Automated loan-trading platforms use data to address multiple challenges

Several platforms have emerged to facilitate matching counterparties and to provide necessary due diligence and documentation for credit analysis, whether to purchase whole loans, participations or both.

By John Hintze

Primis Bank division Panacea Financial has developed a robust platform catering to physicians, dentists and veterinarians across the country and a concentration of loans in that sector. LendingClub Bank is in a nationwide search for Small Business Administration loans. And Optus Bank, a community development financial institution that must provide 60 percent of its loans to members of low-to-moderate-income communities, is seeking to grow its book outside its Columbia, South Carolina, footprint.

Each of these banks is either seeking to add or reduce loans on its balance sheet. Regional banks whose lending may be confined to their local business markets have always faced challenges managing their assets and liabilities. To diversify by product type and geography on the asset side, they have tended to rely on brokers to match them up with counterparties to either purchase or sell loans. Aiming to provide more efficient and potentially cost-effective options, several platforms have emerged to facilitate matching counterparties in accordance with their balance-sheet needs, and to provide the necessary due diligence and documentation for credit analysis, whether to purchase whole loans, participations, or both.

Most of the platforms have been developed by fintech firms and are relatively new. PNC Financial Services is the first major regional bank to enter the space, announcing in August the launch of PNC Asset Exchange. The regional bank is white labeling the technology platform developed by Community Capital Technology, which has facilitated loan trades since 2018, and is layering advisory services on top.

An early loan-sharing platform is LoanStreet, which has registered 1,300 credit unions, banks and alternative lenders. Other players seeking to improve regional and community depository institutions’ access to different corners of the loan market include Jack Henry’s Loan Marketplace and ORSNN. They are both aiming to digitize their significant experience matching loan-trading counterparties more manually to provide their services more efficiently and effectively.

Each of the platforms enables banks and other depository institutions to post different types of loans or pools of loans on the platform, and the software matches up potential counterparties. The platforms also provide analytical tools to determine the appropriateness of trades as well as information to gauge the integrity of counterparties and the credits in question.

Ian Lampl was deputy chief counsel for the Treasury Department’s Troubled Asset Relief Program before co-founding LoanStreet a decade ago. As the fintech’s CEO, he said that during his TARP stint he was struck by how difficult it was for community banks and credit unions to share credits. He noted an example of a lender in upstate Maine that was unable to fund loans in downstate Maine much less elsewhere in the country and ended up accumulating excessive geographical and product credit risk. Such over-concentrations are common among smaller depositories without the broad scope of financial supermarkets such as JPMorgan Chase and Citigroup.

“They needed a way to effectively manage their balance sheets, and that covers geography, product and duration,” Lampl says.

Matching versus scale

Brokers’ focus had been matching bank loan counterparties, but LoanStreet viewed the primary issue as scale — being able to partner simultaneously with many institutions. Consequently, it initially focused on providing software to allow banks to scale the sharing of credit, which includes tracking, reporting, remitting and analyzing the performance of their loans over time.

“Once you’re tracking every single payment, you get really good at providing analytics around performance,” Lampl said. He added that after building the infrastructure to share credits over time —trading, administering and reporting on loans, pools of loans, and loan portfolios — the firm added applications to facilitate distribution, loan and balance-sheet analysis, and commercial servicing. Now lenders can privately invite potential counterparties to consider transactions or publicly post loan opportunities and provide levels of information access to other institutions on the platform. Lenders can sell entire loans or participations or pools of loans, always retaining the servicing and administrative duties.

Lampl said that transactions range between a few million dollars and hundreds of millions, distributed broadly among multiple counterparties or a narrower syndicate, if the lead seller prefers.

“Leveraging the loan trading software allows us to continue to serve doctors’ needs and capitalize on our lending momentum, while helping to manage liquidity as the deposit side of the [bank]continues to ramp [up],” says Tyler Stafford, CEO and co-founder of Panacea.

Stafford said Panacea plans to use the LoanStreet platform mostly to sell loans, and it made its first sale through the platform in third quarter 2023. He added that his team found the network of participants to be sizable as well as significant expertise among members of the platform’s sales team and trading desk.

“Further, the post-close reporting data allows for both sides to quickly and easily monitor the performance of the loan pool,” he says, adding that Panacea anticipates using other platforms to sell whole loans, likely starting soon.

CCT started in 2018 and offers the ability to trade whole loans and pools, as well as participations across all asset classes. Before PNC, it had spread its reach through direct relationships with financial institutions and partnering with credit union service organizations and bank technology service providers to add a loan marketplace to their existing offerings. PNC has relationships with more than 1000 financial institutions that it is encouraging them to join Asset Exchange at no additional cost.

