LendingClub Loan Buyers Retreat After Shakeup; U.S. Probes

LendingClub Loan Buyers Retreat After Shakeup; U.S. Probes(bloomberg.com)

64 points by luther07 10 years ago | 39 comments

rcarrigan87 10 years ago |

I've used Lending Club on both sides of the marketplace (Lender and Borrower) and I really love the platform. So much easier than dealing with banks and the rates have always been fair. It's a shame they've made these missteps, but ultimately I think they'll come out stronger.

johnward 10 years ago | |

I use it as a borrower. I was able to get better rates than banks to do some consolidation. I like the platform from this side. I just worry who my loan will get sold to if they tank.

toomuchtodo 10 years ago | | |

I wouldn't too much about that. The new noteholder would still need to honor the provisions of the original agreement, and you could involve the Consumer Financial Protection Bureau if you ran into problems with the servicing of the note.

EDIT: I rescind my statement. If LC fails, both lenders and investors are going to have a bad time.

https://www.reddit.com/r/investing/comments/4jqaal/lending_c...

"From their prospectus: Our arrangements for backup servicing are limited. If we fail to maintain operations, you will experience a delay and increased cost in respect of your expected principal and interest payments on the Notes, and we may be unable to collect and process repayments from borrowers. We have made arrangements for only limited backup servicing. If our platform were to fail or we became insolvent, we would attempt to transfer our Loan servicing obligations to our third-party back-up servicer. There can be no assurance that this back-up servicer will be able to adequately perform the servicing of the outstanding Loan. If this back-up servicer assumes the servicing of the Loan, the back-up servicer will impose additional servicing fees, reducing the amounts available for payments on the Notes. Additionally, transferring these servicing obligations to our back-up servicer may result in delays in the processing and recovery of information with respect to amounts owed on the Loan or, if our platform becomes inoperable, may prevent us from servicing the Loan and making principal and interest payments on the Notes. If our back-up servicer is not able to service the Loan effectively, investors’ ability to receive principal and interest payments on their Notes may be substantially impaired."

dawhizkid 10 years ago | | |

Why would you worry about who your loan gets sold to as a borrower? If I were an investor on the platform I would be much more worried.

chris11 10 years ago | |

Aren't they being accused of misrepresenting over $20 million worth of loans to institutional investors? It sounds like they are dealing with some serious fraud allegations. How will they survive? It looks to me like the company is imploding right now.

pmorici 10 years ago | | |

No, it was 3 million. They originate over $100 million per month in loans so it was a very small amount and the data they fudged was not related to the credit quality. The only reason to be concerned is if you believe this is only the tip of the iceberg. Those fears were put to rest yesterday though when the new CEO released a letter stating that they engaged an accounting firm to audit their entire portfolio and found no additional discrepancies.

retbull 10 years ago | | |

They control 5 billion. So 20 million is a lot but in those terms, a small misstep.

rcarrigan87 10 years ago | | |

As with anything financial, there's always a lot of grey. Litigation will get drug out, a fine will be levied, business will resume. DOJ probe is a CYA move by the feds.

11thEarlOfMar 10 years ago |

LendingClub is carrying more than $5 Billion in loans on its balance sheet [1]. That means $5 Billion still owed to Lending Club by retail borrowers. At an average of, say, $20,000 [2] per loan, that is 250,000 borrowers.

That same $5 Billion is owed by Lending Club to lenders. A portion of the lenders are institutions. The remainder are also at the retail level. I don't know the average amount loaned per investor, but I'd guess there are more than 100,000 lenders.

Contractually, through Lending Club in the middle, those hundreds of thousands of borrowers owe the hundred thousand lenders that $5 Billion, which will be paid off over (at most) 5 years.

As the middle-man, Lending Club collects about 1% in fees. That is $50 million in fees outanding.

If Lending Club ceases operation, that $5 Billion is still contractually owed by the borrowers to the lenders. In Lending Club's prospectus, under bankruptcy or if they become unable to process loan payments, the whole thing transfers to a trust, 'Portfolio Financial Servicing Company (“PFSC”)'[3] to continue collecting from borrowers and paying lenders.

