By Heather Somerville, Olivia Oran and joy Wiltermuth
SAN FRANCISCO / NEW YORK (Reuters / IFR) - Many online lenders have managed to detect the "stacking" of multiple loans by borrowers who slip through their automated underwriting systems, giving company executives and investors Reuters .
The practice is rampant in the sector - led by LendingClub, OnDeck and Prosperous market - due hasty assurance many lenders, algorithmic, the use of "soft" credit inquiries, and the irregular notification of the result to the credit bureaus credit, according to online loans and consumer credit experts.
Such gaps, they said, can lead to several lenders who make loans to the same borrower, often within a short period of time without a complete view of their obligations increase and deterioration of ability to pay.
The stack is "causing problems with the entire industry," said Brian Biglin, director LoanDepot risk, a five-year-old mortgage lender last year began making personal loans online.
New revelations of lost loans could make it more difficult for the embattled to regain the confidence of investors who are already concerned about sloppy underwriting and increased risk of default sector. The lending industry market - which last year reached US $ 18 billion in the placement of the annual credit - has been falling stock prices and the withdrawal of some major sponsors such as BlackRock and Citigroup (NYSE: C ).
industry leaders and LendingClub Avant said they are aware of stacking and its dangers, but downplayed the risks and no examples of specific measures taken to prevent the practice are provided. OnDeck and Prospero said they have launched efforts to detect and protect against the stack.
"We have established proprietary algorithms," said spokeswoman Sarah Prosper Cain.
Some subprime lenders allow and promote the stack as debt consolidation, but most lenders consider it a threat, especially when not disclosed.
Edward Hanson, the owner of Ella wood fire Pizza, said he started stacking loans five years ago to keep your business.
"You take out another to help pay for the first," Hanson said.
Hanson, 55, said he already had loans from a variety of online lenders when received offers from lenders online business and OnDeck Kabbage, who approved his request, he said.
OnDeck knew Hanson had at least another loan when applied in August 2014, and requires that the existing debt be paid as a condition for new loan, company spokesman Jim Larkin said the. When Hanson returned a year later, OnDeck declined his application because Hanson had piled loans during the course of the return, Larkin said.
Kabbage declined to comment on Hanson loans and did not respond to questions about their policies stacking.
Hanson now pays almost 40 percent interest in its last loan from another lender.
"I pretty much feel trapped," he said.
investors nervous
Institutional investors have grown wary lenders lately market after initially hailing as disruptors of banks and credit card companies. Wall Street money is crucial for most online lenders, who need to finance their loans.
Citigroup ended its association with Prospero earlier this year. The bank had repackaged about $ 1.5 billion in securities lending Prospero since the association began less than a year.
Investor sentiment was drawn back last month by a scandal in LendingClub industry leader. The company sold knowingly $ 22 million in loans that did not meet the agreed specifications of an investment bank, Jefferies, and falsified applications $ 3 million of those loans.
LendingClub is being investigated by the US Justice Department, the company said last month, and several of its major investors have stopped investments as a result of the resignation of its chief executive. The Department of Financial Services of New York has also said it will launch an investigation into online lenders.
Now stacking concerns are adding to the problems of the industry. An investment firm that was considering buying shares in a market lender describes stacked as a sector "blind spot". The firm declined to be identified.
Bill Kassul, a partner in Ranger Capital Group - which has about $ 300 million invested in loans market and business loans - said stacking has become a concern in the past two years and is a "great risk" investors.
Blue Elephant Capital Management stopped buying credits Prosper recently for several months because of concerns about weak underwriting and profitability. market lenders have to lower their lending processes and improve the exchange of credit information, said Brian Weinstein, chief investment officer of Blue Elephant.
Piling was "one of the reasons why we believe that deteriorating credit saw last summer when we stopped our program loan market," Weinstein said.
Blue Elephant last month announced plans to resume buying Prosper loans, partly because the company is charging interest rates higher.
Credit checks "soft"
In his haste to give borrowers quick decisions - sometimes within 24 hours - some lenders in the market do not carry out thorough credit checks, known as "difficult questions", according to industry executives.
These controls create an updated loan applications and loan registration, and can lower the credit score of the borrower. Soft inquiries do not require the consent of the borrower and usually do not appear on credit reports.
OnDeck said only smooth running checks. LendingClub and Prospero said initially smooth controls run but run checks hard disk later in the process, just before the loans they finance.
Run checks hard disk only at the last minute, however, you can also let other lenders in the dark, said Gilles Gade, president and CEO of the Cross river bank, which invests in many online lending platforms. At that time, the borrower may already have obtained other loans, he said, because hard controls may take about 30 days to appear on a credit report.
Another problem: Loans that do not appear on credit reports at all, due to the uneven information online lenders.
"Not all lenders in our industry report agencies," said Leslie Payne, a spokesman for LendUp, which makes installment loans high interest. In a February blog Experian, the credit agency said a "significant number" of market lenders do not report their loans.
Thriving Avant and LendingClub told Reuters report their loans to the three major credit bureaus at least monthly. OnDeck reports said several leading commercial credit agencies such as Experian and PayNet.
Many lenders said they also extract data from other sources, including tax receipts, documents and accounting software for businesses to size up the borrower's ability to pay.
LoanDepot said it has taken several steps to mitigate the risks of stacking, including requiring months of bank statements of its borrowers and building custom algorithms activity stacking flag potential.
When the music stops
Most online lenders focus on business and consumer credit. Those loans to small businesses may face a higher risk of stacking, partly due to a separate high-risk, high-interest lenders that actively promotes trade practice class.
Lenders merchant cash advance made based primarily on the expected income from a business rather than your credit history existing debts or loans. Often run through databases of commercial loans - such as OnDeck or Kabbage - and use them as marketing leads to find new borrowers, loans online executives and investors they said.
OnDeck has made efforts to educate customers to stay away from credit lenders stacked, said chief operating officer James Hobson. It has also begun tracking borrowers more frequently and joined the Business Finance Small Change, an effort to share credit data to protect stacking.
OnDeck then rejected the second request for Hanson, the owner pizzeria, lenders turned to the world of business, a small business lender founded in 2011. Currently pays an interest rate of 39 percent.
Hanson would not detail the balance or your payments, but said he put his home as collateral. The company said the latest Hanson loan payments reduced from 44 percent of your business income to 12 percent, providing a longer term.
Some small business owners keep loans, provided lenders grant approvals, taking a loan after another, said CEO Doug Naidus. But at some point, he warned, the director has to get paid again.
"The fifth stack stack pays the fourth, and sixth stack pays the fifth stack," Naidus said. "But when the music stops, everyone has to find a chair."
