Community Dividend

CDFIs seek to innovate to compete with speedy online lenders

Some mission-focused lenders are experimenting with innovative technology platforms to speed up their loan origination and underwriting processes.

Jacob Wascalus | Community Development Senior Project Manager

Published November 10, 2015  | October 2015 issue

CDFI Virtual Handshake
Michael Jacobsen

The field of small business lending is seeing an emergence of for-profit, online lenders that use innovative software tools to provide small business loans very quickly—often in as little as 24 hours. For many mission-focused small business lenders, the trend presents an opportunity to reshape their segment of the industry. With more and more entrepreneurs turning to quick lending options, could mission-focused lenders, such as community development financial institutions (CDFIs) and microlenders, use similar technology tools to improve efficiency and capture some of this business activity?

CDFIs are specialized entities that provide loans, investments, and services in underserved areas. While they’re known for delivering technical assistance and other intensive support to their customers, they’re not necessarily structured to process loans quickly. But according to Mark Pinsky, president and chief operating officer of the Opportunity Finance Network, a nationwide CDFI network, some CDFIs and other mission-focused lenders are experimenting with innovative technology platforms to speed up their loan origination and underwriting processes. Some of the experiments will fail, he says, but others might turn out to be success stories.

“These lenders will serve as great test tubes of innovation while they try to figure out what they can do in this space,” Pinsky says. “As an industry, we can learn from their experiences and adapt.”

Based on conversations with experts in the community development finance field, Community Dividend highlights below three relatively new technology innovations that mission-focused lenders have launched to speed up their loan activities.

Quickly assessing a potential borrower’s risk

LiftFund (liftfund.com), a San Antonio-based CDFI formerly known as Accion Texas, hosts the web-based Microloan Management Services (MMS) platform, which processes loan applications in a matter of minutes to assess an applicant’s risk level, categorizing it as either low, moderate, or high. According to Janie Barrera, LiftFund’s president and chief executive officer, the software saves lenders time as it weighs a battery of applicant information (e.g., assets, liabilities, credit score, etc.) to reach its prediction.

“It’s carving a good two days off of the loan origination,” she says, explaining that the algorithm underlying the MMS software is based on 12,000 completed loan applications, with repayment history, that the organization has processed since its incorporation in 1994. “We wanted to develop a profile of a good-paying customer and a not-so-good-paying customer. That’s what MMS is. We now don’t have to spend as much time with that client upfront.”

LiftFund has been using MMS for all of its loans since developing the software in 2007. Since the product was made available for licensure in 2008, 14 other CDFIs have incorporated it into their own loan application processes, with three more adoptions in the works. As evidence of its effectiveness, Barrera says that 96 percent of LiftFund’s borrowers pay back their loans. And although she can’t disclose the rate of default for the other lenders that use MMS, she notes that the software has seen 5 to 7 percent annual growth in the number of applications it has processed on behalf of the other CDFIs since 2009.

Building a low-cost distribution infrastructure

The Association for Enterprise Opportunity (AEO), a national trade association for microfinance and microbusiness, recently launched the TILT Forward initiative (tiltforward.com), which aims to improve the technology and capabilities of mission-focused lending. Tammy Halevy, senior vice president of new initiatives at AEO, says TILT Forward is building low-cost product and service distribution infrastructure to coordinate and leverage the resources of CDFIs and other mission-focused lenders across the country.

An integral part of TILT Forward is DreamFund, a nonprofit intermediary that AEO launched in June. DreamFund was established to enable mission-focused lenders (and others) to offer third-party licensed loan products at below-market rates to business owners in underserved communities. DreamFund serves as a common gateway for CDFIs that are too small to develop innovative product platforms or that seek to limit their exposure to the risk from any single product. Working on behalf of CDFIs that participate in the TILT Forward initiative, DreamFund screens and evaluates products systematically and then negotiates the loan terms.

The first product made available via the DreamFund gateway is a short-term working capital loan licensed from OnDeck, a prominent for-profit online small business lender that has developed proprietary models for evaluating the credit risk of small businesses. Participating CDFIs have originated more than $1 million in these loans to date, saving business owners an average of more than $2,700 per loan when compared to market rates. CDFIs set pricing for the licensed product in their target market (rates range from 16 percent to 22 percent), retain control of the relationship with the business owner, and provide guidance to help the business prosper. According to Halevy, the DreamFund model enables CDFIs to say “yes” to more clients and better meet the needs of small businesses in their communities.

“CDFIs are uniquely positioned to serve their communities but are constrained in many ways,” she says. “We’re trying to provide them with tools to help.” DreamFund plans to license additional product platforms and AEO expects it to evolve into an independent utility for the industry.

Joining forces with an online, alternative lender

Opportunity Fund is responding to the emergence of online, alternative lenders by partnering with one, says Caitlin McShane, marketing and communications director of the San Francisco-based CDFI. Under the terms of a partnership with online loan provider Lending Club that is set to launch in January 2016, Opportunity Fund is setting aside $10 million to loan to California-based small business applicants that are rejected by Lending Club but fit the CDFI’s applicant profile.

“For the small business, the application process will be seamless,” explains McShane, noting that applicants will apply through the Lending Club web site. “They won’t actually receive a message indicating they are being rejected by Lending Club. Instead, they’ll be instantly told that they qualify for a loan from us.”

After the qualification notice pops up, it will take Opportunity Fund about two days to complete the rest of the underwriting process. While general underwriting terms for loans generated through Lending Club’s web site are still being determined, McShane estimates that the loans will range from $5,000 to $50,000, with an interest rate between 16.9 and 18.9 percent, to be paid back after 24 to 36 months.

After Opportunity Fund exhausts its $10 million allocation, the CDFI will suspend its lending activity and monitor the portfolio of loans for 9 to 12 months.

“We’ll see what we’ve learned and decide how we tinker with the process for stage two,” says McShane.

Streamlining the SBA 7(a) loan application

The U.S. Small Business Administration (SBA) 7(a) loan program is the federal government’s primary means of helping small businesses start up or expand. The program works by guaranteeing loans made by participating lending institutions—a process that can take several months. Minneapolis-based Community Reinvestment Fund, USA (CRF), a CDFI with a national scope, has created a web-based lending platform called Spark (lendwithspark.com) that reduces the time to originate an SBA 7(a) loan by as much as 40 percent, according to Nick Elders, CRF’s vice president of technology services and solutions.

The software streamlines the 7(a) loan application process from an average of 120 days (for most lenders) down to 70 by eliminating much of the redundant data collection and re-entry many lenders face and assisting applicants through tips and online tutorials embedded in the interface. Moreover, explains Elders, the program speeds up the process by leveraging various credit risk models to help the lender determine an applicant’s risk—a function Elders describes as “starting to score the unscorable.” Based on the outcome of this evaluation, the lender will know how to proceed with the loan or if it should conduct a further examination of an applicant’s credit risk.

“This is an engineered, turnkey product and process,” Elders says, noting the software includes an extension that helps lenders sell their loans on a secondary market. “It incorporates the lender’s look, their feel, their policies, their procedure, their fonts, their people, their logo. Their brand is embedded into the software and it becomes a natural extension of their lending environment.”

Elders explains that while Spark currently facilitates SBA 7(a) loans, CRF plans to expand its applicability to microlending, merchant cash advances, lines of credit, and any other conventional lending that CDFIs do. So far, eight lenders have licensed the software since it became available in June 2015.

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