Fund it and Ask Questions Later
Ever since OnDeck Capital stopped doing verbal landlord references, the underwriting landscape of alternative lending has changed dramatically. Kabbage will supposedly fund applicants in just 7 minutes. Everybody’s under the gun to streamline their process, fund deals faster, and produce record breaking numbers month after month.
And why shouldn’t they? Investors are practically foaming at the mouth to get in on any and all kinds of alternative lending. Even Lending Club has thrown in the towel by no longer allowing investors to ask applicants questions. Prior to March 19th, applicants on Lending Club’s platform had the option to answer standardized questions about themselves and their purpose for seeking out a loan. This was set up to help investors feel more informed and comfortable. Once the loan was posted, prospective investors could ask the applicant additional questions of their own to help them decide if it was a deal they wanted to participate in. For example, “what are the interest rates on the credit cards you claim you want to consolidate?” That’s a fair question to ask someone seeking a debt consolidation loan.
Lending Club did away with the Q&A in the name of privacy but conceded in their blog that people are funding deals so fast that no one cares what applicants have to say.
We know that in the past some investors enjoyed reading these descriptions and answers, but as the platform has grown, fewer and fewer investors are using this approach to inform their decisions. Fewer than 3% of investors currently ask questions and only 13% of posted loans have answers provided by borrowers. Furthermore, loans are currently funding in as little as a few hours – well before borrower answers and descriptions can be reviewed and posted.
Loans are being fully funded by institutional investors and mom & pop investors before the applicant can even finish filling out the questionnaire.
The demand to invest outpaces the amount of loans that Lending Club can originate. In a call I had with Lending Club today as a potential investor, I was told that businesses were not even allowed to invest on their platform at this time because they’ll take up all the loans and leave nothing for the average mom & pop investors, the ones which have made their peer-to-peer fame possible.
In the Lend Academy blog forum, mom & pop investors debated the usefulness of the Q&A system. Some argued that responses from applicants allowed them to weed out folks with poor spelling and grammar. Others believed that a poorly worded response was better than someone who didn’t respond at all because it showed that they actually cared about the loan they were applying for.
There were folks that analyzed the applicants language on a scientific level, with one going so far as to cite this study: Peer-to-Peer Lending The Relationship Between Language Features, Trustworthiness, and Persuasion Success.
I am reminded of my underwriting days conducting merchant interviews prior to a final decision. There were applicants that looked good on paper that came across as completely clueless about their business over the phone. Like beyond clueless. And then there were applicants that looked ugly on paper that really impressed me with their command of business subject matter. What shocked me were the former and it’s a testament to how tricky business lending is. Those phone calls impacted my final decision all the time.
But in today’s world where funders are dealing in kilos of cash instead of nickels and dimes, there’s a growing impatience over non-automated things like interacting with the applicant. Fund the deal and ask questions later!
The vast majority of merchant cash advance companies still conduct applicant phone interviews and there’s a part of me that hopes that never changes. As investors grow restless for new pools of loans or advances to participate in, I fear there will be more underwriting sacrifices to satisfy that demand.
It was only a year ago that I laughed at my friend in commercial banking when he told me a small business loan application begins with lunch and a few rounds of golf. “It’s about relationships,” he said. That couldn’t be less true in peer-to-peer lending where the goal is to know as little as possible about where the money is going. I see that mentality creeping into merchant cash advance as well. Sure, there are folks that point to thousands of data points aggregated through online sources but it only takes a 5 minute phone call to determine that an applicant is completely full of crap.
Maybe Jeremy Brown of RapidAdvance was on to something. When Will the Bubble Burst?
Join the discussion about this on DailyFunder.Last modified: March 25, 2014