Some Quick Notes on LC’s first 10-k (that I finally got around to reading)
LendingClub has Facilitated $7.6B of loan origination since it’s launch (in 2007). Keep in mind that it’s facilitating the loans, not actually originating them. This would incur deeper regulatory scrutiny.
The consumer site is where borrowers can engage in “transactions relating to Standard Program Loans” which adhere to certain standards available to the public. Custom Program Loans are only available to qualified investors, and these are probably higher yielding. This means most retail investors don’t have access to the riskier and higher return loans.
These loans available only to certain investors include: Small Business Loans, Sub Prime Consumer Loans, Education and Patience Finance Loans.
The LC technology automates the following processes:
Borrower application process
LC Generates revenue via the following activities
Transaction fees from its marketplaces role, matching borrowers with investors
Servicing Fees from Investors
Management Fees from Investment Funds
Importantly, LendingClub does not incur balance sheet risk. LC does not us its own capital to invest except in limited circumstances, and in those cases, it’s an immaterial amount.
LC believes there is an opportunity for the online marketplace model to transform the banking system via:
Transparent and open marketplace where borrowers and lenders have access to information
Technology and information can make credit more affordable
By redirecting existing capital that’s currently trapped in the current banking system, LC has the chance to put more capital to work in alternative asset classes and stimulate the economy while improving yield for investors.
Problems with the Current Banking System
Traditional banks are burdened with high fixed costs of underwriting in part because of physical infrastructure and in part because of the complex and expensive regulatory environment.
In response to a difficult environment, traditional banking has relied on credit cards to issue credit, which does not suffice.
Traditional investors earn low yield despite funding these loans via deposits.
Many retail investors do not have sufficient funds to access higher yielding investment opportunities until now
LC’s Competitive Strengths
Marketplace technology matching borrowers and lenders
Network effect that leads to better potential for participant matching. And increased participation results in the generation of substantial data that is used to impove credit scoring.
As trust increases, the market becomes increasingly liquid and allows people to take lower risk premiums on the investments (allowing LC to offer lower rates to borrowers).
LC has a high net promoter score (in the 70's)
LC’s technology allows for better customer experience and is also cost efficient
Proprietary algorithms leveraging behavioral data, employment info, supplemental risk assessment tools and FICO scores improves credit scoring
Products to Borrowers
Persoanl Loans: ($1k-$35k) terms of 3–5 years, no prepayment penalties, FICO scores of at least 660, good debt-to-income ratios, 36 months of credit history and limited credic
Sup-Prime Consumer Loans: $1-$50k (for shorter, smaller size term loans). $1k-$50k of terms of 2-y years and fixed rates between 3.99%-9.34%
Education and Patience Finance Loans: LC acquired Springstone which facilitates unsecured education and patient finance loans. 24–84 month terms, fixed rates (from 4–18%) monthly payments, no prepayments. Loan options range from $500 to $32k
Small Business Loans: unsecured small biz loans (only available via private transactions with qualified lenders), fixed loans, $15k-$300k fixed rate and terms of 1–5 yrs.
Product to Investors
Investors can invest in a wide range of loans based on term and credit characteristics. Investors receive monthly cash flow. Lenders are offered risk scores and data on potential loans. Investors can either use low-touch or high-touch accounts & managed accounts.
LC offers servicing throughout the life of the loan.
Regulatory and Compliance Stuff
LC is regulated differently than banks are. Banks have capital risk from both credit and interest rates. LC does not take deposits, so is not regulated by the FDIC (which insures bank holding co’s and mandates certain cap requirements).
LC is still subject to some regulation. Partner bank, WebBank, is regulated by the FDIC and by the state of Utag. These regulations limit fees that may be assessed on loans, require extensive discolsure and consent from the borrowers and lenders, prohibit discrimination and unfair and deceptive acts of practice and qualification and licensing obligations on LendingClub (not sure what exactly they must get in terms of licenses, still).
Implications if LC screws this up: very bad.
LC has relationships with issuing banks that originate the loans to borrowers.
Work flow: issuing banks (WebBank is LC’s primary issuing bank) originate the loans, which are then purchased by LC using the funds on the platform (allowing the interest rates to pass through to the investors and helping LC avoid much of the licensing, etc.).
LC’s back up bank is Cross River Bank.
LC’s agreement with WebBank says that it must service the loans during the time they are owned by WebBank. LC pays WebBank a monthly service fee based on the amount of loans issued by WebBank and purchased by LC’s partners. WebBank retains ownership of all loans for up to two days and earns the interest rate (over those days) on them. LC cannot securitize the loans w/o prior written consent from WebBank.
LC also has a customer identification process that helps detect fraud and verifies information.
LC services all the loans facilitated through the marketplace except for those facilitated through Sprinstone’s platform. Payments are made via ACH transfer from a borrower’s bank account. Loan repayments are remitted to bank accounts maintained for the benefit of investors. Subsequent servicing services for loans deliquent for 30 days or more are outsourced to third party collection agencies.
Servicing fees paid by investors cover day to day costs of processing loans. Sometimes investors are charged a collection fee if the loan requires it. The amount charged to investors is up to 35% of the amount recovered.
Current competitors range from credit card issuers to traditional financial institutions. The competitive advantage is the technology and marketplace network effects that make the platform cost-efficient and capable of offering lower rates.