LendingClub Loan Buyers Retreat After Shakeup; U.S. Probes | Hacker News Reader

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

bloomberg.com

64 pointsluther0739 comments

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.

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.

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."

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.

I'd also like an answer to this.

I guess I really don't. According to the comment above the terms can't change. So long as the terms stay the same and I can pay online it wouldn't really impact me.

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.

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

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.

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.

Ah, some papers are reporting that New York is interested in $22 million in loans to one specific client. 3 million sounds a lot less troublesome.

The total amount of loans sold to the client was $22 million but only $3 million of those didn't conform. The issue at the heart of this is the legal language in the agreement that was shown to the loan applicant when they applied for the loan. It was really a stupid thing for them to fudge and the returned loans have already been snapped up by other clients.

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...

> the whole thing transfers to a trust, 'Portfolio Financial Servicing Company (“PFSC”)'[3] to continue collecting from borrowers and paying lenders.

The "paying lenders" part is partially correct. Only the Lenders that are part of LC Trust I, Lending Club Advisors (LCA), and one another entity (name escapes me at the moment) will get paid as these entities are Bankruptcy Remote Vehicle (BRV). As I mentioned in another comment, the Retail Lenders don't have any BRV protection so they will be considered unsecured creditor of Lending Club.

As debt is senior to equity, debt holders will get paid before equity holders. The unsecured creditor is subordinate to any senior debt holder, the retail lenders will be last one to be paid before equity holders. Source: Read the SEC Filings - prospectus and 10-K.

Also from your PFSC link:

"If the underlying loans are determined to be part of Lending Club’s bankruptcy estate, PFSC may not be able to make payments on the Notes."

"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.

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.

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

I'm not sure what you are trying to correct or clarify in the comment you are replying to. Did you mean to reply elsewhere?

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.

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

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

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

I have a lot of money in there

Hopefully you'll get some of it back.

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

Nope. If you are retail lender, you are actually lending to Lending Club and not to borrowers. With this structure, you will be an unsecured creditor to Lending Club in the event of LC going out of business. I like to call it that you are buying Corporate Junk Bond from Lending Club with variable yield.

This is correct. If you have money with Lending Club or any of these other unsecured P2P loan companies you should understand exactly what you've invested in.

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

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

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.

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.

The Google ads ban does not affect players like LendingClub/SoFi/Avant since they are long term loans with interest rates similar to credit cards.

True, I grouped them together since they are both semi unregulated alternative lenders. Google also had a stake/partnership with LendingClub.

Can you cite that claim of Google has a stake/partnership with LendingClub?

Google Buys Stake in LendingClub Startup Valued at $1.55 Billion (2013) http://www.bloomberg.com/news/articles/2013-05-02/google-buy...

Google in peer-to-peer lending venture (2015) http://www.ft.com/cms/s/0/fe0e1ca4-9cc3-11e4-a730-00144feabd...

A Google search for 'google stake LendingClub' will reveal more.

Are you too lazy to use the Google?

Comparing LendingClub to a payday loan is dishonest. A Pay day loan company charges interest that amounts to an APR of 100%+ [0]. LendingClub's rates range from 5% - 30% [1] and the overwhelming majority of the loans they issue are on the lower end of that scale. Credit cards charge interest rates of 12% - 30% for comparison.

Here is a better article about the issue that caused the resignation of the CEO.

http://www.bloomberg.com/news/articles/2016-05-10/jefferies-...

The specific information that was changed on the loans in question was the application date. It had nothing to do with credit quality, or rates to consumers. The reason they changed the dates was because the bank they were selling them to wanted different wording of the legal language in the loan application document and they asked that the language be changed. LendingClub employees changed the application date on some loans to make it appear as though the customers had applied for the loan after that legal language change happened when in fact they had agreed to only the old terms.

It's not honest for sure and shouldn't have been done but at the same time it was caught and corrected and isn't the end of the world. A lot of the negativity narrative is coming from hedge funds who have piled into short positions in LC stock.

[0] http://www.consumerfinance.gov/askcfpb/1567/what-payday-loan...

[1] https://www.lendingclub.com/public/rates-and-fees.action

Do you have references for that last claim?

One of the main places that LendingClub loan investors discuss the company is in a forum hosted by the site LendAcademy[0] Starting in January of this year someone claiming to be from a hedge fund was in the forum saying they had shorted the stock and trying to convince everyone the company was garbage and generally causing a ruckus[1]. After the news about the CEO resigning broke last week another hedge fund guy went on Bloomberg to trash LC. [2]

[0] http://www.lendacademy.com/forum/index.php [1] http://www.lendacademy.com/forum/index.php?topic=3606.0 [2] http://www.bloomberg.com/news/articles/2016-05-12/jim-chanos...

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