What Credit Unions Can Learn From Lending Club’s Woes

May 26, 2016 at 8:46 am 1 comment

There are two prevalent attitudes in the credit union industry when it comes to technological innovations.  In the one group are relative newcomers to the banking world like myself – I’ve only been doing this for a mere 10 years – who see technology fundamentally changing where and how banking is done.  The other group is the crusty curmudgeons who pine for the days when underwriters didn’t use computers to figure out who qualified for a loan, but rolled up their sleeves and did their own due diligence. 

The last few weeks have been heady times for the curmudgeons.  Leading marketplace lender Lending Club forced out its CEO amid allegations of undisclosed interests and inaccurate loan information.  The stock has taken a tumble and its supply  of investors anxious  to snap up its loans is drying up.  Score one for the curmudgeons.  I can just see the smirk widening across their faces as they read their morning news in the WSJ.  They got more good news last night with reports that New York State’s Department of Financial Services is expanding its investigation of the marketplace lending industry beyond Lending Club. 

But then again, what do the recent lows of online marketplace lenders really tell us about the direction lending is headed?  Not as much as you might think. 

First, sophisticated computer algorithms fueled by Big Data will revolutionize banking by allowing lending decisions to be made instantaneously based on information which no human could process in a lifetime.  There is going to be more lending without collateral and participation agreements to spread out this risk is going to be crucial

Second, lending is going online.  This is true not only of the consumer looking to refinance credit card debt or student loans but also extends to the small business owner.  For small business lenders, quick and expanded access to needed capital is a lot more attractive than trudging down to the old brick and mortar. 

Third, New York State’s efforts notwithstanding, the Internet has accelerated the nationalization of lending.  For credit unions, this means that the industry must continue to push for greater field of membership flexibility.  It also means that federal regulators have to take the lead in proposing appropriate regulations, Congress has to strengthen preemption laws and Courts have to do a better job of explaining the interplay between federal and state regulations.  In an age when a consumer in New York can qualify for a loan issued by a bank in Utah that is subsequently bundled and sold to a non-depository institution based in Chicago, a state by state approach to regulation will be both ineffective and will inhibit legitimate financial evolution.  For those of you that are interested in more background on this issue, here is a white paper issued by the Treasury Department.

On that note, your faithful blogger will be back on Tuesday.  Enjoy your long weekend and remember, if there is more than one guy standing around the barbecue, you can guarantee the burger is going to be overcooked.      

Entry filed under: General, New York State, technology. Tags: .

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Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

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