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Lending Club Can Be a Better Bank Than the Banks

56 points by stygiansonic 12y ago

novalis78 12y ago
Interesting - so Lending Club does not actually work like BTCJam. I did not know that.
- snapclass 12y ago
  Use BTCJam and Lending Club. LC is amazing and I am happy with my returns. BTC seems like a scam as the reputation of borrowers means very little in their willingness to repay. I've seen many people build their reputation in order to borrow more and then bounce.
  - flavio87 12y ago
    snapclass - although this happened a lot in the past, we are now curating the platform much more and also our repayment rates are in the 85% area. If you diversify well and go for A/B rated borrowers you can definitely make very positive returns. We are now doing around USD 1M per month, are growing the number of borrowers rapidly - which allows for more diversification and better returns (on average)
    - novalis78 12y ago
      Hi flavio87 big fan of BTCJam here - have to agree, you guys are doing a much better job on filtering out people - the idea of having borrowers pose with their passport was great. 85% seems to fit my own observations so far, maybe close to 90% depending on your level of scrutiny. Keep up the great work!
juanplusjuan 12y ago
I always wondered why big banks didn't get into the business that Lending Club started. I figured that it was due to inefficiencies in the consumer credit model that made it such that "high risk" borrowers were ineligible for secured loans and that LC found a better way to accurately measure that risk. Who knew it came down to accounting?
- prostoalex 12y ago
  Personal loans and personal lines of credit have been around https://www.wellsfargo.com/personal_credit/ https://www.wellsfargo.com/personal_credit/ http://www.eloan.com/personal-loans http://www.eloan.com/personal-loans https://www.discover.com/personal-loans/ https://www.discover.com/personal-loans/ My guess is that they constitute such a small revenue stream for the banks, that banks skip on marketing and execution.
  - kourt 12y ago
    "personal loan" does not mean "peer-to-peer loan"
    - melvinmt 12y ago
      Banks are actually all about "peer-to-peer" loans, where do you think their massive funds come from? You deposit money, the bank lends it out. In reality it's a bit more complicated than that but that's the essence of banking.
      - rjtavares 12y ago
        But there's no connection between the lenders and the depositors. So it's more server based than peer-to-peer.
        melvinmt 12y ago
        It's a bit similar with Lending Club. They give out the loans and you buy the notes for those loans from LC.
    - prostoalex 12y ago
      Well, Lending Club is no longer pure peer-to-peer either http://blog.lendingclub.com/a-note-on-our-recent-loan-volume/ http://blog.lendingclub.com/a-note-on-our-recent-loan-volume... But would be the bank's role in a peer-to-peer transaction? Pure servicer?
donohoe 12y ago
I've taken out two loans with Lending Club over the last 3 or 4 years. Each time I've compared the rate with my bank (Citi) and others, and each time LC has been competitively cheaper. Citi advertises "Get a fixed rate ranging from 8.99% APR to 20.74% APR." and my rate with LC has been typically 7.86% APR (forget exact decimal place figure). The 8.99% rate with Citi assumes they give me the best rate - not guaranteed. Its fast, friendly, and I can repay early at no penalty. Extremely satisfied.
- radmuzom 12y ago
  Ultimately, their sustainability will depend on the cost at which they can raise funds. Banks can raise funds cheaply through deposits (and many other sources like wholesale funding which may be at a higher cost), which they lend out at slightly higher interest rates than they pay their depositors. Given that LC is not a depository institution, the only way I see them providing lower interest rates is they have figured out a cheaper source of funding - or burning investor money to do this which is not sustainable and the big banks will defeat them eventually. The moment you start taking deposits, you will be regulated like any other institution and they need to compete with other banks on the same terms. Another aspect is that banks are in the business of risk management, so it is probable that LC has figured out a better way to manage their risks than existing institutions - again, this is something where existing institutions have enough resources to catch up easily.
  - prostoalex 12y ago
    They raise money from institutional and private buyers https://www.lendingclub.com/public/steady-returns.action https://www.lendingclub.com/public/steady-returns.action I'm a private buyer on Lending Club, their automated investing feature breaks up your deposit into chunks of $25, so a $1,000 gets allocated into 40 loans. Expected returns are listed on that page.
  - 7Figures2Commas 12y ago
    > Given that LC is not a depository institution, the only way I see them providing lower interest rates is they have figured out a cheaper source of funding... Yes, the source of funding is private investors, both retail and institutional, many of whom are chasing yield. When the market shifts and investors are forced to reprice risk, lending $10,000 at 13% to someone who has a credit score of 660-665, 55% revolving credit utilization and a gross income of under $2,000/month might be a lot less appealing.
chiph 12y ago
> Lending Club is not a bank. So it's not subject to banking regulation, which means that it can do a core function of banking much more efficiently than an actual bank can. Are the various banking regulatory agencies in agreement with that? (FDIC, Federal Reserve, Comptroller of the Currency, Thrift Supervision, as well as the various and sundry states)
- IgorPartola 12y ago
  Well, LC doesn't do deposits, so it is not doing partial reserve banking. I suppose there could be extra regulation attached to what they do, but I don't think it is much different than a message board that connects buyers and lenders at its core.
  - dragonwriter 12y ago
    While LC is not a bank -- and not subject to banking regulations -- its not at all a "message board that connects buyers to lenders". While it initially was something like that (and still has some superficial resemblance to it), lending is a tightly regulated industry, and there'd be a very narrow market if it it tried to actually be that, rather than being the lender itself and selling notes tied to its loans (essentially, a key part of the service LC is providing is dealing with the regulatory compliance with regard to lending.) This is the same model as is used by other superficially "peer-to-peer" lending services (e.g., Prosper.com)
