Cuts to federally guaranteed student lending programs could create new opportunities for private lenders, and a small insurance company in Sioux Falls, S.D., wants to help community and regional banks get in on the action.
ReliaMax was founded by CEO Michael VanErdewyk in 2006 to acquire Hemar, an underwriter of surety bonds, or triparty insurance contracts, from Sallie Mae (SLM Corp.). It has since expanded into servicing loans, underwriting them and even finding borrowers — marketing itself to institutions that want to acquire a portfolio of private student loans or to start originating them.
“I've got 20 years of data on $12 billion of loans,” VanErdewyk said. “After seeing how most of these [loans] performed … we decided to expand our services, offering our clients origination and servicing about four years ago. It’s really made a difference.”
This combination of insurance, underwriting and servicing is an unusual twist on the "rent-a-bank" model employed by many marketplace lenders. Typically, marketplace lenders find borrowers and underwrite the loans, send them to a bank to be originated, and almost immediately purchase them. In ReliaMax’s case, however, the loans stay on the originating bank’s balance sheet — unless the borrower defaults.
“When a loan hits 60 days past due, it goes into our default prevention program,” VanErdewyk said. “We pay a claim at 180 days.” At that point, ReliaMax Surety Company owns the loan.
To date, the company says it has paid only about $40 million in defaulted claims on the more than $3.5 billion it has insured since 2009.
Many banks exited private student lending after the financial crisis; the market is now dominated by a few large players, including Sallie Mae, Wells Fargo, Discover and Citizens Financial Group.
The regulatory climate has become more favorable for private student lenders and servicers under the Trump administration. And the House is preparing legislation that would curb federally guaranteed lending to graduate students and parents of students, potentially creating a multibillion-dollar opportunity for the private sector.
So far, however, relatively few community and regional banks are involved. Many lack any experience with the asset class, or if they have experience, it was as a lender under the Federal Family Education Loan Program, which ended in 2010.
Yet student loans offer attractive yields. Typically, after servicing and insurance, you can see a net yield of 4%-6% on the average fully insured student loan, VanErdewyk said. “Where else can a bank get that yield?”
It’s not uncommon for banks to insure student loans and some other kinds of assets, such as home improvement products, according to Mike Stallmeyer, chief operating officer at LendKey, a company that manages online lending programs for banks and credit unions.
“In our experience, some lenders like having insurance on certain assets, when they can get it, the question is, ‘is there a provider at an attractive price?’”
Typically, Stallmeyer said, clients will use insurance either because they are new to an asset class or they like the comfort of a third party validating their underwriting box and providing certainty around the risk adjusted returns. Once they get comfortable with asset class and portfolio performance they may decide to self-insure rather than purchase 3rd party default protection.
ReliaMax works with more than 475 banks, credit unions and alternative lenders. It may be the only insurer of private student loans, but it faces plenty of competition in student loan servicing. This is low-margin business that benefits from economies of scale, and the big players, including Navient (which was spun out of Sallie Mae), Nelnet, and Great Lakes Educational Loan Services, all primarily service federal student loans.
However, ReliaMax’s focus on private student loans is a big advantage, VanErdewyk said. “Our platform has things others don’t,” such as full transparency around co-signers. “The federal government doesn’t require borrowers to have a co-signer, but 95% of our [private] loans are co-signed, typically by a parent. We always notify both the borrower and the co-signer of any activity in that account. If the borrower gets behind, the co-signer knows instantly. You can imagine how that can help.”
“If someone is servicing private loans on a federal student loan servicing platform, that [ability] doesn’t necessarily exist,” he said.
The company has built a soon-to-launch mobile app into its servicing platform that allows borrowers to check their balances, change their address, or make a payment — something the Department of Education is only now considering.
The servicing platform also automates a lot of regulatory and compliance functions, such as requirements for SCRA (Servicemembers Civil Relief Act)
working with active service members.
While ReliaMax will offer servicing on a stand-alone basis, lenders rarely choose this option. “We always tell a lender, ‘You can make a loan to whomever you want, we will only insure those loans that fit our agreed-upon criteria. If you just want servicing, that’s fine’,” Van Erdewyk said. “But they rarely go that way.”
Most lenders also have little experience in borrower acquisition. So ReliaMax has a team that calls on schools, for instance, to get its lender clients on preferred lender lists. It also has its own consumer-facing website, and it works with third-party borrower acquisition sites, like Credible and Lending Tree.
“A lot of banks and credit unions are located in towns where there are major colleges or universities. They have that presence but don’t even know how to take advantage of it — or that these preferred lender lists are even out there,” Van Erdewyk said.
“If lenders want to get into a consolidation refi program,you can go to alumni associations. There are so many entry points into a school.”
In the case of portfolio trades – loans that have already been underwritten, ReliaMax can assist a buyer by providing insurance on the loans as the trade is completed.
For example, in September, ReliaMax was selected by MetaBank, the federally chartered savings bank of Meta Financial Group, to service and insure a $73 million portfolio of private student loans that it had acquired. And in 2016, MetaBank selected ReliaMax to service and insure a $151 million private student loan portfolio.
ReliaMax has been involved in 12 deals totaling $340 million through its portfolio trade channel, often working with brokers and investment banks to help identify potential buyers. “We know where a lot of loan portfolios are,” Van Erdewyk said. “We insure a bunch of them.”
The CEO thinks the private sector can lend much more responsibly than the federal government, which offers the same terms to all lenders who meet a needs test, regardless of their credit history, course of study or the school that they attend. Federal lending to graduate students can be particularly problematic, since borrowers can currently obtain loans to cover the full cost of attendance.
“I believe the federal government should be a lender of last resort, not a lender of first resort,” Van Erdewyk said. “If there are more grants and scholarships, great. If you look at how borrowers get into trouble, it’s often with federal loans, not private.”
For example, ReliaMax recently paid a claim on a borrower with a total of $100,000 in private student loans, one of which a client acquired through a portfolio trade. When the loan was insured, this borrower was current; six months later, she defaulted, and it turned out that, in addition to the $100,000 in private student loans, she also has over $900,000 in federal student loans.
“In the private sector, that would never happen,” Van Erdewyk said