Is ‘Stacking’ Threatening The Online Lending Industry?

High Risk Lenders & Loan Stacking

Traditional lenders use underwriting practices to prevent debtors from borrowing more than they can afford. As online lenders seek to expand credit access, they are now running into the challenge of managing borrower risk.

Some online lenders are struggling to detect and reduce loan “stacking.” This term refers to the practice of taking out multiple loans – often from different lenders – reaching a total outstanding balance that the borrower may not have been allowed to obtain through a single loan.

“Loan stacking increases risk for all parties involved.”

Loan stacking increases risk for all parties involved. Though some lenders will deliberately allow it for the purpose of debt consolidation in a high-risk situation, much of the stacking being done today is occurring without lender knowledge. Borrowers often end up in debt far beyond their ability to pay, all while facing pressure from numerous creditors. Meanwhile, those creditors may not realize that the risk level of their loan has increased without a corresponding rise in interest rates.

Reuters reported that this issue stems from automated underwriting platforms that are often not up to the task of adequately scrutinizing borrowers. If a borrower applies for several loans within a short period of time, the news source noted, then it is often possible to get approved before lenders realize that multiple applications exist. Incomplete and slow loan reporting contributes to this problem.

This is a major obstacle for a relatively new industry that is seeking to prove itself in the eyes of both customers and regulators. But this challenge is not insurmountable, and indeed can be overcome if online lenders move to adopt a more rapid approach to credit reporting. Consumers still demand access to credit, and in many cases online lenders can offer favorable terms – provided they invest in their underwriting platforms.

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