Latest threat to online lenders: 'stacking' of multiple loans

Fri Jun 10, 2016 6:09am EDT
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By Heather Somerville, Olivia Oran and Joy Wiltermuth

SAN FRANCISCO/NEW YORK (Reuters/IFR) - Many online lenders have failed to detect the “stacking” of multiple loans by borrowers who slip through their automated underwriting systems, lending company executives and investors told Reuters.

The practice is proliferating in the sector - led by LendingClub, OnDeck and Prosper Marketplace - because of many lenders’ hurried, algorithmic underwriting, use of “soft” credit inquiries, and patchy reporting of the resulting loans to credit bureaus, according to online lending and consumer credit experts.

Such loopholes, they said, can result in multiple lenders making loans to the same borrowers, often within a short period, without the full picture of their rising obligations and deteriorating ability to pay.

Stacking is “causing problems with the whole industry," said Brian Biglin, chief risk officer of LoanDepot, a five-year-old mortgage lender that last year started making personal loans online.

New revelations of loose lending could make it harder for the beleaguered sector to win back trust from investors who are already concerned about slipshod underwriting and rising default risk. The marketplace lending industry - which last year hit $18 billion in annual loan originations - has seen plummeting share prices and the retreat of some major backers, including BlackRock and Citigroup.

Industry leaders LendingClub and Avant said they are aware of stacking and its dangers, but they 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," said Prosper spokeswoman Sarah Cain.

Some higher-risk lenders allow and promote stacking as debt consolidation, but most lenders consider it a threat, particularly when not disclosed.   Continued...

FILE PHOTO --  A woman looks at her phone as she passes by a Lending Club banner on the facade of the the New York Stock Exchange December 11, 2014.   REUTERS/Brendan McDermid/File Photo