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Lending Club Changes How Investors Can Ask Questions

by Peter Renton on April 15, 2011

Yesterday on the Lending Club blog, in a post titled Protecting Identity and Privacy, CEO Renaud Laplanche announced a change. There has always been a fertile Q&A area on every loan where investors could ask any question to a borrower. Not any more.

Starting today, investors will only be able to ask questions from a predefined list. No free format questions will be allowed. No doubt many investors will be distressed about this, but I see their point. Often as I read these Q&A’s it became clear that with a little digging I could find out the borrower’s identity.

Too Much Information

For example, a common question has always been about employment. Borrowers will often reply with complete detail about this. Someone might say I have been the office manager at ABC Company in Little Rock, Arkansas for 5 years. If I so choose, with a tiny bit of research on Google I could find the phone number and most likely the name for that person at their workplace. From there it is not that difficult to find a home address and social media profiles. No doubt some “enterprising” investors have done something like this, which likely prompted this change.

I don’t think this a big deal personally and I completely see Lending Club’s point. While the Q&A is a nice feature it is not something I focus on. What it shows me more than anything is the responsiveness of the borrower and their attention to detail. Did they answer the question and how long did they take? This is useful information, but I have to admit lately I am moving away from the importance I have placed on them. My reason? I have noticed on several of my defaults when I went back to look at the loan listing, I saw they answered the questions precisely and in detail and looked like a great risk for an investment. Then a few months later they defaulted on the loan.

The List of Questions

The preset questions that Lending Club will allow differs depending on the purpose of the loan. For a debt consolidation loan there are three questions only that may be asked:

1. What is your intended use of the loan proceeds?
2. What are your current monthly expenses (rent, transportation, utilities, phone, insurance, food, etc.)?
3. What are your current debt balances, interest rates, and monthly payments by type (credit cards, student loans, mortgages, lines of credit, etc)?

Considering debt consolidation is by far the most popular category it would have been nice if Lending Club allowed for a few more questions here. For a small business loan there are eight allowable questions, including questions one and two above. In fact, the first two questions are available for every loan category it seems and then the other questions vary depending on the category.

The one downside I see is that there is no space now for questions regarding specific verifiable information like the kind that ReadyForZero provides. It is sort of covered in question 3 above, but it is now completely up to the borrower to proactively provide this information. I would like to see more integration with a service like this and that may well come in the future. I am sure Lending Club is monitoring how this change lands with investors and may well make an adjustment or two as they see how everything plays out.

What do others think? Are you outraged or like me, do you think this is not a big deal for investors? Please share your thoughts in the comments.

[Update: Just heard from Lending Club and they said that the number of questions are not fixed. Investors can ask for questions to be added by sending their requests to feedback@lendingclub.com.  It will take them 2-3 weeks to review questions and get them added (if approved). Also, as Ken from Lendstats.com points out in the comments, it looks like Prosper has completely eliminated investor questions. No warning from them either. It can't be a coincidence that both companies made this change basically on the same day.]

[Update 2: I have been informed that this change has been mandated by WebBank, the company that underwrites the loans for Lending Club and Prosper]

{ 82 comments… read them below or add one }

Mike April 15, 2011 at 4:57 pm

April Fools Day was two weeks ago. Is this post for real???

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Dan B April 15, 2011 at 5:28 pm

If your lending money then you should have the right to ask whatever you want. The borrower is not obligated to reply & in that case you can make up your own mind as to how you want to interpret a non-response or evasive response.
On the other hand this will cut down on the ridiculously long winded questions/comments that are asked of pretty much every borrower by 1 or 2 lenders. The other thing is that I know for a fact that at least one lender has used the previous format to advise/admonish/comment/ridicule some borrowers regarding their loan applications. I am that lender. Call me insensitive but for example, I have a real tough time with people who title their loan as “dept conciladition” or some other permutation of the above…………when they can just copy the spelling correctly from 12, 000 other locations on the same website. Or people who list a 17,500 monthly income unverified & are asking for a $10k loan.
Personally…………I rarely read the questions/answers any more so it makes little difference to me.

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Peter Renton April 15, 2011 at 6:25 pm

@Mike, This is no joke I am afraid.

@Dan, I disagree that you should have the right to ask anything you want. As you point out some of these borrowers are not that sophisticated and may not see any problem in giving out their phone number or email address if asked. Lending Club is just trying to protect these people from themselves. And the SEC might have something to say to LC if it saw borrower harassment or identity theft.

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Investor Junkie April 15, 2011 at 7:23 pm

I agree with you Peter. I doesn’t really affect my loan decisions. Though it if their responses are really good or bad it might change my mind. Overall it does not affect me.

To the other commentators, keep in mind if you are doing 200+ loans and asking questions for each borrower and monitoring them, that would take up too much time IMHO.

I like the idea of predetermined questions. If anything to save time.

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Lou April 15, 2011 at 7:26 pm

I agree with @Dan, my money my questions. If they are worried about privacy concerns, they need to censor the answers not the questions.
They also need to censor the usernames, some of them are pretty easy to decipher.
-LL

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Dan B April 15, 2011 at 7:28 pm

@Peter………..I’ll be sure to remind you of your position on this when I hit you up for some money in a few months. I’ll supply you with my credit report, screen name & tell you how much I make. I might tell you the truth, or not. Then you can ask me any question that’s on that list that Lending Club listed. :)

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Lou April 15, 2011 at 7:29 pm

Also, if a lender contacts a borrower, then Lending Club should give them 30 days (or 15) to liquidate their portfolio and then kick them off the platform. Most likely they will have to take a loss to do that. That should be a deterrent.

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Peter Renton April 15, 2011 at 7:41 pm

@IJ, That is part of my reasoning. I want a peer to peer lending investment system that can scale. And spending too much much time on questions is simply not scalable.

@Lou, While censoring the answers would be an ideal situation, in reality it is not manageable with the hundreds of notes on the platform at any one time. Good point on the usernames, although most people do choose the generic names thankfully. Then, of course, there is the loan title. I just noticed a loan on there today titled Natasha. Hmmmm.

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Peter Renton April 15, 2011 at 7:43 pm

@Dan, If your credit data meets my filtering criteria then you might end up getting an investment from me regardless….

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Dan B April 15, 2011 at 8:19 pm

I want something that is practical & quick as well………..& like I’ve said this change won’t affect me personally. Nevertheless I’m opposed on principal because I believe that a lender has the right to ask questions to the borrower as he sees fit…………………not as some lawyer sees fit. Some lawyer that likely has no money at stake in the outcome of that loan, I might add.

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Dan B April 15, 2011 at 8:22 pm

@Peter……….That’s great Peter. I’ll make sure to leet you now when I neid that dept concilidation loan to pay of my credut cardz.

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Max April 15, 2011 at 8:24 pm

I don’t think this is a good strategy by lending club unless they expand their list to a bigger set of questions which would cover a lot of scenarios

But really there are lot of things that can go answered especially with so many mistake son income and no reporting of credit

For example how can u explain somebody has a debt to income ratio of 25% but a 25$ cc balance and staying on rent. I need to be able to ask the borrower to explain.

I think this change has once again made lenders more dependent on the lending club cross hair analysis rather than his own. In that case you can pretty much invest only based on grade. Not a good idea for all lenders who want to spend more time figuring out before investing their money and taking on the risk

Its the same as Lending club saying ” Trust us and invest based on our grade but take on the risk if we screwed up in our analysis which is easy with so many loans out there

I think lenders take a hit and time will tell how much

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Peter Renton April 15, 2011 at 10:23 pm

@Dan, It is a very unfortunate situation that this business is dominated by the decisions of lawyers. But it seems to be a necessary evil. And I look forward to reading your fewture lone aplicayshon…..