This is shaping up to be a pretty interesting situation. If legal expenses, ballooning compensation and declining loan origination revenues eat up Lending Club's cash and drive them to bankruptcy, a bankruptcy court judge is going to have to decide on the fate of these hundreds of thousands of Lending Club customers.

Is there a precedent for this? Would a fail-over to PFSC definitely happen? Is it possible a judge could rule that money being paid back by borrowers is to be used to pay off LC stock holders, should shareholder lawsuits prevail?

[1] https://www.google.com/finance?q=NYSE%3ALC&fstype=ii&ei=vzI7... (select Balance Sheet)

[2] I don't know the actual average, but the max is $35,000. The average may be much lower since many loans are paid down below $10k already.

[3] http://kb.lendingclub.com/investor/articles/Investor/What-ha...

edc117 10 years ago |

"The scandal hurt LendingClub’s ability to hold onto some of its key personnel. To retain managers and attract new ones, the company said it will need to boost pay packages.

Details of some of those arrangements were disclosed Monday: Acting CEO Scott Sanborn received a grant of restricted stock valued at $5 million and his salary was increased to $500,000. Chief Financial Officer Carrie Dolan received $3.5 million of restricted stock units and her salary was increased to $400,000. Both executives also received $500,000 cash awards that will pay out in a year."

Out of curiosity, how common is this? To me this sounds like grabbing everything you can and heading for the exits before the building burns down, but I'm not familiar with the pay range for CEOs/CFOs in their location. You don't hear anything about others in the company receiving similar packages.

davidu 10 years ago | |

These stock grants will vest over time. The retention bonuses pay out in a year.

A lot can be done to turn the ship around in a year. If they don't, the stock grants (depending on issue price) will be worth a lot less than originally issued, and they'll mainly have a highly taxed bonus. The grants are to prevent opportunity cost of leaving from being considered.

If they turn it around, the stock grants will be easily worth it. The company was worth $3b+ weeks ago. Now it's dipped below $1.5b. If they can fix that, that's a small price to pay.

scurvy 10 years ago | | |

They're stock grants not stock options. They're worth something even if the stock goes down (except to 0).

sseveran 10 years ago | |

Non-officers retention doesn't have to be disclosed with the same level of granularity. You might just see stock compensation expenses rise. At a large company retention might not even show up in a meaningful way in compensation expenses.

zjaffee 10 years ago |

Its also worth noting that they did things like, cancel their internship program. Things must be very serious.

toomuchtodo 10 years ago | |

Lots of money no longer willing to chase returns through subprime investments.

luther07 10 years ago |

This is going from bad to worse, shareholder lawsuit over financial/operational controls: http://mobile.reuters.com/article/idUSKCN0Y81QT

homero 10 years ago |

I have a lot of money in there

zrail 10 years ago | |

Hopefully you'll get some of it back.

fiatmoney 10 years ago | | |

LendingClub isn't the counterparty; even if they went bankrupt there would be procedures to move the loans to a different servicer.

luther07 10 years ago |

Anyone at all concerned about the DOJ subpoena? Lending Club is being investigated by the DOJ.

guelo 10 years ago |

Does it mean that their loan rates will go up? Is it a good time to invest?

scurvy 10 years ago | |

To be honest, the street smart investors will get in there soon. With all of the scrutiny, the following loan offerings will be their most by the numbers yet. At least that's how typical scandal clean ups happen.

manav 10 years ago |

This isn't surprising. The entire personal loan/payday loan industry is terribly corrupt. This only comes a few days after Google banned ads for payday loan companies.

I think regulation is coming soon to the alternative-loan industry as a whole. In regards to the LendingClub specifically, I can't speak for much since the details in the article are lacking, but it appears that there was some kind of falsification or "data errors" on securitized loans sold to banks or third parties. Based on how they are structured, I would guess that an investors audit of loans originated by Lending Club came up with some inconsistencies that didn't meet the purchase guidelines, triggering Lending Club to have to buy back the entirety of the security.