Stacking 101 – The Growing Trend in Commercial Lending

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“Stacking refers to a scenario in which borrowers take out multiple loans in a short time period, often using the new loan to fund repayments on older loans,” via Business Insider.

There is a growing trend in commercial lending fraud called stacking. Borrowers take advantage of the approval speed some small business loans can be funded. The quick turn times can result in the lender not catching that the borrower has multiple credit inquiries, and the borrower taking advantage by opening several new business loans at one time, from different financial institutions. As a result, the debt-to-income (DTI) used in the decision-making process may be inaccurate. Some best practices are suggested, including knowing your customer. [i]

Some higher risk lenders are encouraging loan stacking as a tool for debt consolidation, according to Reuters, but most lenders feel as though this type of lending is a threat to their stability. The use of soft credit pulls early in the process makes it easier for borrowers to have applications in process with more than one financial institution, without the knowledge of competing lenders. Even in cases where a hard credit report is pulled, the stacking fraud is frequently still not caught in time, as not all lenders are diligent in reporting either inquiries, or new trade lines, promptly to the credit bureaus. [ii]

check_1.png Best Practices to avoid all types of loan stacking fraud, as always, are:
1. Know your customer
2. Do your due diligence
check_1.png How To Avoid Commercial Loan Stacking In Your Lending Practices:
1. Lenders should take the steps of confirming the existence of their borrower’s business
2. Understand the industry type of their borrower and their business
3. Confirm the financial status of the business through third parties, such as CPAs, Secretary of State Filings, or professional licensing

Having these initial steps in place will help build a stronger foundation to avoid stacking pitfalls, and will set you on a solid path to originating a quality commercial loan.