
LendingClub CEO Resigns Following Loan Sales Review - jackgavigan
http://www.wsj.com/articles/lendingclub-ceo-resigns-over-sales-review-1462795070
======
11thEarlOfMar
Lending Club is building a two-sided marketplace, which is always hard. I've
been lending on the platform for almost 3 years now. It was always difficult
for me to find loans that met my criteria. Borrowers have 14 days to get their
loans funded by lenders and loans were typically funded by lenders within 1
day. So lenders were outnumbering borrowers.

Starting in January this year, however, loans started taking longer and longer
to fund. Recently, I've seen them timing out. This means that in the
marketplace, the balance shifted and borrowers outnumbered lenders. Another
indication that Lending Club was experiencing a shortage of lenders: they
began offering bonuses up to $2,000 for new accounts.

Finally, this earnings release indicates that loan originations, while still
growing, has slowed considerably. That is the formal evidence confirming a
significant slowdown in new lenders.

I suspect that there was a lot of pressure internally for sales personnel to
bring in new capital through either retail of commercial lenders (they've
served both markets for quite a while), and, someone or some group got too
aggressive. Whether LaPlanche knew and ok'd the deal, or whether he was just
'person in charge' and has to take the fall, I don't know. But this will be a
major wound. It's really sad that it is self-inflicted.

~~~
pc86
I refinanced two credit cards for what I thought was a large amount ($9k + I
included the LC fees) and I was honestly skeptical that it would even get
funded.

It was funded by a single investor in less than two hours.

I've often thought about investing in the platform but I've always been
skeptical of the ability to make consistent returns on it - it seems like a
platform where unless you have significant capital invested, one or two
defaults above what you expect and you could be wiped out.

~~~
11thEarlOfMar
It is important to lend to many borrowers. Lending Club recommends at least
100. That normalizes the risk. My returns have been consistently 9.5-10.5%,
net of defaults.

I started with an experiment: $2,500 loaned $25 at a time to 100 borrowers.
Lending Club forecasts the default rate based on their own credit rating. It
went well and the actual return was about 1% higher than they forecast.

~~~
briffle
I am literally doing the same thing right now, with my tax returns.. Anxious
for the end of this month, when the first payments are due..

~~~
CodeCube
Take my advice ... forget about it for a while, and check back in in a few
months :) Generally speaking, first payments tend to come in ... it's not
until later that lates and defaults happen ;)

------
sgwealti
I lend on Prosper but I am worried that there are borrowers who have figured
out how to game the system. If you look at the borrower applications they are
clearly not filled out by real people. When I first started lending there in
2007 you could tell it was a real person applying for the loan because the
application form contained more information about the borrower and they
actually answered questions. It seems pretty sketchy to me but I haven't
pulled my money out just yet.

~~~
Unklejoe
> [... I am worried that there are borrowers who have figured out how to game
> the system]

I thought this as well, but on LendingClub.

Out of all of my notes that have defaulted, they all seem to share the same
pattern:

They make about 4 perfectly on-time payments then never make another payment
again.

I believe the loans were taken out by real people, but I feel like they were
people who knew that they were ultimately going to file for bankruptcy anyway,
so they figured they might as well grab some quick cash before doing so. This
is just my guess. It just seems too odd that all of my defaulted notes look
pretty much the same. Maybe the 4 on-time payments were done to avoid any
claims of fraudulent intent?

My fear was that there was some Reddit thread or something which was
instructing people on how to do this.

They could have done the same thing with a credit card, but with LendingClub,
you end up with actual cash, and I bet it's easier to get a loan funded on
LendingClub than it is to apply for a credit card of the same amount.

[EDIT]: To add, apparently, if someone obtains a loan immediately before
filing for bankruptcy, the creditor can move to basically have the loan un-
wipable if they can prove that the loan was taken after the person already
knew they were going to file for bankruptcy. However, I doubt LendingClub goes
through this trouble for each note, which could make the platform more
attractive for this type of fraud.

~~~
giarc
Why pay back some of the money at all then? If you are knowingly scamming the
system (and the lender) you don't take out a $2,000 loan, just to pay back
$400 before declaring bankruptcy.

~~~
Unklejoe
My guess is to avoid the possibility of the creditor claiming that you took
out the loan after already knowing that you were going to declare bankruptcy.

The 4 on-time payments make it look like you tried to pay the loan back but
just couldn't afford it.

If no payments were made at all, it would be easier to prove that there was
intentional fraud. If such is proven, it may be impossible to wipe the loan
during bankruptcy.

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matt_wulfeck
> The Wall Street Journal reported last month that Jefferies was working with
> the company on a sale of bonds backed by LendingClub loans to less
> creditworthy borrowers.

Ah! So we're back in the derivatives market. Buy up crap, package and
obfuscate it, then sell it off as "high quality" crap to investors desperate
for yield.

~~~
minimax
There are no derivatives here. Jefferies was going to sell bonds backed by the
loans. The payments on the loans would effectively flow directly to the
bondholders.

