Latest threat to online lenders: “accumulation” of several loans
SAN FRANCISCO/NEW YORK (Reuters/IFR) – Many online lenders have failed to detect the “stacking” of multiple loans by borrowers sneaking into their automated underwriting systems, senior executives told Reuters. lending companies and investors.
The practice is proliferating in the industry – led by LendingClub, OnDeck and Prosper Marketplace – due to many lenders’ rushed and algorithmic underwriting, use of “soft” credit inquiries and spotty reporting of resulting loans to bureaus of credit, according to online loans. and consumer credit experts.
Such shortcomings, they said, can lead multiple lenders to lend to the same borrowers, often over a short period of time, without seeing the big picture of their growing obligations and deteriorating ability to pay.
The stacking is “causing problems with the entire industry,” said Brian Biglin, chief risk officer of LoanDepot, a five-year-old mortgage lender that started making personal loans online last year.
New revelations about loose lending could make it harder for the beleaguered sector to regain the confidence of investors who are already concerned about sloppy underwriting and rising risk of default. The lending industry in the market – which reached $18 billion in annual loans last year – has seen share prices plummet and the withdrawal of some big lenders, including BlackRock and Citigroup.
Industry leaders LendingClub and Avant said they were aware of piling and its dangers, but downplayed the risks and did not provide examples of specific actions taken to prevent the practice. . OnDeck and Prosper said they have launched efforts to detect and guard against stacking.
“We have established proprietary algorithms,” Prosper spokeswoman Sarah Cain said.
Some high-risk lenders allow and promote stacking as debt consolidation, but most lenders see it as a threat, especially when it’s not disclosed.
Edward Hanson, the owner of Ella’s Wood Fire Pizza, said he started accumulating loans about five years ago to support his business.
“You take another one to help pay for the first one,” Hanson said.
Hanson, 55, said he already had loans from various online lenders when he received offers from online commercial lenders OnDeck and Kabbage, who approved his application, he said.
OnDeck knew Hanson had at least one other loan when it applied in August 2014, and demanded that existing debt be repaid as a condition of the new loan, company spokesman Jim Larkin said. When Hanson returned a year later, OnDeck denied his request because Hanson had accumulated loans during repayment, Larkin said.
Kabbage declined to comment on Hanson’s loans and did not respond to questions about his stacking policies.
Hanson is now paying almost 40% interest on his last loan, from another lender.
“I feel pretty much trapped,” he said.
Institutional investors have recently grown wary of market lenders after initially hailing them as disruptors to banks and credit card companies. Money from Wall Street is crucial for most online lenders, who need it to fund their loans.
Citigroup ended its partnership with Prosper earlier this year. The bank had repackaged about $1.5 billion of Prosper’s loans into securities since the partnership began less than a year ago.
Investor sentiment was again hammered last month by a scandal at industry leader LendingClub. The company knowingly sold $22 million in loans that did not meet the agreed specifications of an investment bank, Jefferies, and falsified applications for $3 million of those loans.
LendingClub is under investigation by the US Department of Justice, the company announced last month, and a number of its large investors have halted their investments following the resignation of its chief executive. The New York Department of Financial Services has also announced that it will launch an investigation into online lenders.
Now stacking concerns are adding to the industry’s woes. An investment firm that was considering buying shares in a market lender described stacking as an industry “blind spot”. The company declined to be named.
Bill Kassul, a partner at Ranger Capital Group – which has invested around $300 million in market and business lending – said stacking has become a concern over the past two years and poses a ” big risk” for investors.
Blue Elephant Capital Management recently stopped buying loans from Prosper for several months due to concerns about weak underwriting and profitability. Marketplace lenders need to slow down their lending processes and improve credit information sharing, said Brian Weinstein, chief investment officer at Blue Elephant.
The stacking was “one of the reasons we think we saw bad credit last summer when we stopped our market lending program,” Weinstein said.
Blue Elephant last month announced plans to resume buying Prosper loans, in part because the company is charging higher interest rates.
“SOFT” CREDIT CONTROLS
In their rush to give applicants quick loan decisions – sometimes within 24 hours – some market lenders are failing to conduct thorough credit checks, called “serious inquiries”, according to industry executives.
These checks create an updated log of credit and loan applications, and they can lower a borrower’s credit score. Informal requests do not require the borrower’s consent and generally do not appear on credit reports.
OnDeck said it only performs software checks. LendingClub and Prosper said they run soft checks initially, but run hard checks later in the process, just before loans are funded.
However, carrying out rigorous checks only at the last minute can also leave other lenders in the dark, said Gilles Gade, president and CEO of Cross River Bank, which invests in many online lending platforms. At this point, the borrower may have already secured other loans, he said, because hard checks can take about 30 days to show up on a credit report.
Another problem: loans that never show up on credit reports, due to spotty reports from online lenders.
“Not all lenders in our industry are office-based,” said Leslie Payne, spokeswoman for LendUp, which provides high-interest installment loans. In a February blog post, Experian, the credit bureau, said a “significant number” of Marketplace lenders are not reporting their loans.
Prosper, Avant and LendingClub told Reuters they report their loans to the three major credit bureaus at least once a month. OnDeck said it reports to several leading commercial credit bureaus, including Experian and PayNet.
Many lenders said they also pull data from other sources, including pay stubs, tax documents and business accounting software to assess a borrower’s ability to pay.
LoanDepot said it has taken several steps to mitigate stacking risks, including requiring months of bank statements for its borrowers and creating custom algorithms to flag potential stacking activity.
WHEN THE MUSIC STOPS
Most online lenders focus on business or personal loans. Those who lend to small businesses may face greater risk of accrual, in part because of a distinct class of high-risk, high-interest commercial lenders that actively promote the practice.
Merchant cash advance lenders make loans based primarily on a business’s expected revenue rather than its credit history or existing debts. They often scour business loan databases — such as those from OnDeck or Kabbage — and use them as marketing leads to find new borrowers, online loan officers and investors said.
OnDeck has made efforts to educate customers to stay away from lenders offering stacked loans, chief operating officer James Hobson said. He also began monitoring borrowers more frequently and joined the Small Business Finance Exchange, an effort to share loan data to guard against stacking.
After OnDeck rejected the second request from Hanson, the pizzeria owner, he turned to World Business Lenders, a small business lender founded in 2011. He is now paying 39% interest.
Hanson did not detail his balance or payments, but said he had put his house up as collateral. The company said Hanson’s latest loan reduced his payments from 44% of his company’s revenue to 12% by offering a longer term.
Some small business owners will continue to borrow as long as lenders give approvals, taking out one loan after another, chief executive Doug Naidus said. But at some point, he warned, the principal must be repaid.
“The fifth stack pays the fourth stack, and the sixth stack pays the fifth stack,” Naidus said. “But when the music stops, everyone has to find a chair.”
Reporting by Heather Somerville in San Francisco and Olivia Oran and Joy Wiltermuth in New York. Additional reporting by Lauren LaCapra and Michael Erman in New York. Editing by Carmel Crimmins and Brian Thevenot