Poll

As a LC retail investor, I am concerned as indicated that LC has no BRV for retail investors

Extremely concerned and already limit my LC lending because of this matter
14 (18.4%)
Very concerned and will consider limiting limiting future LC investments
16 (21.1%)
Somewhat concened and am waiting to see what happens
26 (34.2%)
No very concerned
20 (26.3%)

Total Members Voted: 76

Author Topic: Lending Club bankruptcy remote vehicle  (Read 21671 times)

hoggy1

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Lending Club bankruptcy remote vehicle
« on: October 07, 2014, 01:50:43 PM »
Pleas indicate your level of concern with the lack of a bankruptcy remote vehicle for LC retail investors.

For those of you who have not followed other threads on this subject or don't know what a BRV is (which included me until a few weeks ago) a BRV protects investors in the event of a LC bankruptcy wherein the notes are held by a third party trustee in escrow for lenders (or similar functional arrangement). At present, the borrowers owe LC the money, not the investors, therefore in a LC failure preferred investors and secured debt holders would be entitled to these cash flows before lenders would be.
« Last Edit: October 07, 2014, 03:12:48 PM by hoggy1 »
Steve

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Re: Lending Club bankruptcy remote vehicle
« Reply #1 on: October 07, 2014, 05:07:28 PM »

brother7

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Re: Lending Club bankruptcy remote vehicle
« Reply #2 on: October 07, 2014, 05:11:18 PM »
I wonder... is LC's lack of a BRV reason enough to sway investors away from LC towards Prosper?
I have accounts at both but am now wondering if I should halt reinvestment at LC and funnel the funds toward Prosper. Is anyone doing this? And if so, what are your underlying reasons?

Rob L

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Re: Lending Club bankruptcy remote vehicle
« Reply #3 on: October 07, 2014, 06:55:41 PM »
I opened a Prosper account a few months ago; about half the size of my LC account now.
If a BRV were in place I would probably have invested the entire amount in LC. The other way to look at it is that LC would have 50% more money.
I don't know what others call it, but I use the term "risk of ruin". For my LC account it is quite conceivable might lose it all.
Prosper somewhat less,but still not zero.

rawraw

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Re: Lending Club bankruptcy remote vehicle
« Reply #4 on: October 07, 2014, 07:06:40 PM »
I call it platform risk

Fred

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Re: Lending Club bankruptcy remote vehicle
« Reply #5 on: October 08, 2014, 01:09:13 AM »
Not sure if anyone is aware of Portfolio Financial Servicing Company (“PFSC”) per http://kb.lendingclub.com/investor/articles/Investor/What-happens-if-Lending-Club-goes-out-of-business

Quote
We have taken steps to ensure continuity to protect investors and borrowers if Lending Club went out of business.  For example, we have executed a backup and successor servicing agreement with Portfolio Financial Servicing Company (“PFSC”).  Under this agreement, PFSC stands ready to service the member loans. Following five business days’ prior written notice from us or from the indenture trustee for the Notes, PFSC will begin servicing the member loans. If the underlying loans are determined to be part of the Lending Club’s bankruptcy estate, PFSC may not be able to make payments on the Notes. If our agreement with PFSC were to be terminated, we would seek to replace PFSC with another backup servicer.

hoggy1

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Re: Lending Club bankruptcy remote vehicle
« Reply #6 on: October 08, 2014, 07:27:45 AM »
Well we have 27 votes which break down roughly as I expected but there have been 160 views indicating 133 abstentions. I think we have to count those as very low concern or IQ.
Steve

Rob L

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Re: Lending Club bankruptcy remote vehicle
« Reply #7 on: October 08, 2014, 08:58:07 AM »
I call it platform risk

Like that term too (even better). Captures the essence of the specific risk.
My "risk of ruin" term has a broader meaning; for example portfolios highly concentrated in a few notes.
We are only talking about platform risk in this thread.

DanB

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Re: Lending Club bankruptcy remote vehicle
« Reply #8 on: October 08, 2014, 09:13:22 AM »
Not sure if anyone is aware of Portfolio Financial Servicing Company (“PFSC”) per http://kb.lendingclub.com/investor/articles/Investor/What-happens-if-Lending-Club-goes-out-of-business

Quote
We have taken steps to ensure continuity to protect investors and borrowers if Lending Club went out of business.  For example, we have executed a backup and successor servicing agreement with Portfolio Financial Servicing Company (“PFSC”).  Under this agreement, PFSC stands ready to service the member loans. Following five business days’ prior written notice from us or from the indenture trustee for the Notes, PFSC will begin servicing the member loans. If the underlying loans are determined to be part of the Lending Club’s bankruptcy estate, PFSC may not be able to make payments on the Notes. If our agreement with PFSC were to be terminated, we would seek to replace PFSC with another backup servicer.

I've been well aware of this for years. Not sure if you are aware that no one contends that this servicing agreement protects us like a BRV would or increases the chances of us lenders getting our money back by addressing the fundamental issue.
This servicing  agreement is about decreasing the chances (not eliminating) the likelihood of a substantial walkaway on the part of borrowers simply because they feel they don't need to pay anymore, without negative consequences.  Before anyone rubbishes that possibility, I'd ask that they look at the behavior of Loanio borrowers when it went under.

