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Several Changes Today for Investors at Lending Club

by Peter Renton on September 28, 2012

Lending Club just posted this update on their blog today. It announces several new changes to their platform. Most of them are minor but there is one that may cause some consternation among investors. So what changes have been made?

Basically there are four changes that I will summarize here:

  1. New listing times have been changed to 6am, 10am, 2pm and 6pm Pacific time every day. This is a shift of four hours later so that all times now occur during the day.
  2. Four new credit attributes have been added to the Browse Notes download file: total installment credit limit, months since oldest bank installment account opened, number of revolving accounts and months since most recent bankcard delinquency. These new attributes are only available on the downloadable CSV file, not in their web interface.
  3. FICO score ranges will now be five points instead of 18 or more. This is a nice improvement that will allow closer scrutiny of credit score for investors.
  4. There will be a portion of available loans set aside for 12 hours for large investors.

The last change is the one that I will be focusing on in this post because the other changes are relatively simple and self-explanatory. I encourage you to read the post on Lending Club’s blog for all the details. For a glossary of all the fields in the Browse Notes files go here.

Some Loans Now Carved off For Large Investors

Before I launch into the details of this change here is some background. The large investors on Lending Club want to invest in entire loans. Up until now Lending Club has said no, you can invest in a maximum of 75% of a loan. But the demand for whole loans has been gaining momentum.

A few weeks ago Lending Club contacted me to get some feedback on this change. At the time I told them that retail investors wouldn’t like missing out on any loans. They understood that but they have to answer to both retail and institutional investors. So they came up with this plan. Interestingly, in our conversation the plan was for loans to be available to institutions for 24 hours but they have reduced that time period to 12 hours with this change.

This is how it works. Every time loans are added on to the platform 20% of them are held back for institutional investors. These loans are selected randomly from the pool of loans being added. After 12 hours the loans that were not taken by the institutional investors will be made available to everyone. On the CSV download there is now a new field called initial_list_status that will be set to “f” for fractional or “w” for whole. As I write this they are all fractional loans because this change was only implemented this morning. But soon we will see a mix of “f” and “w” loans.

So, here we are with this change. As a retail investor I am not thrilled about it. I want to be able to invest in every borrower that meets my criteria. But taken as a whole it seems like a reasonable compromise.

What do you think of these changes? I am always interested to hear your comments.

{ 91 comments… read them below or add one }

Danny S September 28, 2012 at 11:46 am

Pretty unhappy with this change. Actually very unhappy with this change.

Are you/we sure the notes held back are truly ‘random’ ? If so, then maybe its not SO bad. But its still bad.

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Peter Renton September 28, 2012 at 11:56 am

Danny, Obviously I can’t be sure they are random but I would be very surprised if they weren’t. If this change was made and it got out that Lending Club was holding the best loans back for institutional investors that could be a disaster. Not so much because they were doing it but because they were not open about it. They have said in their blog it is random, so to have that be a lie would be a risk I wouldn’t want to take if I were Lending Club.

One more thing. You will be able to know if it is random eventually. This field will be available on the historical download file. In a short time you will be able to look at all the “f” loans and “w” loans and compare them for yourself.

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Andrew N September 28, 2012 at 12:27 pm

Is there a reason that the institutions are so determined to take up an entire loan? I just don’t see the point.

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Investforfreedom September 28, 2012 at 12:35 pm

Peter,

You talked about P2P lending shaping to become a trillion dollar industry. I responded by saying that at that kind of market cap, P2P lending would not be what we have come to know today. I am afraid that even at just a bit over $1 billion (i. e., LendingClub plus Prosper), we are already witnessing a harbinger of what is to become: institutional investors squeezing out the little guys, which would eventually corrupt the nature of peer-to-peer lending and turn it into institution-to-individual lending. If they want to keep peer-to-peer lending from degenerating into institution-to-individual lending, retail investors must always be given priority.

I don’t understand the rationale behind the need for institutional investors to invest in an entire loan. A little creative thinking would allow institutional investors to invest in, for example, 80% of the loan. I don’t see any material difference to invest in 100% as opposed to, say, 80% of a $35,000 loan for institutional investors.

My proposed alternative is that retail investors should always be the first ones to have the chance to pick the loans. After, say, 20% or 25% of a loan getting funded, it is then open to institutional investors. If they like the loan, they can pitch in the rest and close the loan.

I don’t like this development at all.

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Anil @ PeerCube September 28, 2012 at 4:10 pm

+1 Well said “peer to peer to lending turn into institution-to-individual lending.”

IMO, this is a very bad move on Lending Club part. Such moves will turn Lending Club into nothing more than a “borrowers finder” for institutions, not much different from what mortgage brokers are to banks.

One of the most often asked question from new people interested in peer to peer lending was the fairness of the process. There were already enough concerns about LC Advisors activities. Such moves will make more individual lenders hesitant to trust the fairness of the process.

A better move would have been to cap investment up to certain percentage in a loan whether institution or individuals.

I always thought Lending Club aspired to be an exchange like NASDAQ. I guess I was wrong, they only aspired to be a mortgage broker.

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Investforfreedom September 28, 2012 at 4:42 pm

Anil,

I cringed on hearing that former investment bankers John Mack from Morgan Stanley and Eric Schwartz from Goldman Sachs joined the boards of LC and Prosper. While LC and Prosper would certainly benefit from the wealth of experience that these veterans could bring into their management, it is also a double-edged sword. With their extensive connections with Wall Street, it is difficult to assuage my concern that someday LC and Prosper would be made to serve the interests of Wall Street, which goes diametrically against what P2P lending stands for. Unfortunately, that seems to be the direction which both companies are reeling toward.

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rufus September 28, 2012 at 12:58 pm

Yup this is inevitable, LC and the others will be compelled to serve the interests of the big money investors – that’s where the lion’s share of the growth comes from. Now if one of these institutional investors can create some kind of vehicle that will accept retail money, invest in LendingClub notes and turn the gains into treatment as long-term capital gains, I will happily invest with them.

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Roy S September 28, 2012 at 1:45 pm

Another here who doesn’t like it (though I am currently not on LC). My question is whether these institutional investors are allowed to invest in the remaining 80% or loans within the first 12 hours. I think it’s only fair that if the retail investors can’t invest in some loans for 12 hours that the institutional investors shouldn’t be able to invest in the other loans for 12 hours as well.

As Prosper and LC tend to look more towards the institutional investors, retail investors will start to get more and more frustrated. Already, I am having an extremely difficult time on Prosper finding Notes that meet my criteria. I am finding that the quick invest feature just isn’t working out for me. A Note will appear on the platform that matches my criteria, and then within 5 minutes it has been fully funded. You just have to wait and swoop in to grab a share of the Note before it is gone.

