Opportunity Fund and Lending Club commit to pilot a breakthrough model for partnership scaling CDFI lending with new credit technologies. The partnership combines the high-touch skills of one of the most successful CDFI businesses lenders with the scalability of the world leader in online lending technology.
This unprecedented partnership will provide $10 million in needed loan capital to small businesses in underserved areas of California, helping an estimated 400 businesses create and sustain 1,000 jobs.
Opportunity Fund and Lending Club will create a custom credit model, designed for businesses that currently lack access to credit. This new credit model will be used to approve businesses that apply for credit through Lending Club, are located in California regions most in need of investment, and who would otherwise be declined. Through this new pilot program qualifying businesses will now be offered a co-branded loan, provided by Lending Club and Opportunity Fund. After Lending Club performs the loan underwriting, Opportunity Fund will fund these loans through the Lending Club platform. Opportunity Fund will provide these borrowers with a below-market interest rate based on its ability to access low-cost capital and accept a below-market return. Opportunity Fund will then act as the relationship manager and potentially the collections agency, applying CDFI high-touch approach to relationship building, collections, and technical assistance to help businesses that stumble to recover, improving loan performance and thereby proving these borrowers to be creditworthy.
This partnership leverages Opportunity Funds expertise in lending to microbusinesses (now at a rate of $3-4 million per month), technical assistance, borrower-success focused collections, and its commitment to innovation. Lending Club will contribute expertise in next-generation credit modeling, instant decisioning, marketing, technology-enabled underwriting, and scalable processes. This collaboration of a best-in-class CDFI microlender with the world leader in online lending has the potential to take CDFI lending to a new scale.
Based on the success of this Commitment to Action, Opportunity Fund and Lending Club will evaluate scaling this pilot program and investing additional tens of millions into small business lending.
This partnership will hopefully pave the way for other CDFIs to leverage new credit technologies and improve the efficiency and scale of their work, increasing economic opportunity for underserved small businesses.
Q2 2015: Public rollout of partnership
Q3 2015: In the quarter following announcement, Opportunity Fund and Lending Club will work together to finalize the terms of the partnership, incorporating any developments that take place at CGI America. Lending Club product managers and engineers will complete scoping of the technical development, and the two organizations will sign their partnership agreement.
Q4 2015: In the following quarter, Lending Club data scientists and risk modelers will develop a custom credit model, focused on reaching a new population of borrowers. Lending Club engineers will develop a co-branded loan experience and integrations with Opportunity Fund. Opportunity Fund will develop systems to service and collect on loans approved through Lending Club. The co-branded loan product will become available on Lending Clubs platform.
Q1 2016: Within one quarter of launch, Opportunity Fund will invest $4 million in 160 businesses, through the Lending Club platform.
Q2 2016: Within two quarters of launch, Opportunity Fund will have invested the entire $10 million in 400 businesses.
Q4 2016: Once $10 million has been invested, Lending Club and Opportunity Fund will observe loan performance for an additional six months to allow loan performance to season. At that point, the partners will evaluate the loan performance, operational performance, and borrower experience. Based on these results, Lending Club and Opportunity Fund will endeavor to scale this partnership through an additional larger ongoing investment from Opportunity Fund, and with other CDFIs seeking to efficiently scale their business lending and reach new businesses.
Small businesses financing is in a time of crisis and opportunity. Access to capital for entrepreneurs plays a key role in class mobility, job creation, and the health of the middle-class. However, small businesses' access to capital is in question as bank lending to small businesses has failed to recover from the 2008 recession. According to FDIC data, while bank commercial loans of $1 million or more have increased by 47% from 2007 to 2014, loans of $100,000 or less that small businesses depend on have actually fallen by 9%. Minority communities and women entrepreneurs are particularly underserved, exacerbating disparities in wealth and opportunity.
CDFIs have developed deep expertise in providing capital in communities underserved by traditional banking. These programs have helped tens of thousands of small businesses, but the scale of the problem has continued to grow faster than CDFIs can fill the gap.
New credit technologies can help CDFIs to grow to meet the need; if those technologies are made available and adopted. Innovations in financial technology have produced an online lending industry that is scalable, and doubling in size each year. Technology has addressed the two key reasons for market failure in small business financing. First, technology reduces the cost of underwriting through automation and improved credit modeling. Second, it reduces the cost of reaching small businesses by creating a process that attracts credit seekers, including simple online applications, instant loan decisioning, and the ability to fund within days rather than weeks or months. Importantly, however, the growing online lending industry may not reach underserved communities with responsible loan products without the reach and insight CDFIs have developed in these markets.
Partnerships between CDFIs and technology-enabled online lenders will be critical for the future of the CDFI industry. The advantages of new credit technologies are becoming necessary to remain competitive as a lender. And yet these advantages are out of the reach for most CDFIs, who typically are not able to hire teams of engineers and data scientists required to operate competitive online lending platforms.
The Opportunity Fund and Lending Club partnership can lead to other forms of partnerships that increase small business lending in underserved communities.
For CDFIs interested in scaling their business lending programs, Lending Club offers a technology platform that can lower the cost of underwriting and provide the online experience many businesses prefer. This platform could allow CDFIs to efficiently serve the market-ready portion of their customers, providing an instant decision, transparent pricing, a responsible and customizable loan product, and capital within a few days. The CDFI partner could maintain their relationship with the customer, and the income from serving the customer, without incurring the cost of underwriting. The CDFI can then focus resources where they are most needed, serving customers that arent ready for a scalable loan product and who need a high-touch underwriting processes in order to access financing.
For technology enabled alternative lenders, Opportunity Fund offers the brand and proven model of a best-in-class CDFI small business microlender to expand market share with reduced pricing. Opportunity Fund has a successful track record of providing a high volume of small business loans at below market rates to higher risk borrowers while maintaining excellent loan performance. Technology enabled alternative lenders can partner with Opportunity Fund to add credit enhancements that will improve overall loan product offers in regards to pricing, sizing, terms, and conditions. The partnership helps the alternative lending partner recover declines and withdraws, therefore decrease the cost of borrower acquisition, and additionally contribute to reducing loan rates. Opportunity Fund believes that the net savings from reduced rates for small businesses will lead to greater income, employment, and business viability.