Peer-to-peer lending platforms get lots of attention. These platforms help individual investors buy securities linked to personal loans and even small real estate loans. But other fintechs offer lending platforms for institutional buyers. These commercial lending platforms support much larger transactions. For example, a bank could use one of them to purchase a $25 million loan to the developer of an apartment complex in Los Angeles or New York City. One example of a platform like this is operated by Metechi. Commercial lending platforms offer several benefits.
Access to More Loans
Many banks hold commercial loans and may be willing to sell them to third-party investors. But there are thousands of banks in the United States. It would take a long time to call each banker on the phone and ask them if they have any loans for sale. So bankers typically trade loans with other bankers who they know already and may contact other banks located nearby.
A commercial lending platform allows banks to purchase mortgages on properties located on the other side of the country. This allows the bank to reduce its exposure to the local real estate market and limit geographic risk. The bank can also find better deals by conducting its search in a larger market. And with more buyers available for loans, the selling bank can sell the loans more quickly at better prices.
Better Information About Loans
Like other fintech platforms, a commercial lending platform can use machine learning software to calculate appropriate valuations. The platform can set the appropriate value for a mortgage, determine the correct discount on a non-performing loan, and so on. The platform can also decide if a loan is priced correctly. When banks sell loans to each other, they may quote poor prices because of conflicts of interest.
These conflicts of interest can even apply to the bank employees themselves. If a bank employee sells off the entire portfolio of non-performing loans, for example, the bank may not need that employee to manage the loans anymore. So the banker may refuse to sell the loans, or quote high prices for them, to avoid getting laid off by the bank.
Better Privacy for Transactions
Banks may refuse to share information about the loans they are willing to sell for privacy reasons. Selling a non-performing loan can imply that the bank made a bad decision when it originated the loan. This can damage the bank’s reputation with investors, unless the bank has a good excuse like the coronavirus pandemic. And if the bank sells a non-performing loan at a huge discount, other buyers may begin expecting generous discounts as well.
Additionally, buyers who offer to purchase loans from a bank may not be who they seem. The buyer may actually represent a third-party agency that will list the loan itself and attempt to sell it to other banks. If the bank provides information to this type of buyer, it can get in trouble with regulators for sharing confidential details about its buyers. And competitors will also be able to see information about the loan, including other banks.
A commercial lending platform can ensure that banks that bid on loans can only see the financial information that they need to make a decision. This process can even be automated, with banks automatically bidding for loans that meet their criteria. As a result, only the bank that wins the auction will be able to see private information about the borrower afterward. Securing privacy for banks may make them more willing to list their loans on a commercial lending platform instead of marketing their loans through other channels.
Access to More Buyers
Commercial loan trading platforms appeal to many types of buyers, including potential buyers that a bank may not have considered. For example, smaller banks may want access to higher-quality loans than the ones that are currently on their books. But other investors may want to buy riskier, non-performing loans that could offer much higher returns if they can convince the borrower to start making payments again. Banks may be able to use commercial lending platforms to sell loans that they could not easily offload otherwise.
A large bank can also use a commercial lending platform to split up the mortgage on a large property into several smaller loans. For example, the bank might have financed a $50 million construction project. Instead of selling the entire $50 million loan to another major bank, it can split up the loan into five segments and sell the $10 million loans to five smaller banks. This setup reduces risk for the smaller banks because they share the risk. And with the commercial loan platform available, the large bank doesn’t have to reach out to multiple small banks individually to set up the transaction.
Saving Time for Underwriters
A small bank might also have money available to lend, but it might not have enough underwriters to examine all of the loan applications. The commercial lending platform can save the underwriters time by organizing and collecting loan documents. But another benefit of a commercial lending platform is that the underwriter can focus on the most profitable loans. Approving a $1 million loan may require as much work from the underwriter as approving a $10 million loan, but the bank may make 10 times the profit on the larger loan.