If another player were to come into the market and make it purely p2p, I would start moving over in that direction. As of right now, however, that isn’t an option. So it is either deal with the system as is or just move out, which sucks. I’m hoping Prosper will see the frustration and pounce on the opportunity to grab some of the disaffected LC lenders, but they also need to increase the number of borrowers on their platform. I’m looking forward to Prosper’s next move in the retail versus institutional investors conundrum…

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Mike September 28, 2012 at 2:58 pm

This is the first step of showing preference to institutional investors. Really not happy if the playing field is not even. Will be hard to show that ‘random’ is really random. This may be one of the first events that shows LC breaking the trust of all the investors who got them to where they are. Really unhappy with this decision. It’s not just the loans. They mention they will be doing special servicing on the accounts. Will that take away servicing on other’s accounts? Will they be able to do better collections than the rest of us are getting?

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Dan B September 28, 2012 at 3:26 pm

Since 90% of the people here aren’t going to bother reading the actual press release, I think it’s important that this blog provide information that is as accurate as possible. Let me first say that I’m not that thrilled with this “loan availability” change.

Nevertheless, it is important to note that LC isn’t reserving 20% of the loans for 12 hours for institutional investors. LC is setting aside 20% of loans for 12 hours as “whole” loans for anyone (retail or institutional) who would like to invest in whole loans. Of course I understand that most of the “whole loans” demand will come from institutionals, but not all. Peter alludes to this in the above blog post, but then goes on to say that this is a institutional versus retail scenario………….which it is not. This is a fractional loan investor versus whole loan investor situation. I’m not trying to nitpick, but it’s important to be accurate here.

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Roy S September 28, 2012 at 3:32 pm

With all due respect, this is basically an institutional versus retail investor scenario, Dan. Perhaps then, LC should make the fractional loans such that no one can invest more than a certain percentage (1%, 2%, 5%)? I’m fairly certain that as it stands, an institutional investor can still invest 100% in a fractional loan…or maybe their 90% limit (I think it was 90% for all loans prior to this announcement). This is meant PURELY as a set aside for the institutional investors.

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Dan B September 28, 2012 at 3:47 pm

Well yes & no. This is meant as as set aside for whole loan preference investors………………most of which are institutional investors. Most institutional investors are large & prefer whole notes…………..but not all of them fit that description. Most retail investors are smaller & prefer fractional notes……………but not even close to all fit that description either. LC has a small number of retail investors that have millions invested & they’re not buying $25-$100 increments………….we can be certain about that. But Roy, we’re in 99% agreement here. Regardless, I’m not that thrilled about this change. Then again, I’m not that thrilled about a number of things, including the change in hours for listing new loans. Being the perpetual night owl, the 2am listing suited me perfectly. :)

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Roy S September 28, 2012 at 4:41 pm

I would like to know what prompts this “whole loan preference.” Unless the institutional investors are keeping track of every single loan (which would be ridiculous to do manually when you’re talking about millions of dollars–regardless of whether they were to invest in whole loans only–or completely automated by a computer somewhere thus making it irrelevant), it really doesn’t matter whether they are investing in whole loans or fractional loans. All that they are concerned about is investing a certain dollar amount at a certain percentage. So what this “whole loan preference” crap (excuse my language) is about is guaranteeing larger institutional investors first crack at certain loans without competition from the smaller retail investors. And again, I doubt that they are being prohibited from investing in the fractional loans either–it is NOT about them preferring to invest in whole loans. Regardless of how you slice it, it is LC catering to the large institutional investors at the expense of the smaller retail investors. This, of course, is all just my humble opinion…

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Megan October 7, 2012 at 9:14 am

It’s clearly stated on the LC post that all you have to do to be included in the group of investors that have the opportunity to invest in whole loans is send an email to:

“investing@lendingclub.com (please put Whole Loan Access Request in the subject line).”

I am not encouraged by this change for many of the reason mentioned above, there is no way I could get the diversity I want in loans, and also fully fund notes. but at least the did make the whole loan access publicly available to anyone that wanted it. Though I haven’t tried it to see if I can get access to it.

Megan October 7, 2012 at 9:19 am

I completely agree with your comment about how it isn’t fair that fractional investors can’t have access the the whole loans, but the whole loan folks can have access to the retail loans. My other question that isn’t asked either in the original post or in Peter’s analysis is do the whole loan investors get more access to the borrower’s information either before or after the loan is made? It’s only 20% of loans that are getting siphoned off now, but how long until that percentage increase? LC didn’t state a specific amount (of loans being randomly selected to be available to whole loan investors) in their press release, so they don’t have to notify anyone when they start to reduce the # of loans available to fractional loan investors.

Danny S September 28, 2012 at 4:09 pm

All in all, the changes, when it comes down to it, are tilted toward favoring institutional investors and against retail investors.

I can understand why LC needs to please the big cash players. I just hope this isnt the first move of many down a long road towards hurting the retail investors.

I also agree with Dan B about the time changes… I also liked the prior schedule more, but I can live with the new one I guess.

The big change I DO like is the breaking up of the credit score into smaller subsets.

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Dan B September 28, 2012 at 4:53 pm

Danny S…………My sentiments as well. The bottom line is that “big money”, whether it’s from institutions or large investors, has always & are always going to get preferential treatment in every facet of life. That is just the way life works. It’s a bit of wishful thinking to think this is going to be different. Besides, let’s face it, most of the huge growth of this industry in the past year has been due to the institutional side. That stampede of new individual investors which I’m fairly confident will occur, hasn’t yet occurred. So…………….

I’ve been investing pretty much daily for over a year now. If I experience a substantial change in the quality of loans or whatever in the coming months everyone here knows that I’ll be complaining loudly. I’m almost certain others will as well. But for now I’m just going to see how it plays out.

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Sarah September 28, 2012 at 5:16 pm

As a FolioFN investor, this means I’ll have even slimmer pickings to choose from, since any loans bought whole will not end up on Folio. And presumably they will be skimming the cream from the 20% and taking all the best loans. Meaning that, on average, loans available to everyone else will be worse. I wonder if they will exclude whole loans from the statistics they give to lure in retail-level investors?

It’s probably the worst for people who do automated investing, because if the average loan is worse, their returns will be worse, period. Those of us doing individual loan picking can choose to invest in fewer loans if we don’t find enough good ones.

On another note, I’d love to hear more people’s thoughts about the #2 item on your list, the added credit attributes. Any thoughts or explanations on these? (E.g., what is the difference between “delinquency” as we already have it listed and “bankcard delinquency”? Is one worse than the other or more important?)

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Peter Renton September 28, 2012 at 5:28 pm

Sarah, I am not sure of the exact differences myself. One thing that Lending Club mentioned on my visit there last month is that they are going to come out with a glossary of term explaining each field in the spreadsheet. I will see if I can get an advance copy of that and share it here.

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Megan October 7, 2012 at 9:22 am

They posted the link to the Data Glossary in their post: http://www.lendingclub.com/kb/index.php?View=entry&EntryID=253

Not sure if it answers your question or not

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Peter Renton September 28, 2012 at 5:25 pm

Thanks for your comments everyone. I chatted with Scott Sanborn, the chief marketing officer at Lending Club, to make sure I had all the facts straight before responding. Here is what he said:
1. The collections procedure is identical for every loan no matter how it originates or who invests in it.
2. Dan B. is right, we are not talking about institutions versus retail here, anyone can sign up for access to these whole loans.
3. Institutional investors who want to take large portions of a fractional loan are now not permitted to invest in these loans for the first 72 hours they are on the platform.