@Max, I think you will see the list of questions expand in the next few weeks, but the kind of personalized question of the example you give is probably gone forever. I can see that it is going to become more a number game, where the main tools of research will be the numbers provided on the credit report. But unless there is a change back, you will likely not be able to dig to find the reasons behind the numbers.

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Max April 16, 2011 at 2:14 am

@Peter – I think the list should def expand to increase investor confidence
Also from what i see the lender has to ask each question one at a time , cannot ask multiple questions at one go (a bit annoying)

Coming back to my above post recently a lot of loans have been showing yearly gross income as income per month. With no flexibility to ask question lender needs to take a guess. Sometimes all the other factors look really great but there are 6 inquires on credit report again without asking ur not going to know. Another important thing is spouse income or why the borrower is requesting more than his cc debit and the list can go on depending on what you see in a particular loan and the description provided. Sometimes u ask questions to clarify the lenders response , how do u account for thing like that

Im not saying u will do all this for every loan but then again there are various places u might want to be safe than sorry if you as a lender are not confident. With these changes the lender might not invest at all which will slow down amount of lending per day.

Also sometimes lending club comes out with bonuses, transfer x dollars and invest into platform to get y commission. If investor is going to invest slowly these offers wont be attractive anymore

Finally there is talk about expanding and making the list of questions exhaustive, in that case cant the borrower be back to revealing some personal info… then back to square 1.

This sudden move by LC dosen’t make a whole lot of sense . Why cant LC caution the borrower to refrain from including too much personal info into the answers against answering the intent of why the loan is being taken and why u should feel confident investing into them

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Lou April 16, 2011 at 5:14 am

@Peter, they can automate the scrubbing process. If they designate certain data fields as off limits, they can create a program to either kick the answers back or “redact” the info. (redacting would probably work better otherwise a borrower might get frustrated)
For instance any data entered in the Name or address field of the App would be pulled out of an answer and a marker put in it’s place.
“Hi my name is ***** and I live at **** **** in the town of ****”
I think @Max is right, they want us to rely more on the credit grades and other data (FICO,PRs, etc) they collect and less on the touchy feely stuff. Maybe they’re thinking it will speed up the amount we lend…

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KenL April 16, 2011 at 11:47 am

It looks like Prosper has completely eliminated questioning. So I guess these changes must have been brought on by another party.

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Dan B April 16, 2011 at 4:15 pm

I suppose this can be interpreted as just another subtle reminder that we are NOT lending money to individual borrowers. We are in fact lending money to Lending Club & Prosper…………who are in turn lending that money to individual borrowers & paying us an interest rate based on their risk assessment of those borrowers.

Frankly if we had any real brains (& money) we would pool all of it & form a VC company……….then lend the lump sum directly to LC (the next time they run out of funding) at 10% plus warrants. That’ll give us a predictable 10% return, potential to cash in with the warrants in if they become profitable & put us near the front of the queue in case they go under. There is of course one downside to all this. We’ll need $20 million or so to get into that game.

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Peter Renton April 16, 2011 at 8:11 pm

Thanks for all the comments.

It is very curious that Prosper has appear to have eliminated the Q&A ability completely (without an announcement) at the exact same time as Lending Club. Makes me think that either the lawyers came up with this idea at exactly the same time (unlikely), or there may have been some kind of communication from the SEC. Who knows? But it looks like this kind of open interaction between lender and borrower has gone forever.

You all make valid points here. To some extent the skill involved in selecting a loan has changed now. No longer can you make a decision based on the back and forth with a borrower. Sure, some of the human touch will now be gone. But let’s face it, there are hundreds of borrowers funding each loan and only usually a small number (two or three) who are asking questions. I think Prosper and Lending Club realized they would annoy these people, and they decided that was worth it. Or they were forced to make the change.

If I find out the real reason behind the change, I will be sure to let everyone know here.

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taxpayer April 18, 2011 at 8:48 am

This change means that any previous analysis, relating the borrower’s answers to subsequent loan performance, is pretty much inapplicable to future loan decisions.

Altho I may be technically lending money to Lending Club, repayment depends on the borrower’s performance and it seems fair that I should have as much information as s/he wishes to provide.

I will be watching how this plays out before deciding whether to make any more loans. Or, if enough lenders are turned off, it might be a good time to buy some loans thru Foliofn.

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Bilgefisher April 18, 2011 at 12:59 pm

If I had to guess, they were contacted by some govt entity. They have to be very careful with the questions. Suppose race, gender or any other protected class were asked about. They could quickly be in a lot of hot water because they hosted the question. Makes no difference whether they asked it or not, by allowing it on their site, they have effectively allowed an illegal question. There is no way to positively filter every random question.

That said, this may be a bit of a knee jerk reaction. They may both expand their questioning a bit to fill lenders needs. It will likely still only be specific lawyer scrutinized questions from a drop down menu.

Jason

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John E. April 18, 2011 at 1:59 pm

Peter, you should not assume that the few number of questions relative to the number of lenders means that only a few of the lenders are interested in the answers to those questions. I try to avoid asking questions because it takes time, but I am very interested in the questions and answers, and will also ask a question if I think it’s important and nobody else has ask it (e.g. current mortgage balance and home value).

I am very displeased with this turn of events. It is going to severely hamper my ability to assess the loans. I can only hope that they very quickly add more reasonably useful questions. Currently their questions don’t even always make sense. For example, they ask mortgage holders about rent expense. Come on, you can do better than that! And they don’t ask the very common question I mentioned above about mortgage balance and home value. I almost never lend to somebody whose home is under water, and if I can’t ascertain that I will simply never again lend to mortgage holders.

John

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Dan B April 18, 2011 at 2:23 pm

@Bilgefisher………….Under the previous format we only got to see the questions if the borrower decided to answer. We definitely did not get to see every random question. But I do understand your larger point & you may be correct as to why this change has come about. We should all keep a close eye on the filtering categories to see if any of them suddenly disappear. That to me would be confirmation that something is up.

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Aaron April 18, 2011 at 8:08 pm

Interesting comments. Now for my take. With the increased institutional investment and the complete dilution of lender to borrower interaction, how in the world could this still be considered SOCIAL LENDING. I think in reality, we have become nothing more than bond holders in CDOs.

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Dan B April 18, 2011 at 10:22 pm

@Aaron……….I’m not sure why you’d you’d call this CDOs as in collateralized. Hell I wish it was, but it most definitely isn’t. But putting that issue aside…………….. why is being or not being “social lending” an important distinction? From an investors viewpoint why do you think it’s important that it be pure social lending?
Have we not dispelled the illusion already that borrowers are somehow less likely to stiff us because we’re all part of some touchy feely “social lending” family?

I think that if we want to put an accurate label to it then we’re investors in a “pool of subordinated unsecured personal loans”. If that sounds a bit iffy & high risk that’s because it is.

Which is why I think that a 10%+ real return is the minimum we as investors should accept here. Which is why I think it’s ridiculous that these companies think it’s a good idea to be lending at 6-7%. Oh sure, let’s lend money to Joe the burger flipper at 7%. He’s got a great credit score & says he’s going to pay down debt. Never mind that he might change his mind & put a pool in his backyard instead. Never mind that he could lose his job & then realize that he’s only got $76 in his savings account. Yeah, he’s a good risk at 7%! But I digress…………….

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Peter Renton April 19, 2011 at 5:30 am

More great comments everyone, thanks.

@Taxpayer, yes for many of us how we choose loans has now changed. There will no doubt be some investor pull back as people like yourself voice their displeasure in this change. Unfortunately, we don’t make the rules and in many cases neither does Lending Club or Prosper.

@Jason, I have contacted both Lending Club and Prosper to see if we can get to the bottom of the reason for these changes. I will let you know when I hear back something.

@John, You make a valid point. I know I rarely asked a question but I often looked at the answers to others questions. I think you will find more questions will be added, but probably not very quickly. Feel free to use the feedback email address I mentioned. They need to hear from investors like us.

