Saturday, March 22, 2008

Interesting Fynanz lender agreement conditions

I'm signing up for Fynanz and this is part of the lender registration agreement:

Borrowers and co-signers are identified by a Fynanz user name but are not allowed to disclose their identity or contact information to Lenders. You may contact Fynanz to request any such additional information concerning the borrower or cosigner as you reasonably believe would assist you in making your decision to lend. Fynanz will evaluate such requests on a case-by-case basis and will provide any additional requested information in its sole discretion after it has received the borrower’s approval to release information.

A little further down they talk about pledge bids. Seems they have the same difficulties as Prosper (and the other sites) in paying lenders interest on deposited funds, so their way around it is to allow a lender to pledge a bid:

Fynanz, in its sole discretion, may allow you to place a bid even if you do not have sufficient funds to meet the bid in the Fynanz Funding Account (a “Pledge Bid”). You must transfer funds from your deposit account to the Fynanz Funding Account to cover the amount of the Pledge Bid within five days of placing the bid but no later than the close of the auction in which your bid is a winning bid. Fynanz reserves the right to cancel Pledge Bids at any time.
Also interesting.

As I'm reading through, I keep finding interesting nuggets. Fynanz will also create loans if the listings has not been full funded. Seems 50% is the cut-off:

If a listing gets a bid or bids in an amount totaling at least half the amount of the borrower's requested loan, the bids that are winning bids at the time the listing expires are matched with the listing, and Fynanz will arrange for a loan to be made in the amount totaling the winning bids to the borrower who posted the listing, ...

This is different. I can see how even a partial loan can help a student, whereas in other situations it might not be so useful.

Who will bear the cost of collections?
Fynanz pays certain collection costs out of the guarantee fund, depending on the Loan’s stage of collection. Before a Borrower has missed the fifth consecutive loan payment (the “Cure Period”), Fynanz pays collection costs out of the guarantee fund and returns 100% of any proceeds from debt collection to the Lender. Following the Cure Period, Fynanz returns proceeds of collection efforts to Lenders net of (1) collection costs, (2) accrued servicing fees, (3) accrued guaranty fees, and (4) amounts previously paid from the Guarantee Fund in respect of the defaulted loan. Collection efforts may include settlement offers to borrowers to repay delinquent loans for less than the outstanding balance.
Oh dear, they might make settlement offers to defaulting borrowers? Not sure I like this.

I also don't get this:
Voluntary Repurchases. From time to time Fynanz may, in its sole discretion, invite you to offer your Notes evidencing non-delinquent loans to Fynanz for repurchase from you at a slight discount from face value. Any discount rate will be based on the holding period, the interest rate or margin, borrower payment history, the current status of the loan and the proprietary credit grade assigned by Fynanz to the loan. Your offer to Fynanz is entirely voluntary. If you make such an offer, Fynanz may accept by buying back the Notes within a 90 day evaluation in its sole discretion. When deciding to accept your offer, Fynanz will consider whether the borrower has defaulted on the loan, made any late payment under the Note, and whether the loan status or expected status has changed, including entering any deferment or forbearance within the 90 day period.
I really don't know if this is just an "in case" safeguarding clause they stick in there.

Now here it gets interesting. They seem to have the ability for lenders to transfer notes to other lenders:
Transfer Notice. If at any time you propose to transfer (including any sale, assignment, encumbrance, hypothecation, pledge, conveyance in trust, gift, or other transfer or disposition of any kind, collectively, “Transfer”), any Notes, then you shall promptly give Fynanz written notice of your intention to make the Transfer (the “Transfer Notice”). The Transfer Notice shall include (i) a description of the Notes to be transferred (the “Offered Notes”), (ii) the name(s) and address(es) of the prospective transferee(s) and (iii) the consideration and (iv) the material terms and conditions upon which the proposed Transfer is to be made. The Transfer Notice shall certify that you have received a firm offer from the prospective transferee(s) and in good faith believe a binding agreement for the Transfer is obtainable on the terms set forth in the Transfer Notice. The Transfer Notice shall also include a copy of any written proposal, term sheet or letter of intent or other agreement relating to the proposed Transfer. The transferee(s) must have an active Fynanz account(s) and accept the provisions of this Agreement.
Fynanz’s Right of First Refusal. Fynanz shall have an option for a period of 10 days from receipt of the Transfer Notice to elect to purchase the Offered Notes at the lesser of (x) the same price and subject to the same material terms and conditions as described in the Transfer Notice or (y) the outstanding principal balance of the Notes as of the date of repurchase, plus any accrued but unpaid interest on the principal balance as of the date of repurchase at the interest rate set forth in the Notes. Fynanz may exercise such purchase option and purchase all or any portion of the Offered Notes by notifying you in writing before expiration of the 10 day period as to which Notes it wishes to purchase. If Fynanz notifies you that it desires to purchase any such Notes, then payment for the Offered Notes shall be by remittance into the Fynanz Funding Account.
Hmmm, this could get really interesting.


Chirag Chaman said...
This comment has been removed by the author.
Chirag Chaman said...

- repost. fixes spelling errors + repurchase -

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