Peer to Peer Lending? Lending Club Funds 24% of Loans
Like most other social lending sites, Lending Club’s home page includes saccharine quotes from satisfied customers. The latest happy couple is Anna & Roger from Buffalo, who like that their loan isn’t being made by “an all-knowing computer somewhere based solely on numbers.” However, Lending Club’s sales report filings with the SEC indicate that 24% of loans funded since their relaunch last October have been funded by Lending Club itself. And I’m betting that they use computers. And numbers.
Lending Club has filed 20 weekly sales reports with the SEC as a condition of their securities registration, and because Lending Club is known to get in on the action (they funded $7 million of the first $16 million in loans issued), the SEC must have asked them to include their participation in their sales reports. Here’s an example where Lending Club contributed $17,750 of a $25,000 loan:
That means Lending Club is funding 71% of the borrower’s loan! And that’s not the most notable instance… in one case, Lending Club funded $12,800 of a $14,000 loan – 91%. Here’s what the data looks like over time (each point is a weekly report):
You can see that in the first few months of operation, Lending Club was funding high percentages of loans – between 30% and 50% each week. The percentage funded by Lending Club dropped into the single digits over the holidays, and has dropped again recently. Note that the weeks where Lending Club doesn’t pump money in turn out to be slower weeks. Is growth slowing overall? Is this why Lending Club has started removing the downloadable data file from their statistics page?
Is there a real story here? I mean, is there really anything wrong with a company eating their own dog food every now and then? If I put myself in the shoes of a Lending Club lender, it might be comforting to know that the people running the site are in on the action, too. Maybe that would improve collections? But in the shoes of a VC who had given Lending Club money, I would be pretty scared. Are these guys in the business of building a business, or just spending my money to make loans? I thought I’d funded a web startup, and instead I’m funding a bank. (And as a US taxpayer, I’m already funding my share of banks.)
Here’s another view of the data, showing Lending Club’s funding in blue (again, each bar is a weekly report):
Reading between the lines, I think there are a couple of take-home messages here:
- Lending Club really, really wants to be a web 2.0 company, but doesn’t get it. They really want to have a killer product that lots of people use, and they really want to appear transparent, but they aren’t willing to let it happen organically, and had they not registered with the SEC, no one outside the company would know that they have been using their own money to pump up their marketplace. And they don’t seem to understand why that’s a problem.
- Lending Club talks about being a technology company, but past behavior seems to indicate that they would rather just make loans.
- Given the recent trend in funding percentages (down to single digits lately), it looks like Lending Club is starting to run low on cash. Lending Club raised $4.1 million back in September, and has spent $2.4 million to date on new loans. That leaves less and less each week to spread around.
Here is the data for these charts:
And here is the full data set, including report date, loan amount, and Lending Club portion.
Related posts:
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The worst part is that Lendingclub sets the interest rates on the loans, and is setting them too low. Look at the loan performance, as graphed here: http://fred93blog.blogspot.com/2009/02/lendingclub-020108-late-loan-stats.html
I have to agree with Fred93 here. The rates vs. the default risk are insanely low and frankly unacceptable. Either they need to bump them up or make it a more freestyle bid-down model like Prosper has where lenders influence the final rate the borrower obtains. Even with a relatively safe portfolio (A/B grades only) I personally expect to only receive a 3.5-5% return annually under a best case scenario. My legacy portfolio, notes pre-SEC, have just recently eaten away all profits with defaults and charge-offs starting to swell. I appreciate the collections tracking, but I think more can be done. Getting that white towel ready to throw, but suspect some eyes from LC will be here shortly to reply. Maybe they can instill confidence that the model will be adjusted in accordance with current credit risk. This will be the make or break year for P2P lending as a business model.
One more thing… I am fearful of LC’s involvement in note origination as it could be used to influence the secondary note market’s overall pricing. They could artificially lower the markup rates on notes or dump large quantities into the market thus diluting it and prolonging the selling process for legitimate lenders selling notes for liquidity. They should pledge to NEVER put any notes they purchased up for sale on the secondary market unless they make the market transparent (so I know who’s selling it). I am also wondering why they purchased notes after the SEC ruling since such purchases can only be viewed as influencing default numbers in the long term and keeping them muddy. By muddy I mean LC can see more info than the lenders can typically see, therefore they may have made their purchasing decisions based upon full credit profile transparency advantages we lenders don’t have. Unfair perhaps?
I think it’s actually a good thing that LC funds some of their own loans. They have a classic chicken and egg problem – how do they get borrowers without lenders and how do they get lenders without borrowers. This helps them get to the point where the p2p market can operate by itself.
In addition, with their own skin in the game to the tune of millions of dollars they are much more likely to take collections seriously. Their interests are closely aligned to the success of the borrower.
I may be mistaken, but I think LC removed the information regarding their contribution to a loan in the prospectus. It used to be located in the last box on the right on the loan listing prospectus, as in the screen shot above. Please let me know if this is true.
No, it’s still there. There are two documents that LC files with the SEC, one is the listing summary, the other is the sales summary. Only the sales summary contains the amount (if any) that LC committed to a loan.
Fred, why do you say “I personally expect to only receive a 3.5-5% return annually under a best case scenario”? how do you calculate that? even their lowest rates are in the 7% range. i’m new to LC and don’t quite understand the nuances of how some of these things work. would you advocate investing your nest egg with them? getting nervous…
The lowest interest rate is 7% but if you have a 2% default rate it would drop to 5% however lendingclub has changed a lot since these comments were made. I’ve been in for over half a year now and my net return is around 12.5% and I’ve only had 1 note out of 151 go late so far.
I’m very selective and browse several times a week for good loans. The disadvantage to LC’s set interest rates is that they don’t move with the market, the advantage is that if you know what you’re looking for then you can find good notes with higher interest rates than they deserve.
The average lender gets over 9.5% back, that’s netted with all charge-offs subtracted.
As for whether you should invest everything, you should talk to a CPA but take baby steps. Put in 1-2k and invest slowly. Don’t feel pressured to spend it all the day it arrives in your account, take 1-2 months if that’s what you need to find good notes because you want as many different notes as possible to spread risk.
Some of my friends are also into LC and they were always asking for tips on what loans to get so I started a blog called Peer2Pick, if you’d like some note suggestions the check it out: peer2pick.blogger.com I’ll be posting investment tips on there soon.