On behalf of Lending Club Corporation (Lending Club), thank you for the opportunity to contribute to the Department of the Treasury’s Request for Information concerning Marketplace Lending. We also appreciate your hosting the Treasury Marketplace Lending Forum held on August 5, which we attended and found very valuable.
Lending Club (NYSE:LC) is the world’s largest online marketplace connecting borrowers and investors. Our mission is to transform the banking system to make credit more affordable and investing more rewarding. Our platform has facilitated over $11 billion in loans to more than one million individual and small business borrowers since launching in 2007, and is continuing its rapid and deliberate growth, fueled by the value we deliver to borrowers and investors and by their high level of satisfaction with our products.
As important and sophisticated as our technology is, we start from a set of values that prioritize acting in the customer’s best interests. For borrowers, our platform offers responsible credit products with standard program loans offering a fixed rate, fixed term, and no hidden fees. Our platform’s products are generally offered at a lower interest rate than prevailing alternatives, and we disclose all terms upfront in a manner that is easy for borrowers to understand and plan for. For investors, we provide full transparency by posting on our website the performance of every loan offered publicly since inception, as well as equal access and a level playing field with the same tools, data, and access for all investors, small and large.
We use technology to automate processes and reduce costs, and pass on these cost reductions to borrowers in the form of lower interest rates and to investors in the form of better returns. Technology-led cost reductions include many process improvements, the ability to operate without a branch network, and the automation of tasks that remain highly manual at most traditional banks. Our ability to collect and analyze data, process and service loans in a highly automated fashion, and simplify processes for our customers has fueled our growth and the growth of marketplace lending over the last eight years.
As a two-sided technology-enabled marketplace, we deliver unique benefits to both borrowers and investors. We believe that we also deliver strong benefits to the U.S. financial system as a whole by bringing more transparency, removing friction, reducing systemic risk by requiring a match between assets and liabilities, and offering traditional banks, including many local community banks, the opportunity to participate on our platform and benefit from the same cost reductions from which our other borrowers and investors benefit.
Borrower Benefits
We believe our platform’s low cost operating model enables it to make credit more affordable and available for consumers and small business owners and helps community banks reach more of their borrowers:
For consumers:
Significant cost savings
: Over 70% of borrowers on our platform report using their loan to pay off an existing loan or credit card balance and report that the interest rate on their Lending Club loan was an average of 7 percentage points lower than they were paying on their outstanding debt or credit cards.
Responsible credit
: Customers who use Lending Club to refinance their credit card balance are replacing revolving, non-amortizing, variable rate debt with a fully-amortizing, fixed rate installment loan. This product provides for a more responsible way to manage their credit, and helps improve the customer’s credit score by reducing the amount of open-ended credit. In fact, 77% of these customers experienced a FICO score increase within three months of obtaining their loan through Lending Club, with an average score increase of 21 points.
Predictable payments
: Our platform’s personal loan customers benefit from a fixed interest rate and fixed monthly payments that help them better budget their monthly payments and plan ahead, and protects them against the risk of rising interest rates.
For small business owners
:
Access to capital
: Many small business owners cannot get the credit they need to finance their business expansion and create jobs. In particular commercial loans under $250,000 are underserved by traditional lenders, largely due to the high fixed costs of underwriting these loans through traditional methods. Bank loans from $100k to $250k have fallen 22% since 2007, during a period when bank loans of $1 million or greater increased by 56%.
Our platform’s automated processes allow us to provide smaller commercial loans that are less available more economically than traditional banks can.
Transparency
: Lending Club’s platform offers a more transparent process to small business owners looking for credit. We clearly disclose the interest rate being charged to the borrower and all fees. We also offer a simpler application process, faster credit decision, and faster funding than most traditional banks.
Affordability
: The same low operating cost model that powers our consumer lending marketplace also enables a lower cost of funding for small businesses. Small business owners looking for small loans often resort to merchant cash advances that have implied annual interest rates of as much as 100%. Lending Club’s platform can help small businesses access capital at longer terms and larger amounts with lower rates than typical credit cards or “alternative” business loans or cash advances.
Responsible products:
Our platform’s use of 1-5 year terms and no prepayment penalties keeps borrowers from over-levering or getting into cycles of unnecessary repeat borrowing.
Small Business Borrowers’ Bill of Rights
: Lending Club joined with leading Community Development Financial Institutions (CDFIs), think tanks, nonprofit small business advocates, and other responsible small business lenders, brokers, and marketplaces in the Responsible Business Lending Coalition and unveiled the
Small Business Borrowers’ Bill of Rights
on August 5, 2015 (
http://www.responsiblebusinesslending.org/
). It is the first-ever consensus set of principles and practices for responsible small business lending. Lending Club has signed on to these principles and has committed to operate its business within them.
For community banks
:
Lower cost of operations
: Over the last 30 years, community banks have lost significant market share to larger banks because of their inability to compete with the scale of large financial institutions. By partnering with Lending Club, community banks can offer loans to their customers using the Lending Club platform’s lower cost of operations to more effectively compete with these larger financial institutions and their products. To strengthen these relationships, we recently announced a partnership with BancAlliance, a national consortium of over 200 community banks, to support this segment.
Saying yes to more customers
: Community banks can “offer more approvals” to more of their customers by partnering with Lending Club and accessing our breadth of investor risk appetites. Additionally, community banks can define their investment criteria and invest in loans that meet their specific criteria – allowing these banks to expand their offerings to their borrowers while diversifying their own exposure. Providing their customers with access to loans also helps community banks to retain and attract customers.
