Emotions are running high right now. After more bad news from Lending Club on Monday afternoon it is understandable that some investors are getting nervous. And not just the investors in Lending Club equity but also investors in Lending Club loans.
Since 2010 I have hosted over a half-dozen conferences, produced over 60 podcasts, written over 1000 articles, and had tens of thousands of conversations about one thing: the peer to peer lending industry. To boil down my collective thoughts about our current situation to a single blog post feels very difficult, but I have set out to do it nonetheless. Now, this post can only scratch the surface of the issues. It is a summary of my thoughts as of this day, which run deep and broad, and may change tomorrow as this complex situation continues to unfold. Here goes.
I have had several emails and comments in the last couple of days from investors asking me if they should take their money out of Lending Club. That is, either cease investing (and reinvesting) in Lending Club notes, or sell them outright on the secondary market via Folio. While I can’t recommend any course of action for others I am happy to tell you what I am going to do with my Lending Club investments: stay the course.
Between all the Lending Club accounts that my wife and I own, including my portion of the Lend Academy P2P Fund that has about 1/3 of its invested capital in Lending Club notes, the total is well over $250,000. That is not an insignificant percentage of our liquid assets. And I am not changing anything – I continue to reinvest my principal and interest in new loans.
I am very confident that Lending Club loans will continue to perform well despite the governance issues that cropped up and came to light over the past two weeks. Renaud Laplanche’s departure is sad and unfortunate to say the least. But the likelihood that more departures will occur, that perhaps a large reduction-in-force is in the works, that banks will cease buying Lending Club paper, that origination volumes will go down, that profitability of the company itself may plummet, that Lending Club may participate partially by investing in loans using its own balance sheet, and that “experts” and pundits like Jim Cramer will cry sell! sell! – nothing in this narrative shakes my confidence in the underlying business model of Lending Club, nor the ability and willingness of my fellow Americans to pay their debts in a responsible fashion to the best of their ability.
Lending Club’s business model is about providing a lower rate of interest to American borrowers using a more responsible structure than credit card-style revolving debt, and at the same time providing a high return by passing through 99% of the cash flows (that’s 100% minus a 1% servicing fee) to investors. Lending Club’s underwriting model – the way in which it selects loans to list on its marketplace – has absolutely nothing to do with the recent events that ended in the resignation of its CEO and founder.