Lending Club P2P: Review of New Post-SEC Changes

Now that LendingClub has finished their SEC filing and is one of the only P2P lenders currently operating (everyone else either shut down or is in an SEC quiet period), let’s take a look at some of the changes. You are now officially “investing” in notes offered by LendingClub, as opposed to directly “lending” to private individuals. The bad news is that this also means some new restrictions that have been added. The good news that now these notes can be traded on a secondary market, offering liquidity for loans that used to be a 3-year commitment.

Borrowers

I have always found borrowing from LendingClub to be very straightforward to borrowers. You get a 3-year, unsecured loan at a fixed rate. If you qualify (see below), you simply submit an free application and they tell you what rate you get. Then you can simply compare this rate with your other options – credit cards, home equity loans, whatever – before deciding if you want to attempt a listing. However, which the current credit conditions, remember that credit cards can only guarantee 6-12 months of a low rate, and home equity loans have gotten a lot more strict (and also put your house at risk).

Eligibility. However, be aware LC is only seeking “prime” borrowers. Borrowers must be a US citizen or permanent resident, and at least 18 years old with a valid bank account and a valid Social Security number. You can’t be from the following 8 States: Idaho, Indiana, Iowa, Maine, Nebraska, North Carolina, North Dakota, and Tennessee. You have to have good-to-excellent credit in addition to satisfying additional requirements. From their FAQ:

In order to qualify for listing a loan request, you will need a FICO score of at least 660 with a debt-to-income ratio (excluding mortgage) below 25%. In addition, your credit history must show that you are a responsible borrower:

* at least 1 year of credit history, showing no current delinquencies, recent bankruptcies (7 years), open tax liens, charge-offs or collections account in the past 12 months,
* no more than 10 inquiries on your credit report in the last 6 months,
* a revolving credit utilization of less than 100%, and
* more than 3 accounts in your credit report, of which more than 2 are currently open.

Put together, these minimums are actually relatively strict. However, as a lender I would say that crafting a convincing loan listing showing your income, expenses, and exactly how you plan to pay off the loan is still very critical to get your loan funded.

Fees. Borrowers pay an upfront fee that is a percentage of the loan amount. The fee ranges from 0.75% to 3.50% based on the credit grade given.

Lenders

The interest rates charged by LendingClub currently vary from 7.37% to 20.11% (6.69 to 19.37% after fees) based on the credit grade assigned by LC after reviewing the borrower’s overall profile. There is no eBay-like bidding here. You see the rate, you read the listing and credit grade, and you decide either to fund it or not. Remember the minimum requirements above. The rates are higher than before, probably to counter potentially higher future defaults and to match increasing rates in the overall market.

Default Rates. You can see all the stats on existing LendingClub loans here. Up to this point, I have only investing in top-grade “A” loans. Out of 332 A loans, only 2 have been late since they started in June 2007. That’s a 0.6% late rate, with no defaults yet. Across all their loans, they have had a default rate of less than 3%. This includes a few loans that were of slightly lower quality than their current minimum requirements.

Looking at the overall late and default rates as compared to credit grades, it would appear the “sweet spot” is currently B and C grade loans. However, I personally still like minimal risk and plan on sticking mainly to A grade loans.

Finally, it is interesting to note that out of the $23 million of issued loans, there was also $199 million of “declined” loans. I’m not sure if this is due to rejection by LendingClub, or simply prospective lenders deciding that the loans were unsatisfactory. It also could be due to a lack of funds by lenders, so only the “best” loans were funded.

Eligibility. After the SEC filing, you must now meet certain minimum income and net worth requirements. You must also be a resident of on these 25 states (new states are added as they are approved):

California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Louisiana, Minnesota, Mississippi, Montana, New Hampshire, Nevada, New York, Rhode Island, South Carolina, South Dakota, Utah, Virginia, Washington, Wisconsin, West Virginia, and Wyoming.

