Tuesday, March 25, 2008

Great response from Fynanz CEO

Chirag Chaman, CEO of Fynanz left a comment on my previous blog post where I mentioned some of the Terms and Conditions in the Fynanz Lender Agreement. In fact, he came back and revised it to add some more material to the comment.

So that it gets better distribution, I'm going to repost the comment verbatim.

Thank you for considering to become a Fynanz lender. I am very glad to see that you took the time to read the agreement, instead of simply clicking "I accept". A lot of time, money, effort and legal expertise were invested to create the Fynanz platform and you've highlighted things that we spent a considerable amount of our resources on.

Let me address the more important ones and why we choose to do things as laid out in the agreement. But, let me begin with the common theme; Fynanz could and would not exist without the lenders. You are the source of financing for the students. Thus, providing safety, security and full disclosure to lenders was paramount for us.

+ Pledge Bids: As you rightly pointed out, we want lenders to have more control over their funds and thus provide pledge bids. It's not that P2P lending sites don't want to pay interest, banking regulations make it very onerous to pay interest and have lender funds FDIC insured at the same time.

+ 50% funding level: The OpenLoan is an alternative to what banks offer. Students/parents may opt for one because it is cheaper or because they want to formalize a loan amongst themselves; earn interest and avail of tax benefits. Education costs are only going up and we want families to get as much benefit as they can, even if not for the whole amount. For what remains, the banks are there as an "option", NOT a necessity as they have been in the past.

+ Guarantee & collection costs: Student loans are complex debt instruments. On the surface it's a loan, but when you look deeper the dynamics of how it works, both as a debt instrument and psychologically on the borrower is very different. The big part of collecting a student loan is not when it becomes 60 days late, but in educating the borrower of their options and the benefits of making timely payments. Studies show that defaults can be reduced dramatically by reaching out to borrowers and educating them, instead of calling them with threats of ruining their credit history. Student loan collection practices and deferment options offered to students have become a key part in reducing default rates. Today, the default rates on student loans are at historic lows (as reported by the Department of Education), and a fraction of what they were 10-15 years ago.

We want borrowers to have options and not feel they have been pushed in to a corner. Thus, we pay costs associated with collections, as these cost may not always be variable (%age of amount delinquent) and difficult to allocate to each lender. Moreover, we do not want the incentive for the collection agency to be a percentage of dollars collected. We want them to give each student and their cosigner parent the same level of service, education and options regardless of the outstanding balance.

On our part, that is why we guarantee loans. It aligns our interests with those of the lender. It is not in Fynanz's best interest to be lax in servicing or collection practices. We need to be optimal. The better we do our job, the less burden on the Default Prevention & Guarantee Fund. The better we do, the more beneficial the marketplace is for lenders and borrowers.

This brings me to your point of settlement offers. Even with student loan defaults being single digits, there may come a situation where we have exhausted all options and still the borrower or their parent is unable to pay off the balance. They may have suffered a personal financial loss, or simply can't afford to carry on making payments and "live" at the same time. Under EXTREME circumstances it may be prudent to offer a settlement than force the borrower to future financial problems. As a lender, you will get AT LEAST the guarantee amount owed to you even if the settlement offer is for a lot less.

That said, we want lenders to be assured that Fynanz will work through every available option to cure a loan and settlements will only be offered under extreme circumstances on a case by case basis. After all, this is a business for us -- the "social good" aspect of lending to students is done by the lenders -- not Fynanz. We may be the medium for making it happen, but for us to do our job well and be beneficial to borrowers and lenders, we need to operate as a business.

+ Repurchase: Fynanz over the next year will introduce a feature that will allow lenders to sell the note back should they not want to hold it for the entire terms. We realize that student loans are long term obligations and not all lenders may want to hold the loans to their entirety. Parents may lend to their child to reduce the rate while in school and may want to recoup their capital once the student graduates.

Again, I thank you for taking the time to go through the agreement. Please feel free to contact me or my team at any time.

Chirag Chaman
CEO | Fynanz

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