Credit- and data-quality concerns were already dogging the high-flying marketplace lending sector when, in May, Renaud Laplanche, founder and chief executive officer of the biggest of the peer-to-peer platform upstarts, LendingClub, resigned in the wake of conduct and governance failures. While remedial actions were taken, including a revamping of LendingClub management under chairman Hans Morris, a Bloomberg headline captured the perceived reputational damage: LendingClub Is Ruining It for the Rest of Fintech.
“U.S. peer-to-peer lending model has parallels with subprime crisis,” warned the headline over a May 30, 2016 Financial Times column by Patrick Jenkins. “Investors are exposed to counterparty risk,” he asserted, which could be mitigated by, among other measures, “a mechanism to boost trust in credit quality.” He put in a plug for “a pilot scheme with some big investors to vet loan portfolios and collateral” operated by the Global Debt Registry (GDR).
GDR is based in Wilmington, Delaware and led by executive chairman and CEO Mark Parsells, a former chief compliance officer of American Express Co.’s merchant division, chief privacy officer of Bank One Corp. and chairman and CEO of anti-money-laundering/know-your-customer technology and services company Regulatory DataCorp. He says he got a call last year from several hedge fund firms suggesting that GDR could bring some order to marketplace lending with something similar to the consumer loan validation platform that Parsells and his team began working on in 2006.
The original platform was an aid to consumer-loan risk management, digitally validating credit card, student and auto loans and other debts. In 2014, GDR launched Debt Lookup, a free database — paid for by owners of loans who also make use of it — for consumers to verify debt collectors’ claims and authenticity.
‘Provenance Tracker’
GDR is the “provenance tracker in the chain of title tracking,” with 5 million consumer accounts in its database, Parsells explains. Services provided to the accounts receivable management (ARM) industry include ongoing compliance validation “to be sure the borrower hasn’t ended up on any laundering lists.”
Mark Parsells, Executive Chairman and CEO, Global Debt Registry
While with American Express, where Parsells became a compliance officer when the position was emerging in the early ’90s, he sealed the first credit card acceptance agreement with a government entity, the U.S. Postal Service, in 1993. Parsells also was president of Citibank Online and head of technology for global online banking between 1999 and 2001.
The senior team at GDR includes compliance, security and risk management veteran David Mertz, who is chief compliance officer; chief technology officer Robert Brown, who was chief architect of Juniper Bank, a pioneering online operation that was acquired by Barclays; and chief commercial officer Charlie Moore, whose business development background includes Thomson Reuters, Lloyds of London and Barclays.
Market Assessment
To answer the hedge funds’ call, GDR turned to Chadds Ford, Pennsylvania-based consulting firm BridgeForce to identify pain points and the extent to which validation was addressing them. The finding was that warehouse lenders, rating agencies, trustees, regulators, and investment banks (securitizers of loans) did not have a way to determine the validity and accuracy of loan and borrower information, Parsells says. Warehouse lenders in particular wanted a way to know if collateral was being double pledged and to be certain that funds had been disbursed to borrowers.
“LendingClub and originators like it, despite the errors we’ve found, appear to have a very robust system of data integrity,” Bo Brustkern said in an interview. Co-founder and CEO of NSR Invest, a fiduciary that helps clients build portfolios of P2P loans, and a founder of the trade show LendIt, Brustkern acknowledged that “with the speed of growth in the industry and recent revelations, data not only can be, but has been, changed. With good reason, investors require more certainty around the paper they’re investing in.”
“It’s a cool idea,” says Don Davis, managing partner at Prime Meridian Capital Management of Walnut Creek, California, which specializes in P2P/marketplace lending strategies. Davis can see where a securitized portfolio might get “a higher rating if the marketplace accepts this company.” Although Prime Meridian is not in the market for it now, “If we needed the service in a year or two and the cost made sense, then sure. Why not?”
Three Pilots
With backing from an undisclosed private equity firm, GDR announced its entry into the MPL arena in April at the LendIt San Francisco conference. It is the first of three pilots and is scheduled to finish at the end of June, testing both technology — establishing two-way connectivity among participants — and the platform’s ability to validate portfolios of online loans for the “mature investor,” Parsells says.
The second pilot, through mid-August, is testing the quality of data coming from such sources as LexisNexis, credit bureaus and publicly available databases. Results will be compared against other available data, says Parsells, thus helping GDR nail down optimal sources and establishing fields for certifications.
By the fall a cross-section of users will be engaged in live validations. The third pilot will involve checks with original creditors to match loans with Social Security numbers and to ensure funds were disbursed and loans were executed. Collateral will be tracked to be sure, as Parsells puts it, that one of the eight major lenders isn’t holding a loan whose same collateral is pledged to five others.
To eliminate duplicate loan documentation, GDR will assign a “Unique Loan Identification Number” that stays with the loan through its sale or securitization. Despite GDR’s efforts, regulators have yet to agree on a CUSIP-type identifier for this “new asset class” of certified loans.
“It is imperative for the company to educate the market on how it is different from the current verification process, which involves simply verifying the borrower from the same spreadsheet provided by the originator,” George Alex Popescu, founder and editor-in-chief of Lending Times, wrote in a June 16 article “Its patent pending account-level digital tracking sets it apart from the current crop of audit agencies.”
Fixing Origination
Even with GDR’s numbering system, the point at which the ID is applied — what GDR calls the origination point — may prove problematic for investors, particularly with existing as opposed to new loans.
The industry considers the origination of an account to be when investors buy the loan from a marketplace platform, according to a spokesperson for GDR. “We currently validate immediately after that.”
If there are data variances — say, a FICO credit score falling below an investor’s requisites — “the investor can call up representations and warrants in the loan-purchase agreement to return the loan to that marketplace platform and request an eligible one,” the spokesperson adds.
What about portfolios with older loans? “For retrospective validations, it is possible to access bureau and other databases for historical data,” she says. “We don’t anticipate doing much retrospective validation, primarily for initial pilots, unless we see issues.”
Future Prospects
“A borrower’s financial situation changes all the time. If you wait long enough, 100% of all borrowers’ information will change,” Popescu tells GARP Risk Intelligence.
“Present unsecured personal loans have the advantage of being short-term enough where one can model an expected statistical change and flag if changes are higher than expected,” he adds. He proposes that longer-term certifications might be validated every three years. “If cost was free, one would want to validate the data daily for all borrowers. However, that will require a level of automatic borrower data collection which will only be available in a few years.”
The full power of a registry will be realized when platforms register all loans upon application “and that data becomes the permanent initial record of the account,” Parsells states. “At that stage, we would be able to specifically validate the application date for investors.”