That last point is the one I really wanted clarification on. So, 80% of the loans on the platform are reserved for smaller investors for three days. The large investors can take the whole loan route or they can wait three days and take what is left over from the smaller investors. As I have been watching the loans today that seems to be ringing true. I have not seen any of these big 75% chunks taken by one investor as has often been the case previously.

[This point I made above about whole loan investors not being allowed to participate in the retail platform for 72 hours is not correct. There was a misunderstanding that I clarified in my follow-up comment. My apologies.]

I think all of us here are in agreement that we don’t like this change. Sanborn also said to me that Lending Club is 100% committed to the retail investors who have been the core of the business from the beginning. But they are obviously not so committed to retail investors that they are willing to hurt their large investors for our benefit. From a business perspective you can understand that.

If you hate the idea of institutional investors being a part of p2p lending then you should leave now. Because they are here to stay. Peer to peer lending is morphing into its own asset class and people and institutions both want to be a part of it.

Maybe one day there will be a company that is a pure peer to peer play but that is probably a long time in the future. Lending Club and Prosper have shown that this is not a get rich quick kind of business. Even with substantial institutional support now for 18 months neither company has ever had a profitable quarter. If they had focused on just the small investor they would both be much further away from turning a profit. What I want more than anything is a profitable and thriving p2p lending industry where I can make a good and safe investment return. The institutional investors help make that a reality.

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Roy S September 28, 2012 at 5:45 pm

I like that they are offsetting the 20% by withholding 80% for the retail investors, but 3 days might be a tad long. Given this additional information (and assuming the 20% truly is random), I’m not actually against the change. I think it is a balanced approach. I like the idea of the large institutional investors “cleaning up” the loans after the small retail investors have had a realistic chance at getting a share of the loan. I might have made it two days, but I’m assuming that LC will keep an eye on it and decide whether 3 days is too long or too short and then adjust it.

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Peter Renton September 28, 2012 at 6:38 pm

This is a new change and I am sure LC will be monitoring it and adjusting if need be. I will keep everyone here abreast of any tweaks in this new system.

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Dan B September 28, 2012 at 5:56 pm

I think that we can all agree that what we want most is, as you put it, “a profitable and thriving p2p lending industry where we can make a good and safe investment return. The institutional investors help make that a reality”. So I’m not happy about this, but I can live with it as well.

PS……..Did Scott Sanborn really say the words “Dan B is right”? Wow! Did you happen to notice if he sounded pained or going through some discomfort while saying it? :)

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Peter Renton September 28, 2012 at 6:39 pm

I think Sanborn’s exact words were, “I like what Dan B. said”. I nearly fell off my chair. :-)

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Dan B September 29, 2012 at 2:20 am

Peter…………Well, I guess not everything is necessarily as it appears, huh? :)

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Peter Renton September 28, 2012 at 8:54 pm

I just need to clarify one comment I made above in my 5:25pm comment. I misunderstood exactly what Sanborn was saying about the 72 hour period for large investors. They are allowed to invest in fractional loans on the retail platform but they are capped at a certain percentage. So in reality they will be investing along with the retail investors in the fractional loans, they are just limited to how much they can invest in the first three days. This limit is not set across the board, it will vary by investor. Sorry for the confusion.

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Roy S September 28, 2012 at 9:20 pm

…and I’m back to disliking it. I am so glad I’m not a part of LC at this point with the going back and forth. …and it’s nice to know that there is no set limit across, but rather some nebulous limit imposed on the larger lenders by LC that no one but LC knows about.

I’m back to my original musings…what is Prosper’s next move to take advantage of the frustration of LC lenders…?

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Sarah September 28, 2012 at 11:11 pm

Wait, so what is the 72 hour limit then? They are limited to an unknown fraction for 72 hours and then what, they take the whole loan if they like? Or am I missing something?

I think it is important to know what these percentage caps are. If we’re talking 75% on average (which is what it was before), then institutional investors could take 80% of all investment opportunity on Lending Club in the first ten minutes of loans being released, if they wanted to.

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Peter Renton September 29, 2012 at 7:30 am

Once the 72 hour period is over then it is true karge investors can take the entire loan. We don’t know what these percentage caps are (apparently it is going to vary) but it appears from looking at the activity in the last 24 hours that it is well under 75% and looks to be closer to 50%.

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Peter Renton September 29, 2012 at 7:32 am

Also, I wanted to respond to your secondary market comment. I really don’t think it is going to be affected that much. Like everything else at Lending Club this market has grown a great deal in the last 12 months – more than doubling in size. So, instead of maybe growing at 120% over the next 12 months it may only grow at 100%. Still plenty of notes available there for buyers.

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Sarah September 29, 2012 at 12:27 pm

Secondary-market availability is not determined by total size of LC loans, it’s determined by the the ratio of available notes to interested investors. If interested investors increase faster than the number of available notes, it will become more difficult to find good notes. I see the number of available notes going sharply downward as a result of these changes and I don’t see the number of interested investors going anywhere but up. We’re already at a disadvantage in FolioFN states and they seem to be going out of their way to make it worse.

It is already difficult finding good notes on the secondary market because the primary note buyers naturally want to hold on to their best notes and get rid of their crap notes. That’s just the nature of the beast. Plus there are thousands of notes that are pure junk at prices no one will ever touch (negative “yield to maturity”) and this makes it a lot harder to sort through everything. And of course the fact that FolioFN is a completely terrible, slow platform with utterly pathetic search parameters doesn’t help us any. (Seriously, how hard is it to just add a FICO score filter or something?! It should be completely simple to do.) I’m really pretty discouraged, and thinking of pulling my money out before the end of the year if I can do so without taking losses.

On another note, has anyone else’s Account Activity page been broken since they made the site update? I haven’t bothered contacting them since it’s a weekend and they always take days to get back to me… for some reason every time I have a problem with their site it’s on a late Friday afternoon.

Peter Renton September 29, 2012 at 5:43 pm

Sarah, I am not a frequent participant in the secondary market so I can’t comment on the quality of notes although I am sure your observations are correct. All I was referring to was the size of the market and that is what has more than doubled in the past year. Whether or not the good notes have doubled is well is very difficult to say.

Investforfreedom September 29, 2012 at 8:11 am

“If you hate the idea of institutional investors being a part of p2p lending then you should leave now. Because they are here to stay. Peer to peer lending is morphing into its own asset class and people and institutions both want to be a part of it.”

“Maybe one day there will be a company that is a pure peer to peer play but that is probably a long time in the future.”