Financial institutions using the CCT platform describe transaction opportunities using more than 80 data points, starting with the asset type, then applying criteria such deal structure, collateral, rate, size and region. A matching algorithm also captures custom preferences at the user level so a banker can, for example, enter key loan attributes he or she is looking to buy or sell, and the software pairs opportunities, alerting users to matching deals or counterparties through the platform and email.

Existing CCT customers will be able to take advantage of PNC’s balance-sheet and loan-level analytics, to better understand how trades will impact their asset-liability mix, as well as its advisory services.

“If there is interest in a deal, we can get on the phone to offer customized advice from PNC FIG Advisory’s team of seasoned traders, who advise on issues ranging from M&A to hedging to securities lending,” says Charlotte McLaughlin, president and CEO of PNC Capital Markets

Platform benefits

Bill Johnson, senior business development manager at LendingClub Bank, describes CCT as a “clearinghouse” for loan deals nationwide, which is more efficient than sourcing and maintaining relationships with intermediaries in regional markets. In addition, CCT does the necessary due diligence on loan-funded projects and backs that up with the appropriate documentation to quickly determine loan credit quality.

“LendingClub is currently working on deals stemming from CCT in Hoboken, Philadelphia, Boston and Denver, and we wouldn’t have found those as readily with my broker sources,” Johnson says, adding that CCT quickly provides additional information as needed and will set up calls with prospective borrowers and/or the selling banks to ensure the lender understands deals fully.

Johnson said that many banks are currently facing capital constraints, and they are using CCT to find new homes for the credit while retaining their relationships with the borrowers.

“A lot of these banks are pulling back, and we’re seeing significant credit tightening,” Johnson says. “We’re starting to see transactions that we never would have seen over the last 10 years.”

Garrett Smith, CEO and found of CCT, says loans put up for bid often have multiple interested parties, and sellers choose which offer or offers to take. Typically 15 to 40 percent of deals result in executed transactions, according to the loan type and structure. And transaction sizes generally range from $500,000 to $50 million although there is increasing deal flow and demand for transactions over $100 million, he adds.

Also looking to build the asset side of its balance sheet is Optus Bank, the only Black-owned bank in South Carolina. It began a relationship with LoanStreet in December 2022, when it was looking to expand into solar-panel lending as well as increase its lending in LMI communities. Reggie Webber, EVP and chief credit officer at Optus Bank, says LoanStreet loans can be any size and most have been less than $100,000.

Webber says Optus also uses other loan-trading platforms, prioritizing the ease to receive and navigate relevant information and documentation. Providing filters to more easily identify LMI loans would be helpful, he says, but LoanStreet is an efficient way to find more assets, especially since there’s no charge to loan purchasers.

“It’s very beneficial to those institutions that want to grow their balance sheet but have limited overhead to do that,” Webber says.

Serving loan niches

Two other digital loan trading platforms are seeking to leverage their relatively extensive experience matching bank-loan parties. Jack Henry and Associates facilitated loan trades for 20 years in a more manual process before buying an existing digital platform in 2021. It spent much of 2022 doing market research and working closely with a tight-knit group of clients to optimize it.

It began actively marketing the Loan Marketplace platform to customers in 2023 to its depository institution base and alternative lenders, excluding brokers. Kristen Zell, national director and head of sales for lending at Jack Henry, said that so far the platform has facilitated participations, in part for banks that have hit their concentration limits with good borrowers but that want to retain the retain the servicing and client relationship.

“Credit unions are buying commercial paper, because some don’t have the staff or expertise to originate it on their own,” Zell says. “So we see banks and credit unions doing deals together — [I’ve] never seen that before.”

The platform has the ability also to do whole loans, “and conversations are happening,” she says, and it has the functionality to transmit the necessary information to enable buyers’ credit analysis. She notes that deterioration in the credit markets is fueling activity, such as the jump in auto delinquencies that compares to levels in 2007 and has prompted credit unions to offload some of that debt.

“A bank said this morning that a borrower in tough times no longer fit in its credit box, so we’re connecting the borrower to one of our factoring clients,” Zell says. “That allows them to continue their business and maintain a relationship with the particular bank.”

While other platforms exclude Wall Street firms and even market themselves as more democratic and less costly options to buy and sell loans, ORSNN views dealers as a critical part of its offering. Launched on Dec. 11, ORSNN benefits from the experience of co-founder CEO Sean Banerjee who previously headed up RedBrook Capital, a voice platform that specialized in providing regional banks and credit unions access to secondary-market pools of loans across multiple asset classes.

ORSNN is a digital platform with a sophisticated functionality providing asset-class and loan-level analytics, marketplace access catering to the needs of different types of participants and highly efficient due diligence to speed up settlement.

“We’ve built a road for credit unions and banks to drive right up to dealers and get a bid for a loan pool that will wind up in a securitization, if they haven’t been able to sell it as a participation,” Banerjee says.

John Hintze is a frequent contributor to ABA Banking Journal.