Beyond the Horizon

Quontic Bank is all about thinking outside the traditional lending box – and that’s the way they like it

Horizons are simply the boundaries of our sight, and the greatest innovators dare to see beyond them. The creation of the first community development financial institution (CDFI), Chicago’s South Shore Bank, breached banking norms by lending to credit-worthy customers who couldn’t meet traditional lending criteria. That was in 1992. Since then, CDFIs have become a pathway to home ownership for millions of borrowers underserved by traditional banking, and a profitable niche for banks bold enough to take the risk.

Paul Bate

As the Chief Risk Officer of Quontic, Paul Bate, CRCM, oversees the nationwide digital bank’s operational risks. “My goal is to assess all the different risks that a bank will encounter, including standard capital adequacy, asset quality, management capability, earnings, liquidity, and sensitivity to market risk, as well as reputational, legal, and compliance risk, basically all risk,” he explained.

Founded over a decade ago in Astoria, New York, the firm has expanded into South Florida and is eyeing a host of new market entries. Their services, available in all 50 states, include traditional mortgages such as FHA, VA, and fixed-rate home equity loans. On the non-qualified side, they accept alternative documentation, servicing ITIN and debt service coverage loans, bank statement, asset utilization, and light documentation loans, foreign national loans, and TBD loans for properties that have yet to be identified by the potential buyer.

Their borrowers are composed of the self-employed, people with alternative income, non-U.S. citizens, and real estate investors. Any way you slice it, that’s a lot of risk. It’s also a great opportunity, recognized by Quontic’s late CEO, Steve Schnall. “Steve essentially found a group of credit-worthy individuals that needed mortgages and went about building a way to get them that credit in a safe and sound manner,” said Bate.

Institutions in the $300 million to just under $1 billion asset class, as Quontic is, are vital for our country’s economic health. Banks with $1 to $3 billion are too big to offer niche banking and too small to compete with larger institutions. Large banks with asset classes significantly over $3 billion find niche banking unprofitable.

The survival of institutions like Quontic is based solely on the ability to provide niche products and services. “We’re the class of institutions who serve a lot of people who just don’t fit the traditional underwriting criteria,” he stressed. “Without us, they just don’t get mortgages.”

Those people are sole proprietors, small business owners, and cash intensive business owners such as gas stations, convenience stores, restaurants, dry cleaners, and the like. Quontic looks for customers with large down payments, low loan-to-value ratios, and good credit. “We’re talking about good credit relative to nothing derogatory, somebody who only has one or two credit cards and maybe a car loan, and that’s it. Their credit file isn’t thick, but they don’t have any defaults, bankruptcies, or anything like that. That’s what good credit is,” he said.

As Quontic explores new market possibilities, economic viability is a concern. To gauge whether a market is in need of Quontic, Bate considers commonalities with their existing markets, such as the concentration of small, solely-owned and profitable businesses, and the strength of the area’s economy.

“If you’re moving into an area that’s declining economically, that’s gonna be a whole different set of risks. That’s not to say you shouldn’t do it, it’s saying that the risks are very different than in an area where the economics are increasing, and need to be evaluated. For mortgages, you have to look at the housing market. A home is going to appreciate in Kansas City very differently than in Seattle, and that purchase market is going to create unique risks,” he posited. “Sometimes risk isn’t the right word. Sometimes you have to look at the fact pattern. Every different area has a completely different set of facts that dictate the risks associated with it.”

Scammers are more deviously sophisticated than ever, and digital banks are faced with challenges that could cause customer friction. “If the bad guys were easy to pick out, my life would be a whole lot easier, but the bad guys work very hard to look like regular people,” he said. “A normal customer might feel like they’re being accused of something that would never even cross their minds.”

For potential Quontic customers, the cost of stolen personally identifiable information presents a risk that is on a different level than that of a large bank. “If somebody comes in and sweeps $20,000 out of an account at a large bank and they have to reimburse it, that’s sofa change for them. A $300 billion institution is very, very different than a $600 million institution, and $1 to them and $1 to us are vastly different amounts, so we must be better at detecting and preventing fraud.”

Bate added, “When somebody is trying to open an account and we follow up and ask if we can have a video conference with them so we can see them holding up their passport, it’s because we’re trying to protect them. We can’t say, ‘That person looks like a fraudster and this person looks like a legitimate customer,’ because the fraudster is trying to look just like a legitimate customer.”

Quontic believes that banking should be for the people. Making the home ownership dream a reality for credit-worthy immigrants, people of color, small business owners, and others who are unable to qualify for mortgage loans with traditional lenders is the mission that keeps them pushing the boundaries of what a digital bank for the people should look like. The same goes for tech investments.

“We’ll definitely keep looking into new technologies to make sure we’ll always be on the cutting edge,” Bate said. “But the baseline is that we build customer relations because we want people to remember who believed in them when they needed someone to give them opportunity to thrive.”

That’s a beautiful horizon to reach for.