Peter, if the replies quoted above are meant to address the concerns I have raised, then I am afraid you have turned my arguments into a straw man. Nowhere have I suggested that it is viable to have a pure peer-to-peer play free of institutional players. There are essentially three issues here:

(1) At what point would institutional participation alter the fundamental character of peer-to-peer lending?
(2) In this particular case, is there a rationale for big players to invest in an entire loan of $35000 as opposed to, say, 80% of the loan? What material difference does it make if retail investors are given the chance to pick the loans first and then after reaching 20% or 25% funding, the larger players can pitch in the rest if they so prefer.
(3) I understand that we are only small potatoes here. But if we don’t at least voice our displeasure, then they would assume that this is all okay with us. We would have much less of a right to complain later on when they make further changes to our disfavor.

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Peter Renton September 29, 2012 at 11:00 am

My response was not meant to address your concerns it was more a case of looking at the reality of the situation. I don’t believe that LC are trying to screw small investors, they are trying to balance the needs of two very different groups.

Anyway, I will address your three issues:
1. I think that point has come in 2012. The nature of peer to peer lending has changed from being just about people investing in people to one where people looking for sources of funding are connected with these sources wherever or whomever they may be.
2. I don’t pretend to understand the nuances of complex accounting law but I have been told that by investing in whole loans institutional investors can record these investments differently on their balance sheets, something they can’t do with fractional loans. That is the primary reason they want whole loans.
3. I think it is great that everyone is expressing their displeasure here. I know the LC management are reading these comments closely and they are well aware this change has not been received well by small investors.

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Peer-Lend September 29, 2012 at 1:01 pm

“2. I don’t pretend to understand the nuances of complex accounting law but I have been told that by investing in whole loans institutional investors can record these investments differently on their balance sheets, something they can’t do with fractional loans. That is the primary reason they want whole loans.”

So, I think that’s the real question here: Why is this being done? What’s the ultimate benefit for owning a whole loan? Is it assigned to the investors differently than a note (“obligation of LendingClub”) would be? Is LendingClub removed from the equation – aside from (perhaps some tweakable set of) servicing functions? Are these loans going to be “repackaged”, necessitating structural finance tricks?

I could speculate all day long about the motives for this, but, since you’ve got a line in, why not just ask the direct question “Hey, why are you guys doing this anyway?”

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Anil @ PeerCube September 29, 2012 at 2:10 pm

Depending on whether the institution is insurance, bank or investment trading firm, the reason for acquiring whole loan most likely are different. Below are my guess on why financial institutions want to buy whole loans.

Overall, if any institution buys notes instead of whole loan, they are getting same amount of information as other lenders i.e. individuals. Once the institution buys whole loan LC/Web Bank can transfer ownership of loan to the institution, effectively institution becomes the owner of loan and has all information about borrowers of whole loan. This will enable institution to better predict the loan performance and have their own collection and repayment processes. In fact LC/Web Bank most probably collecting a lump sum origination fee on whole loan (acting as loan broker) from institutions. Insurance companies are most probably interested in extra borrower information as they typically are very good at estimating risks for a borrower.

Owning whole loans will allow institutions to securitze these loans, bundle them for reselling/trade. This is the reason most probably, investment trading firms want the whole loans.

If institution is a bank, buying whole loan will show up on their financial statements as “money lent” instead of “investment” influencing their reserve requirements with Federal Reserve.

Overall, I believe institution wants whole loan to own them outright, access to all borrower information, own the collection process, and ability to trade.

Peter Renton September 29, 2012 at 5:31 pm

Anil, Those explanations all sound plausible to me but I will see if I can get an official response to this.

Dan B September 29, 2012 at 6:58 pm

Anil………..Your “guesses” below as to the motivation for this “whole loan” preferences are rather interesting to read. However I find a few of them highly unlikely if for no other reason than the fact that Lending Club have already stated that they aren’t correct.

For example, you guessed that “This will enable institution to better predict the loan performance and have their own collection and repayment processes”. However LC have already stated that ” The collections procedure is identical for every loan no matter how it originates or who invests in it.” Therefore the investor cannot have their own “collection” process.

Secondly, you mention that investors in whole loans would have access to “all borrower information”. I don’t think so, because that would be in direct conflict with LC privacy policies.

You also suggested that “effectively institution becomes the owner of loan and has all information about borrowers of whole loan” That sounds reasonable except that, as we know, these “loans” that we are investing in are all actually obligations of Lending Club…………..not of the individual borrowers. Hence the whole SEC registration process etc etc. So that “guess” can’t be plausible because the premise is incorrect to begin with.

Anyway, these are just a few of the things that popped out at me when I read through your post quickly. Interesting speculations though.

Megan October 7, 2012 at 9:22 am

Oh I like point 3 a lot! That’s a really great compromise!

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Charlie H September 29, 2012 at 9:04 am

“These loans are selected randomly from the pool of loans being added. After 12 hours the loans that were not taken by the institutional investors will be made available to everyone.”

How long until these loans are not selected randomly? After all they have to answer institutional investors…..

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Peter Renton September 29, 2012 at 11:03 am

As I said before we will continue to have access to the entire loan history of Lending Club and so it would be a pretty stupid thing for them to do this any way other than randomly. Any one will be able to do some analysis and determine if it is not a random selection.

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rufus September 29, 2012 at 12:22 pm

I too trust LC will continue to keep it random. But I do worry that over time adjustments could be made to set aside a random portion based on grade (20% of A, 20% of B, etc.) or that the portion of notes set aside will increase from the current 20%. I only hope that the continued increase in the size of the overall marketplace insures that a large pool of desirable notes will always be available.

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Dan B September 29, 2012 at 3:15 pm

Charlie H…………As much as I’m usually open to entertaining conspiracy theories & what not, in this case I have to agree with Peter in that I see no reason, at this time, to doubt that Lending Club will keep this loan selection/reservation process random.

Being the way I am, it would be against my nature not to keep a very close eye on this sort of thing. From the comments, I’m guessing that there are a few others who will be giving it their attention as well. If anything starts looking non-random I’m confident one or more of us will notice it.

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B. Mason September 29, 2012 at 10:44 am

Reposting what I wrote on their blog:

I critique LC’s addition of new variables.

Good: Thank you for making FICO into smaller bands; may as well take the next step and
publish the score. Also, the new variables are worthy of consideration.

Bad: What good are the new variables (in28, bi20, re01, bc36) if you do not also include them for study in the historical extract? In fact here is a list of interesting variables
in the “Browse Notes” file that are not in the historical extract. Please include them!

acc_open_past_24mths
bc_open_to_buy
percent_bc_gt_75
bc_util
mths_since_recent_inq
mths_since_recent_bc
mort_acc
total_bal_ex_mort
total_bc_limit
in28 bi20 re01 bc36
initial_list_status

Finally, please, for the sanity of the programmers out there, use consistent variable names between the “Browse Notes” file and the “Loan Stats” file (historical extract).

Cheers!

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Peter Renton September 29, 2012 at 11:06 am

Bryce, I have asked them several times for this information because I don’t see the sense in making something available on the Browse notes file and then excluding it from the historical file. They are supposed to be working on this and adding consistent data names but we are still waiting….

