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4 Reasons To Consider a Loan Marketplace To Maintain Your Institutions’ Credit Health

Doug Diekmann
Mar 22, 2023

The noted financial historian and economist Peter Bernstein once said, “The constant lesson of history is the dominant role played by surprise. Just when we are most comfortable with an environment and come to believe we finally understand it, the ground shifts under our feet.”

This perfectly summarizes the recent economic events in the US.

Financial institutions adjusted to the pandemic and the corresponding drop in Fed Funds during March of 2020 to 0%, resulting in widescale change, infrastructure investment, PPP, and skyrocketing liquidity. Once this mode of business was just getting comfortable, banks and credit unions then had to pivot and react to record increases in wages, interest rates, a plummeting bond market, yield to negative AOCI, and liquidity problems in the Summer of 2022.

So how can financial institution leaders navigate these rapidly changing waters while still meeting Board-driven financial goals?

The answer is being nimble enough to pivot when you need to and creative enough to think outside the box in accomplishing your objectives. Preserving earnings while navigating credit risk and loan concentrations requires planning and skill. As the market becomes increasingly volatile and talk of a recession in 2023 rises, prudent financial institutions should give serious thought to diversifying risk in their portfolios.

A Three-Pronged Strategy to Maintain Good Credit Health

  1. Diversify your portfolio by geography, industry, and loan type
  2. Rebalance to reduce risk and keep a healthy balance sheet
  3. Prune your credit tree of dead or dying limbs before you face an increase in reserve or even worse – a loss

All three strategies are best accomplished through an online loan marketplace. If loan growth is what you need, consider purchasing loans or participations. If you need liquidity, try reducing your portfolio through loan sales and selling participations. If reducing higher-risk exposure is important, a loan marketplace can help you explore who might have an appetite for it – a win-win opportunity for allThere are paths for all these strategies, each of which involves a reputable loan marketplace.  

How Do You Find a Reputable Loan Marketplace?

First, consider providers who have deep relationships with financial institutions.

Most providers have a material number of relationships across the nation that you can leverage. These relationships are key because you need a provider who can connect you with other like-minded banks and credit unions while providing a low-cost, superior platform.

Speaking of the platform … this is the second item to consider.

Is your provider credible in the technology space? Providers can’t just throw together a loan marketplace; they need to develop and implement successful technology that benefits you and your institution.

Use of a marketplace and shifting your strategy to actively purchase and sell loans and participations is a definite shift in thinking. This is because historically, leadership has relied on a network of “friendly” providers who will share loans back and forth when they have them. The problem is that friendly networks are getting acquired, causing friendly networks to change their appetites or go cold when they suffer a loss – resulting in inconsistency and impacting how you do business. This is why expanding that network through a loan marketplace is a good solution.

Four Reasons to Consider a Loan Marketplace to Supplement Your Network or Replace It

  1. Providers on a reputable platform are vetted and known. You can determine and research who you want to deal with, what their quality metrics are for you to consider them, and if they have expertise in the segment you are looking to purchase or sell.  
  2. A loan marketplace is a great way to add or reduce loans to impact liquidity or find nonpredatory providers who can either buy participations or offer you participations. A loan marketplace is also good for rebalancing portfolios and selling pools as it can factor into your business strategy or safety and soundness exam.
  3. The network that comes with a loan marketplace can help you find outlets for loans that no longer meet your risk tolerance or business model. Don’t get me wrong, the marketplace you select does not want to be the isle of misfit loans (stealing from the Rudolph the Red Nosed Reindeer cartoon); however, it can be an outlet for deals you don’t mind leaving.
  4. Lastly, a good marketplace will have a staff of experts (not brokers) who will leverage former lenders and financial institution leaders who have been where you are and have successfully navigated challenging economic waters.

In a world full of many surprises, it’s nice to know you can rely on providers to help you consider and implement new opportunities. A reputable loan marketplace with former lenders and leadership can help your organization accomplish your lending and portfolio goals.

This on-demand webinar will help you discover more ways to navigate the volatile lending market.

Watch the Recording


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