
LendingClub Loan Buyers Retreat After Shakeup; U.S. Probes - luther07
http://www.bloomberg.com/news/articles/2016-05-16/lendingclub-receives-department-of-justice-grand-jury-subpoena
======
rcarrigan87
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.

~~~
chris11
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.

~~~
pmorici
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.

~~~
chris11
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.

~~~
pmorici
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.

------
11thEarlOfMar
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...](https://www.google.com/finance?q=NYSE%3ALC&fstype=ii&ei=vzI7V7mxIeGqiQKLrblg)
(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...](http://kb.lendingclub.com/investor/articles/Investor/What-happens-if-
Lending-Club-goes-out-of-business)

~~~
akg_67
> 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."

------
edc117
"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.

~~~
davidu
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.

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

~~~
skwirl
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?

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

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

------
luther07
This is going from bad to worse, shareholder lawsuit over
financial/operational controls:
[http://mobile.reuters.com/article/idUSKCN0Y81QT](http://mobile.reuters.com/article/idUSKCN0Y81QT)

------
homero
I have a lot of money in there

~~~
zrail
Hopefully you'll get some of it back.

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

~~~
akg_67
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.

~~~
zrail
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.

------
luther07
Anyone at all concerned about the DOJ subpoena? Lending Club is being
investigated by the DOJ.

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

~~~
scurvy
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.

------
manav
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.

~~~
pmorici
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-...](http://www.bloomberg.com/news/articles/2016-05-10/jefferies-
said-to-have-pressed-lendingclub-to-improve-disclosure)

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...](http://www.consumerfinance.gov/askcfpb/1567/what-payday-loan.html)

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

~~~
oneloop
Do you have references for that last claim?

~~~
pmorici
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](http://www.lendacademy.com/forum/index.php)
[1]
[http://www.lendacademy.com/forum/index.php?topic=3606.0](http://www.lendacademy.com/forum/index.php?topic=3606.0)
[2] [http://www.bloomberg.com/news/articles/2016-05-12/jim-
chanos...](http://www.bloomberg.com/news/articles/2016-05-12/jim-chanos-says-
we-were-short-lending-club)

