LendKey Creates New Student Loan Market
A financial commitment by Apollo Global Management, a leading alternative investment manager, will make up to $1 billion available through its subsidiary MidCap Financial for repurchasing private, student-refinanced loans originated by credit unions through LendKey, the New York City-based technology platform that serves 305 community financial institutions.
The agreement, announced today, creates a one-of-a-kind, private secondary market for the loans that already adhere to credit union underwriting standards and will retain the issuing credit union’s identity, brand and member relationship even after the loans have been sold, according to LendKey CEO Vince Passione.
“We’ve created a liquidity market for some of our credit union clients that allows them to maintain their longevity in the student lending market,” Passione said. “We think this is a big win for everyone.”
Beginning in 2009, LendKey has provided private student origination and consolidation loans on both an exclusive and participation basis for credit unions. The ability to sell a portion of these loans to the secondary market gives participating credit unions a third option that provides fee income to the lending institution while freeing up credit union capital for additional uses, Passione explained.
“About 650 credit unions sell their student loans to Sallie Mae, which is a bank that then begins marketing other financial services to borrowers,” Passione said. “Apollo is a financial buyer and treats its assets as such. Based on what we know, this is the largest financial commitment of its kind to the secondary market.”
The $100 billion student loan market is in need of additional refinancing options, Passione said. Since 1999, student debt has increased by more than 500%. The average student loan debt is at an all-time high of $33,000 per student with interest rates in excess of 7%. In addition to helping credit unions, the commitment by the $160 billion-asset Apollo through MidCap will allow LendKey to develop new products and expand online offerings.
The partnership began with an inquiry from Apollo executives about credit union investment opportunities, Passione said. Offering student loan refinances made the most sense initially, and the quality of credit union assets made the member-owned financial institutions an attractive target.
By targeting student loan refinances first, LendKey can help borrowers reduce high interest rates and bring more assets to credit unions. Since its founding six years ago, the firm has also attracted about 20,000 new members to the credit union fold through its marketing efforts for student loans with more attractive rates, Passione added.
“Credit unions have the lowest cost of funds and the best member relationships,” Passione said. “Apollo said it would continue working with credit unions with any other loan vehicles they are interested in offering.”
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The LendKey executive noted that such relationships are challenging to form, which is why the firm chose to explore refinanced loans first. The move is also designed to provide critical assistance to borrowers and cosigners in search of more reasonable loan rates while attracting them to the credit union marketplace, Passione said.
“We touch some seven million members with the 305 community financial institution relationships we have, and the last thing we want to see our credit unions do is to lose their members to other service companies,” he added. “We think this service is just in time.”
Part of the draw is the increased interest in online lending options, especially to Millenials who carry student debt, as well as their baby boomer and older parents and relatives who cosign for the loans. Consolidation and refinanced student loans offer the opportunity to combine multiple higher-interest loans into single loans with more reasonable rates, making them more reliable and attractive assets to the secondary market, Passione said.
In addition to private student origination and consolidation loans, LendKey has begun expanding into other loan products. On April 3, the company launched an auto loan program in partnership with TrueCar Inc., a concierge auto buying service based in Santa Monica, Calif. that offers car buyers guaranteed discounts based on make and model national average prices.
Participating borrowers receive coupons representing guaranteed prices from TrueCar and coupons with approved loan amounts from LendKey credit unions that they then take to the dealer at the time of purchase.
LendKey also has expanded its “green loan” construction loan program piloted in New Jersey to become a bona fide unsecured home improvement loan program. The firm plans to re-launch the program nationally later this year, Passione said.
“We followed the demand from our credit unions and listened closely to what they wanted,” Passione said. “They’re great partners.”