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The Future of Lending Club – Will they Survive and Thrive, or Crash and Burn?

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Last week, Lending Club made a major announcement: they suspended the addition of new lender registrations, stopped current lenders from lending more money, and halted their referral program. This has sparked a lot of debate in the blogosphere regarding what is going on at Lending Club HQ, and what will happen to not only Lending Club, but to the P2P industry. To further confuse the issue, Lending Club has officially entered into a “quiet period” where they are not allowed to discuss their situation with the press, save reading from a prepared script and answering general questions.

What follows are my thoughts about Lending Club which are based on reading other blogs, industry news, and a phone call I had with a Lending Club customer service representative last week. Many of the answers I received from Lending Club were read directly from a script, and several questions received the standard “no comment” response. However, the customer service rep answered a few other questions which I received interesting responses to – if you read between the lines.

As a note, I am a paid freelance writer for the Prosper blog, and these views do not represent those of Prosper, Lending Club, or any other person or business. I am an active lender in the P2P loan market, and I have a vested interest in the P2P lending industry. As such, these are my own views regarding Lending Club, what is going on over there, and their future within the P2P industry.

What is going on at Lending Club?

Last week Lending Cub halted new lender registrations and their referral program to “register with the proper authorities.” Most people speculate that Lending Club did this to obtain a broker/dealer license from the SEC that would allow them to permit members to buy and sell loans between themselves. Currently, Lending Club borrows money from “lenders” and lends it out to “borrowers” in the form of a promissory note. If the filing is approved, it will allow Lending Club to register these promissory notes as securities, which will allow lenders to buy, sell, and trade portions of their portfolio.

According to Lending Club officials, this was a voluntary decision and they were operating within the full limits of the laws. However, there were certain things they were not legally allowed to do, such as allow Lending Club borrowers to transfer loans among themselves. Borrowers are currently locked into 3 year loans which is a deterrent to investors who desire liquidity in their investments. Filing with the SEC will legitimatize the buying/selling process between users and allow Lending Club and its users more freedom with their investments.

Is Lending Club broke / dead?

Several bloggers have asked the question, is Lending Club broke or is Lending Club Dead? Based on the information I have, the answer is no.

Lending Club is not broke. They are continuing to fund new loans during the quiet period. They also have millions of dollars in private equity backing. (They are a privately held company, so their books are closed; this information is based on discussions with LC representatives and reading on the web). Based on the fact that they have so much backing and so much money in current loans, there is too much potential for profit for Lending Club not to be backed by someone.

However, Lending Club is at a turning point for their company. They have stopped bringing in new lenders for the time being and I believe they need to get this situation resolved quickly to increase their foothold within the P2P lending industry and become profitable. Lending Club is still at a young enough state of business that they may be able to afford to slow operations to add functionality and legality to certain operations. Had they waited much longer, this could have been nearly impossible.

As it stands, I think they are taking a very calculated risk, and one that was not made lightly. A small sacrifice now has the potential to reap large dividends later.

Lending Club is continuing current operations – although at a slower pace

Prior to this announcement, Lending Club was making huge strides in the P2P industry. Lending Club had originated over $15 million in loans and they were recently growing at the rate of $1 million in loan originations per week for the several weeks leading up to the quiet period. (See Lending Club Stats for more information regarding originated loans).

Lending Club has announced they will continue funding new loans, albeit at a slower pace. They have heavy backing, but I don’t think they have enough funding to burn through over $1 million in loans per week for several months.

They will continue funding new loans and my guess is that if/when the securities application is approved, they will likely put these loans on the market to their lenders. I believe Lending Club’s business model supports them being in the P2P lending industry as a loan facilitator, not as a direct lender. So this would make sense. (this is speculation on my part).

Why did Lending Club halt new lender applications if they are continuing operations?

Lending Club reported they were required by the “registration regulations” to halt new lender registrations and their referral program until their registration application is resolved. I think this is primarily for two reasons – to simplify accounting and to ensure that everything is within the limits of the law.

How long will this take?

At this point, the answer is unknown. But it will likely take several months before any answer is given by the SEC (or whichever governing body LC is registering with; this was a point they could not confirm or deny). This type of registration often takes 2-4 months to complete, but as no company has successfully attempted to register a P2P lending company this way before, this is really unchartered territory. It will be interesting to see how the regulatory committee handles the application. (One of the key points to this being unchartered territory is that only a portion of the loan is being sold to an individual, and not the entire loan).

How will the securities registration affect Lending Club?

Right now Lending Club is taking a hit on their image. There have been many questions regarding their stability (see the articles mentioned above, and a few below), and many people have withdrawn their money and vowed not to return. I think much of this is due to the lack of available information and the fact that many people just don’t know what is going on. The quiet period is not helping matters. However, I think this has the potential to be a short term image problem if Lending Club is successful with their registration bid.

Lending Club needs to maintain the image that everything is, and will be, good for their company. Their actions to this point are reassuring. To me, it speaks volumes that they are continuing to fund loans with their own operating funds. I think their actions also send a positive message to the P2P industry, markets, and analysts.

There are several ways the securities application can affect Lending Club:

Lending Club’s application is approved. If Lending Club’s application is approved, I think they will be fine. Upon approval, LC is going to do everything they can to engender positive media and bring new lenders and borrowers to their site. They will likely bring back their referral program (though I have been told it will be in a different form; no details at this point). The increased functionality and liquidity of their loans will be a nice selling point, as the other major P2P lender in the US, Prosper, does not yet have this option.

In addition to filing for a securities license, it is believed Lending Club is requesting approval to allow its account holders to place their unused funds in a Money Market Account, similar to what PayPal does. This allows unused funds to earn the borrowers/lenders interest, which is currently unavailable for account holders at either Prosper or Lending Club.

