LendingClub, a peer to peer lending site, brings individual borrowers and lenders together to fund loans up to $25,000. I got the opportunity of meeting LendingClub’s Rob Garcia when I was doing my research on how LendingClub and sets interest rates. Rob joined the founders of Lending Club and serves as the Director of Product Strategy there. His background is in user centric web product design and before Lending Club, worked as a consultant in digital solutions and eCommerce implementations with Razorfish, a leading interactive agency. With the introduction of LendingClub’s new Note Trading Platform, I thought it would be a good idea to learn more about this social lending platform, and Rob graciously agreed to this interview.
DR: How does Lending Club work?
RG: The concept is quite simple. Lending Club’s community is made up of borrower and lender members. Borrowers are good credit folks who need a personal loan for a variety of reasons. Lenders fund those loans and in return receive payments in principal and interest from the borrowers. It’s a win-win situation for all members because rates are typically lower than those paid by borrowers on their credit cards, but higher than those received by lenders for comparable investment opportunities.
DR: How do lenders fund loans? Is it done by auction or some other way?
RG: All borrowers who pass our strict credit policy are assigned an interest rate based on their credit and risk profile, varying from 7.37% to 20.11%. We then present notes associated to the loan to prospective lenders. Lenders review the “inventory” of notes and pick which ones they’ll like to invest in. Alternatively, lenders can run LendingMatch to automatically generate a portfolio with tens or hundreds of loans at a specified average interest rate. There is no bidding involved.
DR: When a lender wants to sell a loan how is this accomplished? Does he or she just set a price?
RG: A Note Trading platform operated by Foliofn is available to lender members, who just need to complete a short trading member application with Foliofn. Once that is completed, they can put their notes up for sale at a price they set for up to 30 days. Other trading members browse notes for sale and decide which notes are attractive to them based on the information available about the loan (payment history, FICO score trend, and collections log if any), and decide to buy these notes. The seller receives the purchase price minus a 1% trading fee.
DR: What kind of growth do you see ahead for Lending Club and the industry?
RG: Peer lending, and Lending Club specifically, will continue to grow rapidly and become increasingly mainstream. We have demonstrated over the last 18 months that the economics work: borrowers get more affordable access to credit and lenders earn very attractive returns. We have been gaining acceptance from the blogging community, and increasingly from mainstream press, with Lending Club being featured in CBS Evening News, NPR’s Morning Edition and WSJ in just the last few weeks. As a result, we have been growing fast in Q4 and will continue along the same trend.
DR: How is Lending Club different from other p2p lending sites?
RG: There are two key differences. First, our notes are the first and only registered with the SEC. Second, our product focuses on high quality borrowers, with a minimum FICO of 660 and an average of 708. There are other operational differences such as smaller investment amount (starting at $25 per note), an interest rate set based on credit risks (no auction model), and an effective collection process.
DR: Do you think peer to peer lending will become more popular as the public gets used to the concept?
RG: Most definitely. We have started seeing more acceptance of the concept, and it is slowly moving from the “new and interesting” category to the “part of the solution” category. As people get used to the concept, more success stories are shared, and a longer track record becomes available, mainstream will catch up on it.
DR: What are some of the features planned for Lending Club in the near future?
RG: We are focusing on 2 areas: 1) Make it simpler for Lenders to invest and keep their proceeds re-invested in the type of notes they care for, and 2) Empower borrowers to manage their loan applications and repayment process. In fact, we just pusblished some new features a few days back. You’ll see more features aimed at addressing these 2 areas being released within the next few months.
DR: Do you have any advice for beginning lenders or borrowers?
RG: To borrowers, I recommend they understand their current financial situation and are able to explain it clearly and in simple terms. Know why they are borrowing and convey how you plan to repay it.
When I speak to new Lenders, I typically recommend spreading their risk as much as possible (diversification) and understanding how to read borrowers’ credit profiles to aid them in making decisions on which notes to invest.
DR: With credit tightening will this be an opportunity for peer to peer lenders to increase the quality of the loans they fund?
RG: Absolutely. We recently increased our minimum FICO score from 640 to 660 and continue to conduct very strict credit review to ensure the community is fair to all members (borrowers and lenders).
DR: LendingClub recently added additional criteria to its interest rate calculation which in most cases will cause interest rates to go up. Can you explain what caused LC to do this? Did it conclude that its original interest rate formula did not adequately account for default risk, and if so, why?
RG: We are committed to a continuous evolution of our pricing algorithm to ensure both borrowers and lenders get a fair deal. As our portfolio gets older, we have more data to work with to identify predictors of performance unique to our members. Our pricing algorithm also reflects changes in the economic environment.
DR: Last year Prosper filed an S-1 ahead of LC, but did not suspend its lender program. It recently re-filed its S-1 and, following LC’s lead, suspended its lender program while its S-1 is pending. Do you know what happened at Prosper and why LC was able to leapfrog it with its trading platform?
RG: We cannot comment on Prosper’s regulatory situation.
DR: There have been a number of p2p companies started in the last year. Do you anticipate any consolidation in the industry in the next 12 to 24 months, and if so, what is LC’s strategy in that regard?
RG: Not really. It is quite early in this industry to predict any consolidations. I think there will be at least 3 or 4 very successful, public companies, and a handful or smaller players.
DR: LC currently offers borrowers a 3-year fixed rate loan. Do you have plans to offer loans on any other terms? Have you considered an LC credit card?
RG: We do have a product roadmap that considers new product extensions and additions. I’ll be able to share more details as we get closer to introducing those new products.
DR: Does LC intend to offer lenders guidance on how to value a note for sale on LC’s trading platform?
RG: No, Lending Club is the issuer of the notes and as such is not involved in the way the trading platform operates. We do, however, provide very detailed information to lenders about the borrower’s FICO score trend, loan’s payment history and any collections activity, so that the selling lender member can decide how to price their notes.
For a detailed description of LendingClub’s Note Trading Platform and insight on valuing loans, check out my LendingClub Note Trading Platform Review.
DR: To sign up for LC’s trading platform, one must identify the name and address of their employer. You also must indicate how much you make and your net worth. Can you explain why.
RG: Foliofn is a registered broker dealer, member of FINRA and member of SIPC (Securities Investor Protection Corporation). As such, they have certain information they need to request of all their customers.
DR: Will data about loans and borrowers on the trading platform be made available to developers through an API or otherwise?
RG: Yes, that’s on the roadmap.
DR: Any last comment?
RG: Thanks for the opportunity to present Lending Club to your readers. I encourage them to try us out and send me any comments at [email protected]
If you’d like to give LendingClub a try as a borrower, lender or both, you can check it out here.