Today Lending Club has unveiled a new product offer. Borrowers in California will be able to refinance auto loans through Lending Club. Lending Club says that the opportunity is huge with currently more than 1 trillion US$ in auto debt outstanding, while just a fraction of that – 40 billion US$ – refinanced annually. The company states this represents huge potential for both Lending Club’s platform and the millions of Americans who could save by refinancing into a more affordable product. Lending Club estimates the average APR for borrowers on new loans through Lending Club will be about 1-3% lower than their current loan, translating into an average savings of up to 1,350 US$ over the life of the loan.
“Tens of millions of Americans borrow over half a trillion dollars every year to buy cars. The practices and processes of the auto lending industry offer consumers limited options and a lack of transparency. This has created a gap between the rates consumers pay and the rates they might otherwise qualify for, unnecessarily driving up debt burdens,” said Scott Sanborn, Lending Club’s President and Chief Executive Officer. “We are excited to leverage our technology and core capabilities to put thousands of dollars back in consumers’ pockets.”. “This is Lending Club’s first offering of access to a secured loan with an overall risk and return profile that’s complementary to the unsecured loans available through our platform. It’s a big step in the evolution of our platform, a win for consumers, and will give our investors access to another proven asset,” Sanborn said.
Loans will be for amounts from 5K to 50K US$ with terms of 24 to 72 months and APRs ranging from 2.49% to 19.99%.
Lending Club strives to offer a much simpler application process than competitors. While the loans are initially limited to borrowers in California it seems likely that Lending Club will expand that. An article with more details is on Lendacademy.
Chinese billionaire Chen Tianqiao has bought a close to 12 percent stake in Lending Club.
Singapore-based private investment group Shanda Group, which is led by Chen, said on Monday that it saw the online lender’s battered stock as an attractive buying opportunity.
The sale of the 11.7 percent stake comes as growth in Lending Club’s loan originations is slowing and regulatory interest in the sector is increasing.
Lending Club shares were up in yesterday’s trading. The stock had fallen more than 40 percent since the May 9 announcement of Chief Executive Officer Renaud Laplanche’s resignation after an internal investigation found the company had knowingly sold 22 million US$ of loans that did not match the buyer’s specifications.
‘We have been in discussions with Shanda regarding their investment, and we look forward to a continued dialogue with them,’ a Lending Club spokesman said.
Shanda Group said in a statement that it was a “strong believer” in the business model that Lending Club has pioneered and was “positive on its long-term prospects as it continues to evolve and refine its business.”
The company bought a total of about 29 million Lending Club shares for $148.7 million. It also has call options to buy 15.7 million shares for $11.2 million. Some of the shares were bought before Laplanche’s resignation but the bulk of the purchases were conducted after May 9th.
Today’s news that Renaud Laplanche, founder of Lending Club, resigns came as a surprise for me and I think pretty much everybody else in the industry. Renaud Laplanche steered Lending Club from launch to the position it as the largest marketplace lending service for consumer loans in the US.
The board has reportedly asked for his resination after an investigation into a sale of 22 million US$ in loans to an institutional investor that mismatched the investor’s criteria. The loans were subsequently repurchased by Lending Club.
Lending Club conducted a review, under the supervision of a sub-committee of the board of directors and with the assistance of independent outside counsel and other advisors, regarding non-conforming sales to a single, accredited institutional investor of $22 million of near-prime loans ($15 million in March and $7 million in April). The loans in question failed to conform to the investor’s express instructions as to a non-credit and non-pricing element. Certain personnel apparently were aware that the sale did not meet the investor’s criteria.
In early April 2016, Lending Club repurchased these loans at par and subsequently resold them at par to another investor. As a result of the repurchase, as of March 31, 2016, these loans were recorded as secured borrowings on the Company’s balance sheet and were also recorded at fair value. The financial impact of this reporting is that the Company was unable to recognize approximately $150,000 in revenue as of March 31, 2016, related to gains on sales of these loans.
The review began with discovery of a change in the application dates for $3.0 million of the loans described above, which was promptly remediated. The board also hired an outside expert firm to review all other loans facilitated in the first quarter of 2016 and the firm did not find changes to data in these or other Q1 loans.
