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Messages - MoMoney

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I'm not suggesting they change the APR (APR includes origination fees into account). What I'm saying is to charge borrowers a higher interest rate but keep the APR intact. Then instead of deducting origination fees from the borrower, do that on the investor side. The higher interest rate would offset the extra investor fee so it wouldn't make a difference for the investors. On the borrower side, the APR which includes the origination fee wouldn't change.

I've been clamoring for something like this for years. The fact that the bulk of LC's revenue comes from the upfront origination fee means that there is a less of an incentive for collections and to do rigorous underwriting. If LC's fees were collected along with the servicing of the loan, then LC and investor interests are better aligned. In theory this should lead to better returns.

100% agree. It's honestly a move that benefits everyone:
It benefits the consumers as it makes it less costly for them to be responsible and pay out the loan as soon as they can. It also creates a better customer experience for borrowers so they will be happier to come back for another loan later. There will also be less confusion or bitterness regarding fees or why they didn't get the full amount they asked for. It also allows them to refinance cheaper if their credit profile improves. Marcus has done a lot of research on this already and how much more borrowers would like that.
It benefits the note investors as it both aligns the investor incentives but also attracts higher quality borrowers. In theory it should also delay defaults as the borrower either starts with more money (no origination taken out) or lower payments (less total loan needed since no origination is being taken out.)
It benefits the longer term stock holders as happier/healthier borrowers and investors will mean more originations. It will help them with marketing because now they can say no originations/hidden fees. That also makes them more well positioned to enter new categories such as top tier student loan borrowers and better positioned to compete with likes of SOFI and Marcus. In the short term it will decrease the revenue but long term, it shouldn't make a difference. Early payoffs or charge offs lowers the fees slightly but that can also be offset by slightly increasing the investor fees.
Above all if lending club wants to show they are serious in being a leader in financial and credit consumer health, this is one of the first steps they should take. They can also use this in settlement negotiations with FTC.

2
I actually hope lending club eliminates the origination fees from the borrower side all together and shift the fees to investors more like Marcus. That would encourage better borrower behavior, and would also attract more financial savvy borrowers and improve charge offs. It would also...

This would require LC to raise the fees charged to lenders, probably by a significant amount.  I'll bet they're scared to do that.  Investors would probably take a dim view.

I'm not sayin' its right or its wrong ... just thinkin' about the way investor customers would react.  I try to put myself in their shoes and think how the hell would I sell that idea to investors?  It would have to come with a significant raise in interest rates. 

The present management doesn't have the guts to make big changes.

I'm not suggesting they change the APR (APR includes origination fees into account). What I'm saying is to charge borrowers a higher interest rate but keep the APR intact. Then instead of deducting origination fees from the borrower, do that on the investor side. The higher interest rate would offset the extra investor fee so it wouldn't make a difference for the investors. On the borrower side, the APR which includes the origination fee wouldn't change. Most borrowers come to lending club directly and the rest come from lead websites such as credit karma. Sites like Credit karma already lists the APR which includes the origination fees so not much really changes as for as competing. LendingClub might lose some less affluent borrowers who don't understand that their payment and APR doesn't really change even though their interest rate listed is a bit more, but lending club doesn't really have a problem attracting borrowers and they're operating at a scale so larger than the closest competitor that it might even be beneficial for them to lose some of those less affluent borrowers. The investors won't see a difference because the higher investor fees will be offset by higher interest rates. I think the biggest challenge for lending club in doing this is actually tech and process change which they're really slow at, not any backslash from investors or borrowers.

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I still maintain that lending club is worth at least $8 based on a very conservative DCF and am heavily long the stock.

When do you expect the stock price to move up to $8?

You're making some assumptions in your DCF calculation.  One of the assumptions is your estimate of future operating expenses.  I've been surprised that they've allowed operating expenses to grow they way they have.  I don't really understand what they're doing with all that money.  I don't see a crack engineering team.  Middle managers?  Have operating expenses been in line with your expectations?

I'm not a wallstreet analyst who would give a price target for a year from now. I can't predict short term. I can just tell you what I think the stock is worth currently. Mr Market will correct the price at some point. However, if I were to guess after the next earnings call there should be a big movement upward. I can tell you that in 2025, conservatively I would expect an EPS of $2 which with a p/e 15 would yield to stock price of $30.

