Lending Club Gets More Aggressive With Direct Pay

Lending Club’s maximum debt-to-income ratio eligibility level until now had been 30%. But under a new pilot program called Direct Pay Loans, borrowers whose DTI is as high as 50% can now get approved. But there’s a catch…

The Direct Pay Loan program “requires a borrower to use up to 80% of their loan proceeds to pay off outstanding debt,” according to a notice published by the company. They’re not trusting the borrower in these cases to do that on their own either. Lending Club will actually be the ones making the payments on the borrower’s behalf.

The move is reminiscent of a fairly common practice in the commercial financing industry where liabilities such as past due rent and tax liens are payed by the funding company directly.

It’s unclear if the ultimate goal is to be able to lend to more risky borrowers or if this is an experiment to determine if paying directly reduces the odds that a borrower will lie about how they intend to use the proceeds.

As of September 30th, 2015, Lending Club reported that 67.7% of their borrowers used their loans to refinance existing loans or pay off their credit cards. Since that’s based entirely on what box applicants select on the online application and isn’t actually verified, it’s possible that no borrowers actually refinance or pay off anything. With this being the case, Direct Pay may help Lending Club force their borrowers to hold up their end of the bargain.

Sean Murray is the President and Chief Editor of deBanked and the founder of the Broker Fair Conference. Connect with me on LinkedIn or follow me on twitter. You can view all future deBanked events here.