The review further discovered another matter unrelated to the sale of the loans, involving a failure to inform the board’s Risk Committee of personal interests held in a third party fund while the Company was contemplating an investment in the same fund. This lack of disclosure had no impact on financial results for the first quarter.
Given the events above, the Company took, and will continue to take, remediation steps to resolve the material weaknesses in internal control over financial reporting identified in the first quarter of 2016 — one related to the sales of non-conforming loans and the other to the failure to disclose the personal investment interests — and to restore the effectiveness of its disclosure controls and procedures. These remediation steps included the termination or resignation of three senior managers involved in the sales of the $22 million of near-prime loans.
Scott Sanborn will continue in his role of President and will become acting CEO.
The LC stock is currently trading 25% down following the news.
I have written about the partnership between Google and Lending Club earlier. The image below shows an actual advertising message Google is sending to its Adwords customers. Note that a special loan is offered, not a standard Lending Club loan. This partnership is a great match for both Google and Lending Club. Google can enable its customers to get access to the funds they need to grow their business and potentially spend more on advertising services supplied by Google. Lending Club can target selected businesses, which were prescreened based on the data Google has via the Adwords customer relationship.
Lending Club reported the results for the 3rd quarter today.
Financial Highlights are:
Originations – Loan originations in the third quarter of 2015 were $2.24 billion, compared to $1.17 billion in the same period last year, an increase of 92% year-over-year. The Lending Club platform has now facilitated loans totaling over $13.4 billion since inception.
Operating Revenue – Operating revenue in the third quarter of 2015 was $115.1 million, compared to $56.5 million in the same period last year, an increase of 104% year-over-year. Operating revenue as a percent of originations, or revenue yield, was 5.15% in the third quarter, up from 4.85% in the prior year.
Adjusted EBITDA – Adjusted EBITDA was $21.2 million in the third quarter of 2015, compared to $7.5 million in the same period last year. As a percent of operating revenue, Adjusted EBITDA margin increased to 18.4% in the third quarter of 2015, up from 13.3% in the prior year.
Net Income – GAAP net income was $1.0 million for the third quarter of 2015, compared to a net loss of $7.4 million in the same period last year. GAAP net income included $13.5 million of stock-based compensation expense during the third quarter of 2015, compared to $10.5 million in the prior year.
Earnings Per Share (EPS)– Basic and diluted earnings per share was $0.00 for the third quarter, compared to basic and diluted EPS of ($0.12) in the same period last year.
Adjusted EPS – Adjusted EPS was $0.04 for the third quarter of 2015, compared to $0.02 in the same period last year.
Cash, Cash Equivalents and Securities Available for Sale – As of September 30, 2015, cash, cash equivalents and securities available for sale totaled $918 million, with no outstanding debt.
“We had another spectacular quarter, with revenue growth re-accelerating from 98% to 104%, and EBITDA jumping 181% year-over-year to reach 18.4% margin ,” said Lending Club founder and CEO Renaud Laplanche. “With over 1.2 million customers, continuously high customer satisfaction, strong credit performance, increased marketing efficiency and lower customer acquisition costs, we are continuing to observe tremendous network effects and benefits of scale. Our results this quarter combined with our raised Q4 outlook lead us to forecast a near doubling of revenue again this year and look toward 2016 with high confidence.”
Lending Club opened to retail investors in nine new states, bringing investor base, which is very sticky, to over 100,000.
Small business loans grew in line with expectations.
Traditional banks do not benefit from network effects. Lending Club on the other hand does benefit strongly from network effects. All these dynamics lead to lower acquisition costs and higher margins.
From the Q&A of the earning call:
Decrease in returns (approx 1%) is due to network effects allowing Lending Club to pass some benefits in form of lower interest rates to borrowers. This is also enabled by high investor demand.
Custom loans are stable quarter of quarter. Lending Club has not transferred loans to the standard product.
Customer acquisition costs have not risen as Lending Club has invested early into the product and now benefits from it, e.g. through good customer ratings driving traffic
On the question if there is an increase on fraud attempts, Lending Club responded that there was no increase in attempts or frauds committed. Laplanche is not surprised that new platforms might experience a rise of attempts.
