Saturday, November 23, 2013

All about Lending Club

Lending Club is a US peer to peer lending company, headquartered in San Francisco, California. It was the first peer-to-peer lender to register its offerings as securities with the Securities and Exchange Commission (SEC), and to offer loan trading on a secondary market. Lending Club operates an online lending platform that enables borrowers to obtain a loan, and investors to purchase notes backed by payments made on loans. As of June 2013, Lending Club has originated over 2 billion USD in loans, and averages $2.7 million in daily loan originations.[6][7]


Early history

Lending Club was initially launched on Facebook as one of Facebook's first applications.[2][8] After receiving $10.26 million in a Series A funding round in August 2007, from venture capital investors Norwest Venture Partners and Canaan Partners, Lending Club was developed into a full-scale person-to-person lending company.[2][9]
On April 8, 2008, Lending Club temporarily suspended new lender registration, canceled its affiliate program and entered a "quiet period" while it awaited approval to issue promissory notes to lenders.[10] On June 20, 2008, Lending Club filed an S-1 statement[11] with the U.S. Securities and Exchange Commission (SEC) seeking the registration of $600 million in "Member Payment Dependent Notes" to be issued on its Web site.[12] On August 1, 2008, Lending Club filed an amendment to its Form S-1[13] outlining new interest rate formulas as well as more details on a "resale trading system".[14] On October 14, 2008, Lending Club announced its completion of the SEC registration process, posted the filed prospectus on its website, and resumed new lender registration. Notes issued on or after October 14, 2008 represent Lending Club securities rather than direct obligations of the ultimate borrower and are tradable (can be bought and sold) on the Foliofn trading platform.[15] In March 2009, Lending Club raised $12 million in a Series B funding round led by Morgenthaler Ventures.[16]


In April 2010, the company raised $24.5 million in a Series C funding led by Foundation Capital and joined by existing investors including Morgenthaler Ventures, Norwest Venture Partners and Canaan Partners.[17] In August 2011, Lending Club raised an additional $25 million in venture capital from Union Square Ventures and Thomvest, owned by the Thomson family of Thomson-Reuters.[1][18] This led to Lending Club earning a $275 million post-money valuation and an increase of $80 million in valuation from the preceding year.[19] Thomson-Reuters founder Peter J. Thomson also invested an unspecified amount of his personal fortune into Lending Club as well.[20]
In the fall of 2011, Lending Club's headquarters were moved to downtown San Francisco; its earlier offices were located in Sunnyvale and Redwood City.[1] Co-founder Soul Htite left for China to start SinoLending, a peer-to-peer lending company based in Shanghai. In 2012, the company employed about 80 people, with Renaud Laplanche continuing as the company CEO and chairman of the Board of Directors.[1][21][22] The company averaged about $1.5 million in loan originations daily, with a total of $600 million since its founding.[6][7]
In April 2012, Lending Club's SEC registration from 2008 was renewed for $1 billion USD in Member Payment Dependent Notes and became effective on April 10, 2012.[23] In June 2012, the company received $15 million in new funding from Kleiner Perkins Caufield & Byers and $2.5 million of personal investments from John J. Mack. Kleiner Perkins partner Mary Meeker joined Mack on Lending Club's board of directors.[4] This led to a $570 million valuation of the company.[24] In November 2012, Lending Club surpassed $1 billion in loans issued since inception and announced they were now cash flow positive.[25]
As of March 15, 2013, Lending Club had facilitated more than 100,000 loans, for a total of $1.5 billion.[26] In May 2013 Google purchased a stake in Lending Club, leading to a valuation of $1.55 billion, which was nearly three times as much as the company was valued in June 2012.[24] The investment by Google was part of a $125 million secondary round.[27][28] As of this time Lending Club was responsible for facilitating more than $1.9 billion loans in total.[24]
They also began partnering with smaller banks in order to help streamline their small loans operations. In June 2013 the company partnered with Titan Bank in Texas and Congressional Bank in Maryland in order to help them facilitate loans that would have been otherwise unprofitable for them.[29] The founder has stated that Lending Club plans on unveiling a small business loans platform in either late 2013 or early 2014, after it surpassed over $2 billion in loans in June of 2013.[30] The company is preparing to be IPO-ready in 2014.[31][32]