SeanG

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Re: Lending Club bankruptcy remote vehicle
« Reply #9 on: October 08, 2014, 09:35:23 AM »
First time posting on this blog. Great topic. I voted and am in the second rank; seriously considering not investing any more funds with LC until a satisfactory solution is presented by LC.

Victor

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Re: Lending Club bankruptcy remote vehicle
« Reply #10 on: October 08, 2014, 10:34:27 AM »
The servicing agreement alone fails to protect us lenders since there is slim (no) chance that the loans (notes) will be considered separate from LC's bankruptcy estate in the event of a Chapter 7 or 11.  The loan service agreement may assure that borrower payments will be processed, but the money will be channeled by the bankruptcy court to other creditors and equity holders before it ever gets to us lenders.  Ergo, the institutional investors insist on a BRV.

I can fathom no reason why "small" or retail investors shouldn't be equally protected.  All of the retail money on this platform certainly should aggregate to the size of an institution.  What are we, 10% of the platform,?  More?  Less?

Fred

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Re: Lending Club bankruptcy remote vehicle
« Reply #11 on: October 08, 2014, 10:38:03 AM »
This servicing  agreement is about decreasing the chances (not eliminating) the likelihood of a substantial walkaway on the part of borrowers simply because they feel they don't need to pay anymore, without negative consequences.

BRV does not eliminate the risk either; borrowers might still walk away.

Fred

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Re: Lending Club bankruptcy remote vehicle
« Reply #12 on: October 08, 2014, 10:57:57 AM »
The servicing agreement alone fails to protect us lenders since there is slim (no) chance that the loans (notes) will be considered separate from LC's bankruptcy estate in the event of a Chapter 7 or 11.

Don't confuse the roles of loans and notes in this situation.

In bankruptcy proceedings, loans and notes are on the opposite side of LC balance sheet.  Loans payments (from borrowers) are "revenues", Notes payments (to Lenders) are "obligations".

The loan service agreement may assure that borrower payments will be processed, but the money will be channeled by the bankruptcy court to other creditors and equity holders before it ever gets to us lenders.

I am not sure equity holders will be higher in priority than us lenders.

Jon

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Re: Lending Club bankruptcy remote vehicle
« Reply #13 on: October 08, 2014, 11:49:00 AM »
I spent 12 years in IT for the US Courts, specifically serving the US Bankruptcy Court, 9th Circuit, Western District of Washington. 

The Department of Justice's US Trustee Program represents "The State" or "The Prosecution" in a Bankruptcy case.  It also oversees asset liquidation and distributes funds.  This is the arm of the government which will seize and liquidate assets.

What I saw in my service, the order of priority for payouts in practice - if not law - is:

1) The US Federal Government - debts to the Feds are never discharged in bankruptcy proceedings.  This means IRS debt, student loan debt etc.  Money owed Uncle Sam never goes away until paid in full.

2) Secured Creditors - debts secured by assets like an inventory of goods, real estate or something else that can be sold off to pay debtors' obligations

3) Unsecured Creditors - these are employees (maybe their paychecks bounced), the unfortunate suppliers of inventory of goods (the stuff the debtor sells for profit), the office's janitorial service, the power company, the water company, the phone company, the insurance companies, the food vendor for yesterday's company meeting  etc.  Basically, this is anyone that sent a bill and hasn't been paid.

4) Shareholders - those that own a percentage of the debtor's organization... they never get anything.

So from my experience, absent LC signing a "reaffirmation agreement," or some other legal shielding, it'd be up to the Court to decide our status. 

If I had to make a bet, I'd say LC's lawyers would zealously  argue we're unsecured creditors.  If there's an argument that we're a Secured Creditor, it's beyond my imagination, but not necessarily beyond possible.  Maybe some other department in the Executive Branch would submit a motion on our behalf.

-Jon

PS: A "reaffirmation agreement" is a written promise to pay a debt, keeping it out of bankruptcy proceedings.  There is one meeting that debtors must attend.  It's called the 351 meeting, or the meeting of creditors. 

Nordstrom, Bloomingdales and other unsecured debtors will send pretty people to lurk in the halls well before the 351 meeting, hoping to ambush the debtor, get the debtor to sign a reaffirmation agreement.  Lawyers warn debtors about this, but some people have trouble heeding warnings.  This tactic works better than I thought it would.

PPS: I see the 351 meeting is now called a 341 meeting.  That happened after I left service in 1999.
« Last Edit: October 08, 2014, 12:15:23 PM by Jon »

bobeubanks

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Re: Lending Club bankruptcy remote vehicle
« Reply #14 on: October 08, 2014, 12:24:17 PM »
Well we have 27 votes which break down roughly as I expected but there have been 160 views indicating 133 abstentions. I think we have to count those as very low concern or IQ.

I wouldn't make that assumption. I'm one of the views without voting because I'm in a non-LC state. I'm interested in the discussion but didn't vote. Also, I'm not sure if the forum software recounts each time a person visits a thread.