@Aaron, This lending vehicle is no longer really social lending or peer to peer lending for that matter. It is now an investment without a name. If you notice on their home page both Lending Club and Prosper make no mention of peer to peer or social lending. They, particularly Lending Club, are trying to downplay the social component.

@Dan, I have always maintained that the most positive aspect of p2p lending (or whatever you want to call it) is the return on your investment. The social aspect, while nice, was not essential to me. Now, it seems that this part is fading away. Some investors will be disappointed with this change and move on and that is ok.
I couldn’t agree more that 6-7% is not enough reward for an investment in an unsecured personal loan. In any other interest rate environment other than this one, most people would agree. But we have become used to 0.5%, so hey 6% sounds great. In a couple of years when interest rates rise these loans will be going away in p2p lending, and we will be left with higher risk borrowers.

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Smith April 19, 2011 at 11:41 am

I think many of the comments here are over reactions. So big deal that LendingClub has removed the free text format for asking questions; the questions aren’t gone. In fact, LendingClub has encouraged investors to submit questions!

“As an investor, feel free to submit additional questions that you would like to see added to list to feedback@lendingclub.com.
As always, your comments are welcome as we continue to make improvements to our platform.”

Like Peter, I’m moving away from using the questions anyway. I’d rather not have an emotional reason for investing in a loan. The credit detail gives me all of the information I need to know about the borrower’s attitude toward obtaining credit and repaying the loan!

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Dan B April 19, 2011 at 4:30 pm

@Smith……..I don’t personally care if they curtail/eliminate questions or not but if you really think that the “feel free to submit additional questions” line is sincere, then I’m assuming that you also believe in the sincerity of the “in order to serve you better” line…………….. a generic line that precedes every inconvenient to borderline insulting act committed by a virtually all companies/government agencies in the US.

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Peter Renton April 19, 2011 at 4:47 pm

I have heard from a source (who wants to remain anonymous) about the reason for this change to the Q&A for Lending Club and Prosper. It seems that it came from WebBank, the bank that originates loans for both companies. There were “privacy concerns” and both companies were given a very short time to make the necessary changes.

@Dan, One shouldn’t always assume that a company isn’t sincere. Particularly in this situation when Lending Club has been told they had to make a change. The may well have not wanted to do anything. Time will tell as we see if the number of questions change.

@Smith, Thanks for joining the conversation. I am with you. I will believe that Lending Club are intending to do the right thing here until proven otherwise.

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Dan B April 19, 2011 at 5:09 pm

@Peter………So after almost 4 years & & tens of thousands of loans this privacy issue finally comes up? But why all the half steps? Why not just make the “approved” questions part of the loan application instead & be done with it?
Oh wait, I know………………….The answer is likely the same one that was given when LC was asked why income or job status isn’t verified for all borrowers………………..& that is that they want to make the process as user friendly &/or convenient/easy for borrowers. So the less information asked, the better.

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Max April 19, 2011 at 11:06 pm

@Dan : I agree why is lending club always shying away from giving more information about the borrower (not personal but lending capabilities adding more parameters to the list they have in place now will be a great benefit to all lenders) Now that’s not controlled by WebBank. Infact the more parameters they add which can be decided based on lenders feedback the less questions borrowers have to deal with and less scrutinity to get personal information

I think the right way forward to help lenders fund loans quickly is to add more parameter. I had given this feedback to lending club 6 months ago but they didn’t seem interested

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Peter Renton April 20, 2011 at 1:35 am

@Dan, I also think that Lending Club didn’t want to leave investors completely out of the loop. Would you have preferred they did what Prosper did and just disable the feature completely?

@Max, By parameters, do you mean the list of questions or some other credit parameters? I expect we will see more questions as times goes on, but probably not enough to satisfy many investors.

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Dan B April 20, 2011 at 2:00 am

@Peter……..What I’m saying is that it’s impossible to satisfy people as someone will always say why don’t you offer this question or that question as an option. Before long, if the company is being sincere in wanting feedback they’ll have to hire someone just to answer those types of suggestion emails. So instead of all this nonsense & assuming that the company was in fact told to eliminate the previous setup……………just spend 10 minutes & decide on a handful of specific questions that the borrower has to answer in order to complete the loan application. It’s not brain surgery, it’s almost common sense.
For example…………if a borrower owns a home then one of the required questions could be how much they owed on their mortgage & how much their house was worth (as was suggested by someone here already) Another example would be if someone listed “debt consolidation”……………. then a question on a pop down menu could be………..list all your card balances, loans & their interest rates. You know, a few required common sense questions that have some relevance to the loan in question & the circumstances of the specific borrower & that they can then run by Webbank & that’ll be that.

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Max April 20, 2011 at 10:08 am

@Peter – I think both, they can add a few more more credit parameters as well what Dan is suggesting here to have a set of most common predefined questions based on the loan type and have the borrower answer them before the loan is listed on the platform

I would also like to see verification of income and loan type/purpose before loan is listed. lately i have been observing that lot of loans have the income and loan type/purpose messed up and highly misleading. You got to understand sooner or later people will try to game the system. I think these 2 should be verified like all the other credit parameters before loan is listed

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Peter Renton April 20, 2011 at 2:49 pm

@Dan, Thanks for the clarifications. These changes all sound good to me. They might lose a few borrowers over it but if someone doesn’t want to reveal that information do we really want them on the platform? It would probably satisfy most (but not all, of course) investors who are craving for more information from the borrowers.

@Max, Loan type is going to be a really tough one to verify. You can contact the borrower about it and they might say, yes this is for debt consolidation, but then go ahead and install a swimming pool once they have the money. I like a feature that Prosper has that can inquire as to the payment performance of a previous p2p loan. Now, you don’t get a huge number of people with a second loan (particularly on Lending Club), but to me if someone has made all their payments on time and paid off their previous loan then they are a better credit risk than someone new to the platform. As p2p lending matures on Lending Club I hope they add this feature as well.

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Lou April 20, 2011 at 2:56 pm

I agree with @Max, there are a lot of borrowers who put misleading information up and it takes a question or many questions to get the truth out of them (For example: There was one guy who kept insisting the listed income was monthly, but after about 10-15 people questioned him, he admitted it was his yearly) Since LC doesn’t confirm all incomes, this would have gone unnoticed without the questions and Lending Club will most likely not add that question to their pre-recorded ones. (or the guy who chose loan Purpose=Green/Renewable because he wanted some green to pay off debts)
And I agree with @DanB they should save us some time and automatically have the borrower fill out the prerecorded questions (list the debts, mortgage, home value, etc) in the App process.
I suggested to Christopher Young @ LC that they should add a little Web 2.0 to their site, give us some guidance (what’s legal and illegal) and let the Lenders self police the questions and answers. We have the ability to report the listing, but not to flag questions and answers. How many times have you seen a Borrower sign their name to a question or post their address…
-LL

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Eliot April 20, 2011 at 7:07 pm

Peter: Thanks for this great thread, I have found it quite useful. I have been starting to read up on LC’s 10-Q quarterly submissions to the SEC. Do you or others have concerns over the fact that they continue to project that they themselves do not expect to be profitable in the coming 12 months? They appear to be hemorraging money with no real end in sight.

I feel like I have well distributed my risks in $25 increments across over 700 loans over the past 14 months – but in the end, LC’s disclosures have me concerned that in the end, I may have been putting all the eggs in one basket. – E

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Dan B April 20, 2011 at 8:11 pm

@Lou……………I hear you. I just saw a note on LC a few minutes ago that illustrates your point. Someone with unverified income of $14,000+ per month, asking for a $6900 loan to do some work with their teeth.
And get this………..the interest rate is 5.79%!
Sounds like a real gem of an investment opportunity, don’t you think?

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Dan B April 20, 2011 at 8:17 pm

Correction…………it’s listed as a debt reduction loan but is entitled Tassie’s Teeth. I have no idea what that means.
Needless to say the list of approved questions do not include any relating to dental work & this person has virtually no credit card debt. So I’m stumped.