As for your comments regarding costs, I think you're misunderstanding the earnings report. The big items in the cost for the quarter where a non-cash write-down of their patient finance business coming out of their goodwill and the legal fees related to their legacy issues which is almost over.

Some more context from the earnings call regarding cost and what it will be like moving forward:
"Even when normalizing for last year’s insurance reimbursement and legacy expenses, tech and G&A expenses were up only 7%, with revenues up 27%."
"Turning to G&A. Expenses were $37.8 million for the quarter, or 21.3% of revenue, down three points sequentially. Thinking back on our commitment at Investor Day to focus on driving operational leverage and our fixed cost, the second quarter’s a good view into what we can achieve."
"Engineering/operating expenses were $22 million in the second quarter, down $300,000 sequentially, and up $500,000 year-over-year."
"For the quarter, adjusted EBITDA was $25.7 million with margin at 14.5 and improvement of 4.4 points sequentially, an 11.3 points increase year-over-year"
"First, removing the legacy items in the non-cash goodwill impairment, our GAAP net loss would’ve been $6.7 million and ahead of our guidance from last year’s earnings call"
"We have vast scale in our business and are optimistic that we can continue to drive operating leverage as we head into 2019."
"EBITDA margin of 14.5%, up over 11 points, reflecting revenue growth of 27%, set against lower operating expense growth of 12% year-over-year. M&S and O&S efficiency both improved in the quarter, driving a contribution margin of 48.3%."
"We are starting to drive a wedge to expand our operating margin in our business. We believe there are additional opportunities to pursue and have retained an adviser to do a rigorous review of our expense structure to position us for the next wave of growth."



3
Some positive news regarding the lendingclub lawsuit. They had a hearing for motion to dismiss the lawsuit. They were not granted motion to dismiss; however motions to dismiss are rarely granted so that wasn't a suprise. The judge noted that lending club had already stopped making the no hidden fees advertisement. She encouraged the parties to settle and avoid wasting court resources.  She said, "If they agree not to do it anymore in an enforceable way, then why are we here? That is not a good use of court resources. To me, it's not rational, and it doesn't make sense. I can't conceive of why the case shouldn’t be resolved.”
The judge seemed to lean toward finding for LendingClub on the FTC’s claims seeking injunctive relief, saying “the allegations are thin here.”  Rather than offering money as payment for a wrong in a civil action, injunctive relief is a court order for the defendant to stop a specified act or behavior.

There were some negative comments that the judge made as well which were the basis to deny the motion to dismiss. She argued that lending club customers are "less sophisticated consumers than someone getting a jumbo mortgage" and that they might just scroll through the contract without reading it fully.

In summary, this case will probably go to settlement with no or little monetary settlement. The judge has already said the the "allegations are thin".

I actually hope lending club eliminates the origination fees from the borrower side all together and shift the fees to investors more like Marcus. That would encourage better borrower behavior, and would also attract more financial savvy borrowers and improve charge offs. It would also fit within lending club's new focus on consumer financial health, and would show that they are serious about that. If they do that within the settlement, that could also give a "win" to both sides as it would look really good for FTC that lending club will no longer charge origination fees from consumers moving forward altogether. In addition, lending club mentioned in the last earning call that moving forward, their bottle neck is on the investor side not the borrower side. However, since Laplanche's departure lending club has been slower and a lot more conservative especially on the tech side. They have talked about new products coming for quarters yet little to show for it. Even features such as direct payoffs and car loans are in their infancy after quarters of touting them. In the last earnings call they said that direct payoffs is still not implemented for the majority of borrowers when they have seen very positive results as a result of it. Elon musk changes the break distance with an on air software update. How long does it take to implement a direct payoff features for gods sake. I'm still waiting for new credit monitoring service they had hinted a few quarters ago. We'll have to see if the new CTO is any more competent.

I still maintain that lending club is worth at least $8 based on a very conservative DCF and am heavily long the stock.

