Independent loan-by-loan data validation for marketplace lending

Global Debt Registry describes itself as an independent validator of underlying loan data for the consumer debt industry to manage performing or non-performing account’s data when owned, sold or placed with collection agencies.

Why are independent solutions needed ?

The Lending Club fiasco resulted in the firing of the founder and CEO Renaud Laplanche. In hindsight, it was an issue of a $22 million tranche of securities from a company which originated $2.75 Bil in loans in the first quarter of 2016. But the bigger issue is how to ensure that there is no Ponzi scheme lurking in the future. It sometimes takes very little for an entire industry to fall like a house of cards. The burning question is how best practices can be incorporated into marketplace lending securitization so that this kind of fraud is never replicable. The industry till recently was buying and selling loans on the basis of information contained in an excel sheet. It seems Venture Capital firms were already onto the problem and few months prior to the entire debacle, a company called Global Debt Registry (GDR) was being roped into structuring the processes for this industry.

Patented process

GDR provides SaaS debt management solutions to securely store, analyze, and share information across debt owners, collectors and consumers. It describes itself as an independent registry for the consumer debt industry to manage non-performing accounts when sold or placed with collection agencies. Global Debt Registry’s patent pending account-level digital tracking, data integrity tools and consumer access services reduce risk, enhance the value of debt, improve regulatory compliance, enable customer service post charge off and allow legitimate debt collectors to prove who they are to consumers. Global Debt Registry tracks consumer debt including credit card, student, medical, auto and personal loans.

Company history and background

The company was founded in 2005 by banking industry leaders and is headquartered in Wilmington, Delaware. The company raised a $7 mil Series A funding in 2015. It is funded by an undisclosed, New York-based, $5 bil private equity firm. The CEO of the company is Marks Parsells; he was the Chief Compliance Officer of $ 105 bil US merchant division in Amex; Chief Privacy Officer of Bank One and President of Citi Online in the United States. He has also been the CEO of Fusura, an online insurance marketplace which was subsequently sold to AIG. He was also the Chairman of Regulatory Data Corp, a KYC company which had the largest database of money launderers and terrorists in the world. The senior management team includes Charlie Moore (Chief Commercial Officer), Todd Veale (COO) and Robert Brown (CTO). Though GDR is an early stage company, its roster includes experienced banking professionals atypical to a fintech start-up. Mark feels the firm is akin to Carfax and DMV for consumer credit card debt which has been charged off and sold off to debt buyers. According to him, the framework of a central database and chain of title was introduced by GDR in the industry. The company also has a free debt lookup site for the users which allows them to analyze 18 months of their statements, debt collector authorization and other details of their loans. The company is now bringing this to MPL (marketplace lending/lenders) to serve investors, lenders and rating agencies looking to rate MPL debt.

When do MPL loans need 3rd party checking ?

The extension to MPL was not an undertaking conceived by the management. Its investors were approached by MPL investors to get GDR to enter the MPL space. The investors needed validation i.e. a third party check that the core information being provided by lenders is accurate. It checks 100% of the loans in a particular portfolio before certifying them as genuine. This check can be executed at multiple levels; at the time of purchase of a loan by an investor, securitization of MPL loan and if an investor wants to leverage his MPL holdings for cash. Currently, this service will be paid for by an investor or a warehouse lender. But as in the case of Carfax, the burden of payment will eventually shift from the buyer to the seller. As and when GDR becomes the industry standard, it will hurt an MPL not to have GDR validation for the securitized loans. The company has achieved great traction with 3 pilots at top 10 players in the MPL industry. It is also in a pilot with a warehouse lender and is hoping to complete the process in 3 months for a summer rollout. The firm hopes to find favor with rating agencies, who should perceive significant creditworthiness in a portfolio which has 100% of the loans validated by a third party. GDR is still finalizing its pricing, though it will be much lower than the cost of underwriting. Though a lot of trustees are required to verify the loans, they are able to audit only a 2-3% sample from the entire portfolio.

GDR’s 1st mover advantage

2006 founded GDR has a huge first mover’s advantage because of its existing work in credit card industry. Its seasoned management team understands compliance and privacy like no other. With millions of borrower data to be handled and verified, a wrong service provider can create a privacy nightmare for an MPL. GDR’s strong backers and proven history create a strong barrier to entry for other firms looking to enter the space. It is imperative for the company to educate the market how it is different from the current verification process which involves simply verifying the borrower from the same spreadsheet provided by the originator. Its patent pending account level digital tracking sets it apart from the current crop of audit agencies. JP Morgan Chase had to pay a $200 mil fine in July 2015 to settle claims that it had wrongfully collected credit card payments from hundreds of thousands of customers. Due to the crisis, Lending Club’s market value plummeted to $1.68 bil from the $9 bil during its IPO. Prudent investors not wishing a similar loss would be queuing up at GDR’s office to get the MPL originated loans validated.