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Matt_SF April 21, 2011 at 10:31 am

I’m thinking Lending Club is going to lose me after this new development.

Lending Club attracted me as an investor on many progressive principles, and one of the big ones was increased transparency. For example, I could — could — ask a borrower more detailed questions than I could from a muni bond issuer, corporate bond issuer, etc.

However, removing the investor’s ability to ask a unique question about the borrower’s personal finances versus only allowing us a pre-approved set of questions, goes against the concept of transparency from my point of view.

I get that LC wants to protect borrower identity, and I agree 110% with this policy, but limiting my ability to ask the borrower pertinent financial questions is an unacceptable change.

For example, what is the borrower’s real Debt to Income ratio is versus what Lending Club says it is (e.g. they don’t take into account mortgage payments).

There are dozens of permutations of perfectly acceptable questions that we will no longer be capable of asking. And for that reason, I’ll be halting my reinvestments until the policy is reversed.

Vote with your money, as they say.

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Aaron April 21, 2011 at 2:59 pm

@Dan, I have never been under the illusion that the average guy is not going to stiff me on the loan. All I am saying is that the “novel” aspect of this investment vehicle is being dilluted. I came to Prosper/LC because of a unique social function that they were claiming to promote. Now it appears they have thrown it out the window. I am continuing with the current rate of investment, but this doesn’t make me happy.

I don’t really ask many questions either, I am more upset on principle than anything else. Sometimes, (rarely) I do have a question that I would like an answer to. I believe I should have that option.

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Bilgefisher April 21, 2011 at 3:10 pm

I don’t ask many questions either, but I do ask real estate questions on business real estate loans. I know the field and can somewhat determine if they are a rookie or more experienced based on the answers.

I have also seen many revealing answers to questions. “This loan is to cover my expenses while i find a new job” or “My income is half and this will cover the rest” etc etc. It doesn’t prevent all problems, but its nice to avoid certain loans when red flags appear.

I am hoping and expecting prosper to create a list of questions we can use and take input in the need for more questions as the need arises.

Jason

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Dan B April 21, 2011 at 4:26 pm

@Aaron…….We’re not far apart on this at all. I think that every investor would like the option of asking a question if he/she feels that it’s important to their process. I agree in principle that all of us should have that right, it is after all our money.

But then I personally believe I should have the unrestricted right to ask a prospective employee anything I want too……………. but that’s not really possible anymore in this country. So………….

As I’ve said in many previous posts, I think the dilution of the whole “social” aspect is inevitable & in fact a good thing…………as it shows that the investment format is maturing & willing to now stand/fall on the merits of its results. I can’t speak for the motivation of others but as for myself the “social lending” aspect never meant anything to me. As for the borrowers, on the either side of this equation, I’d suspect that in their heart of hearts the vast majority of them don’t give a crap either…………..they’re just looking for money at the best rate.

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Dan B April 21, 2011 at 4:29 pm

Or in the case of many borrowers at Prosper……………they’re looking for money at ANY rate.

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Mike April 21, 2011 at 5:10 pm

One more minor point about this new policy: you can no longer determine how long it took the borrower to respond to the question.

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Dan B April 21, 2011 at 6:04 pm

One other not so minor point is that there is no question that gives the borrower the opportunity to explain any delinquencies in their credit report.

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Max April 21, 2011 at 10:01 pm

One Big risk on platform for investors is verified sources of income and lot of borrower’s have been indicating otherwise. This one sole parameter can give a lot of comfort to the investor and avoid defaults. Not sure why LC cant enforce this . I think all investors should write in and suggest to implement this as soon as possible

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Dan B April 21, 2011 at 10:22 pm

@Max………….It’s not a matter of “can’t” but rather one of won’t, and LC has essentially said this. In fact LC claims that loans without income verification slightly outperform the ones with.

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Dan B April 21, 2011 at 10:43 pm

@MattSF……………It’s not going to be reversed A year from now the majority of “investors” won’t even remember that there was a time when you could ask questions. Two years from now our numbers will be such a minority that we’ll be marginalized to telling stories of the good ‘ol days. After all if this investment that was formerly called p2p is to succeed they will need a lot more new investors who will know nothing of what we could do up until now. Besides people have a notoriously short memory anyway.
But you Matt, can’t leave now. You can’t leave while you still have that obscenely high NAR. You better not leave before it has had the chance to come tumbling down & I’ve had the chance to say I told you so! :)

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Matt SF April 22, 2011 at 8:30 am

@Dan B

Yep, they’ve gotten their free publicity out of me, so doubt they’ll care. Too bad b/c the investment club is ~100 members now.

And you’re correct that my high NAR will fall b/c I’m not reinvesting in those 15%+ NAR notes. Not that 15% NAR equates to a real 15% ROI, but that’s a different beef altogether.

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Peter Renton April 22, 2011 at 11:28 am

Thanks everyone, you all make interesting points. I jumped on a plane in Sydney, Australia a day and a half ago and by the time I was back to Denver (24 hours later) I was surprised to see so many new comments.

@Lou, I believe you should view all borrower responses with a healthy skepticism, which is why when I do my analysis I try and base it on independent credit data as much as possible. Having said that, it is one thing for a borrower to “fudge” a little on a borrower application, it is another to state an outright lie to a prospective investor. Some will, but I think the vast majority of borrowers will try and give something close to the truth when pressed. Which is why I view it as a shame that the Q&A is going away, but it is not a game changer for me.

@Eliot, This financial sustainability of both Lending Club and Prosper casts a constant shadow over the future of peer to peer lending. Neither company has demonstrated that they are capable of making a profit yet. But Lending Club is certainly on the right trajectory so one of these days I hope to see significant improvement in their financials. They just finished their financial year on March 31st, so we should get full year financials next month. I will do a blog post on this when their results come out.

@Matt_SF, Well it will be certainly sad to see you depart the p2p lending landscape. I understand your decision because I know you have always placed great stock in the Q&A section. I will miss your always insightful updates.

@Aaron, Keep in mind this was not a decision of Lending Club, it was mandated on them (and Prosper) from WebBank. Not that that makes any difference in practical terms. But I believe the social part of social lending is going to continue to erode (maybe I should change the name of this blog!) as more big money players join us.

@Bilgefisher, I have no news yet on whether Prosper will be allowing a prescreened list of questions, but I expect they will. It looks kind of funny on the loan listing page with the new loans still showing a Q&A section that is always blank and with no ability to add a question.

@Mike, Good catch on that. Now, when the question is asked it is not time stamped, only when it is answered. Seems like a feature request to me.

@Max, As Dan pointed out LC could verify all loans, but chose to only verify a subset. From their perspective they flag certain loans verification where they think it is necessary or there is some red flag that causes concern in the application. But in an article from February, CEO Renaud Lapalanche did state that unverified loans slightly outperform verified loans. Now, this maybe because the verified loans are higher risk loans in general, although we really don’t know what caused the income verification trigger.

@Dan, Thanks for acting as quasi-moderator while I was offline.

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Matt Jabs April 22, 2011 at 12:31 pm

This is a tad worrisome, but considering your *update 1* stating investors can submit more questions for approval, it’s not a worrisome as first supposed. Like you, I don’t largely base my investment choices on the question/answer sessions, although I do love having it there for extra info.

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Dan B April 22, 2011 at 2:25 pm

Incidentally………..MattSF may not be actively participating in Lending Club but the bulk of his invested money isn’t really going anywhere for at least another 4 years. Those high yielding 5 year notes that he’s been loading up on since last May will certainly see to that. It’ll be a super slow motion exit kind of like those discount suit businesses that have a going out of business sign year after year. Not that I’m comparing Matt to a cheap suit. :)

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Peter Renton April 22, 2011 at 3:00 pm

Good point Dan. Assuming Matt doesn’t change his mind it will be fully five years before he will be able to close down his LC account and maybe a little longer if you account for some of the stragglers to fully repay their loan.