Liquidity. All loans you take on can now be sold on a secondary market at FOLIOfn, so if you need your money back it is possible. As an existing lender, I had to fill out some additional information, but my application was approved in a day and I can now view a listing of loans that people want to sell. FOLIOfn charges the seller a 1% trading fee.

Fees. Lenders pay a 1% service charge on all interest payments. Due to reasons that I haven’t worked out, this reduces the APR by less than 1%.

My Experience

In general, my use of LendingClub has been limited to some experimental investing. I like the idea and I like trying out new financial services, but as I mentioned, I’m also very risk-averse. My loans have to have an A-grade (I choose them myself and don’t use LendingMatch). Also, they have to outline a clear plan for repayment. My main problem so far is a lack of such high quality loans. I’ve only funded about 8 loans so far, but the volume seems to be picking up. I’ve been earning about 7% (8% minus fees) with no lates or defaults. The movement of money back and forth between my bank is smooth, just like with an online bank. I only wish there was an “instant funding” feature, as I don’t like to keep idle cash sitting there, but I like the ability to fund attractive loans quickly before they fill up.

In fact, although I usually don’t care about this sort of thing, yesterday I used their loan map mashup and actually found a loan by a local store that I have shopped at before. After reading it over, I am now moving some funds in to help fund that loan. Should be interesting.

How are your experiences with Lending Club?

Comments

  1. I am very interested in the secondary loan market at LC. I think it could have huge potential. It would basically let me “preview” a borrower’s payment history to the initial lender, then I can reduce my risk by buying only loans that have a proven payment track record. Am I missing something here, or is this the case?

  2. Budget Save Buy says:

    Do you have to pay taxes on the interest you earn? I assume you would but is it up to each lender or does Lending Club send you some sort of statement?

  3. BSB – Yes, you are responsible for taxes on interest, treated as ordinary income. They give you a 1099.

    sprfrkr – Yes, you get to see payment history. You can also see if the borrower’s credit score has gone up, down, or stayed the same since loan initiation. One downside (for some) is that I don’t seem to be able to read the original loan listing description.

  4. Thanks for teh reply. I looked into it deeper, my idea of reducing risk by exclusively investing in notes with good payment history is offset by a “premium” or “dicount” added to the loan based on teh payment history. In a perfect market, the premium points paid will offset the additional interest.

  5. Has anyone who signed up had to provide evidence to LC to prove they met the salary and net worth requirements? Being a 25 year old CA resident leaves me kind of stuck as I meet neither the annual salary or total net worth requirements. I really like the idea of social lending especially if I can help local people and businesses. Leaves me debating whether I should just accept the “Note Purchase Agreement” and keep my fingers crossed they don’t ask any questions.

  6. ThePessimist says:

    Is anyone else worried that Lending Club could go bankrupt? Looking at their filings, their losing money at a fast pace. Since they are the legal debtor for all loans, if they go under, lenders lose money. This is true even if the borrowers are still current on their loans!

    I’d be a lot more comfortable with this if LC were a profitable (or at least break-even) company…

  7. My experience with Lending Club has been positive. I have 9 loans with them and none of them have ever been late.

    Unfortunately, I won’t be able to lend any more money there. They don’t allow lenders from my state and I wouldn’t meet the income and net worth requirements anyway. The requirements seem ridiculously high for a $25 investment. I could invest a lot more in a riskier mutual fund and not have to meet any requirements. This doesn’t make sense to me but I guess it was part of their settlement with the SEC.

  8. I have been using Lending Club as a lender for about a year. So far so good. I am only funding 3 loans and they all pay on time and my average interest is 9%. At this point I highly recommend it!

  9. spkrfkr – That would be true, *if* the market was perfectly efficient, but I doubt it is. I’m still trying to find some good loan buying opportunities myself, but most of the loans are still very young as only loans initiated after October 2008 can be sold. With time, the market should open up.

    Rich – I have never had any broker ask for evidence of stated income or net worth. It would seem they need to show that the investment is “appropriate” for the applicant. Definitely an SEC compromise.

