A California securitizing firm and CFI Proservices Inc., the banking software company, plan a venture to securitize small-business loans made by community banks.
CFI and TIS Financial Services said the venture, which they plan to call Loan Origination Management and Exchange Corp., would start operating early next year.
They've already nicknamed it: Lori Mae.
TIS, based in San Francisco, now securitizes mortgages and other asset- backed loans. The securitization of nonguaranteed small-business loans would allow community banks to make more loans and generate fee income from servicing the loans without risking additional capital.
"I think the reception will be overwhelming," said Matt Chapman, chairman and chief executive officer of CFI Proservices. "It's profitable for banks to do this."
Initially, Lori Mae would limit loan amounts to $250,000. But Tom Sidley, who will be Lori Mae's chief operating officer, estimates it could securitize $250 million of small-business loans in 1998.
The securitization of small-business loans is currently dominated by nonbank lenders who sell the guaranteed or nonguaranteed portions of their Small Business Administration loans.
Nearly half of all SBA loans are securitized, but the market for other small-business loans has been hampered by a lack of standardized loan documentation and terms.
More than $21 billion in SBA loans have been securitized since 1977, but Mr. Chapman estimates that only $1.5 billion in loans without government guarantees have been securitized. Lori Mae would securitize such loans.
Initially, Lori Mae would focus on securitizing lines of credit secured by accounts receivable and term loans for equipment. Later it could expand to securitize credits, such as agribusiness loans.
Lori Mae would standardize the loans by requiring banks to use computer software from CFI Proservices to document, process, analyze, and close the loans.
Steven Osburn, executive vice president for Triangle Bank in Raleigh, N.C., said securitization would appeal to smaller banks that have reached their lending limits.
"If the requirements aren't too cumbersome, it could be very attractive," said Mr. Osburn, whose bank sells the government-guaranteed portions of its SBA loans.
CFI has about 5,000 customers, and nearly 3,000 banks use the software needed to participate in the program. Lori Mae plans a test run of the program with 15 banks this summer.
The community banks would sell the standardized loans to Lori Mae, which would bundle pools of small-business loans to sell to secondary investors.
The community banks, which would be the first to assume any losses, would maintain some loan ownership and continue to handle all servicing and customer interaction.
Mr. Chapman said Lori Mae will focus on community banks because they have more small-business loans than the big banks do.
"I think the need is greater, and we can offer more value to the community-bank market," Chapman said.
Greg Schneider, executive vice president at $175 million-asset Prestige State Bank in Flemington, N.J., said securitization would help raise the amount of capital available to small-business lenders.
"It brings the money back to the hands of the lenders, and that benefits the lenders and the borrowers," said Mr. Schneider, whose bank sells its SBA loans.
