Online lending as a business model has taken some lumps over the last several months, with Lending Club (and investors) only the most visible casualty of alleged fraud.
Simply put, along with the technology backing online loans, data — or the lack thereof — has become an issue when checking the ability of borrowers to pay when assuming this readily available debt.
In an interview with Karen Webster, Charlie Moore, president of loan validation platform Global Debt Registry, said that within the last 18 months there has developed a clear need for better investor confidence in online loans — specifically loans being funded by institutional capital across different lending models.
One of the big challenges, said Moore, is for the institutional investor to be able to validate the integrity of the loan data itself.
The headline surrounding Lending Club, which Moore termed “a wakeup call,” raised awareness around the whole industry, spotlighting that “it’s very easy for errors or fraud to come through … as lenders are effectively buying a spreadsheet” without the personal and private, and most importantly, error-free information that would help inform decisions, especially important if you are on Wall Street and putting up millions of dollars to buy loans that are being sold (i.e. not being directly underwritten).
The spreadsheets themselves might indicate, hypothetically, that a woman with a 700 FICO score, between the ages of 35 and 44 in New York City has taken out a loan of $10,000, but they won’t, as Moore stated, get the full PII or validating information that this is a real person with a real income that can be used to pay that loan’s terms. “The investors are buying on trust,” he said.
The goal of Global Debt Registry, Moore explained, is to instill greater confidence among investors, given their ability to add operational risk due diligence, so that larger, more risk-averse investors such as endowments and insurers may be attracted to putting up capital.
The Global Debt Registry, in turn, seeks to confirm the information in the spreadsheet, with affirmation that the borrower is a real person, that they have a social security number, that the credit score is real and that they have the capacity to pay back the loan.
The information is provided by Global Debt Registry directly after the investor buys the loan, said Moore, “and if we identify a problem [such as a bankruptcy that had not shown up in the data] that enables the investor to enforce the rights and warrants that they have to put back the loan.”
As for questions surrounding the viability of these online lending platforms, as posited by Webster, Moore said the model exists as one that is here to stay. And, as with any nascent, evolving industry, “will we see consolidation? Yes.”
He pointed to online brokerages as an analogy and said that “lending is all about scale,” and thus it may be harder for smaller and mid-sized players to compete effectively.
Noting that his firm is almost like “a clearinghouse between” marketplace lenders and the investors, Moore stated that because Global Debt Registry has access to PII and has connections to the credit bureaus and data sources, “that enables us to do more than just the diligence piece.”
The firm is able to have: “unique credit insight that investors wouldn’t be able to get … so we can tell if the loans have been stacked” or if borrowers have been out shopping for loans, or even if loans are being placed with multiple parties. Drawing off several data sources, including proofs of primary and ancillary income, the company can help give a good picture of the creditworthiness of an individual account as measured over time and what is “improving or deteriorating” — helping investors in the secondary markets gain a sense of “what do they want to hold onto versus what do they want to sell.”