Regulatory Framework
Our borrowers benefit from the same regulatory protection as any bank customer as all loans issued through our platform are issued by federally regulated banks. Working in partnership with issuing banks has tremendous value to Lending Club and borrowers as it holds us to the highest compliance and regulatory standard. As a result, borrowers benefit from all consumer protection regulations including equal access to credit, fair lending, truth in lending disclosure requirements, fair credit reporting, and fair debt collection. Our compliance with these rules and regulations is monitored by daily oversight and review as well as quarterly and annual audits by the issuing bank, monthly and annual audits by our internal audit and compliance teams, and an annual audit by an independent auditor. This oversight is further supplemented by the diverse investor base (federal and state chartered banks, insurance companies, pension funds, etc.) that operate through Lending Club’s platform and bring with them not only their internal audit review and oversight process but also the review and oversight of their regulators, such as the FTC, FDIC, and OCC (For example see: OCC bulletin 2013-29 Third Party Relationships), which come together to create a robust compliance program that benefits all users of the platform.
Investor Benefits
Our marketplace has attracted both individual and institutional investors who participate through a variety of programs that generally present the same overall benefits:
Access to credit asset classes
that individual investors did not have access to before and institutional investors only had limited access to on a pool basis.
Steady cash flow
and net annual returns averaging between 6%-9%
since inception.
Full control
over investment decisions: individual investors can build their own portfolio of standard program loans or Notes based on their investment objectives and risk appetite. Investors can use 32 different filters to build their portfolio (including FICO score, debt-to-income ratio, job tenure, home ownership, etc.) and review credit loss forecasts for the specific portfolio they selected before making their investment decision;
Maximum transparency:
investors can review statistics on credit performance by grade and by credit attribute for every single loan that was made publicly available to invest in since inception in 2007, as well as summary statistics by vintage of origination.
Our investment programs available to investors are regulated by the SEC under the Securities Act of 1933 and the Exchange Act of 1934 and the rules and regulations thereunder.
Terminology
The term “marketplace” or “credit marketplace” is best used to refer to two-sided marketplaces that facilitate lending between borrowers and investors, and do not take balance sheet risk by investing in the loans they facilitate. We believe that companies that use their balance sheets to make loans are not marketplace lenders, and may be better described simply as balance sheet lenders. Throughout this response, we use “marketplace” to refer only to two-sided marketplaces that do not predominately self-fund loans. The term “platform” may describe a marketplace or other technology made accessible to third parties.
Recommendations to Enhance Marketplace and Other Online Lending
We have included in our response to the RFI a number of recommendations for legislative or regulatory consideration that Lending Club believes would enhance or clarify the development and operation of online credit marketplaces to the benefit of consumers, small businesses, and the financial system more broadly. For ease of reference, we have listed these below, along with the particular questions where the recommendation is discussed in this submission.
Small business lending protections
– We believe existing regulations adequately protect consumers borrowing through online credit marketplaces. However, we are concerned that small business owners may not benefit from the right level of protections and transparency. We believe there is an opportunity for the industry to fully adopt the practices and principles enumerated in the
Small Business Borrowers' Bill of Rights
, and for the appropriate regulatory agencies to continue to monitor the industry’s progress in that respect. (Q11)
Alignment of interest and disclosure requirements
– Lending Club has a tremendous amount of “skin in the game” (starting with over 20% of our revenue from each loan being subject to loan performance over time) and an ongoing alignment of interests with investors. Therefore, we believe that any mandated capital-based risk retention requirement for marketplaces would be misguided and detrimental to both borrowers and investors. To ensure investors have all the necessary information to make informed investment decisions and continue to exercise full control over the quality of loans being issued through marketplaces, we are proposing additional mandatory disclosure requirements. (Q10)
Tax incentives to increase access to credit in underserved segments
– We propose that investors who provide capital in defined underserved areas and to low- to moderate-income small business borrowers be taxed at the capital gains tax rate, rather than the current marginal income tax rate, if the loan is held for over 12 months. Additionally, we propose, similar to the UK framework, that all investors be able to offset losses directly against interest income and gains and have returns on the first $5,000 of investments made tax-free. (Q9)
More efficient income verification
– We urge that the IRS create an application programing interface (API) for its 4506t tax return transcript process. This would make it easier for consumers and small business owners to give lenders access to their tax information voluntarily. We believe this relatively simple improvement to the current 4506t process would make a meaningful difference in lenders’ ability to offer lower cost, faster, easier, safer, and greater access to credit, across consumer and small business lending. (Q2 and Q9)
Please find below answers to the specific questions asked in the RFI and thank you again for the opportunity to offer input.
Renaud Laplanche
Founder and CEO
Lending Club
[1] Based on responses from 14,986 borrowers in a survey of 70,150 randomly selected borrowers conducted from July 1, 2014 – July 1, 2015, borrowers who received a loan to consolidate existing debt or pay off their credit card balance reported that the interest rate on outstanding debt or credit cards was 21.8% and average interest rate on loans via Lending Club is 14.8%.
[2] Average credit score change of all borrowers who took out a loan via Lending Club between January 1, 2013 and January 31, 2015 with a stated loan purpose of debt consolidation or pay off credit cards.
[3] FDIC March 31, 2015 Call Report Data, C&I Loans and Nonfarm Nonresidential loans
[4] For Retail investors with at least 100 Notes and 100 different borrowers and no Note accounting for more than 2.5% of the portfolio assuming 24 to 30 months of average age of portfolio as of September 15, 2015
