After her deal failed with quarterback turned civil rights activist Colin Kaepernick, The Change Company, led by Steven Sugarman, said it was in talks with other investors to make its vision of serving borrowers a reality. minority and low income.
The neobank is moving forward with plans to expand its mortgage and small business lending and new digital lending market, according to Sugarman.
Last year, the Irvine, Calif., Company was in the process of being acquired by a specialist acquisition company sponsored by Kaepernick’s Mission Advancement Corp. According to The Wall Street Journal, the deal fell apart when Kaepernick refused to talk about it in media interviews.
The Change Company focuses on homeownership and financial inclusion for minority and low-income communities, Sugarman said in a recent interview.
“One of the things that bothers us, and I think a lot of people, is that the gap between black and white home ownership over the past hundred years has actually widened.” , said Sugarman. “Most people know that is not where they would like it to be, but the fact that it is expanding is hard to explain.”
The company is a competitor and a partner of traditional banks and fintechs. Its banking partners invest in its community development finance institution unit and buy its loans from black, Hispanic, and low-income borrowers. In return, these banks receive a Community Reinvestment Act credit.
The Kaepernick affair
Last year, Mission Advancement raised $ 345 million to acquire a socially responsible business. In the fall, she chose The Change Company. The deal fell apart when Kaepernick’s team decided they wouldn’t talk about it on “Good Morning America.” Mission Advancement did not respond to a request for comment.
Sugarman said he would be interested in working with Kaepernick in another way.
“Colin is someone who has spoken forcefully and authentically on some issues important to our target markets,” said Sugarman. “Anyone who represents and has confidence and credibility within our target markets is someone we hope we can partner with in one way or another. “
The Change Company is in talks with several other investors, who like the fact that it’s profitable, Sugarman said. A presentation of the PSPC deal estimated The Change Company’s 2021 income at $ 300 million and its earnings before interest, taxes, depreciation, and amortization at $ 100 million.
Homeownership and Beyond
The company, which Sugarman founded in 2017 under the name Capital Corps, offers mortgages, digital banking, small business loans, appraisals, and insurance to low-income and minority people.
“We believe that in America the racial gap in homeownership is a huge contributor to the racial wealth gap,” Sugarman said. “So we start with the home loan, but like many traditional banks, once we’ve made a loan, we give the borrower a digital banking experience with a Visa card. Evolve Bank & Trust, which is headquartered in Memphis, Tennessee, with $ 628.7 million in assets, holds the current and savings accounts for The Change Company’s ChangeFI mobile banking app.
Mortgages are given to creditworthy blue chip borrowers who cannot obtain home loans through the traditional banking system for a variety of reasons, Sugarman said.
Some cannot provide all the documents that regulations require of banks. Others do not have banks in their neighborhood. Volatile income is a third factor. In the Los Angeles market, there are a lot of contract workers, restaurant workers, and small business owners who have uneven income or cash. These workers are disproportionately minorities, he said.
To lend to people with unpredictable or difficult to document income, the company looks for compensatory factors. Its loans have a loan-to-value ratio of less than 80%. Its borrowers have FICO scores above 640 and cash reserves to fill paycheck gaps – typically over a year.
The company’s Change Home Mortgage subsidiary is a CDFI that is exempt from certain mortgage documentation requirements. In 2021, it granted around 8,000 loans; in 2020, it has made around 7,000. Since its launch as CDFI in 2018, it has granted more than 20,000 loans.
The Change Company is partnering with traditional banks, ESG funds, and other socially responsible investors to help finance these loans and grow.
Partners include Netflix, Blend, Plaid and 20 banks. More than half of the banks are owned by Heartland Financial USA in Dubuque, Iowa.
“The Change Company has been an excellent partner for [Heartland] and our banks, ”said Bruce Lee, President and CEO of Heartland, with $ 19 billion in assets. “Our goal as a financial institution is to collaborate with and support the communities we serve, including those that have traditionally not had access to credit. “
The partnership with The Change Company has given Heartland a way to amplify its investment in these communities, Lee said.
“Their values align with ours, and we believe in their focused mission to extend credit and lending opportunities to underserved communities,” he said. “We have seen The Change Company fulfill this mission firsthand. “
The business has been the primary focus of Sugarman since he resigned in 2017 as president and CEO of Banc of California shortly after the company revealed that the Securities and Exchange Commission opened an investigation into the company’s questionable statements. The problem was the accuracy of a press release issued a few months earlier about the company’s internal investigation into related party transactions that had caught the attention of an activist investor and others. Banc of California said at the time of Sugarman’s resignation that the statement in question contained “inaccurate statements.”
Sugarman says part of his motivation to help minorities and low-income communities comes from a rewarding experience at Banc of California.
In 2014, the bank announced its intention to buy 20 Banco Popular branches. Two local groups, the Greenlining Institute and the California Reinvestment Coalition, opposed the plan, saying the bank did not have a publicly available ARC plan. Banc of California gained approval from groups by pledging to increase loans, investments and donations to low-income communities. Both organizations declined to comment on The Change Company.
“We had the experience of buying the Banco Popular franchise and found that such an acquisition was the most economically interesting acquisition we have made, but it was the least sought after by other banks, [and]it opens your eyes a bit, ”Sugarman said. “And you are starting to see that providing fair financial services is not just the right thing to do, but the right thing for shareholders to do.”
The Change Company has its own valuation management company, run by a black executive who focuses on urban and low-income communities. He also has an insurance company.
“We want to make sure that there are no unfair or predatory practices in the financial process,” Sugarman said.
The year to come
By the end of 2022, Sugarman hopes The Change Company will become one of the largest originators of loans to non-traditional borrowers.
Another goal is to attract more investors and banks to its new digital lending market, XChange.
By selling loans directly through the portal, “we can recycle the money faster and know that there is a socially responsible pool of capital that will always be there and will not fluctuate with Wall Street volatility,” Sugarman noted.
Using the portal, investors can search for loans in counties with poverty rates of 20% over the past 30 years. Icons identify these counties, as well as black and Hispanic borrowers.
“If someone has a socially responsible goal, they can see which loans meet that goal and move it forward,” Sugarman said. They will be able to analyze the underlying credit reports to ensure that they meet certain standards.
This may prove the impact investors are looking for when they aim to ameliorate racial inequalities in the wake of George Floyd’s murder.
“There are a lot of commitments and promises for things like black home ownership and economic initiatives and for black and low-income communities,” Sugarman said. “But often the well-meaning bank that makes this commitment struggles to find workable investments that meet its risk tolerance and community development goals. “