4
General Lending Club Discussion / FTC Lawsuit update
« on: September 14, 2018, 05:28:09 AM »
Some positive news regarding the lendingclub lawsuit. They had a hearing for motion to dismiss the lawsuit. They were not granted motion to dismiss; however motions to dismiss are rarely granted so that wasn't a suprise. The judge noted that lending club had already stopped making the no hidden fees advertisement. She encouraged the parties to settle and avoid wasting court resources.  She said, "If they agree not to do it anymore in an enforceable way, then why are we here? That is not a good use of court resources. To me, it's not rational, and it doesn't make sense. I can't conceive of why the case shouldn’t be resolved.”
The judge seemed to lean toward finding for LendingClub on the FTC’s claims seeking injunctive relief, saying “the allegations are thin here.”  Rather than offering money as payment for a wrong in a civil action, injunctive relief is a court order for the defendant to stop a specified act or behavior.

There were some negative comments that the judge made as well which were the basis to deny the motion to dismiss. She argued that lending club customers are "less sophisticated consumers than someone getting a jumbo mortgage" and that they might just scroll through the contract without reading it fully.

In summary, this case will probably go to settlement with no or little monetary settlement. The judge has already said the the "allegations are thin".

I actually hope lending club eliminates the origination fees from the borrower side all together and shift the fees to investors more like Marcus. That would encourage better borrower behavior, and would also attract more financial savvy borrowers and improve charge offs. It would also fit within lending club's new focus on consumer financial health, and would show that they are serious about that. If they do that within the settlement, that could also give a "win" to both sides as it would look really good for FTC that lending club will no longer charge origination fees from consumers moving forward altogether. In addition, lending club mentioned in the last earning call that moving forward, their bottle neck is on the investor side not the borrower side. However, since Laplanche's departure lending club has been slower and a lot more conservative especially on the tech side. They have talked about new products coming for quarters yet little to show for it. Even features such as direct payoffs and car loans are in their infancy after quarters of touting them. In the last earnings call they said that direct payoffs is still not implemented for the majority of borrowers when they have seen very positive results as a result of it. Elon musk changes the break distance with an on air software update. How long does it take to implement a direct payoff features for gods sake. I'm still waiting for new credit monitoring service they had hinted a few quarters ago. We'll have to see if the new CTO is any more competent.

I still maintain that lending club is worth at least $8 based on a very conservative DCF and am heavily long the stock.

5
I'm planning to start a post about the earning in a few days but generally I couldn't have been happier with the earning and the subsequent price drop. I am happy that I was able to accumulate more shares at cheap prices after seeing the amazing progress the company has made. They have been blowing past their own expectation in almost all categories. I think their full year guidance will be upped next quarter and they are on path be a profitable company in 2019 (I'm modeling at a minimum a $25 million profit for 2019). Adjusted EBIDTA of $75-$90 million already this year is amazing. The whole company is valued at around 700-800 mil when you subtract cash/assets. Almost all their legacy issues will be out of the way in 2018 too. Rising interest rate environment is good for them as it's driving more people to refinance but it also means they will gain more interest income and also will have an easier time finding investors that chase yield. Their scale is also helping them a lot and will only add added benefit. My conservative models give me a price of around $8. I think the stock is a steal at this price. There is risk too such as amazon entering the category or Marcus wanting to massively scale but I don't see that risk in near-term or mid-term. Mostly because Marcus has acknowledged a few times that they're planning to grow conservatively (and GS investors and CEO want that too)

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Investors - LC / Re: LC What's working these days?
« on: August 10, 2018, 04:50:31 PM »
Also, the benefit of buying all those notes for sale at ridiculous discounts when the CEO got fired has really helped my returns.  I think my regular NAR is like 4% and my traded NAR is like 14%.

I was one of the "panic" sellers but it first took me a couple of months to write the software to do it.
My traded NAR is 16.73% for 1348 notes, selling after the CEO disclosure.
The notes I sold were "never late" and predominantly at a premium not a discount. You probably didn't buy any of mine.  ;)
I was then and am still now very glad to have dumped them. Should have sold more. Should have never bought another one.

I would say you got lucky but there was no indication that CEO departing for an unrelated reason would have any impact on the quality of the underwriting. I wasn't personally invested in LC notes at the time but if I was I would have a hard time rationalizing selling my notes just because the CEO was departing.