- aaron987 12y ago
  I don't know about federal regulations, but state regulations have made things difficult. I can't use lending club here in Ohio, and a few other states don't allow it either. Here is more about that: http://www.lendacademy.com/why-some-states-dont-allow-p2p-lending-investments/ http://www.lendacademy.com/why-some-states-dont-allow-p2p-le...
7Figures2Commas 12y ago
> But all of the things that make banks scary don't apply. A run on Lending Club is not possible; nobody can pull their money out of notes or certificates. And if a lot of loans go bad, that will hurt the investors in those notes, but Lending Club as an entity won't be insolvent or even have any losses at all. This is true, but one should recognize that for Lending Club to sustain itself over time, it must be able to acquire borrowers and sell notes. There are a number of events that could put a dent in both supply and demand. On the demand side, if and when there is a recession, defaults will almost certainly rise and it's likely fewer investors (retail and institutional) will be eager to take on new credit risk. If and when interest rates rise, funding these loans may become a lot less appealing. One must also assume that at least some borrowers, particularly those who are heavily indebted, are themselves vulnerable to interest rate increases, so I wouldn't be surprised to see rising rates negatively affect the repayment performance of certain types of portfolios. > There's another point that's a flip side of this one, which is: Equity-funded banks are great at lending. Lending Club is perfectly able to make loans, and apparently at cheaper rates than banks. Lending Club is perfectly able to make loans, and apparently at cheaper rates than banks, because yield-chasing investors are currently willing to misprice risk. What happens when the music stops?
- nullc 12y ago
  > Lending Club is perfectly able to make loans, and apparently at cheaper rates than banks, because yield-chasing investors are currently willing to misprice risk. What happens when the music stops? Very much this— I've been a lending club 'lender' for a number of years now, and for the last 9 months or so have had a very hard time obtaining practically any notes. People are hyper eagerly funding notes which my models suggest have very poor risk adjusted performance. (And, if anything, I'm concerned that my models are too conservative— since they're based on historic LC data and lending club has been reaching out to less and less credit worthy lendees). As a result I'm slowly reducing my amount in lending club as notes return funds and I'm unable to invest it effectively. It was neat in the beginning, but it's a pain to report taxes on, and the decreasing risk adjusted returns make it much less attractive than it used to be.
  - 12y ago
11thEarlOfMar 12y ago
Lending Club will not have trouble raising capital or finding borrowers because it is a lower-cost operation than banks. As such, it can reduce the spread between the yield 'investors' earn and interest rates borrowers pay, making it more attractive to both. The growth of their total loan activity bears that out: 5 Billion in total loans over the last 5 years. 1 Billion of that in the last quarter. The key to their business is in their ability to accurately forecast the default rate of borrowers. The more they can predict the performance of the loans, the more 'fixed' the income seems to investors and the more attractive it is. They do predict default rates for loans and inform investors what those rates are for each loan. Over time, I'd expect their statisticians and big-data analysts will be able to refine the models to be highly accurate. I've been experimenting with LC as an investor for about a year and a half. So far, my loans are performing about 1% better than Lending Club forecast they would. I attribute that to an improving economy.
- foobarqux 12y ago
  > about 1% better than Lending Club forecast they would. I attribute that to an improving economy. Probably just statistical variation.
  - 11thEarlOfMar 12y ago
    It was over 120 loans. All at 17.25% with a forecast 4.95% default rate. 0.5% fees. Actual return after 18 months is 13.85% with 5 defaults.
    - foobarqux 12y ago
      Maybe not, I don't feel like modelling the math right now to see if it could be statistical variation. (I don't understand your numbers though. Forecast return was higher than actual?)
      - db48x 12y ago
        Presumably because there were 5 defaults when 5.94 were predicted. On the other hand, if any of those 120 loans are still outstanding, then they could still default later.
aianus 12y ago
Can you invest in Lending Club if you don't live in the US? It doesn't mention anything in the terms of use but they ask what state you live in when you sign up. Can I just put a friend's state or something?
- dragonwriter 12y ago
  > Can you invest in Lending Club if you don't live in the US? No. And not if you live in certain parts of the US, either. And, in the states where it is available, there are additional restrictions. http://blog.lendingclub.com/is-lending-club-available-in-my-state/ http://blog.lendingclub.com/is-lending-club-available-in-my-... http://kb.lendingclub.com/investor/articles/Investor/What-are-the-current-State-and-Financial-Suitability-conditions/?l=en_US&c=Investor%3AEligibility&fs=Search&pn=1 http://kb.lendingclub.com/investor/articles/Investor/What-ar...
spiritplumber 12y ago
Banks started off as lending clubs. I ditched BofA, signed up with a credit union, and enjoyed fantastic service since. If you don't want to risk these guys in case they get screwed over by regulators, talk to your local CU!
kaushalc 12y ago
In India we call it chit fund.
stygiansonic 12y ago
I really liked the observation that in exchange for your deposit (investment in a note) not being liquid (secondary market notwithstanding), Lending Club is able to match the maturity of their assets and liabilities, thus eliminating this portion of risk from themselves. Theoretically, this could be one of the causes for the lower rates borrowers can obtain and the higher returns that investors get. (Obviously a portion of the higher returns come from the lack of liquidity offered by the notes)

