Lending Club and US Small Banks Plan New Consumer Loan Program


A group of small banks join forces with the Lending Club Corp.

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in a joint effort to wrest a larger share of the consumer loan market from America’s biggest banks.

The partnership, which is expected to be announced on Monday, aims to reverse a trend that the big banks, through mass marketing of credit cards and other products, have grown to hold the vast majority of loans to American consumers.

Members of BancAlliance, a consortium of about 200 community banks, will begin using Lending Club, a website that facilitates personal loans, to build new consumer loan portfolios. Banks will each commit to purchasing a certain amount of loans from the Lending Club, which will screen borrowers based on their repayment capacity. Borrowers will either be from the bank’s own customers, which the bank will send to a Lending Club website, or from other borrowers who come directly to the Lending Club.

Banks should buy unsecured loans under $ 35,000 without requiring collateral. So far, smaller banks have generally not been able to justify the cost of taking out these loans, as the larger banks can do this much more efficiently.

Now, instead of analyzing loans on their own, banks will rely on Lending Club software, which uses a data-driven process to assess a borrower’s repayment capacity. This will help small banks extend credit to borrowers with lower credit ratings than they previously served, and build a pool of those loans large enough that a few bad apples don’t bring down the entire portfolio. The banks would own the loans and assume any default.

The effort is aimed at helping small banks overcome the cost of taking out large numbers of loans while meeting regulatory requirements, which have increased in recent years. By accumulating a larger portfolio of these loans than they otherwise would have, small lenders would isolate themselves from defaults – the same technique that large and mid-sized U.S. banks used when they first started their businesses. of credit cards.

In 1994, banks and savings banks with less than $ 10 billion in assets held about 69% of consumer loans in the United States, according to an analysis of regulatory records from SNL Financial. This share fell to 19% in 2004 and 9% in 2014.

“The big banks have eaten the lunch of the small banks when it comes to these types of loans,” said Mark Pitkin, managing director of Sugar River Bank of Newport, NH, a member of the consortium of banks participating in the program. “We understand consumer loans. We just want more.

At the end of 2014, Sugar River Bank’s loans to individuals stood at $ 1.4 million, or less than 1% of its 261 million in assets. Now, the bank is committing $ 5 million for individual loans under the Lending Club deal by purchasing the loans from borrowers who apply through the Lending Club website.

Mr Pitkin’s Sugar River Bank primarily provides home and small business loans, but he said he did not have enough demand to warrant an extensive assessment program for borrowers with different credit histories.

“Community banks in particular have pulled back from one-off personalized loans they could have made 25 years ago due to all the regulatory risks and hassles associated with it,” said Bert Ely, banking consultant, referring to examining lending discrimination. , consumer protection and a bank’s exposure to credit risk, among others. “The big banks, on the other hand, have built sophisticated software systems to suit individual borrowers.”

For Lending Club, which charges fees to connect borrowers and lenders, the agreement is “really an opportunity to access customers who would not necessarily find us otherwise,” said General Manager Renaud Laplanche. Small banks have relationships with potential borrowers who go to bank branches instead of going online, he said.

Mr. Laplanche said the program targets borrowers with high credit card debt who could get better terms by refinancing into a loan from one of the smaller banks. Lending Club hired a similar segment of borrowers last year when it announced it would work with Mitsubishi UFJ Financial Group,

Inc. MUFG Union Bank NA, a San Francisco-based lender that does not have a large credit card business, said Mr. Laplanche.

“The program can be very important,” said Mr. Laplanche of the small banks initiative. He declined to provide a precise estimate of the expected size of the loan portfolio.

Sugar River Bank is one of three BancAlliance banks that have participated in a pilot version of the program so far. BancAlliance, the cooperative group of small lenders, plans to gradually expand the participation of its member banks, said Brian Graham, managing director of Alliance Partners, which manages the cooperative.

A first task: to make sure that regulators feel comfortable with the increase in the consumer loan portfolios of small banks. BancAlliance has hired lawyers, auditors and analysts to ensure the program complies with applicable laws on consumer issues and other matters, Graham said.

Write to Ryan Tracy at [email protected]

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