"Lending Club has been tested, survived & is getting bigger"
This report on Lending Club by Crowd Fund Insider charts the growth of the online lender since its IPO last year. In an interview, CEO Renaud Laplanche, states that his firm can now be considered to have been tested through an economic crisis and survived. He also disputes critics that accuse Lending Club of predatory lending, stating that one of the individuals making this claim had taken out multiple marketplace loans and ‘got in over his head’. Furthermore, Laplanche added that Lending Club ensures that a key criteria to lending is the ability to repay the loan, and the most important metric is the debt to income ratio. Importantly, when Lending Club makes this calculation, it does not assume that any outstanding debt will be repaid with the Lending Club loan, so they do not assume a refinance of outstanding debt.

It has been almost a year and a half since my last visit to Lending Club and my last interview with Renaud Laplanche its CEO. A lot has changed since then, but even more has stayed the same. Lending Club is now a public company, listed on the New York Stock Exchange. It has grown from around 500 to over 1,000 employees and has sprawled to requiring space in three San Francisco office buildings. What remains the same however, is the mission of the company, to make credit more affordable and investing more rewarding.

To date, Lending Club has helped over a million borrowers pay off credit card debt or avoid credit card (or other forms of) debt with a lower cost and more transparent product, the average interest rate of which is below 12% compared to above 17%. This is a meaningful savings all at a fixed rate with monthly payments.

One of the changes, is Lending Club’s foray into small business lending. Their initial focus has been consumer lending and when asked why the transition, Renaud explained that there was an unmet opportunity and he felt like the right thing to do was to apply technology to facilitate the underwriting process for small business loans between $50,000 and $300,000 which were too costly for banks to underwrite. Renaud has a direct connection to small business, due to his father’s ownership and operation of a grocery in the south of France. Renaud remembers accepting deliveries and stocking shelves in the morning before school. I find it interesting that two generations of Laplanches have built and maintained marketplaces, although for markedly different products.

Because small business lending is less predictable, Lending Club is only offering the business lending product to institutional investors until they get the right metrics around it. The business lending market depends on the company’s own credit performance, as well as the current investor appetite and economic cycle adding more variables to the equation. Renaud concedes that the current economic cycle is probably closer to the end of this expansion than the beginning. Once, Lending Club better understands the performance of these new products, it will roll them out to its retail investors. This is the strategy that Lending Club employs for all new products.

Another change is the typical consumer borrower Lending Club is servicing. While it used to be the early adopter, late 20’s early 30’s, single or recently married, city dweller it has now become a more mainstream, older and more established borrower. Lending Club is gaining more brand awareness though word of mouth, which they measure by a net promoter score focused on the likelihood of a borrower to recommend their service. Renaud noted that Lending Club scores in the 70’s while most financial services companies score in the 20’s. Furthermore, the average for large credit card issuers is in the single digits. What has stayed the same however are the standards for borrowers, who still have higher than average credit scores of 700 and way above average income of $70,000 annually, which is the top 15% of the US population.

The typical investors have changed from individuals to institutions, marking the trend we have seen throughout the marketplace lending industry. When Lending Club started there were only retail investors, now they cater to high net worth individuals, family offices, hedge funds, pension funds, banks, insurance companies and other huge institutions. Many investors preferred to invest in a managed fund rather than pick and choose their own loans so Lending Club launched LC Advisors in 2011 to put together funds. Currently, the rough breakdown of investors is retail 20%, institutions 30%, and funds 50%.

In order to protect the retail investors from institutional investors cherry picking the better loans and gaining access to better information or products, Lending Club bifurcated the platform into the whole loan platform for institutions and the fractional loan platform for retail investors. Loans are randomly selected to be sent to each platform based on the social security number of the borrower, and there has been no difference in the performance of the loans (or the risk adjusted performance of the loans) on the two platforms since 2012.

When asked for his response to critics who claim that the marketplace lending industry is one economic downturn away from annihilation, Renaud noted that Lending Club had already survived one economic crisis. He continued that it was a fair criticism as most platforms have not been tested in down cycle, but that actually Prosper and Lending Club have been tested and survived with good data that although small, is statistically significant. In a severe crisis, when unemployment doubled, credit losses doubled and were 4% to 8%. Renaud explained that this is a scenario where the power of the low cost technology model reveals itself, in that the lower operating cost of marketplace lenders means more loss coverage for investors. The ‘08 and ‘09 loan vintages still had a return of 3%, and Renaud hopes that Lending Club is even better at underwriting today and can achieve even better results. Of course, some platforms will see more volatility, and more recent platforms that don’t have same amount of data and resources will fail.

When asked about a recent New York Times article that accused Lending Club of predatory lending, Renaud laid out the facts that regarding one of the individuals in question who had taken out multiple marketplace loans and gotten in over his head, the first loan that person received was from Lending Club and not the later loans. The borrower was a CPA and first went to Lending Club and acquired a loan, then went to Prosper for the next loan and finally to Avant for yet another loan. Lending Club cannot prevent a person’s future actions and from assuming more debt, they can only be responsible in their lending process. Renaud noted that the key insight to lending is the ability to repay the loan and the MOST important metric is the debt to income ratio. Importantly, when Lending Club makes this calculation, they do not assume that any outstanding debt will be repaid with the Lending Club loan, in other words they do not assume a refinance of outstanding debt.

When asked about any disappointments since last we spoke, Renaud just generalized that everything takes more time than he would like. Most likely a common sentiment amongst CEOs of public companies and something too that will stay the same.

Georgia P. Quinn is the CEO and co-founder of iDisclose, an adaptive web-based application that enables entrepreneurs to prepare customized institutional grade private placement documents for a fraction of the time and cost. Heralded by Thomson-Reuters as a Top Female Attorney in New York City, she also serves as of counsel at the leading firm in crowdfunding, Ellenoff, Grossman & Schole, specializing in facilitating financial transactions and compliance with JOBS Act regulations. A foremost expert in corporate finance, she has worked on over $1 billion in business transactions over the course of her legal career. Prior to founding iDisclose, Georgia represented several Fortune 500 companies in financings for six years at Weil, Gotshal & Manges, one of the top ten law firms in the world, and then for over two years at Seyfarth Shaw, a leader in legal technology. As a globally recognized thought leader in the crowdfunding space, she has been a featured speaker at multiple conferences and has presented to such authorities as the Securities and Exchange Commission (SEC) and the American Bar Association (ABA).