Lending Club Changes How Investors Can Ask Questions

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]

Peter Renton is the chairman and co-founder of LendIt Fintech, the world’s first and largest digital media and events company focused on fintech.

LendIt Fintech conducts three conferences a year for the leading fintech markets of the USA, Europe, and Latin America. LendIt also provides cutting-edge content all year long via audio, video, and written channels.

Peter has been writing about fintech since 2010 and he is the author and creator of the Fintech One-on-One Podcast, the first and longest-running fintech interview series.

Peter has been interviewed by the Wall Street Journal, Bloomberg, The New York Times, CNBC, CNN, Fortune, NPR, Fox Business News, the Financial Times, and dozens of other publications.

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Mike
Mike
Apr. 15, 2011 4:57 pm

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

Dan B
Dan B
Apr. 15, 2011 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.

Investor Junkie
Apr. 15, 2011 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.

Lou
Lou
Apr. 15, 2011 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

Dan B
Dan B
Apr. 15, 2011 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. 🙂

Lou
Lou
Apr. 15, 2011 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.

Dan B
Dan B
Apr. 15, 2011 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.

Dan B
Dan B
Apr. 15, 2011 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.

Max
Max
Apr. 15, 2011 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

Max
Max
Apr. 16, 2011 2:14 am

– 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

Lou
Lou
Apr. 16, 2011 5:14 am

, 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…

KenL
Apr. 16, 2011 11:47 am

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

Dan B
Dan B
Apr. 16, 2011 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.

taxpayer
Apr. 18, 2011 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.

Bilgefisher
Apr. 18, 2011 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

John E.
John E.
Apr. 18, 2011 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

Dan B
Dan B
Apr. 18, 2011 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.

Aaron
Aaron
Apr. 18, 2011 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.

Dan B
Dan B
Apr. 18, 2011 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…………….

Smith
Smith
Apr. 19, 2011 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!

Dan B
Dan B
Apr. 19, 2011 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.

Dan B
Dan B
Apr. 19, 2011 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.

Max
Max
Apr. 19, 2011 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

Dan B
Dan B
Apr. 20, 2011 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.

Max
Max
Apr. 20, 2011 10:08 am

– 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

Lou
Lou
Apr. 20, 2011 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

Eliot
Eliot
Apr. 20, 2011 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

Dan B
Dan B
Apr. 20, 2011 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?

Dan B
Dan B
Apr. 20, 2011 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.

Matt_SF
Apr. 21, 2011 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.

Aaron
Aaron
Apr. 21, 2011 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.

Bilgefisher
Apr. 21, 2011 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

Dan B
Dan B
Apr. 21, 2011 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.

Dan B
Dan B
Apr. 21, 2011 4:29 pm

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

Mike
Mike
Apr. 21, 2011 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.

Dan B
Dan B
Apr. 21, 2011 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.

Max
Max
Apr. 21, 2011 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

Dan B
Dan B
Apr. 21, 2011 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.

Dan B
Dan B
Apr. 21, 2011 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! 🙂

Matt SF
Apr. 22, 2011 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.