A derivative (e.g. a CDS) would be more like a side bet between two (possibly
unrelated) parties based on the performance of those bonds.

~~~
vostok
This is actually a pretty typical example of a derivative. You can buy these
bonds to get exposure to the loans without having to worry about managing them
directly.

A CDS would be a derivative on a derivative. It would allow you to get
exposure to these bonds without worrying about being long or short a
particular issue.

~~~
aianus
By that logic, S&P 500 ETFs would be 'derivatives' too.

(They're not.)

~~~
joncooper
[https://en.wikipedia.org/wiki/Asset-
backed_security](https://en.wikipedia.org/wiki/Asset-backed_security)

------
vosper
> Other platforms, such as Prosper Marketplace Inc., Avant Inc., or On Deck
> Capital Inc. have reported either slowing investor demand for loans or a
> drop in lending volume this year, the result of investors’ skepticism of
> future returns on online loans and because they see greater opportunity in
> other bonds.

So where is the smart money going? Lendingclub and Prosper have had reasonable
returns for me, and seem like a good way to diversify my investments a bit.

~~~
cm2012
Theoretically, this is the best time for small investors to buy LC loans. The
hedge funds have backed out, so you can get better yield loans for much more
competitive pricing. This is unless you think the institutional investors know
something you don't, as opposed to just rebalancing their portfolios.

~~~
vosper
I'm not very strong on finance at all, but if the hedge funds have pulled
their money out of the Lendingclub platform then shouldn't that reduce the
amount of money that Lendingclub has to lend and therefore drive up the cost
of taking a loan from them, assuming demand for their loans hasn't dropped as
well? Like a basic supply and demand thing?

~~~
homero
No loans just don't get funded

~~~
bluejekyll
Yeah. The Lending Club loan would still need to compete in the broader market,
which means that there is a point where the borrower would opt to not take the
more expensive loan.

------
elecengin
An interesting tidbit embedded in the news is that $22mm in loans was sold to
a single investor - the model they talk about on the website is peer to peer,
but this appears more peer-to-institutional-buyer (which I always kind of
suspected, but this clarifies it)...

An article on the trend: [http://qz.com/355848/wall-street-is-hogging-the-
peer-to-peer...](http://qz.com/355848/wall-street-is-hogging-the-peer-to-peer-
lending-market/)

~~~
vosper
I think a lot of their volume is peer-to-peer, though, and there's nothing
saying this $22m was from an institution and not a rich individual (though an
institution seems more likely). I imagine this is more of a case of "I have a
lot more money than your normal customer so I want special treatment" and
Lendingclub then abusing that to take advantage of the investor. I wonder if
the investor had taken their $22m to the automated web platform and setup
their investment criteria if this would never have occurred.

~~~
morgante
I think you're dramatically underestimating the degree to which institutional
investors are involved in peer-to-peer. There are entire software startups
selling analysis software to hedge funds for peer-to-peer lending.

It almost certainly was not a single wealthy individual.

------
matt_wulfeck
I stopped investing in lendingclub once I realized the taxes on my gains.
Interest is basically counted as income, which makes capital gains in stocks
much more attractive.

What I did notice that I was pretty bad at picking notes. Lots of handpicked
ones flopped and a lot of random/automatic ones are still going.

~~~
baccredited
You can invest in Lending Club via a tax deferred account like an IRA. You
won't be taxed on gains that way.

Agree that handpicking is a waste of time. Let the autoinvest feature work for
you.

~~~
hatred
You can also use 3rdparty API's like LendingRobot that promise higher returns
than LendingClub's own auto-investing feature.

~~~
kilroy123
Interesting. Have you used this?

~~~
hatred
Yeah, I learnt about it from a fellow co-worker and have been using it for the
last 6 months. It's pretty seamless to get started with it and has offered
better returns for me then the LC's own auto investing strategy.

------
tsunamifury
All I know is when I started getting mailers DAILY from lendingClub with
magical terms I figured it was some sort of pyramid scheme. I worked in
finance during the recession, you can smell a desperate entity a mile away
trying to cover its books.

~~~
shostack
What does it typically look like when they try to cover their books?

~~~
tsunamifury
Increased marketing for deals on terms so favorable to the client that there
is no way they could make a profit. Usually when they rope in these clients,
they then book 'future revenues' on them against their current losses.

~~~
shostack
Depending on the risk of what is being sold here, is this always necessarily a
bad deal for the clients? Or could they try to cover their losses on one
product by marketing favorable terms on a different product that might perform
well?

Not sure if that's worded the best way--still learning about how the
accounting for this works.

~~~
tsunamifury
If you're buying a product, sure you can make out like a bandit. But in this
case its a contract that can stretch into unforeseen consequences. For example
you get a loan on X terms with Y seller. Y seller goes out of business (due to
being a pyramid scheme) and now your contract is sold to the highest bidder to
satisfy investors in bankruptcy court. You now hold X contract with Z seller
who may be strongly incentivized to take advantage of any terms in your
contract that allow for changes.

In order to make out you need to satisfy the terms of Y seller's contract
before they fold -- and balancing the incentives vs unknown risk of Z at
unknown time, its probably not worth your time.

The exception to that is: You have enough capital to sign a contract so big it
actually forces Z event, then have the political clout to make sure the court
rules in your favor rather than the investors. All the while also buying
insurance against Z event. Then you have something similar to Goldman Sachs'
profitable moves during and after the Great Recession.

