The partnership aims to reverse the trend of the largest banks holding the majority of US consumer loans. It involves members of BancAlliance, a consortium of about 200 community banks, which will start using Lending Club to build a new portfolio of consumer loans.
The banks will each commit to buying a certain amount of loans from Lending Club. The additional benefit of this partnership is that the banks will refer customers onto Lending Club if they need to borrow and can’t be serviced by the bank.
The banks are expected to buy unsecured loans of less than $35,000 without requiring collateral. Up until this point small banks have not been able to enter this market as the cost of underwriting those loans has been so high and thus they have been the preserve of the bigger banks, as it was more efficient for them to process these loans.
Now the banks will rely on Lending Club software, which uses data-driven processes to evaluate a borrower’s ability to repay, in order to underwrite these loans. This will help banks to expand their credit facilities and lend to borrowers with lower credit scores than they were previously able to. The banks will own the loans and so take the hit from any defaults.
The benefit that these smaller banks get from the partnership is that they can create a larger pool of these loans, which in theory should help insulate themselves from any defaults.
Mark Pitkin, President & CEO of BancAlliance member Sugar River Bank, commented:
"By partnering with Lending Club through BancAlliance, our bank can offer access to a responsible product to our customers while at the same time acquiring assets with which we are very familiar and that offer higher returns than many alternatives. As a former regulator, I also appreciate having access to the legal, regulatory, compliance and credit experts at BancAlliance that helped us vet the Lending Club program."
Bert Ely, a banking consultant, explained:
“Community banks particularly have pulled back from the one-off, customized lending that they might have done 25 years ago because of all the regulatory risks and hassles associated with it. Big banks, meanwhile, have built sophisticated software systems to accommodate individual borrowers.”
"Community banks are the lifeblood of American communities. This program will help them level the playing field with national banks by offering affordable, consumer-friendly loans to their customers. We're excited to make Lending Club's low cost of operations available to community banks, for the greater benefit of their customers."
The deal is “really an opportunity to gain access to customers who wouldn’t necessarily find us otherwise.” The implication is that many of the small bank customers’ still use branches rather than going online.
The program is targeting borrowers with high credit card debt who could secure better refinancing terms from one of the small banks.
One of the main issues arising from the partnership is that the regulators could be concerned about the small banks increasing their consumer lending portfolios. And they will need to take into consideration the impact that a dip in the economy causing many defaults could have on these banks’ balance sheets, particularly if they are taking on many more borrowers of a lower credit quality.