Loan stacking, when a consumer takes out multiple loans without a lender’s knowledge, is surfacing as a major issue in the online unsecured lending industry. Simply put, a consumer takes out a loan online, then proceeds to take out several more loans online before the credit bureau loan reporting technology can report the loan activity.It is a matter of technology and a proliferation of consumer-not-present (online) credit offerings.

It used to be that in the prime credit bureau space, the frequency or velocity of consumer credit applications was much slower than today. And the reporting of new credit obligations and/or reporting of credit tradeline status changes were much slower.

Loan Stacking – That Was Then

Let’s say that a consumer applies for a new credit card via mail. After submitting the application, it may be 30 days before they know whether or not they have been approved and get their card. Once they receive the card, they start to use it.

Their statement arrives on the first of the month and payment is due on the 20th. When the 20th rolls around, they either cannot make a payment or choose not to pay. Given the lag in reporting cycles to some of the bureaus, it could be as long as 45 or 60 days before their non-payment hits their credit report. All during this time, (45-60 days) their credit report looks great and they are still deemed creditworthy by anyone pulling their report. This lag time for new loan reporting has always been a problem, but manageable.

Loan Stacking – This is Now

In the current online credit world, consumers can apply for credit today at 10 a.m., be approved in a matter of seconds, use an e-signature to sign the loan documents, and have money in their checking account tomorrow.

To compound the problem, in a consumer-not-present environment, it is easier to succeed at not paying the debt than it is in a consumer-present transaction. If a consumer is securing credit via a consumer-present application, that means they walked into the lender’s place of business and asked for credit. By virtue of proximity, it’s easier for that lender to find them and ask me to repay my debt should they choose to default.

In a consumer-not-present space, the consumer may be in Florida, but the lender may be in another state or even another country. Depending on the amount of the debt, it quickly becomes unfeasible for the creditor to mount a collection effort for a relatively modest amount of money.

The difference in the current online world is that these transactions are reported in real time, which can range from mere minutes to a few days, as opposed to the traditional credit bureaus that update every 45-60 days. The current conventional wisdom is that real-time tradeline reporting is necessary. Clarity supports real-time reporting as do other specialty credit bureaus. But other bureaus’ claim that real-time reporting can solve the problem of loan stacking is simply not true.

Loan Stacking – The Challenge

Consider another scenario:

At 10 a.m., a consumer applies and is approved for an online unsecured installment loan from Lender A. Lender A pulled credit reports from one or many credit bureaus and determined that the consumer was creditworthy and capable of repaying the obligation. The lender notifies the consumer that they have been approved and the money will be deposited into their checking account overnight. Lender A plans to report the new loan record in real-time the following morning when confirmation of the funding is received from the bank.

Once approved by Lender A, the consumer immediately applies for additional credit and is approved by Lender B, Lender C, and Lender D. All of these lenders pull credit reports to see if the consumer is creditworthy and capable of repaying. They are all likely to approve the consumer because they do not see a reported loan from Lender A since it is still in the process of funding.

If all of these lenders pulled the consumer’s credit report again the very next day, they would all see they are now one of many loans made to the consumer who is probably unable or has no intention of repaying all of the debts.

This can happen even with “real-time” loan reporting to a credit reporting agency.

The challenges for lenders are compounded by the recent rules proposed by the Consumer Financial Protection Bureau. The proposed rules require lenders to determine a consumer’s ability to pay loan obligations as a condition of receiving credit, and in some cases, set hard limits on the number and frequency of loans. Even with real-time reporting, lenders could do everything possible to underwrite loans for regulatory compliance and wake up the following morning to find they made loans to consumers who should not have received them.

Loan Stacking – The Solution

Real-time reporting is not the answer to the well-known loan stacking problem. Clarity has solved the problem with a technological approach that will eliminate the reporting gap that exists between the time a loan is approved, and when it’s finally funded and reported. Our approach is so revolutionary that we patented it.

Using Clarity data allows lenders to identify consumers who are attempting to stack loans, thereby minimizing potential losses.

For more information on our revolutionary solution, contact us today.