~~~
shostack
Really great explanation--thanks for sharing. Are there any good sources you'd
recommend for reading up more on this, or search queries I might want to try?

~~~
tsunamifury
The Big Short (Book) is the easiest way to be introduced to these concepts of
contracts and risk.

'Margin Call' is an excellent and thrilling film that dramatizes these
concepts and shows how they can play out on the trading floor.

~~~
shostack
Saw The Big Short movie--does the book go into much more realistic (ie. non-
Hollywood) technical detail?

Will check out Margin Call.

What about outside of huge industry shifts like The Big Short portrayed? I'm
most interested in how this plays out in the day-to-day when there isn't a
huge industry-wide scandal at play.

------
seibelj
Hopefully my side business won't tank! Plug for LendingClub mobile apps:

iOS: [https://itunes.apple.com/us/app/lendingclub-
order/id10461141...](https://itunes.apple.com/us/app/lendingclub-
order/id1046114132?mt=8)

Android:
[https://play.google.com/store/apps/details?id=com.jamesys.le...](https://play.google.com/store/apps/details?id=com.jamesys.lendinglightning&hl=en)

~~~
dang
People downvoted and flagged this, but I think a comment like this is ok when
the author is a regular user, doesn't do it often, and is up-front about it.

~~~
1123581321
Shouldn't the comment have something in it besides two app-store links and one
sentence about those links?

~~~
dang
I don't think so, if the links are relevant enough and it isn't overdone.

If someone's using HN primarily for this purpose, that's a different story.
But seibelj's most recent comments include housing, transportation
infrastructure, freenet, and software licensing. Sounds like a real community
member to me. :)

------
yalogin
What happened? Why is lendingclub doing bad? From the outside it looks like a
good business model. One that should do better I thought.

~~~
joosters
It's a good business model for Lending Club, but maybe not for investors.

LC is responsible for grading the loans and calculating the risk of each
borrower. However, it does not take any of the risk of the loans being traded
on its platform. So there's a big concern that LC may not be very scrupulous
about the borrowers it accepts.

It's a similar situation to the last financial crisis where companies were
happily accepting risky mortgage applications, doing little or no checking,
and then selling them on for a quick profit.

~~~
partytran
> So there's a big concern that LC may not be very scrupulous about the
> borrowers it accepts.

I haven't read this anywhere else other than your comment. Do you have any
other evidence for this claim?

~~~
sjg007
Read the article.

------
jordhy
He was a cofounder, chairman and CEO so it's a big, and sadly a very negative,
event.

~~~
CameronBanga
Who is this big and sad for? The loan buyer?

It isn't sad for retiring CEO Laplanche is it? I mean, it looks like they
cooked the books, and now he's quitting before having to deal with the
repercussion.

My guess is that he was forced out, but I'm not sure it matters if it was
under his own will or not. Either way, it's definitely not sad for him or
LendingClub.

~~~
bluejekyll
"never attribute to malice that which is adequately explained by stupidity"

We probably don't know enough yet to be clear what the real details for the
departure are. It could be that all of this is due to poor oversight, and not
malice.

------
cm2012
My condolences to all the LC employees. By all accounts Renaud was a well
liked CEO, and he was there since the start. This must be such a morale killer
:(

------
ipsin
_" the application date on $3 million of those loans had been altered to make
them comply"_

I'm curious whether the initial discovery of this problem came from API users
noticing the discrepancy, or from a more traditional route, like a
whistleblower.

------
kwikiel
Lending Club is definitely not two-sided marketplace. In marketplace there is
always notion of price - to manage demand and supply. LC is just scoring loans
and then selling a "product".

------
kingnothing
If LendingClub were to go bankrupt, what would realistically happen to all of
the outstanding loans?

------
partytran
The quarterly report states that the investigation found this was an isolated
event that affected only $3M of the $22M in the sale.

"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."

From the quarterly report:
[http://ir.lendingclub.com/QuarterlyResults.aspx?iid=4213397](http://ir.lendingclub.com/QuarterlyResults.aspx?iid=4213397)

------
spking
No paywall:

[http://www.cnbc.com/2016/05/09/lending-club-shares-tumble-
af...](http://www.cnbc.com/2016/05/09/lending-club-shares-tumble-after-ceo-
resigns.html)

~~~
psychometry
Does everyone on HN pay for the WSJ or something? I don't understand why
anyone upvotes these submissions.

~~~
brobinson
Click the "web" link under the title and then click the first Google result to
bypass the paywall.

~~~
TwoFactor
Wow, been on HN for years and never realized that haha. Thanks!

------
mathattack
Ungated -> [http://www.wsj.com/articles/lendingclub-ceo-resigns-over-
sal...](http://www.wsj.com/articles/lendingclub-ceo-resigns-over-sales-
review-1462795070)

------
mnml_
The stock is way undervalued tho. They have a solid growth.

~~~
gk1
Let me guess... You have shares of LC.

~~~
mnml_
yes, I just bought some.

