Overview
LendingClub enabled borrowers to create loan listings on its website by supplying details about themselves and the loans that they would like to request. All loans were unsecured personal loans and could be between $1,000 - $40,000. On the basis of the borrower’s credit score, credit history, desired loan amount and the borrower’s debt-to-income ratio, LendingClub determined whether the borrower was creditworthy and assigned to its approved loans a credit grade that determined the payable interest rate and fees. The standard loan period was three years; a five-year period was available at a higher interest rate and additional fees. The loans can be repaid at any time without penalty.
Only investors in 39 US states were eligible to purchase notes on the LendingClub platform.
Investors were able to search and browse the loan listings on LendingClub website and select loans that they wanted to invest in based on the information supplied about the borrower, amount of loan, loan grade, and loan purpose. The loans could only be chosen at the interest rates assigned by LendingClub, but investors could decide how much to fund each borrower, with a minimum investment of $25 per note.[49]
Investors made money from interest. Rates varied from 6.03% to 26.06%, depending on the credit grade assigned to the loan request. The grades assigned to these requests ranged alphabetically from A to G, with A being the highest-grade, lowest-interest loan. Each of these letter grades had five finer-grain sub-grades, numbered 1 to 5, with 1 being the highest sub-grade. LendingClub made money by charging borrowers an origination fee and investors a service fee. The size of the origination fee depended on the credit grade and ranges to be 1.1–5.0% of the loan amount. The size of the service fee was 1% on all amounts the borrower pays. The company facilitated interest rates that were better for lenders and borrowers than they would receive from most banks. It averaged between a six and nine percent return to investors between its founding and 2013.[50] However, because lenders were making personal loans to individuals on the site, their gains were taxable as personal income instead of investment income. Therefore, income from LendingClub loans could be taxed at a higher rate than investments taxed at the capital gains rate.
Loan ownership
After the notes were issued, LendingClub purchased the loans from the issuing bank and notes became the obligations of LendingClub, and not of the ultimate borrower: LendingClub has promised to pay the noteholder monies it receives from the borrower less its service fees, while the holders of LendingClub notes have the status of unsecured creditors of LendingClub. This means that there is a risk that the investor may lose all or part of the investment if LendingClub becomes insolvent or declares bankruptcy, even if the ultimate borrower continues to pay.
Until August 2020, investors had the ability to put notes up for sale before the notes have reached maturity. This service was offered in a partnership with FOLIOfn Investments which charged a 1% fee on note sales, making LendingClub the first peer-to-peer lending network to offer a secondary market for peer-to-peer loans. Other peer-to-peer lending networks, such as Khutzpa.com, subsequently also partnered with FOLIOfn Investments to offer a secondary market.[51][52] Effective August 28, 2020, the secondary market for trading Lending Club notes was discontinued.
As of 2016, a high proportion of funds for LendingClub-facilitated loans came from hedge funds. During May of that year, LendingClub was seeking to sell hundreds of millions of dollars' worth of loans as bonds as part of a strategy to overcome difficulties in accessing sufficient funding.[53]
Credit risk
When initially founded, LendingClub positioned itself as a social networking service and set up opportunities for members to identify group affinities, based on a theory that borrowers would be less likely to default to lenders with whom they had affinities and social relationships. It developed an algorithm called LendingMatch for identifying common relationship factors such as geographic location, educational and professional background, and connectedness within a given social network.[54][55]
After registering with the SEC, LendingClub stopped presenting itself as a social network and maintaining that social affinity will necessarily reduce the defaulting risk. It now presents the algorithm just as a search tool for investors to find Notes they would like to purchase, using borrower and loan attributes such as the length of a loan term, target weighted average interest rate, borrower credit score, employment tenure, homeownership status, and others.[56] To reduce default risk, LendingClub focuses on high-credit-worthy borrowers, declining approximately 90% of the loan applications it received as of 2012[57] and assigning higher interest rates to riskier borrowers within its credit criteria. Only borrowers with
As of June 30, 2015, the average LendingClub borrower has a FICO score of 699, 17.7% debt-to-income ratio (excluding mortgage), 16.2 years of credit history, $73,945 of personal income and takes out an average loan of $14,553 that s/he uses for debt consolidation or for paying off credit card debts. The investors had funded $11,217,348,156 in loans, with $1,911,759,192 coming from Q2 2015. The nominal average interest rate is 14.08%, default rate 3.39%, and an average net annualized return (net of defaults and service fees) of 8.93%.[59] The average returns of investment for LendingClub lenders are between 5.47% and 10.22%, with 23 straight quarters of positive returns as of the second quarter of 2013.[60]