    ThePessimist – It’s kind of a paradox. LC is a start-up that is only a little over a year old – and it shut down for months in between – so really is is worse than that. They make money off of loan servicing fees. More loans = more income. If nobody lends, then they can’t get loans. Right now they are probably running off of VC funding and mainly working on marketing and growth, so I wouldn’t expect them to be profitable.

    I am not sure how it would work if they went bankrupt. I doubt the borrowers would be let free and the lenders would be stuck with wholesale losses. If so, the smarter move would be to borrow quick!

  10. ThePessimist says:

    Jonathan -

    The borrowers wouldn’t be let free in a LC bankruptcy, as their loans would be assets of LC. My point is that as a “note holder,” we investors are *unsecured* creditors of LC. If LC goes bankrupt, we’re in line with all of the other creditors.

    From LC’s prospectus: “The Notes are unsecured and holders of the Notes do not have a security interest in the corresponding member loans or the proceeds of those corresponding member loans.” And in the case of an LC bankruptcy, “the holder of a Note may be required to share the proceeds of the corresponding member loan with Lending Club’s other creditors.”

    So, to get your money back in full, you need both the borrower *and* LC to stay solvent! So, even if you’re well diversified among different borrowers, you’re still exposed to problems with LC. I’m not sure how comfortable I am putting a lot of my money into unsecured debt of a money-losing company like LC…

  11. ThePessimist makes an excellent point.

    Prosper was not like this before they went into quiet period – the loans themselves were actually sold to lenders. If Prosper failed, they promised to set up a 3rd party to service loans to completion.

    Of course, if Prosper returns, they will probably resemble LendingClub a lot more due to SEC requirements, including this issue of becoming basically a seller of borrower-indexed bonds of the P2P lending company to lenders.

  12. I just registered with LC and funded my account thru Paypal. I have invested only $125.00 including the $25.00 from LC. I don’t know if I’ll be funding anymore loans until I get a better understanding of LC and see if its worth the time.

  13. Thanks for the referral link. I signed up on Monday, and my bank account is already verified. The $25 lender bonus is already invested in a loan @ 15.68%. I did not have to verify salary or net worth. I plan on throwing $500 into several different loans with varied risk levels. Can’t be worse than the stock market or my 4% CDs at ING, right??

  14. I just recently signed up and invested $50 in two different loans. (An A and B). From what I read in the FAQ section, in the event of a bankruptcy, issued notes would be assumed by the bank they are partners with. However, I think LC’s membership will grow as the days progress. It was just recently re-opened.

    On the secondary front, it seems a little slow at this point because loans that can be traded are restricted to anything issued after mid October. So there is no incentive to pay more for a loan with no payment history. In time, hopefully this can become a vibrant market for people to buy and sell notes. It will become very profitable to trade notes in 1 to 2 years when the notes we are funding have some history to them.

    I think all we can do to help LC is spread the word and get more people using LC. Many of my friends have never even heard of LC or P2P lending for that matter, so this is still in its early years.

  15. can i just take the 25 and run?

  16. I have several old loans from Lending Club still in repayment. However, after the new regulations, I am no longer eligible to lend due to both my state of residency and income. Any idea what might happen to my loans? I don’t want to ask Lending Club in case they close my account…

  17. From LC’s FAQs page:

    What happens if Lending Club goes out of business?

    In order to ensure continuity in the case Lending Club stops servicing the loans for any reason, we have entered into a backup servicing and successor agreement with Portfolio Financial Servicing Corporation (www.pfsc.com) for PFSC to take over loan servicing.

Trackbacks

  1. [...] Update: Please see my updated review as well as new lender bonus info here: New Lending Club Review + $25 Bonus [...]

  2. [...] reviewed new changes at Lending Club after they filed their paperwork with the SEC. Looks like LC is the only P2P operator that’s [...]

  3. [...] in December, I wrote a detailed review of the “new” LendingClub, a site which lets individuals lend money directly to other individuals and earn 7-20% interest [...]

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