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B. Mason September 29, 2012 at 11:38 am

Another Thought:

Also, your variable “initial_list_status” is good and well-defined.
However, please consider making a variable “current_list_status” as
those of us who are still fractional loan investors need to be able
to eliminate loans that are _currently_ only available for whole
purchases.

The issue is that what begins as a loan only available for full
investment (“W”) may still become available for fractional
investment if an institution doesn’t pick it up (“F”). We need a
way to know at any given time what is currently available for
fractional/whole investment (not just what it started at).

Both are useful.

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Peter Renton September 29, 2012 at 5:34 pm

Bryce, I would have thought we can assume any loan that we see as a “w” in initial_list_status on the Browse Notes download is in effect an “f”. If it is available as a whole loan it will not appear in the Browse Notes file at all. If it appears in that file we can assume that it has not been picked up as a whole loan and will therefore become a fractional loan. Am I missing something?

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Bryce M. September 30, 2012 at 8:54 am

So they set up a separate listing for whole loans, rather than make a filter for it in their existing system? How inefficient.

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Peter Renton October 1, 2012 at 6:06 am

I am not sure how it works under the hood, but as far as the user experience is the “whole loans” people only see whole loans and we don’t see these loans until 12 hours later. Maybe I should sign up for the whole loans program just to see how it works….

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Greg M September 29, 2012 at 1:27 pm

As has been stated numerous times, this is not a positive move for retail investors. However IF the new structure stays the same (and nothing ever does) I think we can all coexist.
BUT, I would like to point out that this is just the beginning, as this “growing trend of institutional investors” begin taking up more and more whole or larger fractions of notes they (institutions) will have a greater influence over future policy and direction. Influence that retail investors will never muster. So for me I would say the writing is on the wall, get what you can while you can because this is just the first step down the slippery slope. I don’t even particularly blame LC for the decision, lets face it, this is a business with investors who are going to want their money back at somepoint. So from a business stand point it’s the right thing to do, they just have to walk us off the slope slow enough so that the big boys can fill the vacuum left behind. I’m sorry to sound all doom and gloom but lets look back 3 years from now and see which way the pendulum has swung.
I’m quite new to the game so my current exposure is just under 50K currently. After the first of the year I was planning to roll a considerable sum into LC but this revelation has certainly tempered my enthusiasm.
I purchased Peter’s initial P2P learning course in Dec-Jan and quickly jumped in because I was tired of the broad equity market swings often times created by institutional investors and wanted more control over my investments.
I’m not jumping ship just yet, however I do see the path ahead and realize that at some point the retail investors will be left with risk and returns on par with the stock market because anything better than that will be sucked up by institutions.
Anyone care to wager against that prediction?

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Peter Renton September 29, 2012 at 5:37 pm

Greg, You make some fair points here and it will be up to the individual investor to see whether or not this is still a good investment in 6, 12 or 24 months time. Maybe it will degenerate for small investors and maybe it won’t. Being the eternal optimist that I am I expect it will still be a solid investment for all parties for many years to come.

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Roy S September 29, 2012 at 7:10 pm

Greg, LC isn’t the only player in the game. There is always Prosper. Their loan selection hasn’t been very good the last few weeks, but according to Peter’s post (http://www.lendacademy.com/lending-club-marches-on-and-prosper-is-back-on-track-in-september/#comments), “What is interesting is that the large investors are not taking up the lion’s share of the volume like they did 6-9 months ago – Prosper has a very diversified investor base these days.” With a more diversified investor base, Prosper _may_ be more interested in appeasing the retail investor base than LC. It’s at least worth a consideration before jumping ship altogether.

…I wonder if this counts as a referral and whether it warrants a referral bonus… ;-)

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Dan B September 29, 2012 at 7:32 pm

Greg M……..Wow, & people call me a pessimist (among other things) :)
I’ve been an investor with Lending Club for 3 years, come November. I can say with complete candor that no policy change in the past has substantially affected my ability to find suitable loans, nor have any changes adversely affected my consistently above average (low teens) return. I don’t expect this change to have any impact on my above results either.

As much as I’ve rarely shied away from a wager, your offer lacks the specifics required for a wager, doesn’t it? I will agree with you & say that larger & institutional investors will have more things go their way in the future & that’s just natural. However it doesn’t necessarily mean that retail investors will get squeezed out. I think you (& others here) also give too much credit to institutional investors’ abilities. I know I’ve outperformed most of them these past 3 years, so I grant them no such high respect.

Besides, if the future trend turns against the retail investor then we will likely be able to see it coming. I just don’t see anything that traumatic in the horizon so far. Regardless, it’s great reading your thoughtful analysis.

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Greg M September 29, 2012 at 9:33 pm

Plan for the worst and hope for the best. LC or P2P investing for the retail investor isn’t about to go away, however the great success and growth that it’s seen in a reasonably short period was bound to draw interest from big money. As any new technology or sector, P2P lending is going to see many changes and the P2P of today will likely not be the P2P of tomorrow. I can’t believe we’ve seen all of the iterations of this sector yet, as individuals who follow this new frontier very closely we will certainly be the ones who are first to spot opportunies as they emerge.
At this point my strategy and note picking algorithm isn’t about to change, the only difference at this point will be fewer notes to filter. Which is a downer because I was able to tighten my parameters as the number of available notes continued to increase there by increasing my ROR while maintaining an acceptable number of notes to invest in. That said , I think it’s reasonable to assume the number of notes will continue to grow. The unknown is whether or not institutions will offset this growth by consuming the growth.
As I referred to earlier in this post, I believe we’ll at some point see other investment options in the P2P market, the growth potential is just too tremendous for the status quo to remain forever. The question is how we (the small investors) will find a way to mitigate risk within the changing landscape and record the gains we’ve come to expect and enjoy.

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Roy S September 29, 2012 at 9:49 pm

Have you considered increasing your per loan share? If you can tolerate being less diversified, you can just start increasing the amount of each investment you make in the fewer loans that are available. If your parameters are good enough (and you can still put all your funds to work), it should still provide similar return numbers…BUT it is a little riskier and each individual default will have a greater impact on your returns.

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Em October 1, 2012 at 8:49 pm

What do Institutional Investors bring to the table?

M-O-N-E-Y

(Why LendingClub didn’t just offer everyone another $200 bonus to invest another $10K or so, I don’t know. ;-)

But they also bring:

D-E-M-A-N-D-S

For example, right now LendingClub charges the borrower up to a 5.00% “Origination Fee”:

“For example… In the case of a $20,000 60-month loan at an interest rate of 7.62% with a 3.00% origination fee of $600.00, you will receive a loan amount of $19,400.00 and will make 60 monthly payments of approximately $401.90 at an 8.91% APR.”
https://www.lendingclub.com/public/rates-and-fees.action

Now that’s and fine and good, a Lender might say… until the Lender realizes that while the Borrower pays this fee, they’re paying it with The Lender’s money. If the Borrower immediately defaults on that loan, the The Lender loses $20,000. But LendingClub keeps the $600. The only thing LendingClub has lost is the 1% fee on payments that will never get made.

