Parallels between online lending and subprime mortgages

Washington

COULD online lending cause the next financial crisis? While the odds seem overwhelmingly against it, the recent turmoil at LendingClub - a leading online lender - makes it hard not to ask the question. There are some disquieting parallels with subprime mortgages, which seemed beneficial until sloppy and fraudulent lending practices triggered a wider collapse of confidence. Are we about to repeat the cycle?

In theory, online lending makes a lot of sense. Consumers and companies that want credit submit their applications electronically; their creditworthiness is evaluated electronically from data, including Fico scores and payment history, kept by credit bureaus or available from other sources. If prospective borrowers pass the tests, they get the loans. The process is straightforward and fast; the lack of bank branches cuts costs.