Newest Challenge for Lenders: "Loan-Stacking"

Have you ever heard the term “loan-stacking”?
Admittedly, it’s a new term to me.  Recently, the topic of loan-stacking came up during a conversation with a Community Bank. We were discussing their onboarding and underwriting processes and the banker mentioned loan-stacking as a business challenge that has been particularly difficult to solve for, especially with the uptick in lending activity.  I didn’t get as much detail as I would have liked from the bank executives, but the term piqued my interest and I turned to American Banker for additional research.
Apparently, loan-stacking is impacting lenders of all types and sizes and while not exactly a new phenomenon, it seems to be proliferating at a brisk pace.
So what is it?  Loan-stacking occurs when a business or consumer borrows money from Lender A and then gets another loan (often a similar amount and with similar rates and terms) from Lender B.  More than one line of credit for legitimate business purposes isn’t necessarily nefarious, but a lot of times the same business or consumer then borrows money from Lenders C-E. Seriously, it can become 4 or 5 (or more) similar loans stacked on top of each other. Given this complexity, why would an applicant loan-stack?  Well, sometimes a second loan is taken out to pay back the first, then there’s a third to pay back the second…  Sometimes having more money than one deserves spread over multiple loans is too tempting for certain people or businesses to resist.
Loan-stacking is “causing problems with the whole industry,” according to LoanDepot’s Chief Risk Officer Brian Biglin[1].  What happens when the stackers can’t pay?  Well, they don’t, and so the lenders are on the hook for what can add up to some pretty big numbers pretty quickly.  And, while robbing Peter to pay Paul is one thing, you can bet (and probably expected) that the ability to secure a lot of funding a) through the anonymity that the internet affords and b) faster than lenders and/or credit agencies can track it mean that there’s a significant amount of fraud going down.
Up until now in this post, we’ve defined loan-stacking as the process of borrowers opening multiple lines of credit from different institutions.  What if, as in the example offered in my Community Bank meeting, loan-stacking was occurring within the same institution?  Let’s say Dad (or his business) is maxed out, but he needs some more cash?  Maybe he, online, secures more funding as Mom, or Son, or Daughter (since they’re grown and assuming they live at a different address)?  Let’s say this is a really big family.  The risk for the institution grows with each living adult relative.
Part of the strategy that (some) online lenders rely on for approving funding so quickly is the “soft” credit inquiry.  Ekata offers a non-credit header approach and it’s a 1-2 punch solution:

  • Identity Check™, the left jab, provides substantial, non-PII insight on applications, including actionable risk-signals, without any of the baggage related to credit header data. Identity Check flags risky data elements, including auto-generated email addresses, proxy IPs, and name-address mismatches. Phone signals, like line type delineation, prepaid indicator, and carrier information, help to identify risk and add new elements of payment history to thin-file and unbankable customers. A real-time check against the initial applicant’s data provides a valuable filter to remove questionable data from entering the process.
  • Ekata’s Search By API is the right cross. The amount of data that Ekata captures, curates, and updates in the Identity Graph is unmatched. Ekata’s data science team is making and breaking over 1 million relationship links every day and our Search By API empowers lenders, in a single API call, to validate an applicant’s current and historical address and identify other adults associated with those addresses plus their previous address (and adults associated with those addresses, etc., etc.).

Ekata’s dynamic identity data is rich, complete, and accurate, with updates occurring in real-time, every day of the year. Linking the latest information on a person’s phone, addresses, email, and associated people, Ekata data provides identity assessment at enterprise scale.
Get A Demo Of Ekata Identity Check™ from one of our resident financial services experts.
Learn more about how to use Risk Signals in Originations.
[1] Reuters Latest threat to online lenders: ‘stacking’ of multiple loans” 6/10/2016

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