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David April 22, 2011 at 3:00 pm

@Dan B

Actually if Matt wanted to dip his toes into the FOLIOfn trading platform, he could liquidate entirely for a 1% haircut in probably 2-3 weeks. If he decided to tack on 1-2% premiums to his notes (probably a bit more time than it’s worth, given this can’t be done automatically) it would probably be closer to a 2-3 month liquidation time frame.

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Jimmy B from So Cal April 22, 2011 at 3:02 pm

For what it’s worth:

I decided to leave LC a couple weeks back for a few reasons:

First, I had a couple loans that got into trouble on the first payment which seemed very problematic to me. One guy was military w/10+ years job history and the other I can’t remember other than their income wasn’t verified. I stopped doing unverified income in my filters. My current rate of return is about 13.60 to 13.75% depending on which day of the week payments come in. This puts me in the 80-81% investor performance range.
The defaults really pi** me off AND the default rate LC reports are annualized, not cumulative over the life of the loan. Do the math on default rates–they’re higher than you think.

Second, no one really talks about tax implications. I have most of my money in stocks and mutual funds. All of those are tax deferred gains until sold and I don’t sell winners only slight losers. LC is ordinary income. Take LC’s 9.xx% average return and back out taxes to get your effective annual rate of return. I’m opting for tax deferred capital gains and lower tax rates (until the gubment changes the rates that is).

So, every loan is on the Trading Platform. I’ve been on LC long enough to take the interest income and pay for the small trading fees. BTW the loans are selling pretty quickly. Do another check for yourself on the Trading Platform. Check “Never Late” when you look for loans. There are over 10,000 “Never Late” loans for sale. That’s a lot of inventory from investor who used to be sold on the business model. I’m not the only one with my foot out the door.

One last thing: I heavily relied on filters to pick my loans. I thought some of the questions were ridiculous and the answers more so. I was more concerned when I saw marginal quality loans funds quickly with only a question or two asked. LC offers a person to run your portfolio for you but you have a very limited set of parameters you can request they run. That didn’t work for me.

Like Matt, I’m out. Love the idea of P2P but for me, no mas, amigos.

Jimmy B

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Jay April 22, 2011 at 3:20 pm

Matt_SF, to your post on April 21, 2011 at 10:31 am, couldn’t have said it any better. It is an unacceptable change for me as well. As Lou put it: “My money, my questions.” I have notified LC that I’m stopping all my investment activities until I see how this plays out. I can’t invest with confidence if I can’t ask questions (which isn’t often, but I do read responses to other pointed questions). The Q & A is just going to become a section where the predefined questions are posed to all or a majority of borrowers, regardless of relevance to the each individual’s situation. Why not just require ALL borrowers to answer each predefined question as a matter of routine? This change is silly and unnecessary. Borrowers who give up too much info in response to investor questions are responsible for the disclosure of their identity (Just because someone asks you for your SSN doesn’t mean you have to give it, duh?). Creating awareness and educating borrowers about what is and isn’t appropriate info to disclose in response to questioning would’ve been the better route. After all, borrowers don’t have to answer any question they choose not to answer. What is the problem???
I encourage all who feel the same way to contact LC directly, if you haven’t already, and let them know rather than just airing your opinions in this forum.

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Dan B April 22, 2011 at 4:17 pm

@David……….Yes & no. Liquidity isn’t what it was even a few months ago. I sold almost 270 notes at a 2% average premium from Dec. 1st, 2010 to end of March 2011. I’ve only sold 11 notes so far this month. Now this is partially due to the fact that I have fewer notes for sale & partially because the quality of the remaining notes I’m trying to unload is presumably weaker. But even accounting for those factors it’s a sharp decline. And then of course there is the tax issue.

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Matt SF April 22, 2011 at 4:42 pm

@ Peter

Thanks for the clarification and kind words.

But the fact that a third party could dictate a policy change of this magnitude makes it even worse. My opinion only.

Still love the idea of P2P lending, but I’m not going to play in a game where non-governmental regulatory agency can change LC’s policies.

@ Jay, Dan, Jimmy

Yep, I wrote up something along those lines today at my blog. It pains me to have to depart after two very happy years at LC, but you gotta stand for something.

I’ve defended Lending Club on a lot of issues over the last 2 years, even telling several big name bloggers their concerns were unfounded or their research was lacking, but when LC (or a 3rd party) begins setting policies that treads on investor liberties, I can’t help but wonder what’s next.

So telling me that my questions have to go through a compliance officer’s desk when I’ve never asked a single question about “borrower identity” is complete nonsense.

But yeah… I’m stuck in most of my notes until early 2016. I don’t mind holding onto the ones I have, but since I put large percentage of my due diligence into the Q&A section of the notes (I’m more of a qualitative analyst than a quantitative analyst), any future investments seems like an unnecessary risk.

Sadly, I hope the powers that be see they’ve accomplished nothing but weaken the position of the people that fund their business model.

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Dan B April 22, 2011 at 6:28 pm

Before any one goes ballistic at what I’m going to say please read my previous posts for an understanding as to where I stand. But……………..here’s a different look at this situation.
When you apply for a loan at a bank who gets to ask you questions? The bank, right? Do the shareholders of the bank also get to ask you questions? Do the bondholders of the bank? How about the people who deposited money at the bank, do they get to ask the borrower anything?
So now you’re applying for a loan at LC or Prosper. So why do the people who have lent money to LC or Prosper (i.e. us investors) get to ask any questions of the borrower??

Once again, as I’ve said countless times before………. we’re not lending money to borrowers. We’re lending money to LC & Prosper, who are then re-lending that money to the borrowers. They are then paying us the returns that they get from the borrower less their cut. We don’t own a part of each borrowers’ note. We are in fact unsecured bondholders of LC/Prosper’s notes. Anyone that doesn’t understand this or doesn’t understand the implications of this should read the prospectus.

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Jay April 22, 2011 at 8:36 pm

Dan B -
I see where you can make this argument however, I counter with the following (and some of this is exactly what I wrote to LC):
1. Conventional financial institutions have underwriters who have access to much more detailed financial information, particularly for unsecured loans, than LC investors do; therefore there is less need for back and forth Q & A. Risk profiles are calculated much more precisely and buyers of loans, in this scenario, better understand what they’re getting for their money. In contrast, LC is only 3-4 years into its undertaking.
Also, conventional financial institutions provide due diligence prior to issuing the loans…LC does not. As we all know, not even all borrower income is confirmed!!! Try applying for an unsecured loan with employment information showing less than a year at the current employer without having to provide the previous 5 years of employment. You can do that as a LC borrower and now we investors cannot ask for the employment history (without first submitting a generic employment question for LC’s consideration as a one of the “predefined” questions – really lame).
2. As others have alluded to, LC started as a true P2P lending business….that was THE business model. Their business model has dramatically evolved in just 3-4 short years and is traveling further away from what I signed on for.
Interestingly enough, I responded to Renauld’s blog, regarding this change, more than 24 hours ago; at present I still see there are “no comments” posted in response his blog (which is not possible, because I commented). So, LC doesn’t even want my unflattering reply to the CEO blog post regarding the Q&A change, which entirely defeats the purpose of blogging…they’ve intercepted and discarded my reply, which makes me wonder how many other replies have been discarded….there cannot be “no comments” from anyone on the announcement of this issue.
Further, I found it to be a classless thing to announce this MAJOR change to the investor/borrower interface in an obscure blog rather than sending a letter or even an official email to the investors.

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Peter Renton April 22, 2011 at 9:43 pm

@David, Good point on selling the notes, but as Matt pointed out, he has done his due diligence on them and it looks like he intends to stick it out.

