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Is loan validation the key to bringing investors back to the marketplace lending party?

We all know the story by now. Renaud Laplanche was dismissed from Lending Club some three weeks ago, sending shockwaves across the marketplace lending industry. Share prices tumbled and investor appetite for online loans, which was already waning, dwindled further still. It’s been a bad month for marketplace lenders.

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But their loss may be another’s gain. Global Debt Registry (GDR) is a technology-based loan validation company. Its stated mission is to offer investors “reduced risk and greater certainty in the assets they own or are purchasing”. The present market turmoil in the US has played right into GDR’s hands.

I spoke to chief executive officer Mark Parsells yesterday. Mark’s been in what he thinks of as the “fintech” space since 1999, when he was SVP and General Manager at Wingspan Bank. He launched and was the President and COO of Citibank Online in the US and ran online banking technology for Citi globally in the early 2000s. Now the top man at GDR, Mark and his colleagues have been taking an active interest in the marketplace lending sector over the past 10 months.

Global Debt Registry is backed by a $6 billion private equity firm which is based in New York. That company was approached by a number hedge funds which had been investing in the marketplace lending space around a year ago. These companies knew about the work that GDR has been doing in the broader consumer debt space since launching in 2006. It became clear that there was value to be had in applying its methods to the marketplace lending sector.

Mark and his team – who have deep consumer banking, technology, data security and regulatory compliance experience – embarked on an intensive period of market research, speaking to warehouse lenders, a range of institutional investors, ratings agencies, and finally to the platforms themselves. The impetus for bringing GDR’s scrutiny to bear upon the sector came in the first instance from the investors, which wanted to see loan data independently verified. As Mark explained, there are a lot of nascent players in the marketplace lending space. Investors need assurance that the loans being purchased are real, that the borrowers are real, that the loan-level data is accurate, and finally that the collateral isn’t being double-pledged.

Lately, however, enquiries from the platforms themselves have been coming thick and fast. Prior to the Laplanche incident at Lending Club – which revolved around a batch of mis-sold loans to an institutional investor – GDR had three of the US’ top marketplace lenders signed up to the platform. Since Laplanche’s departure, GDR has seen a “significant uptick” in incoming enquiries from marketplace lending platforms. When asked why he thinks that is, Mark said: “Even before the latest industry issues, all of the platforms were looking to put in place standards and new structural controls to increase confidence in the sector and to help attract more permanent capital. The latest news in the space just increased the priority of these important controls."

But what is GDR actually doing – in practical terms – to instill confidence in the market? This is where Mark made a clear distinction between “validation” and “verification”. GDR is a specialist in the former.

Mark explained that “verification” is undertaken for all securitisations and large scale loan purchases. A spreadsheet for, say, a thousand individual marketplace loans that are set to be purchased will be provided by the originating platform. This loan data is then compared against data that is also provided by the originating marketplace lending platform.

“Validation” is quite different. GDR takes the same set of information from a marketplace lending platform and then takes it to trusted third-party data sources, like the credit bureaus, to ensure its veracity. The following points are included on the GDR checklist: Is the borrower real? Is the credit representation real? Where is the collateral being pledged? GDR validates loan data at three different stages in the investment process: prior to institutional purchases, pre-securitisation and on an ongoing basis.

GDR may well come to be a critical infrastructural component within the marketplace lending ecosystem, but one wonders about the associated costs of enlisting the company’s services. It introduces another layer of cost into the marketplace lending value chain – a chain which is designed to run on as few links as possible. GDR would say that they in fact represent a more efficiently priced means of data validation, thanks to what is a largely technology-driven process. Either way, if loan validation is what’s required to rekindle investor demand for marketplace loans, you can bet that the platforms will be willing to stump up the cash.

Finally, I asked Mark about how he views the industry. Is his interest limited to marketplace lending, or does it extend through to balance sheet-based models? Or is it all much of a muchness?

“I look at it as alternative lending,” said Mark. “To me these are new financial models that do not have a lot of history, and in almost all cases there’s not the same kind of regulatory oversight at this time as there is in the more traditional financial services industry. Our mission is to provide confidence in the underlying assets of all innovative new lenders”.

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