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They say such gaps can cause several lenders to lend to the same borrower, often within a brief space of time, without having the full image of their increasing commitments and worsened solvency. Piling up the money is creating "problems with the entire industry," said Brian Biglin, CEO of LoanDepot, a five-year-old mortgager who began providing consumer credit online last year.
Recent findings on bulk loans could make it more difficult for the besieged banking community to regain the confidence of those who are already worried about sloppy asset writing and increasing credit risks. Credit marketplaces - which last year recorded $18 billion in loans annually - saw falling stock markets and the withdrawal of some large lenders, among them BlackRock and Citigroup.
LendingClub and Avant, sector managers, said they were conscious of the stack and its hazards, but they downplayed the hazards and did not give concrete measures to avoid them in use. Both OnDeck and Prosper said they had made an effort to identify and avoid stack formation. "We' ve set up our own algorithm," said Prosper spokesperson Sarah Cain.
While some riskier lenders allow and encourage accumulation as deleveraging, most lenders consider it a menace, especially if it is not revealed. Lately, institutionals have become cautious towards market place lenders, having celebrated them as disrupters of banking and credit cards. Wall Street cash is critical for most online lenders who need it to finance their credits.
The Citigroup terminated its relationship with Prosper this year. Since the beginning of the relationship less than a year ago, the Prosper loan portfolio had been converted into bonds by the Prosper banks to the tune of 1.5 billion US dollars. Investors' mood was again dampened last months by a recent credit crunch at the LendingClub. Deliberately, the firm sells $22 million in unauthorized loan transactions that do not conform to the terms of an agreement with an independent Jefferies credit institution, and falsifies the $3 million loan application.
The LendingClub is being investigated by the U.S. Department of Justice, the firm said last week, and a number of its major shareholders have stopped investing following the retirement of its CEO. New York's Department of Financial Services has also said that it will initiate an inquiry into online lenders.
Now, misgivings about piling are exacerbating the industry's problems. For example, one mutual fund considering purchasing capital from a market place creditor described stack accumulation as a "blind spot" in the market. Ranger Capital Group affiliate Bill Kassul - which has spent around $300 million on market and corporate loans - said stackability has become a problem over the past two years and a "big risk" for an investor.
In recent month, Blue Elephant Capital Management has discontinued the purchase of Prosper credit because of concern over poor subscription quality and low returns. Credit providers need to decelerate their credit process and enhance the exchange of credit information," said Brian Weinstein, Blue Elephant's CIO. Piling was "one of the main causes why we believe that credit deteriorated last summers when we closed our market place credit program," Weinstein said.
Last Blue Elephant last month, announcing plans to restart the purchase of Prosper debt, partly because the corporation charged higher interest rate. Hurrying to give fast credit approvals to candidates - sometimes within 24 hrs - some market place lenders do not carry out thorough credit assessments known as "hard requests," according to sector leaders.
These audits provide an up-to-date record of credit and lending requests, and can lower a borrower's credit value. Software enquiries do not need the borrower's approval and usually do not appear in credit statements. on deck said it was doing only weak controls. Both LendingClub and Prosper said they first did small check, but later in the trial they did big check just before financing credit.
However, last-minute controls can also keep other lenders in the shadows, said Gilles Gade, Cross River Bank's chairman and CEO, who invested in many online credit portals. By this point, the borrower may already have obtained other loans, he said, because tough inspections can take about 30 days to show up on a credit reference.
A further problem: loan that never appear on credit information at all, because of the unequal coverage by online lenders. "Some lenders in our sector don't tell the offices," said Leslie Payne, a LendUp spokesperson who grants high-yield installment credit. Speaking in a February blogs posting, Experian, the credit agency, said that a "considerable number" of market place lenders do not announce their credits.
Several small businesses owner keep lending as long as lenders are granting permits and taking one mortgage after the other, said general director Doug Naidus.