56 points by stygiansonic 12y ago

novalis78 12y ago

Interesting - so Lending Club does not actually work like BTCJam. I did not know that.

snapclass 12y ago
Use BTCJam and Lending Club. LC is amazing and I am happy with my returns. BTC seems like a scam as the reputation of borrowers means very little in their willingness to repay. I've seen many people build their reputation in order to borrow more and then bounce.
- flavio87 12y ago
  snapclass - although this happened a lot in the past, we are now curating the platform much more and also our repayment rates are in the 85% area. If you diversify well and go for A/B rated borrowers you can definitely make very positive returns. We are now doing around USD 1M per month, are growing the number of borrowers rapidly - which allows for more diversification and better returns (on average)
  - novalis78 12y ago
    Hi flavio87 big fan of BTCJam here - have to agree, you guys are doing a much better job on filtering out people - the idea of having borrowers pose with their passport was great. 85% seems to fit my own observations so far, maybe close to 90% depending on your level of scrutiny. Keep up the great work!

juanplusjuan 12y ago

I always wondered why big banks didn't get into the business that Lending Club started. I figured that it was due to inefficiencies in the consumer credit model that made it such that "high risk" borrowers were ineligible for secured loans and that LC found a better way to accurately measure that risk. Who knew it came down to accounting?

prostoalex 12y ago
Personal loans and personal lines of credit have been around https://www.wellsfargo.com/personal_credit/ https://www.wellsfargo.com/personal_credit/ http://www.eloan.com/personal-loans http://www.eloan.com/personal-loans https://www.discover.com/personal-loans/ https://www.discover.com/personal-loans/ My guess is that they constitute such a small revenue stream for the banks, that banks skip on marketing and execution.
- kourt 12y ago
  "personal loan" does not mean "peer-to-peer loan"
  - melvinmt 12y ago
    Banks are actually all about "peer-to-peer" loans, where do you think their massive funds come from? You deposit money, the bank lends it out. In reality it's a bit more complicated than that but that's the essence of banking.
    - rjtavares 12y ago
      But there's no connection between the lenders and the depositors. So it's more server based than peer-to-peer.
      - melvinmt 12y ago
        It's a bit similar with Lending Club. They give out the loans and you buy the notes for those loans from LC.
  - prostoalex 12y ago
    Well, Lending Club is no longer pure peer-to-peer either http://blog.lendingclub.com/a-note-on-our-recent-loan-volume/ http://blog.lendingclub.com/a-note-on-our-recent-loan-volume... But would be the bank's role in a peer-to-peer transaction? Pure servicer?

