What is a loan originator?

Post summary:

• What is a loan originator?
• Primary functions of loan originators
• Scoring loan originator risk
• Why use loan originators in P2P investing?

Within P2P investing, investors would have noticed the term loan originator on the peer-to-peer investing platform.

Loan originators are part of p2p investing alongside borrowers, lenders and the peer-to-peer platform itself. 

What is a loan originator?

A loan originator is an institution or individual that works with an underwriter to complete a loan transaction for a borrower. Since they facilitate loans, loan originators are part of the primary loan market, including crowdfunding and the P2P lending market.

Adding loan originators is entirely new in the peer to peer investing market. It allows P2P platforms to quickly facilitate loans compared to traditional p2p investing, where it is only the platform that searched for loans and then added them to their websites.

Typically, if you were to use p2p investing as an alternative investment strategy, you would scour a platform’s website to search for loans and determine whether the platform had conducted its due diligence. 

However, with loans provided through loan originators, investors can view loans sold through the platform that have already met their own due diligence criteria.

The primary role of a loan originator

The primary role of a loan originator in peer-to-peer investing is to sell debt. 

It essentially means that the central skill of a loan originator is selling loans to borrowers.

A loan originator usually manages the loan application process, including getting the borrower to sign loan agreements, using processors, underwriters, and bookkeepers–all of whom share the same objective.

A loan originator then aims to convince borrowers that their service is the best alternative in the market and to take borrowers through the loan application process until the last stage. 

To many in the p2p investing market, the loan originator is sometimes seen as a sales vehicle first and then a loan approval platform second.

However, although not inaccurate, the description is not entirely fair.

Loan originators are not only interested in getting as many loans pushed through as possible. 

On the contrary, platforms have specific criteria that loan originators must adhere to, meaning that obtaining a loan through a loan originator can be even stricter for those searching to borrow money.

For instance, loan originators will ask questions to determine borrowers’ needs and circumstances. 

They will research and demand to know about the borrower for due diligence and ensure the borrower receives the right loan and the best interest rates.

Scoring loan originator risk

Most P2P investing platforms list their loan originators according to their risks. The scale generally represents the lowest and highest counterparty risk in that order.

Each company has their own criteria for assessing loan originators, but most are as follows:

The low-risk loan originator is a financially strong company with 

• a stable market
• reliable asset quality
• operating in a well-established and sound regulatory environment
• has robust debt-collection techniques 
• lead by a management team with a notable track record of success

A medium-risk loan originator is somewhat financially weaker yet remains a stable company. With an average market position, the company has a relatively positive net operating income and debt vs equity number.

A high-risk loan originator is considered financially weak. The company has a low market position, has no stable net operating income and has negative debt versus equity numbers. Furthermore, it will likely be:

• a new company
• This company’s performing portfolio will be less than the medium rate of repaid loans
• The portfolio will contain many overdue loans based on their historical data. 
• The company’s internal loan issuing and scoring model is either inefficient or unknown. 

Some P2P platforms have a list of default loan originators for those who have not passed their due diligence and risk assessment. Or the company might be in financial distress and can not fulfil its obligations.

Why use loan originators in P2P investing?

Though this may sound worrying for investors in the peer-to-peer marketplace, these preventive measures ensure that the loan originator does not facilitate too much bad debt. 

In return, investors obtain a more stable portfolio to invest their funds in. Although the interest return rate is lower, so is the risk to their capital.

It is why several companies only offer loans through loan originators – to ensure there is a lower risk to the investors’ capital, even if this means sacrificing offering higher returns.

Per the risk criteria above, most risk specialists only permit loan originators who meet our requirements.

This practice is usually called ‘skin in the game.’

For instance, if a Loan Originator with 10% Skin in the game issues a €5,000 loan to a borrower and then puts it on a platform’s marketplace, only €4,500 of this loan will be open for investors.

The loan originator will keep €500 on their balance sheet. Skin in the game ensures that the interests of the loan originator and investor are aligned. 

Both sides have a stake in the loan not to default.

Another precautionary measure usually taken by P2P investing platforms uses a buyback guarantee. This contract compels a loan originator to buy back all the loans if his borrowers miss or default on payment.

A Buyback Guarantee applies when a loan is delayed for more than 60 days. The Loan Originator will repurchase the investment for the principal nominal value and accrued interest. 

Using a loan originator in P2P investing is advantageous for investors if they invest large sums of money.