Now, you or I might not like that but we’re hardly in a position to complain. But an Institutional Investor might not see it that way. They might want to come to a new arrangement. Perhaps a smaller/no origination fee and a larger commission on the payments. Or maybe they’ll demand smaller commissions on the payments, too.

And since LendingClub can’t extend these “special arrangements” to us small investors, the easiest way to do it is probably just for the Institutional Investor to take 100% of the loan. (Will these loans still get published in the SEC filings? I wonder.)

But if the Institutional Investors demand too much, well I suppose LendingClub can always just offer those loans to us small investors. By that time, we’ll want loans so badly we won’t complain if say, the interest rates go lower, or the commissions go higher.

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Peter Renton October 2, 2012 at 5:26 am

Em, You raise some valid concerns here and if any of these things you mention come to pass investors have every reason to be upset. Of course, right now there is no evidence of any special arrangements with large investors and they may even be illegal. But with everything being public information if changes like this do indeed happen it won’t be long before we all find out about them. This is the main reason I believe these kinds of arrangements are unlikely.

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Peer-Lend October 2, 2012 at 6:39 am

Rhetorical question, Peter: How long did it take for you to become aware (and for LC to confirm, in public) that their “LC Advisors” funds for accredited investors existed…?

If, for example, LC brokers the “whole notes”, and WebBank immediately assigns to an SPV entity, then, no, not everything is “public information” and it is quite opaque…

Ohwell…

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Walter September 29, 2012 at 10:31 pm

I see it as more Lending, less Club.

When LC changed the way investors could ask questions to borrowers, the response from many commenters was quite negative, myself included. As it has worked out, LC hardly noticed and we’ve gone right on investing. While I think this move certainly doesn’t help retail investors, I imagine it may work out much the same as before, even if the result another subtle move away from “peer to peer” lending. I mean, if an institution simply gobbles up the whole note, what is “peer to peer” about it? Meet the new loan originator, same as the old loan originator.

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Dan B September 30, 2012 at 9:31 am

Well you know the “peer” part of this investment has been slowly receding into the pages of history for some time now. It started receding when it became clear back in ’07-’08 that lending money as an investment wasn’t going to end up being safer just because it was to a “peer”…………….. & that conversely, borrowing from a “peer” didn’t make it more likely that you’d be paying it back.

Though these realities may seem obvious to all of us today, they weren’t so obvious to many social do-gooders & touchy feely types 5-6 years ago or perhaps even to some people today.

Regardless of whether the “peer” part is fading away or not, this is the only way that retail &/or small investors have to invest in the very lucrative consumer credit market…………….an investment with a 40+ year track record of 10%+ returns. As an investor that is the only thing that really matters to me. I’m reasonably convinced that a year from now we will look back at this change just like we did at the whole Q&A change from last year & see this as no big deal.

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Dave January 4, 2013 at 12:39 pm

Ok, this is a minor semantic point, but ‘peer’ didn’t mean lending to one’s peers, it meant ‘distributed’ as in peer-to-peer downloading ie. things like BitTorrent. It’s a way of distributing risk and cutting out the middleman.

I don’t think LendingClub or Prosper started the business thinking that people would be more likely to loan, or less likely to default because you’re loaning to your peers. They just thought it would cut out the banks/middleman, allowing more profit to be paid to us small-scale individual investors.

And I echo the comments here – this recent move is exactly 180 away from distributed lending, we’re now headed back to whole loan brokering. Large-scale institutions are looking to reinsert themselves back in as middlemen by leveraging the amount of capital they can bring to the table.

Ideally, in my opinion no one lender should be allowed to loan more than $25 to an individual loan. The lenders would need a much larger pool of loans to pick from to allow this, but it’s the ‘most fair’ solution.

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Peter Renton January 4, 2013 at 2:46 pm

Dave, The original idea behind Prosper was that a person would be more likely to repay a “peer” than they would a regular bank or credit card company. But that was proven to be an incorrect assumption and is now no longer part of the thinking there. Lending Club launched with a different mindset – more the one you describe – where a more efficient system by cutting out the middle man was the focus.

I disagree about the $25 limit though. That would ensure no large investors participate (whether they are institutions or individuals) and this would mean a longer road to profitability and a less stable industry. In a few years when we have a thriving p2p lending industry I expect a new company to differentiate themselves in this way but right now that would be a bad move in my opinion.

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DT October 2, 2012 at 2:38 pm

I majorly dislike the change by Lending Club to give preference to institutional investors over retail investors! In order to get good loans on Prosper, I find that I have to be at the computer when the loans are released, speed read and make fast decisions in order to invest the amount of money I want to invest. I am competing with the institutional invests on a daily basis with Prosper already. Now with the Lending Club change, I am not even allow to compete with institutional investors on 20% of the loans. I have thought for some time now that the biggest threat to my Prosper and Lending Club investing is getting pushed out by the institutional investors. I have seen this happening at a more rapid pace lately. Peter – Do you see this as big of a threat as I do?

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Peter Renton October 2, 2012 at 3:15 pm

DT, While this change is certainly not good news for Lending Club investors I don’t see it as a big threat. I actually think there is more of a problem on Prosper right now where Worth-blanket2 is still taking 90% of a loan within minutes of it being loaded on to the platform. I would much rather have a system at Prosper where they get 20% of the loans and we get access to the remaining 80%. I have Automated Quick Invest at Prosper setup and that doesn’t even get a chance to run. At Lending Club I am finding plenty of notes to meet my investing goals but at Prosper I would like to put more money to work but find it difficult to invest in enough loans.

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Roy S October 2, 2012 at 7:10 pm

Peter, my understanding was that the institutional investors at LC are still able to invest in the other 80% and that the 20% set-aside was for investors who wished to buy up entire loans. So you’re still competing with the institutional investors for the remaining 80%…with a few unknown restrictions as to the maximum percentage of the loans the institutional investors are allowed to invest in.

As a side note: I do agree that, for the most part, the AQI on Prosper is pretty much worthless–in my humble opinion, it always was.

I think the big issue retail investors are facing is that LC and Prosper see the growth coming from the institutional investors not the individual investors. As long as that is the case, they will always catered towards that demographic of borrowers. And as long as the demand is outstripping the supply, the institutional investors will get priority over the retail investors. The problem is that it is a self-fulfilling prophecy. Prosper and LC cater to the institutional investors because they believe that is where the growth of the industry will come from, and the retail investors will feel like they are getting the shaft and can’t compete and take their money out (or at least stop contributing). Prosper and LC see the retail investors aren’t as large a part of their business anymore so they cater more to the institutional investors and the cycle repeats. I think during this growth phase over the past year and probably for the next few years will be the most troubling for the individual investor. Once the major growth is over is when I see LC and Prosper becoming more accessible to the individual investors. Until then, those who are sticking with it will have to deal with taking the leftover scraps from the institutional investors and being looked upon as second class lenders.