donohoe 12y ago

I've taken out two loans with Lending Club over the last 3 or 4 years. Each time I've compared the rate with my bank (Citi) and others, and each time LC has been competitively cheaper. Citi advertises "Get a fixed rate ranging from 8.99% APR to 20.74% APR." and my rate with LC has been typically 7.86% APR (forget exact decimal place figure). The 8.99% rate with Citi assumes they give me the best rate - not guaranteed. Its fast, friendly, and I can repay early at no penalty. Extremely satisfied.

radmuzom 12y ago
Ultimately, their sustainability will depend on the cost at which they can raise funds. Banks can raise funds cheaply through deposits (and many other sources like wholesale funding which may be at a higher cost), which they lend out at slightly higher interest rates than they pay their depositors. Given that LC is not a depository institution, the only way I see them providing lower interest rates is they have figured out a cheaper source of funding - or burning investor money to do this which is not sustainable and the big banks will defeat them eventually. The moment you start taking deposits, you will be regulated like any other institution and they need to compete with other banks on the same terms. Another aspect is that banks are in the business of risk management, so it is probable that LC has figured out a better way to manage their risks than existing institutions - again, this is something where existing institutions have enough resources to catch up easily.
- prostoalex 12y ago
  They raise money from institutional and private buyers https://www.lendingclub.com/public/steady-returns.action https://www.lendingclub.com/public/steady-returns.action I'm a private buyer on Lending Club, their automated investing feature breaks up your deposit into chunks of $25, so a $1,000 gets allocated into 40 loans. Expected returns are listed on that page.
- 7Figures2Commas 12y ago
  > Given that LC is not a depository institution, the only way I see them providing lower interest rates is they have figured out a cheaper source of funding... Yes, the source of funding is private investors, both retail and institutional, many of whom are chasing yield. When the market shifts and investors are forced to reprice risk, lending $10,000 at 13% to someone who has a credit score of 660-665, 55% revolving credit utilization and a gross income of under $2,000/month might be a lot less appealing.

chiph 12y ago

> Lending Club is not a bank. So it's not subject to banking regulation, which means that it can do a core function of banking much more efficiently than an actual bank can. Are the various banking regulatory agencies in agreement with that? (FDIC, Federal Reserve, Comptroller of the Currency, Thrift Supervision, as well as the various and sundry states)

IgorPartola 12y ago
Well, LC doesn't do deposits, so it is not doing partial reserve banking. I suppose there could be extra regulation attached to what they do, but I don't think it is much different than a message board that connects buyers and lenders at its core.
- dragonwriter 12y ago
  While LC is not a bank -- and not subject to banking regulations -- its not at all a "message board that connects buyers to lenders". While it initially was something like that (and still has some superficial resemblance to it), lending is a tightly regulated industry, and there'd be a very narrow market if it it tried to actually be that, rather than being the lender itself and selling notes tied to its loans (essentially, a key part of the service LC is providing is dealing with the regulatory compliance with regard to lending.) This is the same model as is used by other superficially "peer-to-peer" lending services (e.g., Prosper.com)
aaron987 12y ago
I don't know about federal regulations, but state regulations have made things difficult. I can't use lending club here in Ohio, and a few other states don't allow it either. Here is more about that: http://www.lendacademy.com/why-some-states-dont-allow-p2p-lending-investments/ http://www.lendacademy.com/why-some-states-dont-allow-p2p-le...