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One of the few things I still have an interest in about LC is their stock- I've got 26K shares. It seems to be fairly cyclical lately- before earnings it goes up a bit, after earnings, way down. I've watched it enough that I think I have a reasonable sense of timing. ;)

Odd thing is that it went up quite a bit the last few days for no apparent reason. Not complaining, but does anyone know why? There's not anything in their press releases that I found, and we're still months off from the quarterly earnings. (Should be August 8th or thereabouts)

Any thoughts?

what goes down for no reason, goes back up for no reason.

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Lending club reported their earnings above their midpoint guidance and beating the expectations with a respectable revenue increase of 22% YoY and strong Adjusted EBIDTA of $15.3 million up from $0.2 million last year. Notable things from the conference call:
* The CLUB Certificates were the highlight of the earnings. They attracted over $160 million in new funding from several of the top names in asset management. They are planing on expanding the rollout.
* Lending club maintains that FTC claims are factually unwarranted and don't see any problems with their practices and expect to resolve the FTC issue.
* FTC complaint has not affected either investor side or borrower side. Scott pretty much said that investors are on the same page with lending club on the FTC issue, and see no problem going forward.
* They have expanded margins and also were able to lower marketing expenses partly because of their scale.
* Bank participation has gone up again following a decrease last quarter.

I think this was a great earnings report for lending club. I think this is a very attractive price point for the stock. It looks like the stock has barely budged after hours. I'm disappointed that there was no news of share repurchase given the depressed stock price.

Things I wish they had talked about:
* Product roadmap and why they are so slow in launching new products when they said they have new products in pipeline a while ago. I would expect a credit monitoring service by now. Upgrade got this done in a few months. I hope the new CTO is more competent.
* More information on Cross selling products in the pipeline if there is any
* More information on how the car loan refinance and business loans are doing
* What percentage of users are repeating users vs new users. They had promised to touch on this in the last earnings call.
* Why did they need to tap to their credit facility to finance loans when they have so much cash on hand which is also increasing with positive EBIDTA.
* Why no share repurchase plan when they believe "FTC claims are factually unwarranted" and share prices are at such a depressed level, and when they had previously launched one at much higher prices.

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Did anyone else's audio of the conference call drop out after the first 5 minutes??
I wanted to hear the Q&A, but no luck!!
Yeah same issue. I had to dial in to the conference call to listen to it.

10
Lending club reported their earnings above their midpoint guidance and beating the expectations with a respectable revenue increase of 22% YoY and strong Adjusted EBIDTA of $15.3 million up from $0.2 million last year. Notable things from the conference call:
* The CLUB Certificates were the highlight of the earnings. They attracted over $160 million in new funding from several of the top names in asset management. They are planing on expanding the rollout.
* Lending club maintains that FTC claims are factually unwarranted and don't see any problems with their practices and expect to resolve the FTC issue.
* FTC complaint has not affected either investor side or borrower side. Scott pretty much said that investors are on the same page with lending club on the FTC issue, and see no problem going forward.
* They have expanded margins and also were able to lower marketing expenses partly because of their scale.
* Bank participation has gone up again following a decrease last quarter.

I think this was a great earnings report for lending club. I think this is a very attractive price point for the stock. It looks like the stock has barely budged after hours. I'm disappointed that there was no news of share repurchase given the depressed stock price.

Things I wish they had talked about:
* Product roadmap and why they are so slow in launching new products when they said they have new products in pipeline a while ago. I would expect a credit monitoring service by now. Upgrade got this done in a few months. I hope the new CTO is more competent.
* More information on Cross selling products in the pipeline if there is any
* More information on how the car loan refinance and business loans are doing
* What percentage of users are repeating users vs new users. They had promised to touch on this in the last earnings call.
* Why did they need to tap to their credit facility to finance loans when they have so much cash on hand which is also increasing with positive EBIDTA.
* Why no share repurchase plan when they believe "FTC claims are factually unwarranted" and share prices are at such a depressed level, and when they had previously launched one at much higher prices.




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I will ask again...What proof do you have that the FTC charges are political?  What makes you think the charges are baseless?

