A South Dakota finance company trying to become a household name in student lending is enlisting community banks to help it reach that goal.
Student Loan Finance Corp. in Aberdeen began originating student loans in the Midwest three years ago after nearly two decades of buying the loans on the secondary market. It hopes the involvement of community banks - which have often shied away from student lending - will help double its share of the $60 billion student lending market, to $1.5 billion, within a year.
"We have worked out well in our home state, but we have been looking to move outside of our immediate area," said Chris Torbert, the company's assistant vice president of business development. "And this gives us the chance to get a great deal of loans funded."
The formula is simple: Student Loan Finance pays a fee to bank members of the Independent Community Bankers Association that refer loan candidates to the company.
The handful of banks that have signed on with Student Loan Finance say they like the arrangement because it gives them another alternative to referring college-bound customers to bigger banks.
"We get to work with a nonthreatening business that we won't worry about stealing our car or home loans," said Jim Goetz, the chief executive officer and chairman of $54 million-asset Security First Bank of North Dakota, in New Salem.
Security First is one of the first community banks to work with Student Loan Finance through the program, which was announced this month. It plans to originate 30 to 50 student loans in its community this year with the program's help.
Once an ICBA-member bank establishes a relationship with the student lender, its only responsibilities are to distribute marketing and informational tools and provide applications for the loan program. Student Loan Finance then does all the paperwork and monitoring. Once the loan is active, the bank and the student can check the loan's progress at a Web site set up for the partnership, www.brainscratch.com.
Robert Kafafian, president of consulting services at Tucker Anthony Capital Markets, in Lancaster, Pa., said the amount of paperwork required by the government to guarantee the loans and the normally high default rates are two reasons why small banks have generally steered clear of student lending.
Also, community banks that have ventured into student lending often do not have the staff or time to dedicate to these loans and end up overlooking regulations necessary to ensure government guarantees, he said.
ICBA-member banks that already originate student loans - guaranteed or not - can also use the program and can even sell some or all of their loans to Student Loan Finance.
"Essentially it's for community banks to compete with the large financial institutions in the marketplace, giving them equal footing with a low risk," said Dan Clancy, ICBA's director of services.
The students receive a preferred interest rate and a personal relationship with the same loan officer throughout the loan's term, Mr. Clancy said.
The bank's referral fee is equal to a percentage of the loan, which is much more than the little or no compensation banks now receive from referrals to "the big bank down the street," he said.
Mr. Goetz said Security First had been getting about $16 per referral from a much bigger bank and now gets about 2% of the loan's value from Student Loan Service.
"Making student loans is a complicated process unless you make it your only business," he said. "We have worked with bigger banks in the past, but this seems like a superior alternative with great compensation."
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