ReliaMax is unlike anyone else. In the same way Uber connects people who need rides with people who provide rides, we connect students and lenders. As Uber doesn’t own vehicles, we don’t own loans. We work with more than 100,000 borrowers and hundreds of lenders.
— Michael VanErdewyk, Founder and CEO of ReliaMax
We’ve previously looked at ReliaMax in A Marketplace Lender Built As An Insurance Company. This time, Lending Times caught up with Michael VanErdewyk at Lend360 and asked him how he did it.
How ReliaMax Is Revolutionizing the Private Student Loan Business
HEMAR Insurance Corporation of America started insuring private student loans for banks in South Dakota in 1986. In 1994, Sallie Mae purchased HEMAR Insurance Corp. of America. By 2004, Sallie Mae had $12 billion insured private student loans but their business model changed and they decided to no longer insure the loans.
VanErdewyk founded ReliaMax in 2005. In July 2006, he acquired HEMAR, gaining access to the company’s data, hardware and software, and analytics. Now, he found himself in the private student loan business after decades of being in the insurance and financial services sector.
In 2009, ReliaMax Surety Company began insuring private student loans. Since then, they’ve insured $3 billion in private student loans and now have 30 years and $15 billion of student loan data. “Because we have this data, the systems and technology, about 75%-80% of our business is in-school loans,” VanErdewyk said. “Few people are doing the in-school business. Everybody is running to the consolidated refi in the super prime space.”
Underwriting graduates is different than students currently in school, VanErdewyk said.
“It’s not difficult to underwrite a Stanford Grad five years after graduation at 800 FICO and make $200,000 per year,” VanErdewyk said. “But, based on our data, we can underwrite in-school loans to a 680 or 660 FICO.”
Sallie Mae issues the most in-school loans followed by Wells Fargo and Discover. ReliaMax is fourth in terms of facilitating loan volume, but they don’t own the loans. Working with 500 banks and credit unions, the institutions they work with use a balance sheet model while ReliaMax insures up to 100% P&I through their fully-regulated insurance company.
ReliaMax partners lenders with borrower acquisition channels. They can acquire student borrowers faster and cheaper than traditional channels and have recently contracted with Upstart, Student Loan Hero, and Lending Tree/SimpleTuition. They expect other partnerships to materialize in the near future. With some significant borrower acquisition channels in the millions of dollars range, they can funnel borrowers to traditional lenders seamlessly. This strategy helps traditional lenders grow.
“We have more lending capacity than borrowers,” Van Erdewyk said. “We also have a capital markets team who creates portfolio liquidity for traditional lenders. We have capital market support to sell the loans to family, office, or life insurance companies. We don’t do securitization. Banks do whole loan sales to other banks. We work from a $250-$500 million up to $1 billion per year commitment with banks that want to buy loans for investment purposes.”
Banks can buy a fully-insured asset class that has a higher coupon (in-school or consolidation refi). Everybody else is running towards that super prime loan because of the low risk that also has the lowest coupon rate (2.5%-3%). ReliaMax can expand the underwriting box because of our data and analytics and prices insurance premiums to the risk. This leaves the investor with a 5%-7% coupon that is fully insured on the principal and interest. The investor — bank or credit union — carries the loan on their balance sheet.
When asked about securitization, VanErdewyk said, “We are not depending on securitization to be successful. We would be open to doing it, but we have insured $3 billion in loans and haven’t done a single securitization. In the future, we will likely have some facility where we will accumulate them, perhaps with 10 banks each giving $25-$50 million for one securitization.”
“Our model is to add as many lenders as possible and partner these lenders with the borrower acquisition channels,” VanErdewyk said, “All these companies can work together. It’s not like alternative lenders should threaten traditional ones. Our model demonstrates that. Without ReliaMax, 500 of our lenders would not have entered this business. Because of ReliaMax, tens of thousands of borrowers got the money they needed to go to school. We have no plans to expand into other asset classes because this market is so big. We are known as the experts.”
Written by Nicki Jacoby.