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Roy S October 2, 2012 at 7:12 pm

*As long as that is the case, they will always catered towards that demographic of LENDERS.

If you’re not going to add an edit function, Peter, I should really start proof-reading my comments. :-)

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Dan B October 2, 2012 at 9:56 pm

Perhaps you can also look into the “reply” function that prevents someone from actually posting a reply to a reply once there have more than “several” replies to that same reply already!

Peter Renton October 2, 2012 at 9:17 pm

Despite the fact that LC is catering very much to the institutional side of the business from conversation I have had with management they have said that the retail side is keeping up. People are adding to their initial investments and they are attracting plenty of new investors. Whether it stays that way remains to be seen but they have emphasized the growth is not one-sided. At Prosper I think it is a similar story these days although there was a time last year when most of the growth was from institutional investors.

If you are waiting for the “major growth” as you call it to be over I think you will be waiting a while. I think this 100%+ growth rate will keep going for several years.

And yes, I am working on getting an edit function for comments. The one I trialed didn’t work well, so I will keep researching.

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Julie October 3, 2012 at 10:28 am

Hi Peter,

I SO appreciate your site, and the thoughtful and informative discussions here.

I am sickened by this news, even though I currently only have a whopping grand total of $50 in two loans at LC, and none at Prosper.

I do understand LC’s desire to become profitable, but I abhor Wall Street with such passion that I tend to have a pessimistic attitude towards more of the big guys getting involved.

In the meantime, I will continue to use my self-directed IRA to invest in people, ideas, and small businesses that I personally know, and don’t see myself putting my annual $5,000 IRA contribution into LC or Prosper anytime soon. I had been giving that option serious consideration, but this news just changed my mind.

I’m sick and tired of the big guys making money off of me, whether the market goes up or down, whether I gain or lose – they always gain. This news just amplifies that emotion for me, but I can only speak for myself. However, I have a feeling I am not alone.

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Roy S October 3, 2012 at 10:56 am

Julie, Do you know who is the biggest U.S. investor? It is CalPERS, the California Public Employees’ Retirement System. In fact, some of the largest investors on Wall Street are public employee pensions funds (like CalPERS and California State Teachers Retirement System [CalSTRS], the second largest U.S. public pension), other pension funds and higher education institutions. So, hating on Wall Street is equivalent to hating on millions of people’s retirement plans and higher education. So unless you’re against pensions (like I am) then you are hating millions of Americans whose pension funds and their returns (i.e. THE PROFITS of Wall Street). You’re also hating on the millions of Americans that work for the big Wall Street companies, too!

One thing we’ll always have to live with is that those with money have more power. But hating on them or Wall Street isn’t helpful, because sometimes it turns out to be our friends, our family and even ourselves. As much as I dislike this news from LC, I am not hating on the large institutional investors at Prosper and LC; they are actually important to the industry. And I’m sure that they are investing money for regular people, like you and me. And extending your emotions towards Wall Street is also not useful. It’ll only get you worked up (for no reason at all), and could have some negative implications for your overall health (i.e. higher stress, blood pressure, etc).

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Peter Renton October 3, 2012 at 2:43 pm

Julie, My perspective is that as an investor at Lending Club or Prosper you are still investing outside of the mainstream financial system. You are investing directly in an individual. Now, these days you are competing more and more with the Wall Street type institutions but that doesn’t change the underlying nature of your investment. I think it is fine to dislike Wall Street and the big banks – you can still invest in LC and Prosper with a clear conscience.

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DT October 3, 2012 at 10:29 am

Thanks for your answer to my post. I agree that institutional investors at Prosper are a greater threat than on Lending Club. I also use quick invest, but end up with very few loans. The way I compete on Prosper, and currently beat the institutional investors, is to be a the computer when new loan requests are posted and beat the intitutional investors to the punch. On the worst days I miss out on only 2 or 3 loans before they are fully funded. My experience on Lending Club is like yours. I can still fine plenty of good loans every day at any time. I usually invest once per day.

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Roy S October 3, 2012 at 10:59 am

I have to do the same DT. It’s a little frustrating, but the larger problem is the lack of borrowers on Prosper. I think there are a lot of people who are having similar issues, and that if Prosper is able to increase the number of borrowers on the platform that their originations would be increasing at a faster rate (just an assumption on my part).

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Peter Renton October 4, 2012 at 6:23 am

Some people have been asking for an explanation of all the fields in the Browse Notes files – Lending Club provides a link with a short explanation of each field here: http://www.lendingclub.com/kb/index.php?View=entry&EntryID=253

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Henry Miller October 6, 2012 at 6:49 am

As a former attorney I would speculate that a major reason for large investors wanting to own whole loans is to protect themselves in case Lending Club, like many other start ups, becomes insolvent. A court may look at a fractional note as merely a LC obligation, and unsecured; but a whole loan may be seen as the investors property, not subject to other LC creditors. Thus LC becomes a mere servicer of the loan. Protecting themselves from avoidable risks is one of the reasons large investors get to be large. Thankfully their extra money may provide the cushion that keeps LC in business, to the betterment of small investors.

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Em October 8, 2012 at 6:23 pm

Interesting! Would doing something like that require a Prospectus change?

“The Notes. LendingClub investors have the opportunity to buy Notes issued by LendingClub and designate the
corresponding member loans to be originated through our platform and funded with the proceeds of their Note purchases. The
Notes will be special, limited obligations of LendingClub only and not obligations of any borrower member. The Notes are
unsecured and holders of the Notes do not have a security interest in the corresponding member loans or the proceeds of those
corresponding member loans, or in any other assets of LendingClub or the underlying borrower member.
LendingClub will pay principal and interest on each Note in a series in an amount equal to each such Note’s pro rata portion
of the principal and interest payments, if any, LendingClub receives on the corresponding member loan funded by the proceeds
of that series, net of LendingClub’s 1.00% service charge. LendingClub will also pay to investors any other amounts
LendingClub receives on each Note, including late fees and prepayments, subject to the 1.00% service charge, except that
LendingClub will not pay to investors any unsuccessful payment fees, check processing and other processing fees, collection fees
we or a third-party collection agency charge and any payments due to LendingClub on account of the portion of the
corresponding member loan, if any, that LendingClub has funded itself. If LendingClub were to become subject to a bankruptcy
or similar proceeding, the holder of a Note will have a general unsecured claim against LendingClub that may or may not be
limited in recovery to borrower payments in respect of the corresponding member loan. See “Risk Factors — If we were to
become subject to a bankruptcy or similar proceeding.”
The Member Loans. Member loans are unsecured obligations of individual borrower members, have a fixed interest rate and
either a three-year or five-year maturity. Except in the instances in which we perform (i) income verification, which we indicate
in the borrower loan listing, or (ii) employment verification, member loans are made without obtaining any documentation of the
borrower member’s ability to afford the loan. Each member loan is originated through our website and funded by WebBank at
closing. WebBank is an FDIC-insured, Utah-chartered industrial bank that serves as the lender for all member loans originated
through our platform. Immediately upon closing of a member loan, WebBank assigns the member loan (and all rights related
thereto including any security interest) to LendingClub, without recourse to WebBank, in exchange for the aggregate purchase
price we have received from investors who have committed to purchase Notes dependent on payments to be received on such
member loan plus any amounts of the member loan that we have determined to fund ourselves. WebBank has no obligation to
purchasers of the Notes. See “About the Loan Platform — How the LendingClub Platform Operates — Purchases of Notes and
Loan Closings.”
We offer unsecured personal loans and the corresponding Notes with a term of three (3) or five (5) years…”

https://www.lendingclub.com/fileDownload.action?file=Clean_As_Filed_20120809.pdf&type=docs

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Peter Renton October 9, 2012 at 7:58 pm

Em, That is an interesting point. But if this change did need a Prospectus change it would happened already but there has been no new Prospectus since July 31. It is something to keep an eye on though.

