Online lenders may be lowering their standards and taking greater risks on borrowers as they chase higher profits.
Prosper Marketplace and Lending Club, two of the largest players in the online personal loan business, don’t always verify key borrower information like income and employment, according to a report from Bloomberg’s Matt Scully.
Bloomberg found that the two companies frequently take the customer’s word on key loan information, and they don’t necessarily nix a loan if it has errors, such as overstating income.
“Prosper Marketplace Inc. doesn’t verify key information like income and employment for around a quarter of the loans it makes, according to documents tied to bonds that Prosper sold last month. LendingClub Corp. said it only verified income about a third of the time for one of the most popular loans it made in 2016, according to company data seen by Bloomberg. If either lender finds mistakes in a borrower’s application, such as overstated income, they may still go ahead with the loan, according to disclosures linked to bond sales from the companies, including documents for securities that LendingClub is offering now.”
The companies defended their practices, citing advanced risk-control procedures that help root out fraud.
Prosper told Bloomberg that it verifies identities and bank accounts for all of its loans, and that it has “developed some of the industry’s leading risk-mitigation controls.”
A Lending Club representative told Bloomberg that the company uses “machine learning and other techniques to build robust models that segment which borrower applications need verification and which do not.”
Despite a relatively robust economy, online lenders have seen loans falter quicker than expected, Bloomberg noted, citing data from Morgan Stanley.
They aren’t the only lenders hitting bumps and coming under scrutiny. Moody’s revealed last month that Santander Consumer USA, one of the country’s largest subprime auto lenders, checked income on just 8% of borrowers as part of a $US1 billion bond offering.
Meanwhile, credit card companies have seen customer defaults spike, suggesting that they have also started to loosen their standards and issue credit more aggressively.