@Jimmy B, The tax issue you bring up really is an important one. I keep saying this to anyone who will listen. You can avoid taxes completely by investing with Lending Club through their IRA. But as you are on the way out I am sure this doesn’t interest you now. Just as an aside, if you invest in a corporate bond fund you pay taxes on all income earned in a similar way to Lending Club.

Marginal quality loans will still get funded, particularly at the end of this week when the big money players come in. Right now, there are 520 loans on the platform, by Friday night this number will be about half with some of the loans funded of dubious quality. If the big institutional investors start to see high default rates then they will also vote with their feet.

@Jay, The funny thing is I bet Lending Club agrees with you here. I bet they would much rather have kept this feature on and educate borrowers. But one thing about this country (spoken by someone born outside the U.S.) is that corporations try desperately to protect the uneducated and plain stupid people from themselves. Just look at the warning labels on any product you buy. So I am not surprised this has happened in p2p lending.

As to your other points I would counter your counter by saying that many people with credit scores above 660 can get an unsecured loan with less than a year on the job and a poor employment history – it is called a credit card. I think you will find anyone who is approved for a Lending Club loan will have been able to also obtain multiple credit cards.

As to your blog comment not being approved for that I am not impressed. As someone who runs a blog this goes against what I believe. I will always approve every comment, no matter how critical (as long as it is not offensive) and I think Lending Club is making a big mistake there by not publishing your comment. And yes, an email would have better.

@Matt, I can tell you that your departure from the scene has not gone unnoticed, including by the people at Lending Club. I will be talking with them next week about this (hopefully on the record) to dig a bit deeper into this. They may well have underestimated the negative response from investors.

@Dan, You make a great point here but even though the facts are clear, many investors still feel like they are lending money directly to the borrower. And they want complete control of this process. But as has been made clear now, investors have little control of how this process works.

Despite what Matt and the other investors here feel, I think you can beat the average by quantitative analysis alone. I am going to prove this with my new account. I just opened a new LC IRA and I am putting new money to work there this week. I will be publicly stating my goals with this account (a real world return of more than 12%). I will be blogging about it in a week or so and if you want to have a friendly wager contact me off the blog.

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Dan B April 23, 2011 at 1:26 am

@Jay………..I don’t understand your #1 comment. Risk profiles may be better calculated by banks, but how can we investors invest in the personal loans issued by banks? I know of no way.
Secondly, as I’ve said before, I think that LC/Prosper should include a set of directly applicable questions that are part of the application process, as opposed to waiting for one of us to ask it. To me this is just a silly misdirection ploy to give us investors the illusion that we are still participating in the vetting process……………..which is clearly not the case.

I’m not the least bit surprised that your blog post didn’t make it to print. About a year ago I posted a comment on LC’s blog in response to a LC blog article regarding “returns” complaining about the whole NAR exaggeration. Yes, I was complaining about that even back then. Anyway it was posted, then deleted. I emailed LC & complained about the deletion & got a email saying they would investigate why it was deleted etc. Never heard from them again.

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Dan B April 23, 2011 at 1:39 am

@Peter…………As a lifelong gambler I can tell you that one should normally look very warily at wagers/dares that are suggested by others. However…………. in this case your belief in a 12%+ real world return is so outrageous that I will happily contact you shortly on a friendly or not friendly wager. Furthermore I will publicly state right now that if you can achieve an average of 12%+ a year over 3 years……I’ll eat a bug of your choosing!

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Jay April 23, 2011 at 8:00 am

Dan – Sorry if I wasn’t clear. I made a variation to your analogy without explaining. I was writing about the loans that get processed by the banks, packaged and sold to third parties; the bank does the due diligence ahead of time so third party “buyers” of the loan know, much better than we LC investors do, what they’re getting.

I understand that’s not exactly what you meant; your scenario, which is depositor money funding the loans indirectly, is not a good analogy to the LC model. As we saw 2 years ago with the many bank failures, if a bank uses my deposits to fund risky loans and then widespread default cause the bank to fail, the FDIC will give me 100k (believe it’s more now with reforms) of my deposits back. That’s why savings rates are no higher than 1.2%….there’s no risk incurred. No such luck at LC.

which brings me to my next rebuttal….

Peter – Good points. However, credit card companies, issuing unsecured “loans” to risky borrowers bear no resemblance to LC investors. CC companies have all sorts of ways to ensure a rate of return (even with the CARD Act in place) despite extending credit to risky lenders. High rates of returns, fees, and better collection processes ensure CC companies will remain extremely profitable. No such luck at LC.

Again, for me, it is all about due diligence. There are LC borrowers who are no-brainers, in terms of whether or not to lend (both ways, yea and no). It’s the people in the middle for whom I want the ability to ask whatever pointed question I want.

I can almost guarantee this change came about because an LC/Prosper quack-investor (or two) contacted a defaulter. But it’s on the defaulter for divulging the type of information that allowed the quack to figure out who he/she is, not on the investor and not on LC/Prosper. If people can’t figure out how to control their information at the appropriate times, in the age of social media, it’s on them. I don’t use any social media for this exact reason….I feel social media is getting and will continue to get entire generations feeling too comfortable about giving up seemingly mundane information about themselves (I’ll climb off the soap box now and continue w/o digression)

Dan – your statement “To me this is just a silly misdirection ploy to give us investors the illusion that we are still participating in the vetting process” is spot on and is exactly why I’m stopping investment activities at LC. It’s a wide departure from LC’s original business model.

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Peter Renton April 23, 2011 at 9:16 am

@Dan, Well if you think my 12% real world return at Lending Club is outrageous then I probably shouldn’t tell you I am going for 15% real world return at Prosper. This is what I want to average over the next three years. I feel like it will be easy in the first year but get tougher come year two and year three.

@Jay, So, I have a question for you. You paint a dark picture for LC investors and yet i would guess in your time there you have seen a decent ROI on your money – is that correct? For me, as long as I can get an ROI I am happy with, both Lending Club and Prosper can change their models all they like and I won’t mind.

Because I am much more of a quantitative investor (studying the trends in credit data) than qualitative investor the Q&A issue had little impact on me. Now, if either company starts to withdraw some pertinent credit information, then I will be hopping mad. But that hasn’t happened. I want an investment that can scale to thousands of notes – and there is no way to do that by studying the Q&A of each note.

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Jay April 23, 2011 at 11:17 am

Peter – Not trying to “paint a dark picture”; it’s simply a matter of preference in investment strategies and LC has now narrowed the preference to quantitative based on what seems to be a knee jerk reaction. What’s next? In what other direction do they want to go. You mention you don’t care as long as you keep earning a return but there isn’t enough data to determine what’s the right strategy. Please read on…
I completely agree quantitative is the only feasible strategy in terms of scalability. I’m not sure how you’re scaling based upon 3 years of data though. In the absence of reliable quantitative data (3 years is not enough; the original 36 mo. LC loans are just now, over the last several months, being paid in full), I preferred to choose investments based more on qualitative data. You must admit that your portfolio return right now may not be accurate or reliable for another few years. The same is true of my return.
You have to know that a lot of borrower applicants go to LC, not because of the emotional “I’d rather pay individuals than the big banks” reason but because the big banks won’t lend to them. Why? Because the banks have more detailed financial information on them than we do and they won’t give them a loan. I didn’t set up my portfolio as though I was a CC company extending unsecured credit to anyone who happens to fall into a “quantitative category.” I don’t use LC’s auto portfolio builder for this reason. My return is about 9% (about what you’d look for in an IRA over the long term. But as someone mentioned, unlike an IRA this is not taxed deferred money, which further reduces our return. Admittedly, I was a little too conservative in my mix early on, otherwise I may be seeing a higher return. But my default rate, as a percentage of investments, is only about 7%.
Scalability is probably the reason, people aren’t flocking to P2P (or, as you say, whatever it’s now called). I would think it’s hard to scale by lending money to the rejects of traditional financial institutions (I don’t mean rejects in a nasty way).