You've read Politico stories, but I read the actual FTC charges.  I find them baseless.  See my earlier comments.  15 complaints out of 2 million loans.  I'll bet the government has received a larger ratio of complaints regarding every major bank and credit card company in the country!

In addition, I have long experience with the FTC, which provides me some experience in how they operate.  This provides me context to recognize bad behavior when I see it.

In today's news environment, I suggest using primary sources, rather than what some guy writes about a situation. 

The charges provided by the FTC (explaining their justification), along with facts provided by LC in their blog (fewer than 15 complaints to CFPB) and my knowledge of the # of loans LC has processed (over 2 million) lead me to this understanding of the situation.  I explained my thinking in more detail in earlier postings.

Its ok if you have a different opinion.  I'm not here to argue.  However, when you simply demand "proof" repeatedly, that doesn't advance our understanding.

I suspect that one problem in this discussion is that different people use the word "political" differently.  In today's polarized climate some folks mean "republican vs democrat".  Others have long used the word in a broader sense, as in "office politics", meaning acting to advance your own position.  The dictionary puts it this way...

Political
derogatory
relating to, affecting, or acting according to the interests of status or authority within an organization rather than matters of principle.


Bureaucrats who raise inappropriate and unfair complaints against companies to extort large fines and advance their status or authority when such complaints are unjustified can be described as acting in a political fashion.  There's a lot of this sort of thing going on in the world today.
+1

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If you scroll up, Peter says, "I should preface these statements by saying that I have had a long, close relationship with LendingClub. I have been an investor in the loans since 2009, an equity investor since their IPO in 2014 and LendingClub has been a sponsor of every LendIt conference since 2013. So, I am hardly impartial in this matter."

As of last week when the charges were announced, there were one Democrat and one Republican/chairperson running the FTC.  The Democrat resigned Saturday.  On Tuesday, four new commissioners were sworn in to fill the vacancies.  The current chair was nominated by the President and is waiting to be approved for a judgeship on the Federal Claims Court before giving up her current position which expires in September.

I will ask again...What proof do you have that the FTC charges are political?  What makes you think the charges are baseless?

sources:  https://www.politico.com/story/2018/04/26/ftc-commissioners-senate-approval-1108262
https://www.politico.com/story/2018/05/03/trump-federal-trade-commission-ohlhausen-511570

In a pretty efficient equity market as an investor my job is to distinguish between real bad news and just the hyped up ones. That's how I can get my edge. I listen to conference calls, read the transcripts over and over, looks at all the data I can find. I have been following lending club for a while. Sometimes it takes a lot of research to distinguish between real bad news and hyped up bad news but in this case it doesn't really take a lot of research or a genius to do that. The most "damming" thing in the FTC is the "hidden" origination fees. Some of the other claims such as sending emails “Investors Have Backed Your Loan” are just laughable. For example, they had a software bug that sent the emails for a few days before they fixed it. Things like this are common place in any software company.

But let's get to the most "damming" claim that lending club has "hidden" origination fee. This is so easy to disprove it's laughable. All you need to do is to go through an application to see how many times the origination fee is highlighted. Or just watch this video peter also posted in that article: https://www.youtube.com/watch?time_continue=202&v=MIAEuNRvoNI
I don't know if you have ever gotten a loan but almost any loans (car, mortgage) has origination fees. For mortgages for mortgages good faith estimate is where the origination fees need to be posted. For lending club, Truth in Lending Act form would be the only place they would need to post the origination fees to legally be in clear. But they have gone above and beyond that. Not just the fees are highlighted in truth in lending form many times, but it also can be found in other places when you go through the application process. No wonder they have such a high customer satisfaction rating and so many costumers returning for loans again. There hasn't been any surprises.

My friends who work in fintech business interacting with fintech companies say that lending club is so careful about their processes and making sure they don't do something that hunts them back later since Renaud's ouster (which was over something so minor btw) to the point that they are much slower than any other fintech company they work with. You can also see how many times they have adjusted their underwriting in ways that have excluded people getting loans which affects revenue in material way in short term in order to improv loan returns for investors and building the business for long term.

