Why Lending Club Has Stopped Taking New Lenders

By Pinyo, on April 17, 2008

Initially, I wasn’t going to write about the change at Lending Club, because I didn’t want to speculate. But since I wrote about it a few times, I felt obligated to share my thought on this event to my readers.

Lending Club

A Quick Background

Lending Club is a peer-to-peer lending network where you could sign up as a lender or a borrower (or both). Borrowers list their loans in the Lending Club marketplace where lenders can shop around and buy a small piece of these loans (as little as $25).

Last week Lending Club sent out a letter that reflects this announcement on their web site:

Lending Club has started a process to register, with the appropriate securities authorities, promissory notes that may be offered and sold to lenders through our site in the future. Until we complete the registration process, we will not accept new lender registrations or allow new commitments from existing lenders. We will continue to service all previously funded loans during this period, and lenders will be able to access their accounts, monitor their portfolios, and withdraw available funds without changes.

The borrowing side of our site will remain generally unaffected by this registration process; borrowers can continue to apply for loans and new loans posted after April 7, 2008, will be funded and held only by Lending Club.

Until the registration process is completed, the company will undergo a quiet period and will not be able to respond to press and other inquiries about Lending Club or the registration process during that time.

My Thought On This

First, I know very little about securities law and regulation, so this is purely a speculation on my part. I believe Lending Club is doing something extraordinary. if they are successful, I believe they will emerge as the industry leader.

I had mentioned my concerns about the peer-to-peer lending industry before in Is Peer to-Peer Lending Ready for Prime Time? I will reiterate them here:

Stability of the organization
Ability for lenders to trade loans — i.e., sell loans in case they want to liquidate.
In another post, I also mentioned my disappointment with the lack of interest payment for idle fund in my account.

I believe this is a strategic change designed to address these issues.

By getting a regulatory body involved, they are in a way legitimizing their operation. This is not any different from brokerage firms that are registered with the SEC, and how our savings are FDIC insured.
This change is probably required for Lending Club to enable buying and selling of loans. So this change could be an indication that’s what they are trying to do.
I am not sure if they need to involve any regulatory body to pay interest to their lenders, but that would certainly give them a competitive edge.

Lending Club Loan Funds

Since I am in a speculating mood, I am going to share this idea that I have.

One of the main “fear factor” for lenders in these peer-to-peer lending network is that they will be the unlucky lender who got stuck with a loan that defaulted. Sure, these lenders could buy a lot of loans to lower this risk, but imagine if Lending Club offers loan funds — i.e., Aggressive Loan Fund, Balanced Loan Fund, Conservative Loan Fund, etc.

Lenders could buy shares of these funds just like buying shares in mutual fund — no more worry about buying individual loans (i.e., individual stocks)! And in the classic Emeril’s “let’s take it up a notch” style, imagine if these funds are open for trade in the general market. For instance, brokerage firms could sell you a Lending Club Aggressive Fund. I guess this product would be structured like a mortgage-only REIT fund.

Here are what other bloggers have to say about the change at Lending Club:

The Future of Lending Club – Will they Survive and Thrive, or Crash and Burn? at Cash Money Life
My take on Lending Club’s SEC Registration at DebtKid
Is Lending Club Bankrupt? at Quest For Four Pillars
Lending Club Is Dead at Lazy Man and Money

This post was featured in the Carnival of Peer-to-Peer Lending #9 hosted by Lazy Man and Money.

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Pinyo is the brain behind Moolanomy personal finance blog and a few other web sites. If you like this article, please subscribe for free daily email updates.

All posts by Pinyo

9 Comments

Patrick
April 17, 2008, 8:27

Interesting. There has been a lot of speculation regarding people being able to buy/sell/trade the loans they made, but I never thought about the possibility of the loans being packaged into a fund that could be traded on the open market. Interesting idea…

I look forward to official announcements from Lending Club regarding their actions.
Mrs. Micah
April 17, 2008, 15:09

I remember this sort of thing being in your suggestions a while back, though I’m not sure if it was to Prosper or LC. If they can keep interest in the company, it should turn out well. Big if, but they might be able to do it.
Four Pillars
April 17, 2008, 21:34

Thanks for the link.

As far as speculating… that’s what makes the blogosphere go around!!

As to you point on stability – the fact that LC shut down the lending portion of their business is not a sign of stability. I hope they will be back but they better have a good explanation!

Mike
Make Friends, Earn Money
April 18, 2008, 3:21

Isn’t this packaging up of loans and selling them on exactly what contibuted to the sub prime collapse very recently? Many companies bought the debt of sub prime loans from other companies who had originally made the loan and then this got sold on again and again. When the sub primers defaulted, most of the global banking institutions were hit because they all had significant levels of exposures to these debts. Personally I think lendclub is great, but they need to learn te lessons of previous difficulties.
Pinyo
April 18, 2008, 5:58

@Mike — Let me ask you this. Who would you rather work with — a regulated versus an unregulated lending organization? I think it’s good that they do it now rather than later. The longer they wait the more painful.

@Make Friends — but that’s just one side of the coin. For all the subprime loans, there are also prime grade loans that make up the traditional market.

And if you look at LendingClub versus Prosper, LC loans are higher grade than Prosper loans.
Shanti @ Antishay
April 18, 2008, 21:27

This is all very interesting. I am still wary of lending P2P but not wary like *fearful*, I’m just being cautious. Thanks for all the information! I’m keeping my radar out for posts on P2P lending because I’m still feeling my way through it.
Make Friends, Earn Money
April 19, 2008, 12:04

It’s a fair point Pinyo, but the beauty of Lending Club is peer to peer lending, that’s it’s Unique Selling Point, once it becomes more mainstream it’s loses some of it’s novelty value and lenders might as well go to a high street lender. Granted though it may mean a greater degree of security when lending. Thanks for expressing your views on this one
shadox
April 20, 2008, 16:53

I am speculating here, but based on the language of the Lending Club announcement that you posted, it sounds to me like the company was contacted by a regulatory agency (the SEC?) about possible violations of security law. Offering financial instruments to the public is a highly regulated field, and if the Lending Club did not have the appropriate licenses they could be in some hot waters. Alternatively, this could have been percipitated by the company’s legal counsel going: “You are doing WHAT, now?”
Pinyo
April 21, 2008, 17:51

@Shanti – Yeah, it’s good to be wary. I wouldn’t touch it either unless everything else is already covered — i.e., debt paid off, 401k and IRA funded, etc.

@Make Friends – True. Although the P2P portion wouldn’t go away. These other things are just going to be added features.

@Shadox – Hey, long time no see! That’s what some people are saying too, but I don’t think that’s the case. Lending Club weren’t doing anything different from Prosper, and both seems to be equally run.

I think this really has something to do with secondary market where lenders can sell/buy loans from other lenders.

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