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Dan B April 23, 2011 at 12:20 pm

@Peter………..You mean your ATTEMPT at a future 12% real return at Lending Club, don’t you? Let’s not confuse the masses here in believing that you’ve somehow already done this.
As for Prosper, I can’t comment since I have so little experience there. But I sincerely wish you luck on that.

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Peter Renton April 23, 2011 at 3:57 pm

@Jay, Thanks for the detailed response. You are dead right in assuming their isn’t enough data to make an accurate prediction. But there is some data that can give you some idea as to the best way to earn an above average return. Now, this data will evolve over time, in fact my quantitative strategies have evolved over the past six months as I see more data from the current portfolio of loans.

The fact is that like any analysis of previous returns, you can never know for certain if the future will repeat the past. All you can try and do is minimize your risks and follow what is working. And then re-examine your criteria as more data becomes available.

I completely disagree that it is hard to scale by lending money to the “rejects of traditional financial institutions” as you put it. The consumer credit market is massive – multiple trillions of dollars. If just a tiny percentage of consumer credit moves to p2p lending in the coming decade then this will be a large and thriving industry. Despite your dire predictions I think p2p is still a win-win for borrowers and investors. I remain as convinced as ever as to its long term viability.

I just want to say one time: Lending Club IRA! You can use an IRA to invest in Lending Club notes and completely negate the impact of taxes.

@Dan, Thanks for clarifying. Yes, the 12% mentioned is my goal for a real world return from my brand new Lending Club IRA that I just opened. My current real world annual return for my three existing Lending Club accounts is just over 9%.

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Johnny April 28, 2011 at 7:58 am

I am deeply troubled by the new policy of pre-set questions. The credit data provided for each borrower is crucial for undertsanding the risk profile, but the q&a added another layer of protection for lenders (and in my view good for borrowers as well). Often times the initial responses are not comprehensive enough and with the old policy, you could re-focus the borrower on what you want answered. That is no longer the case. If a borrower fails to respond completely, say, by providing the interest rates on outstanding credit card debt, there is no way to re-ask the question. This could have been an oversight by the borrower (or intentional evasion), but without the ability to re-ask the question, as an investor I am forced to move on and not invest. Furthermore, sometimes the borrower writes information inconsistent with the credit data provided by lending club, but of course the pre-set questions are so vague that there is no way to find out the reasons behind the inconsistency. I also like to see through the responses by the borrower what sort of level of education he/she has. I certainly base my investment decisions to some extent on the quality of the responses. I also noticed you cannot ask for an explanation of an inquiry or delinquency.

To give lenders the ability to ask questions and then revoke it with little useful explanation, is a shame. I was pretty happy with the service until now and most likely will begin pulling out my money of lending as the loans are paid back. In my mind, the most effective way to show your displeasure is to pull your money out.

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Nathan April 28, 2011 at 10:08 am

I just posted this on the LC blog entry about the same issue, sent it to LC, and then found the conversation going on here an wanted to add it. Thanks.

As a Lending Club investor, I feel that the move to allow predetermined questions has greatly reduced my ability to judge the quality of a loan and decide if I want to invest in it. I hope Lending Club will reconsider this change in policy and return to allowing investors to ask whatever they want.

75% of the my decision to help fund or not fund a loan was based on the answers a borrower gave to questions asked by myself and (mostly) other LC investors, especially the USMC Retired guy.

If the borrower wrote a thoughtful, measured answer in good English explaining why they need the loan, that was usually most of what I needed to decide to fund the loan. It is usually more important than a credit score to me. Borrowers that seemed flippant or lackadaisical were passed over. This was my investment strategy on LC and, based on my rate of return and low amount of walkoffs, it seems to be working.

However, the new, limited questions remove the ability of investors to get a sense of who they’re trusting their money with. These questions don’t encourage personal replies from borrowers because they’re very sterile, cold, and lack nuance. There is no way, for example, for an investor to tell a borrower something like, “Thanks for the information, I’m interested in funding your loan. Please remember that this isn’t a big bank and that these are real people spending their hard-earned money on your loan.”

Thus, I feel like over the last two weeks since this change I’ve end up looking mostly at numbers and brief, unhelpful replies to soulless stock questions. I would consider moving the Lending Club part of my investment strategy to another company that let me have more insight into who I’m giving money to.

I’m sure Lending Club received complaints from borrowers that some questions were too personal. I can imagine if I signed up for a loan and people from the internet started asking me about what I do at my company and the specifics of my monthly budget, I would raise an eyebrow. Privacy on the net is a big deal. However, these questions are important and the culture that rose up around LC investors asking questions is also an important part of the site that I strongly value.

The answer is not to add additional questions to the box of stock questions available to us. There is no way to have an ongoing conversation with a borrower amongst different investors with only stock questions. There is no set of stock questions that would work for every situation. If an borrower replies to a question and it spurs another question from investors, how do we deal with that using only stock questions?

I propose the following fixes, in order of preference:

1 – Go back to allowing lenders to ask whatever they want, but include a note from Lending Club in each question sent to the borrower to the effect of, “If you feel like this question requests too much personal information, you are not obligated to answer it and your loan will continue to be available to fund. Please understand that your answers help our investors feel comfortable sending their money to you.”

Hopefully that would deal with the privacy concerns but still allow us to ask questions that are actually useful and more revealing about a borrower’s character. Alternately…

2 – If the above is not an option, could Lending Club please make it a requirement or at least strongly encourage borrowers to write at least a few sentences about why they need the money in the loan description? So frequently there isn’t -anything- written in the loan description and it’s another perfect place to address my concerns. Even just a few sentences written by the borrower would do so much for our ability judge the quality of a loan.

While I appreciate the transparency with which Lending Club has made this move, I don’t appreciate the move itself. The quality of the site for investors has, in my opinion, dropped significantly since the change and I hope something can be done to reconsider this move.

Thank you for your time and attention.

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Peter Renton April 28, 2011 at 4:54 pm

@Johnny, I have heard that Lending Club is looking at improving the Q&A to take into account the situation where the borrower doesn’t adequately address the lender’s question. What form that will take I don’t know but there may well be a change on this front soon. And as I have said in the second update on this post this decision was imposed on Lending Club (as well as Prosper), they had no choice but to remove the open ended Q&A.

@Nathan, Lending Club are pretty strict on their blog comments, but I am happy to post your comment here. It is highly unlikely that your number 1 fix will come to pass – this decision was imposed on Lending Club and I think it is very unlikely that it will be reversed. As for number 2, I could see something like this being implemented. I have always wondered why someone who is a asking complete strangers to lend them money would not bother giving a couple of sentences about the loan. Are these people busy, lazy, worried about revealing too much or do they not think it will make any difference? Mandating they not leave this field blank could reveal some useful information.

As an aside, there was this interesting analysis of loan description length and investment return that supports your number 2 suggestion.

I also want to mention that investors are definitely split on this issue. There has certainly been many people like yourself who are angry at this move and others (like myself) who don’t see it as a big deal. It all depends on your investment strategy and whether you rely on the Q&A. Some investors do and some don’t – and that has dictated whether you are angry or indifferent to the change.

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Blake April 29, 2011 at 12:13 am

I’m another bugged investor over the removal of Q&A.

While using metrics can obviously be helpful over the long-term, having better data regarding employment, lifestyle, purpose via non-cookie cutter questions is a huge help.

If metrics were so great, then why not use portfolio builder.

I have held back money from borrowers who answer questions poorly or refuse to answer questions at all. To me, if they can’t answer a legitimate question well or at all, why would I want to invest in them.

I propose that investors can ask questions which LendingClub then approves to post to the note, at which time, the borrower can choose to answer or not. Lending Club can put the onus on the investor by having standards for the questions we are allowed to ask and then by screening them much like a blog comment board.