Stevenson Place, San Francisco, the location of Lending Club headquarters

Business model


Lending club enables borrowers to create loan listings on its website by supplying details about themselves and the loans that they would like to request. All loans are unsecured personal loans and can be between $1,000 - $35,000. On the basis of borrower’s credit score, credit history, desired loan amount and the borrower’s debt-to-income ratio, Lending Club determines whether the borrower is credit worthy and assigns loans that it approves a credit grade that determines payable interest rate and fees. Loans are only available to U.S. residents in 43 states and can be repaid any time without penalty. The standard loans period is three years; five-year period is available at a higher interest rate and additional fees.
Investors can search and browse the loan listings on Lending Club website and select loans that they want to invest in based on the information supplied about the borrower, amount of loan, loan grade, and loan purpose. The loans can only be chosen at the interest rates assigned by Lending Club but investors can decide how much to fund each borrower, with the minimum investment of $25 per note.[33]
Investors make money from interest. Rates vary from 6.03% to 24.89%, depending on the credit grade assigned to the loan.[34] Lending Club makes money by charging borrowers an origination fee and investors a service fee. The size of the origination fee depends on the credit grade and ranges from 1.1-5% of the loan amount. The size of the service fee is 1% on all amounts the borrower pays.[35] The company facilitates interest rates that are better for lenders and borrowers than they would receive from most banks. It has averaged between a six and nine percent return to investors between its founding and 2013.[36] However because lenders are making personal loans to individuals on the site their returns are taxable as personal income instead of investment income, so are subjected to a higher tax rate on their returns than they are with alternative investments.[37]
In terms of aggregative totals, in 2007 Lending Club had facilitated $4.8 million in loans, $24.8 million in 2008, $76.6 million in 2009, over $202 million in 2010, more than $460 million in 2011, and in excess of one billion by the end of 2012--half a billion dollars coming in the nine months between February and November.[38] During May, 2013, $148 million of loans were originated via the Lending Club platform.

Loan ownership

After the notes are issued, Lending Club purchases the loans from the issuing bank and notes become the obligations of Lending Club, and not of the ultimate borrower: Lending Club promises to pay the noteholder monies it receives from the borrower less its service fees, while the holders of Lending Club notes have the status of unsecured creditors of Lending Club. This means that there is a risk that the investor may lose all or part of the investment if Lending Club becomes insolvent or declares bankruptcy, even if the ultimate borrower continues to pay.[22]
The investors have the ability to put notes up for sale before the notes have reached maturity. This service is offered in a partnership with FOLIOfn Investments which charges a 1% fee on note sales, making Lending Club the first peer-to-peer lending network to offer a secondary market for peer-to-peer loans. Other peer to peer lending networks have subsequently also partnered with FOLIOfn Investment to offer a secondary market.[39][40]

Credit risk

When initially founded, Lending Club positioned itself as a social networking service and set up opportunities for members to identify group affinities, based on a theory that borrowers would be less likely to default to lenders with whom they had affinities and social relationships. It developed an algorithm called LendingMatch for identifying common relationship factors such as geographic location, educational and professional background, and connectedness within a given social network.[41][42][43]
After registering with the SEC, Lending Club stopped presenting itself as a social network and maintaining that social affinity will necessarily reduce the defaulting risk. It now presents the algorithm just as a search tool for investors to find Notes they would like to purchase, using borrower and loan attributes such as the length of a loan term, target weighted average interest rate, borrower credit score, employment tenure, home ownership status, and others.[44] To reduce default risk, Lending Club focuses on high-credit-worthy borrowers, declining approximately 90% of the loan applications it receives [45] and assigning higher interest rates to riskier and borrowers within its credit criteria.[6] Only borrowers with FICO score of 660 or higher can be approved for loans.[34]

Loan performance statistics

As of March 22, 2013, the average Lending Club borrower has a FICO score of 706, 16% debt-to-income ratio (excluding mortgage), +14 years of credit history, $70,491 of personal income and takes out an average loan of $12,855 that s/he uses for debt consolidation or for paying off credit card debts. The investors had funded $1,501,287,675 in loans and received $128,277,038 in interest payments. The nominal average interest rate is 16.34%, default rate 4%, and an average net annualized return (net of defaults and service fees) of 9.64%.[6][46] The average returns of investment for Lending Club lenders are between 5.47% and 10.22%, with 23 straight quarters of positive returns as of the second quarter of 2013.[30]
In May 2013 Lending Club issued $148 million in new loans for the month bringing its total loans issued to date to over $1.8 billion[47] and is currently the world's largest peer-to-peer lending platform.[48]

Board of directors


In 2011 and 2012 the company was named to as one of the AlwaysOn Global 250.[55][56] Lending Club is the winner of the World Economic Forum 2012 Technology Pioneer Award.[57] It has been recognized by Forbes as one of America’s 20 most promising companies in 2011[1] and 2012,[58] and by Fast Company as one of the ten most innovative financial companies in the world.[59] It was named one of the Disruptor 50 by CNBC in May 2013, as a disruptive innovator in next generation financial services.[60]