A Loan Originator (LO) is a sales entity that uses marketing to acquire borrowers looking for a loan. Loan originators are acting as the fourth part in the peer-to-peer lending process with the other parties involved being the borrower, the lender, and the P2P platform. The role of the loan originator is to provide borrowers with the P2P platform, which then only needs to focus on administration and acquiring lenders.
This business model is new to the peer-to-peer market and allows platforms to facilitate loans faster compared to traditional lending-based crowdfunding where the platform is facilitating every part of the process. Normally, if you were to borrow money on a P2P platform, you would do it directly at the platform’s website. With loan originators, people and companies are borrowing money outside of the P2P platform and the loan originators then sell the loan to lenders on P2P platforms.
This is not without additional risks for investors as it might cause slacking in the approval process caused by the incentive structure. A loan originator has two purposes: The first is to sell borrowers that their lending operation is the best borrowing alternative in the market; the second is to navigate you through the loan application till the signature. A peer-to-peer loan originator is a sales entity first and a loan approval company second.
The Main Job of a Loan Originator is to SELL Debt
Loan originators in the peer-to-peer lending market are traditional non-bank financial institutions whose origin is mainly known as Mortgage Loan Originators (MLOs). The job description of a loan officer working at such a company is, according to careerplanner.com, to “Evaluate, authorize, or recommend approval of commercial, real estate or credit loans.” However, as highlighted by study.com, “Their main job duty is to solicit potential borrowers for new mortgage loans.” – Translation: Working as a loan officer is almost all about selling.
In the process of getting a borrower to sign a loan document, it is the loan originator's job to manage the entity of participants that includes marketers, borrowers, processors, underwriters, closers, and bookkeepers – all with a focus on the same interest and goals of success.
While this might sound worrisome for investors in P2P lending, precautions are made with the loan originators to make sure that too much bad debt is not facilitated. This can be done by having the loan originators participate in the loans with a certain percentage. This is called skin in the game. Another common technique is to use a buyback guarantee, which is a contract forcing the loan originators to buy back the loans if borrowers miss payments.
If you’re lending or borrowing large amounts of money, you need to trust whoever it is you are working with. Good loan originators are experienced and skilled in communicating trust and confidence to all participants in the loan.