On March 10, P2P Lending News published a story about how Lending Club had funded 24% of the loans issued through their platform. Renaud Laplanche, the Founder and CEO of Lending Club was nice enough to address some of our concerns in an interview.
Thanks for taking the time to answer some questions. As you know, we have some concerns about Lending Club’s practice of funding borrower loans. At the very least, it seems to contradict the “social lending” aspect of your business which is so heavily advertised on your site. We look forward to getting your perspective.
Why does Lending Club fund loans out of its own pocket?
We are committed to making the platform work for both lenders and borrowers. We fund some of the loans only to ensure that all loans approved by our credit team get fully funded. The smaller loans tend to get funded in full by the lender community, but the larger loans can require additional funding, which Lending Club provides.
This makes the platform more efficient on both sides: borrowers get the full amount of their loan, and lenders avoid a situation where they would commit funds but the loan ends up not closing because it is insufficiently funded.
What is the plan for continuing this practice in the future? How much longer do you expect to be funding loans?
Our primary business model is to operate the platform, not to make loans. We only participate as a lender on a temporary basis to help the platform operate more efficiently.
There is no specific timeline for funding loans; we will continue funding portions of loans until large loans get fully funded by the community. Our goal is to have the community funding as much of the loans as possible.
Why don’t you notify investors during the “In Funding” period about which loans are being partially funded by Lending Club itself?
We typically complete the funding of larger loans on the last day, so there is little opportunity or benefit to signal Lending Club’s funding in a particular loan.
Would you be willing to disclose the borrower profile and credit criteria under which Lending Club lends its own money to borrowers?
We do not apply any specific credit criteria. Any loan that has been approved by our credit team and is reaching the end of the funding period without being fully funded will typically get funding from Lending Club. Also note that when Lending Club participates in a loan, there is no impact to pricing as in other platforms that are based on an auction model.
Are you concerned that by funding some but not all loans, Lending Club is creating a conflict of interest when it comes to collections? Seems like although it is in your best interest to collect equally on all delinquent loans, if you had a shortage of resources, you might prioritize the loans that Lending Club has participated in?
Our collections team and external collections agency have no knowledge of which loans have been funded by Lending Club, nor would it be a factor in their collections strategy if they had such a knowledge: our main interest is to grow the platform for our customers, not to make money on proprietary investments.
What percentage of your approved borrowers do not receive sufficient funding from investors to issue a loan?
As you have pointed out, Lending Club has funded roughly 25% of the dollar volume of loans since we reopened on October 14, 2008. That’s roughly the percentage of loans that would have gone unfunded if Lending Club had not funded them. Note that this is different from other platforms that do not filter loans upfront, and can experience 90% to 95% of the loans being left unfunded.
It sounds like LC’s position is that every loan that has been approved by your credit team is properly priced and worthy of funding. If that’s the case, why not take the Pertuity Direct model (or the Zopa UK model) and just take lender money, allocate it across all of the approved loans, and give net returns back as they come in? Why bother with the individual loan requests?
We believe all loans approved by our credit team are worthy of funding but we certainly do not impose this view on our lender members. Any lender who has a different opinion can choose to fund specific loans that match his or her own criteria (which would not be the case in the alternative that you are mentioning). Many of our lenders enjoy the opportunity to control exactly which loans they invest in, and we give them the tools and the ability to do exactly that.
Regarding your statistics file, it has been stated that the downloadable file was removed from Lending Club’s statistics page because of privacy concerns on the part of certain borrowers. What privacy-related data was included on the statistics file which is not also included on your daily prospectus supplements?
None. The prospectus supplements and sales report are mandatory filings and we have no control over their content. The downloadable files, however, are both voluntary and more prominent, and they are the ones that created privacy concerns.
You said there was no difference between the data in the downloadable stats file and the prospectus supplements, but by modifying the downloadable stats file you are only addressing one side of that issue. What if borrowers raised the same privacy concerns about the data in the prospectus supplements? Does the SEC have any understanding of borrower privacy issues, or will Lending Club borrowers simply have to deal with having their credit information, hometown, colleges, and employers posted publicly on the internet along with their loan request?
We are trying to strike the right balance between protecting the privacy of the borrowers and letting them share useful information with the lenders. Please note that the information that will no longer be included in the downloadable files (but will continue to be published anonymously as part of our mandatory reporting requirements) is both self-reported and optional. It is made clear to the borrowers that this information is public, and borrowers can decide not to provide such information.
You have probably seen this post about how Lending Club’s practice of publishing certain borrower information makes the correlation of LC loan requests to actual identities fairly simple. As a company, does this concern you? Do you have any plans to change the way this information is collected or published?
The article you are referring to suggests that the main technique for de-anonymization is based on screen names. Some of our borrowers use screen names that can be traced back to their actual identity; some even use their first name and last name as screen name and share personal information about themselves publicly. While we do not encourage borrowers to do so, we respect their right to de-anonymize their profile.
When can we expect the downloadable statistics file to be back up on the Lending Club site?
We will put the statistics file back up as soon as this particular privacy issue has been resolved, which we are hoping to be the case in the next 2-3 weeks. Note that the new file will be minus a few fields that have the potential to compromise a borrower’s privacy.
Congratulations on raising the $12M Series B. Now that you have some extra cash, what are your priorities over the next 6-12 months?
Thank you. We will use the funds to further develop our platform and the Lending Club brand, and bring exciting new products later this year.
Lending Club has continued to fund portions of their borrower’s loan requests, but notably, the
last two sales reports filed with the SEC contain no loans on which Lending Club participated as a lender. The downloadable statistics file has not yet been reinstated.
P2P Lender Prosper announced today that they are now welcoming lenders from Florida. Florida is the fourth most populous state in the U.S., which adds 6% of the population to Prosper’s addressable market. Along with recent announcements opening Rhode Island and Virginia, Prosper is now available to 54.1% of the U.S. population. Rival social lending site Lending Club also announced recently that they were open to Missouri lenders, adding 1.9% of the population, for a grand total of 54.3% of the population.
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