In The Market For Some Fintech?

Marketplace lending is growing so quickly that it has a trade association, warnings from federal agencies and some confusion as to what these lenders are.

In April, two U.S.-based entities, LendingClub Corp. and Prosper Marketplace Inc., and the U.K.-based Funding Circle announced they had formed the Marketplace Lending Association (MLA), a San Francisco-based nonprofit membership organization, “to promote responsible business practices and sound public policy to benefit borrowers and investors,” according to the MLA’s press release. The group, which plans to open an office in Washington, D.C., also “will advance the marketplace lending industry’s efforts to create a more transparent and efficient financial system.”

On its website, the MLA, citing numbers from Morgan Stanley, says that in the U.S., the marketplace lending industry has seen loan originations double every year since 2010 and that originations for the sector are expected to reach $122 billion by 2020.

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The MLA explains that marketplace lenders connect consumers and small businesses that want to borrow money with individuals and institutions that want to invest. The Consumer Financial Protection Bureau (CFPB) notes that marketplace lending, which is also called “peer-to-peer” or “platform” lending, offers a platform that handles all underwriting and customer service interactions with the borrower. Once a loan is originated, the company generally makes arrangements to transfer ownership to the investors while it continues to service the loan.

Marketplace lenders are also known as “fintech,” or financial technology. They are technology-driven and generally do not have brick and mortar locations – though there are exceptions – and allow borrowers to apply for loans online.

There are some differences between these marketplace lenders and other lenders. Stanley Street, president of Street Resource Group in Atlanta, explains that one of the big differences is that with institutional lenders and independent mortgage lenders, the expectation is that they will sell the loan to a secondary market. “Marketplace lenders are basically making a market,” he says. “They are matching investors to loans, either individually or as a group.”

Street says the production is mechanically the same. “You take an application, you underwrite it, approve it and close it, and the business process around creating the loan is pretty much the same,” Street says. “The exception is the marketplace lenders are all about efficiency and speed and automation. They have automated the sales and underwriting business process so as to allow borrowers to apply for loans electronically and to receive expedited decisioning.”

The technology and the expedited decisioning appeal to millennials, who do not have credit records and are often unbanked. These young adults use PayPal, Apple Pay and Starbucks cards, Street says, and are not thinking about checking accounts and branch banking.

Street says the fintech growth is part of the evolution of lending. “As automated underwriting took hold, mortgage bankers began to rely on, and investors started requiring, an automated approval, so it removed much of the intangible or subjective. So what the marketplace lenders have done is built such activity into electronic algorithms, using more artificial intelligence to move back to subjective underwriting but based on behavioral data more so than FICO.”

The technology has not made the marketplace lenders immune to complaints. In March, the CFPB announced that it is accepting complaints from consumers who encountered problems with loans from online marketplace lenders. The bureau also released a consumer bulletin that it said “provides an overview of marketplace lending and outlines tips for consumers who are considering taking out loans from these types of lenders.”

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The bulletin noted that marketplace lenders have to comply with federal and state consumer financial protection laws. Also, there were tips on refinancing student loan debt – many marketplace lenders offer mostly personal loans and student loan refinancing – and on navigating details such as credit and spending, the credit report, and shopping around for the best loan. As for the CFPB complaint database, a quick search of the narratives indicates that the gripes often cover topics that consumers might make about any lender, such as not being able to modify a loan, the company failing to pay the property taxes and monthly payments being higher than agreed.

Other cautions come from a recent U.S. Department of the Treasury report, “Opportunities and Challenges in Online Marketplace Lending.” The report notes that online lenders have leveraged technology to offer faster credit to consumers and small businesses and, over the years, have evolved from online platforms to sophisticated networks featuring institutional investors, financial institution partnerships, direct lending and securitization transactions. The challenge, the report notes, is that using data for credit underwriting can speed the process, but it can also potentially lead to fair lending violations. Another risk is that the new business model emerged during a time of low interest rates, declining unemployment and strong overall credit conditions, so it is not known how this would change if credit conditions deteriorate. Also, the secondary market for these loans is undeveloped.

The Treasury white paper offers several recommendations, including promoting a transparent marketplace for borrowers and investors, expanding access to credit through partnerships, and facilitating interagency coordination through a working group for marketplace lending.

Meanwhile, lenders say they are providing service and speed. Rocket Mortgage by Quicken Loans offers an online application process. “Rocket Mortgage is faster, simpler, smarter and safer than any other mortgage experience available today,” says Regis Hadiaris, Rocket Mortgage product lead. “It’s the first mortgage experience that allows consumers to get home financing without the need to speak to a mortgage banker, if they so choose. Of course, our highly skilled mortgage bankers are always available and standing by at every step of the process.”

Hadiaris says all loan options available through Rocket Mortgage are the same conventional, Federal Housing Administration and Veterans Affairs mortgages the company provides nationwide.  “They are 100 percent QM [qualified mortgage] and TRID [TILA-RESPA Integrated Disclosures rule] compliant. Rocket Mortgage isn’t changing the rigor of underwriting – rather, it’s about providing revolutionary clarity and control for the consumer while also dramatically increasing the efficiency and speed of the process.”

Most consumers can apply for mortgages, get their approvals and lock their rates without talking to anyone. They can submit documents, track their progress and get closing information through the MyQL website or mobile app.

This year, Darien-Rowayton Bank, or DRB, a community bank with branches in Connecticut, announced it would create an advanced retail mortgage platform. The bank and marketplace lender says it has reached more than $1 billion in student loan refinancing originations and will debut a mortgage platform later this year. “The mortgage product is a little more involved than these other products in terms of required documentation to and from the applicant,” says Aryea Aranoff, chief strategy officer for DRB Lending, an affiliate of Darien Rowayton Bank. “Also, what we’re spending a lot of time on is making sure we are asking as little from the applicant as possible.” For example, instead of finding bank statements and sending them to the bank, the applicant will give permission to DRB to access the documents.

Aranoff says on the student loan side, DRB has done securitization and also holds loans on its balance sheet. On the mortgage side, it would be similar, he said, with Fannie Mae and Freddie Mac, and the bank would have to adhere to the usual regulations. “Still, the focus would be different, with what kinds of loans we’re going after, our emphasis on technology, because we’re using technology to acquire the borrower and underwrite the process, and that separates us from traditional brick and mortar.”

Other marketplace lenders include SoFi, which got its start with student loan refinancing and recently announced it won approval from Fannie Mae as a seller and servicer. There is also loanDepot, which offers purchase, refinance, personal and home equity loans nationwide. LendingClub, one of the founding members of the MLA, recently ran into some negative publicity, but the news related to the ousted CEO’s deals with an investor, not any problems with consumers or loans.


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