Back 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 (depending on credit scores). Many of you sent additional questions about LendingClub, and Rob Garcia, Director of Product Strategy, was gracious enough to answer them. I want to thank Rob for his time and candidness, as some of the questions were quite blunt.
Some of my readers are concerned about your company being in its early stages. What would happen if Lending Club goes bankrupt? What would happen to our notes in that scenario? Would we be unsecured creditors of LC?
Yes the notes are unsecured obligations of Lending Club. That being said, we’ve structured the program in a way that makes it as “bankruptcy remote” as possible: all lender funds are kept in a trust account that is not part of Lending Club assets, and therefore would be off-limit to other Lending Club’s creditors. We also have a back-up servicing agreement in place with Portfolio Financial Servicing Corporation (www.pfsc.com), one of the largest loan servicer in the country, who will service the loans should Lending Club be unable to do so.
Any insight to why the income and net worth requirements are somewhat restrictive for lenders?
This comes from state regulations; most states impose financial eligibility requirements for clearing new types of securities offerings. We are hoping that some of these requirements will be lifted as the program continues to build its track record. As pointed out in a recent Javelin study, the average annual return for Lending Club lenders has been 9.05% over the last 18 months, with little volatility. If we continue showing that sort of track record over a long period of time, we hoping the financial eligibility requirements will become unnecessary.
Do you expect to add more eligible states soon?
Yes. We are actively pursuing registration in states where the offering has not yet been cleared. Note that residents of most states who haven’t been cleared for the main offering can already buy notes on the Note Trading Platform from FOLIOfn.
Can I just take the current $25 bonus and run? [See below]
You certainly can, although we’d love you to try Lending Club.
Is there plans to fund via PayPal or some other more instant form of funding? I saw a loan I wanted last week, but had to wait 4 days for my bank deposit to clear and missed it.
We do offer this capability, but only to lenders who do not have a linked bank account. Once a bank account has been linked, it is a lot more cost-efficiently (although admittedly longer) to move funds by ACH.
Any plans to pay interest on idle cash?
Not immediately. Believe it or not, there are lots of regulatory challenges for a non-“deposit taking institution” like Lending Club (basically not a bank) to pay interests on idle funds. It is in our interest to do so to attract more lenders, so we are looking for a way around (along the same vein as what PayPal is doing) and are confident it will come through.
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…
No worries; we’re not closing anybody’s account! All “old” loans continue to be serviced and all lenders get their monthly payments credited to their account irrespective of their state of residence. The new restrictions only restrict the ability to buy new notes.
— End of Interview —
Follow-up Updates and Comments
Here is a excerpt from the Executive Summary of the noted Javelin study, which notes both pros and cons:
If an individual had invested $10,000 on June 1st, 2007 in a representative group of loans on the site, the value of that individual’s account at Lending Club would have grown to $11,594 by November 2008 (assuming reinvestment of payments received). That return would have outpaced other common investments or indexes such as the Standard & Poor’s 500 Index ($6,289), the Nasdaq Composite Index ($6,605), 1-year CDs ($10,678) and 6-month Treasury bills ($10,501). This comparison factors in Lending Club’s 1% service charge but does not include fees and other transaction costs for the other investments. This comparison does not factor in differences in liquidity between Lending Club notes and the other investments or indexes. Notably, Lending Club notes can only be sold through the Note Trading Platform that was made available recently (on October 14, 2008) and there is no assurance that liquidity will develop on that platform.
Over the last few months, we have seen credit card companies canceling inactive cards, reducing credit limits, and raising rates on lots of borrowers. As a result, I have definitely seen a rise in loan volume at LendingClub.
As a lender, I’ve tried to take advantage by slowly investing in lots of small $25 loans to folks with squeaky-clean credit histories and good job histories, and now have about $1,000 lent out. I understand there is risk involved, and will report my results. I do wish the PayPal funding option was always available, as the convenience would be great. Also, another reader pointed out that if they accepted PayPal, one could fund with a credit card for the rewards.
If you are interested in lending, you can still use this special $25 lender sign-up link to get a free $25 to try it out with no future obligation. There is no credit check and you don’t have to deposit anything. After you are approved, the $25 should show up in your account balance, and you can lend it out immediately.