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Peter Renton April 29, 2011 at 11:24 am

@Blake, Thanks for your comments. I don’t think your idea to ask questions which Lending Club approve before being posted on the platform will ever fly. While it is great in theory, this month Lending Club will fund over 1,500 loans. Let’s say investors want to ask an average of two questions per loan, that is over 3,000 questions to vet per month or about 150 per workday. They would need an additional one or two staff members to handle that, which is the main reason why it won’t happen.

As for why not just use the portfolio builder is I rely on metrics? On Lending Club the filtering isn’t flexible enough, but on Prosper I actually do use the portfolio builder (they are called automated plans there) and I find it a big timesaver.

Like many others here you are annoyed by this change and I understand that. In a perfect world I think Lending Club and Prosper would be happy to keep the Q&A the way it was, but in business what lawyers (and government regulators) want often trumps what customers want unfortunately.

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Nathan April 30, 2011 at 12:37 pm

Just a quick follow-up to my lengthy comment above. I had also sent that comment to Lending Club’s feedback email address. I actually got a call from Jeff at Lending Club later in the afternoon that same day. We had a 10 minute conversation about the change and it was pretty enlightening.

Jeff explained Lending Club’s side of the issue. Most of it comes down to finding a balance between not losing quality borrowers and keeping investors happy. The amount of questions and their content could become badgering to a borrower and they might be inclined to simply walk away from the process. Borrowers are used to filling out a simple application for something like a credit card and being approved in a few minutes.

Some other points Jeff emphasized were:
– It’s difficult to empirically evaluate the benefits of a qualitative, read-all-the-questions approach to investing. Borrowers with Prime accounts are still reaching their target returns and they never even see a question. There might be a 1 or 2 percent gain in returns due to a qualitative approach, but it’s impossible to prove.

- Lending Club benefits from word-of-mouth recommendations amongst borrowers and it’s thus beneficial to create a positive experience for a borrower who will in turn recommend the site to a friend.

- Lending Club is proactively covering their asses (he put it more eloquently than that) by dealing with legal/compliance ramifications of the questions.

- As the size of an account and the amount of loans one invests in grows, it becomes difficult to devote the amount of time required to actually vet loans by asking and reading questions. I do see this being an issue in the future for myself.

- There is a substantial amount of work going on behind the scenes to categorize loans which makes a quantitative approach feasible.

- There are enough investors now that loans tend to fund regardless of whether or not a borrower answers a bunch of questions. He did not say this flippantly and emphasized that they’re not interested in biting the hand that feeds them, which is why he was calling in the first place.

Props to Lending Club for reading my concerns and getting back to me — and not just via email, but via a substantial phone call. I didn’t ask them to call, but I’m glad that they did. Even if the policy isn’t going to change, I appreciate that level of proactive customer service.

It would still be nice to see borrowers write more descriptions of their loans, but my concerns about the change have generally been quelled.

Thought it was important to update my comment.

Thanks.

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Peter Renton May 2, 2011 at 9:43 am

@Nathan, I am really glad that Lending Club reached out to you and I appreciate you sharing this. I have also spoken with people at Lending Club about the change and have heard similar things.

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Walter May 7, 2011 at 10:32 am

Per Nathan’s post, my guess is that LC is much more concerned with legal CYA than anything else (I’m betting a couple bad apples can really spoil the bunch when they’re talking with the SEC, and also having banks eager to put LC in regulatory knots) and the number of lenders funding on quantitative analysis alone reduces the benefit of having individualized Q/A. The other stuff is relevant but doesn’t seem as critical.

Already my added reliance on quantitative analysis makes the site feel much less like a “social” lending club. LC is still the best option around, but it certainly feels like reduced best option with the new rules. Perhaps it was inevitable, given the size and speed of growth, but there is certainly room for improvement. The changeover to the standardized questions has coincided with what appears to be far fewer responses (to any questions). One would think that given LC’s great rates for borrowers, they could also communicate to borrowers that part of what helps those rates to be so low is borrower’s ability to answer basic questions (better rates for a few more obvious, standardized questions is a good trade, I would say). Perhaps the borrower could be incentivized for such answers, eh?

Part of the reason I liked LC was because I felt comfortable with the combination of LC’s screening tools and my ability to weed out the obvious potential problems from there (usually based on Q/A). Now it feels like its much more in LC’s hands, and I’m not entirely comfortable with that (yet). Since the change, I have reduced the number of loans I have funded and shifter to higher quality borrowers. I’ll let other lenders blaze the pure quant trail and wait to here back from them. For now, I’ll spare a little return for preservation of principal.

I’m interested in what lenders have to say about if the new system reduces their zeal to recommend this to other lenders, and whether this will have any sort of impact (word-of-mouth goes for lenders and borrowers). I already feel a bit more reluctant to recommend it. Having been on the site a few years, I trust LC for the most part. New lenders, not having that experience, might feel differently (or, not having experienced the individualized Q/A, they might not care about what they never had).

This is a good thread. Thanks to all who have posted.

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Peter Renton May 9, 2011 at 9:20 am

@Walter, Thanks for joining the conversation. I think it is true that “social” lending is becoming less social, and I think this trend has been happening for some time. You will notice that virtually nowhere on Lending Club’s site are the terms social lending or peer to peer lending. They don’t really name this investment vehicle any more.

While I don’t know the exact numbers, lenders who look at each loan are in the minority at Lending Club. Most people use the automated plans or just do some simple filtering before choosing loans. For these people this change in the Q&A has made absolutely no difference.

As I have said before I use a mostly quantitative strategy where I only look at individual loans occasionally. So, I continue to put new money in and continue to recommend peer to peer lending to my friends. But I know other investors (you can read many of them in the comments above) have either stopped lending or are actively trying to pull their money out. These are the people who no longer recommending Lending Club.

Judging by the fact that Lending Club had another record month last month and that almost all the loans on the platform are still funding I would guess that despite the negative reactions of a few lenders there has been no material impact on the amount of money being invested.

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steve May 9, 2011 at 4:14 pm

I just learned of this change on returning home from my Winter holiday.

Seems to me the primary purpose of the current LC management team is to grow the business enough to permit them to do an IPO and make a lot of money personally. I’ve no objection to that, but I don’t buy the automated approach to underwriting these loans when it is my money. The worst performing portfolios I have were the ones created by LC.

What offends me the most about this whole episode is the caviler way they communicated this; via a blog. They send email all the time about promotions, but they can’t send one to advise they are changing the rules.

As I just got done writing to LC, it is your game, and you make the rules, but I don’t have to play.

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Peter Renton May 10, 2011 at 11:11 am

@Steve, In case you missed it this change was mandated on Lending Club (and Prosper), they had no choice but to comply and quickly. I believe they had less than a week to make the change. I know they adding to the list of approved questions very shortly but the free form q&a mechanism is likely gone forever.

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Yosef Katz July 19, 2011 at 10:12 am

Not to pry but where will Matt_SF be putting his money that comes out of LC?! I, on the other hand, do not think that the profitability of my experience with LC will change due to the comments issue, and I do respect privacy, though I do understand Matt_SF’s issue and kind of agree that that sort of influence should not be allowed to come easily and the company should take a stance and hold it firm.

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Peter Renton July 19, 2011 at 12:06 pm

@Yosef, I have no idea where Matt_SF will be putting his money. He is a sophisticated investor so I am sure he has thought of that. If you want to comment on his blog he is usually pretty responsive to reader comments, so he might tell you what he is doing.

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Matt July 18, 2014 at 11:39 pm

Its 2014 and the appeal of Lending Club has really worn off. Why can’t any borrowers give any hint and why they are even borrowing the money.

“MAJOR PURCHASE”

Borrower has not entered any description

WTF!!!!!

Can you imagine a friend coming up to you and asking for $10,000 and not telling you what it is for? How about a complete stranger?

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