[Editor’s note: This is a guest post from Stephen Bisbee, the CEO & President of eOriginal. eOriginal specializes in digital transaction management to offer transparency and verifiability to marketplace lending investors.]
For the past few years, marketplace lending has captured the imagination of investors and the interest of the business press. However, recent headlines have thrust the industry into a less than positive light.
Marketplace lenders (MPLs) have mainly focused on digital loan origination. However, it’s critical that they enhance and extend digital transaction capabilities to more securely manage and transfer loan agreements as financial assets after they have been completed and signed. Unfortunately, many MPLs too often fail to consider these essential post-signature management needs, which are becoming even more important with growing investor scrutiny and the shadow of greater government regulation.
Marketplace lenders should be seeking to adopt the processes and technology that adheres to best practices to alleviate concerns with legality and transparency regarding not only the documentation, but the data used to create the documentation and represent the loan elements to investors and regulators.
Currently, there is a gap between basic content and document management and the higher level of document authentication that the industry and, ultimately, investors, should require. From digital transaction management (DTM) needs ranging from secure vaulting, to pledging, collateralizing or securitizing in the secondary market, each and every transaction should be treated as financial assets that must be verifiably secure, legally compliant, and enforceable.
Investors rely heavily on data, and that data must be trustworthy. To paraphrase the Co-Founder and CEO of NSR Invest, Bo Brustkern’s Guest Post in CrowdFundBeat: Investor loan selection systems are only as reliable as the data they receive. If inaccurate data is sent representing loan agreements, then systems will very likely make an imprudent judgement about which loans to buy for clients.
Brustkern is right on the money. Fortunately, technology now exists in significant production volumes across the asset classes, including in marketplace lending, to make all of this possible.
Increasing Investor Demands
As recently noted by The Economist, “Institutional investors will demand more in the way of disclosure, asset reviews and independent evaluations.” In addition, the United States Department of the Treasury issued a white paper outlining the challenges to marketplace lenders and proposed approaches to address them when considering oversight of peer-to-peer lenders. Several themes were highlighted as the marketplace lending industry continues to grow:
- Use of Data and Modeling Techniques for Underwriting is an Innovation and a Risk.
- There is an opportunity to Expand Access to Credit.
- New Credit Models and Operations Remain Untested.
- Small Business Borrowers Will Likely Require Enhanced Safeguards.
- Greater Transparency can Benefit Borrowers and Investors.
- Secondary Market for Loans is Undeveloped.
- Regulatory Clarity Can Benefit the Market.
eOriginal responded to the Treasury’s original request for information, stating:
In the marketplace lending ecosystem, it is critical to determine who actually possess the risk. Incremental regulation should follow the alignment of risk and, given the increased data transparency of this emerging industry, the risk holders should be able to demonstrate not only compliance, but also real-time monitoring and reporting of both key performance and risk indicators. This increased and real-time monitoring should be available to potential buyers. Potential findings or regulations pose an additional risk if the “originate to distribute” third-party bank model is deemed unsound or unsatisfactory. This would present risk of enforceability or lowered valuation as state usury laws could prevail.
Lenders and investors need to move toward fuller adoption of digital transaction management, which takes the principles of control, transfer, legality and certainty in asset management and ensures they are ironclad and unfailing and fully digital. DTM can also enable certainty of ownership and control of digital assets that are critical to meet lenders’ important business needs. By integrating an auditing solution to existing datasets, MPLs are able to be more responsive and provide a new level of transparency in real-time and across various document and asset types and throughout entire chain of custody. Moreover, it’s a very natural extension of marketplace lending, an industry born by and into technology.
Looking to the Future
The need for marketplace lenders to focus on elevating investor confidence, while also preparing for the possibility of greater investor scrutiny and enhanced regulation is not due to one high profile incident or one week of news. It is a natural step in the evolution and growth of a maturing industry. To support this growth, marketplace lenders need to adopt the processes and technology to adhere to best practices and alleviate any anxieties with greater transparency and stricter requirements for managing assets and the associated information and data. Marketplace lending contract processes and requirements should make digital asset management, certainty and the post-signature life of their digital assets just as important as the closing process.
Although marketplace lenders have the platforms for handling the application and origination processes, many lack the resources and technology to fully support post-signature processes. However, for marketplace lending to continue its trajectory, industry players will need to embrace a proactive approach to digital asset management to restore and actually increase confidence.
The asset classes in marketplace lending are not new. They include student loans, consumer loans, auto loans, mortgages, etc. It is the approach by the marketplace lenders to easily enable consumers to engage and complete the loans for these transactions for these asset classes that are delivering enormous values. Each of these classes have been, for over a decade, able to be managed digitally throughout their lifecycle. Enabling legislation such as ESIGN, UETA, and provisions of the Uniform Commercial Code have been in place for some time, which set the requirements for the management of digital financial assets and their sale, to enhance confidence and acceptance from investors, who continue to show deep interest in the MPL space. The bottom line is that the innovative marketplace lending players with a commitment to transparency and due diligence will be the real winners and accelerate capital investment into the industry. The only question is which ones will be leading the charge.