What is loan stacking? How does a lender identify it? How can a lender stop loan stacking?
The basic definition of loan stacking is when a consumer takes out one or more unsecured loans or cash advances on top of loans of a similar type that already exist. Clearly, this poses additional risk to lenders because the more loans a consumer has, the less likely they are to repay all of them.
A logical assumption is that the sooner transactions are reported to credit bureaus, the more chance lenders have of detecting this type of activity. One might assume “real-time” reporting would suffice.
Not so. As we discussed in a previous blog, real-time reporting is the duct tape of solutions for this particular problem.
The Real Solution For Loan Stacking
Clarity’s Temporary Account Record is an actual solution. In fact, it’s the only solution from any bureau that not only shows current loans but also pending loan transactions, so you can see a customer’s current financial state.
Once a customer is approved for a loan and signs the papers, that loan will appear on their credit report as a temporary tradeline. It will then be much more difficult for that same customer to secure additional loans with other lenders.
Temporary Account Record is FCRA-regulated and actionable, meaning lenders can deny an applicant based on this crucial information
How Temporary Account Record Works for Lenders in the Fight Against Loan Stacking
With all the lead generators out there, you might wonder how to distinguish a loan stacker from a loan shopper. Simple. The key is the number of loans they finalize, not how many applications they submit.
When someone is simply shopping for the best terms, they may accrue several approvals, but only one will be signed and sealed. The Temporary Account Record is only created once the customer provides a signature agreeing to the terms of the loan.
It includes much of the same information as a regular tradeline that a lender would submit. The loan type and the type of lender will appear, as well as amount borrowed and the payment terms. It will not reveal the name of the lenders or the rate information for those pending transactions.
Once the record is created, it will be removed or will expire in one of three ways:
- If a loan offer is rescinded for any reason, the lender can request that the temporary record is removed.
- The record will automatically expire upon the lender-specified time frame. The lender will decide this timing based on their internal reporting cycles.
- Once the loan has funded, the temporary account record will automatically be updated to appear as an active tradeline (no longer temporary).
Put Temporary Account Record to Work for You
Loan stacking will continue until credit bureaus close the reporting gap. Temporary Account Record significantly narrows the gap and puts lenders back in control. Clarity can help you make informed decisions to protect your revenue, your investors and your bottom line.