7Figures2Commas 12y ago

> But all of the things that make banks scary don't apply. A run on Lending Club is not possible; nobody can pull their money out of notes or certificates. And if a lot of loans go bad, that will hurt the investors in those notes, but Lending Club as an entity won't be insolvent or even have any losses at all. This is true, but one should recognize that for Lending Club to sustain itself over time, it must be able to acquire borrowers and sell notes. There are a number of events that could put a dent in both supply and demand. On the demand side, if and when there is a recession, defaults will almost certainly rise and it's likely fewer investors (retail and institutional) will be eager to take on new credit risk. If and when interest rates rise, funding these loans may become a lot less appealing. One must also assume that at least some borrowers, particularly those who are heavily indebted, are themselves vulnerable to interest rate increases, so I wouldn't be surprised to see rising rates negatively affect the repayment performance of certain types of portfolios. > There's another point that's a flip side of this one, which is: Equity-funded banks are great at lending. Lending Club is perfectly able to make loans, and apparently at cheaper rates than banks. Lending Club is perfectly able to make loans, and apparently at cheaper rates than banks, because yield-chasing investors are currently willing to misprice risk. What happens when the music stops?

nullc 12y ago
> Lending Club is perfectly able to make loans, and apparently at cheaper rates than banks, because yield-chasing investors are currently willing to misprice risk. What happens when the music stops? Very much this— I've been a lending club 'lender' for a number of years now, and for the last 9 months or so have had a very hard time obtaining practically any notes. People are hyper eagerly funding notes which my models suggest have very poor risk adjusted performance. (And, if anything, I'm concerned that my models are too conservative— since they're based on historic LC data and lending club has been reaching out to less and less credit worthy lendees). As a result I'm slowly reducing my amount in lending club as notes return funds and I'm unable to invest it effectively. It was neat in the beginning, but it's a pain to report taxes on, and the decreasing risk adjusted returns make it much less attractive than it used to be.
- 12y ago

11thEarlOfMar 12y ago

Lending Club will not have trouble raising capital or finding borrowers because it is a lower-cost operation than banks. As such, it can reduce the spread between the yield 'investors' earn and interest rates borrowers pay, making it more attractive to both. The growth of their total loan activity bears that out: 5 Billion in total loans over the last 5 years. 1 Billion of that in the last quarter. The key to their business is in their ability to accurately forecast the default rate of borrowers. The more they can predict the performance of the loans, the more 'fixed' the income seems to investors and the more attractive it is. They do predict default rates for loans and inform investors what those rates are for each loan. Over time, I'd expect their statisticians and big-data analysts will be able to refine the models to be highly accurate. I've been experimenting with LC as an investor for about a year and a half. So far, my loans are performing about 1% better than Lending Club forecast they would. I attribute that to an improving economy.

foobarqux 12y ago
> about 1% better than Lending Club forecast they would. I attribute that to an improving economy. Probably just statistical variation.
- 11thEarlOfMar 12y ago
  It was over 120 loans. All at 17.25% with a forecast 4.95% default rate. 0.5% fees. Actual return after 18 months is 13.85% with 5 defaults.
  - foobarqux 12y ago
    Maybe not, I don't feel like modelling the math right now to see if it could be statistical variation. (I don't understand your numbers though. Forecast return was higher than actual?)
    - db48x 12y ago
      Presumably because there were 5 defaults when 5.94 were predicted. On the other hand, if any of those 120 loans are still outstanding, then they could still default later.

aianus 12y ago

Can you invest in Lending Club if you don't live in the US? It doesn't mention anything in the terms of use but they ask what state you live in when you sign up. Can I just put a friend's state or something?

dragonwriter 12y ago
> Can you invest in Lending Club if you don't live in the US? No. And not if you live in certain parts of the US, either. And, in the states where it is available, there are additional restrictions. http://blog.lendingclub.com/is-lending-club-available-in-my-state/ http://blog.lendingclub.com/is-lending-club-available-in-my-... http://kb.lendingclub.com/investor/articles/Investor/What-are-the-current-State-and-Financial-Suitability-conditions/?l=en_US&c=Investor%3AEligibility&fs=Search&pn=1 http://kb.lendingclub.com/investor/articles/Investor/What-ar...

spiritplumber 12y ago

Banks started off as lending clubs. I ditched BofA, signed up with a credit union, and enjoyed fantastic service since. If you don't want to risk these guys in case they get screwed over by regulators, talk to your local CU!

kaushalc 12y ago

In India we call it chit fund.

stygiansonic 12y ago

I really liked the observation that in exchange for your deposit (investment in a note) not being liquid (secondary market notwithstanding), Lending Club is able to match the maturity of their assets and liabilities, thus eliminating this portion of risk from themselves. Theoretically, this could be one of the causes for the lower rates borrowers can obtain and the higher returns that investors get. (Obviously a portion of the higher returns come from the lack of liquidity offered by the notes)