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Lyndon January 14, 2013 at 5:51 pm

Im a little confused now. Maybe you could shed some light on this question.

So with peer2peer lending it seems we are under the impression that as borrowers, our money goes directly to fund another person’s loan. However, this is not the case is it? In fact lendingclub borrows money from webbank to fund the borrowers loans. But what then is done with the money the lender puts into lendingclub… the money which he mistakenly believes is bypassing the major banks and going directly to the borrower?

In reality lending club is acting as intermediary between webbank and borrowers.
What interest rate is lendingclub paying webbank?

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Peter Renton January 14, 2013 at 9:09 pm

Lyndon, While it is technically true that the loans are originated by WebBank all loans are assigned to Lending Club within 24 hours. For this service LC pays Webbank a few basis points on every loan. Lending Club does not have a banking license, so it is forbidden from issuing loans directly.

I really consider this a technicality because in reality money is flowing from the lender directly to the borrower except for this very short period of time.

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Dan B January 15, 2013 at 12:24 am

Another point to reinforce what Peter has said already is that Web Bank is not in any other way involved in the loan process. It does not determine underwriting criteria, interest rates, terms, approval/rejection etc etc.

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Anil @ PeerCube January 15, 2013 at 11:45 am

The Lending Club underwriting criteria is based on WebBank’s requirements. WebBank has much more influence over Lending Club practices than you may think. From Lending Club prospectus:

“Our borrower member credit criteria are designed to be consistent with WebBank’s loan underwriting requirements ”

“The interest rates that are charged to borrowers and that form the basis of payments to investors on our Notes are based upon the ability of WebBank, the issuer of the loan, to export the interest rates of Utah to provide for uniform rates to all borrowers. Federal law provides WebBank the authority to charge these interest rates. ”

“WebBank serves as the true creditor for all member loans originated through our platform. ”

“After we receive a loan request, we evaluate whether the prospective borrower member meets Webbank’s loan criteria. The Webbank credit policy provides the underwriting criteria for all loans listed on our platform, and the credit policy may not be changed without the consent of WebBank.”

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Dan B January 15, 2013 at 1:45 pm

I stand corrected. So how would you respond to the question posed then?

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Peter Renton January 15, 2013 at 4:51 pm

Actually Dan, I think you are correct. I think technically the way it works is how Anil describes from the LC Prospectus but in reality I think it is very different. In reality I think WebBank does nothing more than originate the loan.

Now, LC has to make sure all loans satisfy WebBank’s requirements but these are likely to be very broad and are really there to make sure the loan is legal. There are federal and state laws that need to be abided by which are the underwriting requirements referred to in the Prospectus. To think that WebBank dictates underwriting policy to LC is ludicrous – WebBank is taking on no risk in this transaction as they hold the loan for just 24 hours. LC decides on the interest rate for each borrower with the full knowledge that it falls within WebBank’s guidelines.

Anil @ PeerCube January 15, 2013 at 7:10 pm

I think Peter has done a great job answering your questions. I am taking a shot to address your questions specifically mentioned in your comment. I will also recommend that you read Lending Club prospectus.

“So with peer2peer lending it seems we are under the impression that as borrowers, our money goes directly to fund another person’s loan. However, this is not the case is it?”

You are correct. At high level, lenders’ money goes to borrower. At low level, how it gets from lender to borrower is different due to existing banking regulations.

“In fact lendingclub borrows money from webbank to fund the borrowers loans. ”

Lending Club doesn’t borrow money from WebBank. LC maintains a $3MM deposit with WebBank on which WebBanks withdraws at the time of issuing loan.

“But what then is done with the money the lender puts into lendingclub… ”

The lenders’ money goes into LC account at WebBank that is used to issue money to borrowers.

“the money which he mistakenly believes is bypassing the major banks and going directly to the borrower?”

Transferring $25 or so from each lender to borrower directly will be an inefficient and expensive mechanism of money transfer. LC is middleman that consolidates all the money given by lenders and deposits in its account in WebBank from which WebBank withdraws the amount upon issuing loan to the borrower.

WebBank is an industrial bank. If you ever used a store card or in-store financing, the financial institution doing that transaction was an industrial bank like Web Bank. Majority of transactions are performed electronically and money is transferred through a series of complex steps.

Hopefully, this further explains the process. I seriously doubt that any lender or p2p platform operator can believe that they can lend money through p2p lending platform without engaging existing financial channels.

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Peter Renton January 15, 2013 at 9:38 pm

Thanks Anil. That is an accurate answer to the questions. The only thing I would add is that Lending Club also uses the existing banking system to hold investor cash and the money committed to note purchases that are not yet closed. This is called an “In Trust For” account and it is held on investors behalf at Wells Fargo. Another little known fact is that the money in this account is FDIC-insured up to the set limits.

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Martin March 15, 2013 at 8:32 pm

Ops, I didn’t noticed any changes in Lending Club. It works very well for me, making 14%, no late or defaults, so I am investing everything I can. Of course not putting everything to LC. Honestly, I do not care how the monies travel between lenders and borrowers as long as everything works.

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Mayk March 27, 2013 at 1:04 am

Is there a reason that the institutions are so determined to take up an entire loan? I just don’t see the point.

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Peter Renton March 27, 2013 at 10:19 am

There are a several reasons that I am aware of. One is that with the whole loan they have more control over what they can do with it. If LC were to go under they could switch to a new loan servicer and not have to worry about other investors. Also, it gives them the option to package the loans together and securitize them to sell on to pension funds or other large investors. Finally, I have also been told that it provides some favorable tax treatment.

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LesL May 6, 2013 at 4:41 am

Seems like in the last few weeks there is only about 100 plus loans to filter from instead of 800 plus as there had been in the past. Looks like Lending Club has pushed out the small time investor in favor of Big Money. Last thing I want to do is to pick a loan out after the Big Money people have been through the choices.

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Peter Renton May 6, 2013 at 6:20 am

The last few weeks have seen a glut of investors come into Lending Club. There is still just as many loans available for regular investors as before you just have to be quick. If you login to LC just after 6am, 10am, 2pm or 6pm Pacific time every day you will find there is plenty of choice.

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