Does Santander exiting consumer loans have any impact on the relationship between LC and Santander? Santander was a great partner and accounted for a single digit percentage of volume. Lending Club has replaced Santander with other institutional lenders. The very diverse investor base of Lending Club is seen by Laplanche as a competitive advantage over newer platforms.
Madden has no direct impact on the investor base of Lending Club.
Are whole loans growing faster than originations? The mix is a function of the mix and appetite of the investors behind it.
Today Lending Club announced that it opens to investors from Texas and Arizona. Lending Club is now open to retail investors from 30 US states.
“We are delighted to announce the addition of two key states today, which we believe will help drive more individual investors to our platform,” said Lending Club CEO Renaud Laplanche. “Our marketplace gives investors unprecedented access to consumer credit as an asset class, and empowers investors to diversify their investment across hundreds or thousands of loans. We are thrilled to be able to bring this access to investors in Texas and Arizona and appreciate the work done by the state regulators that allowed this to happen.”
When was the last time you stood in a long line outside your bank branch, patiently waiting to deposit money into your savings account? Imagining a scene like that seems ridiculous at a time with near-zero interest rates in an increasingly large number of developed countries.
But there where you would least expect it, in the Fintech world of fast-moving bits, some startups actually are imposing measures to throttle influx of investor money in order to balance it with borrower demand. Welcome to p2p lending (short for peer-to-peer lending). The sector is experiencing tremendous growth rates. With attractive yields for investors some platforms struggle to acquire new borrowers fast enough for loan demand to match the ever-rising available investor demand.
One challenging factor is deeply ingrained in the business model of p2p lending marketplaces: once a new investor is onboarded and found the product satisfactory, he is most likely to stay a customer for years to come and reinvest repayments received and maybe the interest also. On the other hand the majority of borrowers are one-time customers. They take out a loan typically just once. While it may take years for the borrower to repay that loan, in most instances there is no repeat business for the marketplaces. So the marketplaces have to constantly fire on all marketing cylinders to win new borrowers in order to keep up and grow loan origination volume.
This has sparked some outside of the box thinking, e.g. the partnership of Ratesetter with CommuterClub to win their loan volume, which is in fact mostly repeat business.
Winning investors has been relatively easy for many of the p2p lending services in the recent past. Investors are attracted typically through press articles or word of mouth. One UK CEO told me he never spent a marketing penny ever to acquire investors.
But what happens on the marketplace, when there are so many investors waiting to invest their money in loans, but loans are in short supply?
If the marketplace does nothing or little to steer it, then those investors that react the fastest, when new loans are available, will be able to bid and invest their money. This is the situation e.g. on Prosper, Lending Club and Saving Stream.
The marketplace has some kind of queuing mechanism. This is typically coupled with an auto-bid functionality. Examples of this are Zopa, Ratesetter and Bondora.
The investors are competing during an auction period by underbidding each other through lower interest rates. Examples of p2p lending services with this model are Funding Circle, Rebuilding Society and Investly.
The marketplace can lower overall interest rates to attract more borrowers while the resulting lower yields slow investor money influx.
The UK p2p lending sector is eagerly awaiting the sector to become eligible for the new ISA wrapper. Inclusion into the popular tax-efficient wrapper will attract an avalanche of new investor money to the platforms.
“That’s going to be a challenge for the industry,” said Giles Andrews, CEO of Zopa. “Once the dates are worked out, the industry will need to plan for that together, and we may have to do something we have never done before, which is to limit the supply of money. It’s not good to have people’s money lying around [awaiting new borrowers] or to lower standards of borrowers.”
So there is some speculation that UK p2p lending services could impose temporary limits on new investments.
The investor viewpoint
The aim of the investor is to lend the deposited money easy and speedy into those loans that match his selected criteria/risk appetite. Idle cash earns no interest and will impact yields achieved (aka cash drag).
For the retail investor none of the above mentioned mechanisms are ideal. The “fastest bidder wins” scenario means he would either have to sit in front of the computer most of the time or be lucky to be logged in just as new loans arrive. The queuing mechanisms are disliked as they can prove to be very slow in lending out the funds and can be perceived as nontransparent (see the lengthy and numerous forum discussions on the Zopa queuing mechanism). Underbidding in auctions does provide the chance to lend fast, but at the risk of setting the interest rate too low and this requires a strategy and can also be time consuming. Continue reading →