I'm not even gonna go over how lending club has been a leader in transparency in fintech lending and now they are pushing other lenders to also focus consumer credit/financial health. (watch Scott Sanborn's lendit keynote speach) 

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What does this issue have to do with them going bankrupt? They have a billion dollars in assets, a huge line of credit they can tap into and tens of millions of dollars in free cash flow. I really doubt institutional investors are worried about lending club going bankrupt in the span of 3 years(life of the loan) because of political statement by FTC which worse case scenario would result in a fine (which it won't because they have no case)
Also, in the event of bankruptcy, they also have contracts with third party servicing platforms to service the loans.

I'm just pointing out that LC may have to spend some money to reverse the trajectory of their falling stock price.

What proof do you have that the FTC charges are political?  What makes you think the charges are false?  I can't remember another time when Washington has been so pro-business.  Seems odd they would single out LC.

I think Peter does a great job explaining the matter in this article https://www.lendacademy.com/ftc-files-complaint-against-lendingclub/
It doesn't look like the administration has been incompetent to even nominate people for FTC. This excerpt from the article shows why it's political:
"The Commission is headed by five Commissioners, nominated by the President and confirmed by the Senate, each serving a seven-year term. No more than three Commissioners can be of the same political party. The President chooses one Commissioner to act as Chairman."
"Currently there are only two commissioners. Not only that, but one of the commissioners is leaving on Friday, so there will be just one commissioner in the job starting next week. My understanding from people close to the FTC investigation of LendingClub was that it was going well and all parties were working in a cooperative fashion. This announcement appears to have came out of left field this week right as one of the commissioners was getting ready to leave."

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Looking at https://www.lendingclub.com/browse/browse.action and filtering by Time left, out of 685 pages of loans, only half a page is loans between 21-28 days left. The other 684.5 pages are loans 29 days left. Am I not looking at the right thing?

That's loans, not pages (currently 646 loans).

If you have a "time left" filter, then you are looking at a different UI from me. I can filter by "listing expires in", but my only choices are 3 or 7 days.

However, I look at the first 60 loans in the list, and only 4 are 29 days left. the other 56 are 20-28 days. 41 are under 25 days. That's for all loans, not just the ones in the filter I use.

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Retail note investors are very small portion of lending club investor mix. I hope banks and fund managers know the difference between lending club stock and their notes :)

Sure, but I'm only talking about retail.

Edward

Oh yeah you're right. I see the same thing. Around 300 loans are 20-27 days left. How many usually do you normally see in that range?
I think there are too many variables that could influence things. In addition to the previous reasons I mentioned, other reasons could include:
- Tweaks in underwriting approve more people for loans (they have done that before.)
- The timing of their securatization and how many loans are available based on that. They mentioned in their earning calls that they could have irregular loan originations based on the timing of closing deals.
- As you mentioned, some investors might have paused because of this FTC issue but I would think that's not as likely.
But also we are talking about ~6 million dollars worth of loans spread over a week that are not fully funded yet which would be around 73 million dollars for the whole quarter. That's a very small amount of their originations so I wouldn't draw too many conclusions based on just this data point.

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Why would the lenders care about this?

Didn't slow me down. Yet I've heard rather bright people confuse investing in LC's stock with investing in LC loans. I somewhat doubt seasonality, as this is a more serious swing than I've seen before. More likely one of the other factors you note.

Edward

Unlike other investments, LC's success or failure is intertwined with the loans.  Our bankruptcy laws are untested when it comes to this type of investment, and LC never has implemented a BRV for marketplace investors.  If a major brokerage went under, you still own the stock, and your cash is insured.  If LC went under, we know the loans would still be serviced, but would investors get their money back?  If a more traditional financial institution bought out LC, I imagine they will shut down the marketplace and focus on institutional investors and securitization since supporting many small investors is costly and not the primary source of revenue.

What does this issue have to do with them going bankrupt? They have a billion dollars in assets, a huge line of credit they can tap into and tens of millions of dollars in free cash flow. I really doubt institutional investors are worried about lending club going bankrupt in the span of 3 years(life of the loan) because of political statement by FTC which worse case scenario would result in a fine (which it won't because they have no case)
Also, in the event of bankruptcy, they also have contracts with third party servicing platforms to service the loans.

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