Lending Club’s application is not approved. If Lending Club’s application is not approved, there a couple possibilities. The first is they revert to the old business model. Lending Club reports they were operating within legal limits, so there should be no reason why they would not be able to revert to the old process. However, there is the possibility that the application process initiates changes to the laws under which Lending Club operates. If this happens, Lending Club will be forced to adapt to whatever changes occur within the industry. It is important to note that if this is not approved, Lending Club may or may not operate as before.

What should I do with my Lending Club account?

If you made loans at Lending Club they will continue to be serviced, and you will continue earning your payments as if nothing happened. However, you will not be able to reinvest your funds at this time. I recommend withdrawing your funds as they become available, because they will not earn interest and you cannot reinvest them.

If you borrowed money from Lending Club continue to make payments. You entered into a legally binding agreement and are legally bound to repay your debts just as if you borrowed money from a bank or made a purchase with a credit card.

If you have unused funds at Lending Club withdraw them. They cannot earn you interest under the current business model, so there is no sense leaving them there for several months until this situation is resolved.

What I am doing with my account: I withdrew my funds the day of the announcement and have 2 active loans at Lending Club. My loans are current and continue to earn me money. As the money becomes available, I will withdraw it.

I will make a decision regarding my accounts after Lending Club’s situation is resolved. If the business model improves, I will definitely consider adding more funds. However, it is much too early to make that decision.

What does this mean for the P2P lending industry?

Right now I think this is scaring a lot of people away from the industry. The P2P lending industry is very new in the US and is still unproven in its current form. As with any new kind of investment or business there will be growing pains, and this is a perfect example of that.

I think the P2P industry has a lot of potential, which is why I write about it and support it. More importantly, it is why I have invested some of my own money there. However, I do not yet think the P2P lending industry is a viable mainstream investment for everyone, and it is definitely something you need to investigate and research before making any investment. But you so that with all your investments, don’t you? ;)

My verdict: Take a wait and see approach with Lending Club. I won’t write them of as dead, but I will wait for more information before calling their new situation a success.

More reading about Lending Club from other blogs:


Published or updated December 29, 2011.
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{ 7 comments… read them below or add one }

1 FFB

It seems that the beating Lending Club will take for this will benefit other companies that have the same model (it will benefit LC as well if it succeeds). It’s nice that you shed some light on this as it seems there’s a very dark outlook for the company right now. It will be very interesting to see of they succeed. I think P2P has gotten a lot of press recently, it was approaching a tipping point if you will, and their success over the next year can really bring some changes to the lending model.

It sounds like a part of all of this is the ability to make loans more liquid. I understand the importance of this and it’s probably very important but I can’t help but think about the liquidity of mortgages and how that helped create the current housing mess (and S&L crisis in the 80′s). It will be interesting how a loan’s liquidity comes into play.

Time will show whether Lending Club’s” taking one for the team” will pay off in the long run. I haven’t invested in P2P yet and this situation gives me reason to wait and see what happens.

Thanks for the info!

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2 Mrs. Micah

I think it’s a nice idea that people will be able to buy/sell/trade portfolios. That may make it more popular, since you’re not stuck there for 3 years if you don’t like it.

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3 Four Pillars

Thanks for the link.

I hope they are able to bounce back from this as I liked their setup a bit better than Prosper’s.

Given that Prosper is still running and LC is not, it really looks like a rather major foul up occurred.

Hopefully we will find out what really happened at some point.

Mike

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4 Trent Hamm

I think the whole p2p model has some flaws to it that are tough to work around. There seems to be less incentive for the low-credit borrowers to even bother paying things back – basically, they found a way to just go to a website and get free money. Who cares about their credit?

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5 Mark @ TheLocoMono

In one way, I am glad this happened to Lending Club because it shows us that not all P2P are equal.

Prosper has a different model than LC does which was what I noticed was missing from LC. It will be interesting to see how things shake out for LC.

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6 Ryan

Trent, I agree the P2P lending model is not perfect, nor do I believe it is something everyone should participate in. But I do think it is forging new territory for borrowers and investors alike.

However, I don’t see how there is any less incentive for low-credit borrowers not to repay their loan. A P2P loan is essentially the same as taking an unsecured loan from a bank, or a cash advance from a credit card (without as many fees). The incentive to pay the money back should be the same because it has the same legal ramifications of any other legal loan. Some people argue there is a larger incentive to repay the loans because they were made by individuals not faceless corporations, but I think if people aren’t going to repay a loan, that part doesn’t matter so much.

It is also important to keep in mind there are many people high credit ratings who choose to take a loan through a P2P site instead of a bank (for various reasons). For these people, their credit rating is extremely important and they have every incentive to repay their loan. Like every investment, there is an element of risk involved, which is evident in the interest rates that are charged to the borrowers (much like higher credit card interest rates for those with lower credit).

The loans I have made on Prosper and Lending Club have all been to people with high credit ratings. I prefer a lower risk level in exchange for a higher likelihood of receiving my payment.

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7 Shanti @ Antishay

It is fascinating how fast the world moves today; it seems like just yesterday I was learning what P2P loans were, and just hearing about Prosper. After signing up for an account, I made the decision to sit back and watch to see what would happen. I wanted an account just in case (I guess I was interested enough), but I wanted to hear other peoples’ experiences first, and decide if I really did trust this new form of investing (being a lender).

This new development really has me intrigued. My guess is that new laws will be formed due to Lending Club’s proposal, and probably they will be allowed to proceed with their plan to let lenders buy and sell loans from other lenders. I just find this all very interesting! You’ve written a great summary here, and provided a load of information and food for thought. Thank you for covering this!

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