CommonBond, an online lender that launched in 2012 as a marketplace for Wharton business school alumni to make loans to graduates looking to borrow money or refinance their existing loans has a new partner: Nelnet, one of America's biggest student loan operators.
The upstart online lender has been gradually expanding from its initial launch for Wharton grads, and says it has funded over $100 million in loans to graduates of 100 schools. It's now making its services available to grads of more than 700 degree programs, with the help Nelnet, which is investing in the business and has agreed to fund $150 million of new loans.
The company hopes to fund some $1 billion in loans in the next two years, CommonBond co-founder (and Wharton grad) David Klein said in an interview with BuzzFeed News.
It already has financial heavy hitters like former Citigroup chief executive Vikram Pandit and former Thomson Reuters chief Thomas Glocer on its board. Now, it's getting capital from Nelnet, the student finance giant, which owns over $25 billion worth of student loans. Klein wouldn't disclose just how big the investment from Nelnet is, although he did say it was "material" and "in the millions." CommonBond has raised over $103 million according to the venture capital database Crunchbase.
CommonBond, like other online lenders, uses a mix of data that helps it project a borrower's future income — like what school she graduated from — and uses that to underwrite loans in partnership with an actual bank, Lake Mills, that, it says, will save its borrowers about $10,000 over the life of the loan. It then passes on the loan payments to investors.
The more forward-looking data along with what it says is superior (and far more personalized) customer service, is what distinguishes it from traditional student lenders. Its also basically the pitch for much of the rest of the industry, including SoFi and Earnest, which recently started offering student loan refinancing. The rates CommonBond offers — starting at 1.92% for variable rate loans and 3.89% for fixed, are comparable to Earnest and other online student lenders.
"Employment prospects and earnings potential are some of the two biggest predictors" of whether a loan can be paid back, said Klein. "That's the notion we launched on and that's the notion we follow to this day." The methodical expansion since lending $2.5 million to Wharton students in 2012 has followed what Klein called a "Facebook strategy," going from Wharton in 2012, to 25 business schools in 2013, and then in March, 2014, to law, medical, and engineering graduates.
Klein says he came up with the idea for CommonBond at Wharton, amid frustration with the high rates and bad customer service from student loans providers. He "vowed to ensure that no one else had to go through he same process I did to get a student loan."
Starting today, it will be available to graduates of some 700 eligible programs, including healthcare administration, public policy, accounting, dentistry, nursing, optometry, and pharmacology. Previously, CommonBond was available to graduates of about 100 programs.
Nelnet will also be making a big investment in the loans themselves, with a commitment to finance $150 million worth of loans. While many loan marketplaces started with the idea that individual investors could fund individual loans, large institutions have started to dominate the business.
Bloomberg recently reported that the massive asset manager Blackrock has purchased more than $330 million of consumer loans from Prosper, another lending marketplace. Klein said that he expected CommonBond to do its first securtization — packaging CommonBond loans and selling them as securities with different levels of risk — around the middle of this year. Over time, institutions like Nelnet, investment banks, and asset managers will own a greater and greater proportion of CommonBond's loans, Klein said.
CommonBond, like Earnest, boasts that it hasn't had a single borrower enter default or even enter delinquency. While this reflects the quality of the borrowers and the small size of its portfolio (over 1,000 borrowers, the company says), it's not likely to remain true as the loans mature. CommonBond and other online lenders have started by targeting highly educated borrowers in a resurgent job market and have not had to weather an economic downturn. The average CommonBond borrower average borrower is 31 years old with an above-760 credit score and $130,000 annual income, Klein says.
Klein said that the way the company can diversify and survive its first downturn is to take its young, high-income borrowers and offer them a wider range of products. "They probably want a home, probably want a car, maybe they want a second car, maybe it's time to start a small business, maybe they have personal liquidity needs, the opportunity is large."