
Mr. Youmans also said most community banks have enough capital to meet loan demand, so they have little incentive to securitize their loans now.
But Mr. Sidley of Lori Mae said securitization could be useful to banks in areas with weak deposit bases. In fact, he said, the practice could help those banks increase their return on assets by as much as 50%.
