How does Default status work?

[rickhuizinga]

This is why I would like to see LC invest it's origination fee back into the note. It would align their interests with their investors, and they would have skin in the game.

Not sure this makes sense.  It's like asking Amazon to purchase the products on its site; or asking Costco to buy the HDTVs  it's selling.

That's not how it works; that's not how any of this works.

Are you saying that LC never invests or funds (or is incapable of investing or funding) any portion of the loans issued through it's site with its own funds? It was my understanding that they did this at times.

[Fred]

Are you saying that LC never invests or funds (or is incapable of investing or funding) any portion of the loans issued through it's site with its own funds? It was my understanding that they did this at times.

They certainly can, but why?

There are other (better?) ways for LC to deploy their cash: technology, operations, marketing, etc.

[rj2]

This is why I would like to see LC invest it's origination fee back into the note. It would align their interests with their investors, and they would have skin in the game.

Not sure this makes sense.  It's like asking Amazon to purchase the products on its site; or asking Costco to buy the HDTVs  it's selling.

That's not how it works; that's not how any of this works.

Amazon and Costco will take back the HDTV if you are unhappy with it, for a full refund. Your analogy is not valid at all. Brokering loans is nothing like selling televisions.

We rely on LC to originate good loans and to ensure they are paid. It is totally valid to ask that they have a financial incentive to do so.

[nonattender]

This is why I would like to see LC invest it's origination fee back into the note. It would align their interests with their investors, and they would have skin in the game.

Not sure this makes sense.  It's like asking Amazon to purchase the products on its site; or asking Costco to buy the HDTVs  it's selling.

That's not how it works; that's not how any of this works.

Amazon and Costco will take back the HDTV if you are unhappy with it, for a full refund. Your analogy is not valid at all. Brokering loans is nothing like selling televisions.

We rely on LC to originate good loans and to ensure they are paid. It is totally valid to ask that they have a financial incentive to do so.

They have reputational risk and servicing fees (these are not de minimis, in aggregate), both hinging upon how they underwrite.
They have, in aggregate, about nine years of fully transparent data showing that they underwrite well.  What else do you want?

The implication that marketplace lenders are somehow bad actors based upon the design of their business models is tiresome...

[rickhuizinga]

This is why I would like to see LC invest it's origination fee back into the note. It would align their interests with their investors, and they would have skin in the game.

What else do you want?

I want LC to place a bet on the same side of the table they are asking investors to place their money. The concept of an investor wanting to see "insider ownership" prior to putting their money at stake is not new.


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[nonattender]

This is why I would like to see LC invest it's origination fee back into the note. It would align their interests with their investors, and they would have skin in the game.

What else do you want?

I want LC to place a bet on the same side of the table they are asking investors to place their money. The concept of an investor wanting to see "insider ownership" prior to putting their money at stake is not new.

That would introduce a world of perverse incentives that I don't think you've yet thought about.  I am very happy with the marketplace
models not taking on any credit risk, having strong balance sheets, and not having any reason to want to participate in secondary mkt.

I really don't mean to sound jaded, but this is a conversation that many of us have had multiple times since 2006.  The model dynamics
presently in place really are the best possible dynamics for note investors of all sizes and keep the platforms (and our notes) very safe.

Making a seemingly small and well-intentioned change to the balance of the marketplace dynamics would introduce combinatoric risks...

[rickhuizinga]

This is why I would like to see LC invest it's origination fee back into the note. It would align their interests with their investors, and they would have skin in the game.

What else do you want?

I want LC to place a bet on the same side of the table they are asking investors to place their money. The concept of an investor wanting to see "insider ownership" prior to putting their money at stake is not new.

That would introduce a world of perverse incentives that I don't think you've yet thought about.  I am very happy with the marketplace
models not taking on any credit risk, having strong balance sheets, and not having any reason to want to participate in secondary mkt.

I really don't mean to sound jaded, but this is a conversation that many of us have had multiple times since 2006.  The model dynamics
presently in place really are the best possible dynamics for note investors of all sizes and keep the platforms (and our notes) very safe.

Making a seemingly small and well-intentioned change to the balance of the marketplace dynamics would introduce combinatoric risks...

So in a scenario where LC would invest an amount equivalent to their origination fee into every loan, how would that adversely affect the marketplace?

In this scenario, LC would not have a perverse incentive to alter the credit models in their favor, with respect to other investors, because they are investing equally in all classes of loans.

As far as I can tell, this would mainly have the effect of being a revenue deferment program for LC while providing a stronger financial incentive for originating good loans.

[nonattender]

I will leave it to others if they wish to go down that rabbit hole with you.  For my part, I reject your initial premise (as does the data from
the last 10 years or so) that LC has anything but positive incentive to iterate its credit models appropriately, as is.  Don't 'fix' what works.

And, with that, for the moment, I've got to get back to work...

[AnilG]

If LC invests origination fee in loans, what will be the source of money needed for company operations, engineering, marketing, and sales? Majority of LC revenues are from origination fees and most of these revenues are being used for LC expenses.

May be they should charge lenders like you, who want LC to invest in their own loans, 5% additional fees on top of 1% service fees and then turn around and lend collected 5% additional fees in to their own loans to make you happy.

So in a scenario where LC would invest an amount equivalent to their origination fee into every loan, how would that adversely affect the marketplace?

[rickhuizinga]

If LC invests origination fee in loans, what will be the source of money needed for company operations, engineering, marketing, and sales? Majority of LC revenues are from origination fees and most of these revenues are being used for LC expenses.

May be they should charge lenders like you, who want LC to invest in their own loans, 5% additional fees on top of 1% service fees and then turn around and lend collected 5% additional fees in to their own loans to make you happy.

So in a scenario where LC would invest an amount equivalent to their origination fee into every loan, how would that adversely affect the marketplace?

The money wouldn't simply disappear.

If they invested an amount equivalent to the origination fee in loans, the origination fee would be returned to LC at the same rate that the loans are paid off (assuming the loans do get paid off).  They would essentially be deferring the revenue generated from origination fees from the time of origination to the payoff schedule of each loan.

[yojoakak]

I would prefer if LC took a percentage of it's origination fee every month, instead of upfront all at once. (Equivalent to no origination fee and a bigger service fee.)

The current situation is equivalent to Lenders paying LC's Origination Fee in return for the Borrower paying back more in principal than they actually receive. Because this is in fact exactly what happens.

[dompazz]

I would prefer if LC took a percentage of it's origination fee every month, instead of upfront all at once. (Equivalent to no origination fee and a bigger service fee.)

The current situation is equivalent to Lenders paying LC's Origination Fee in return for the Borrower paying back more in principal than they actually receive. Because this is in fact exactly what happens.

They do, most people just don't realize it.  When they take their 1%, it comes out of interest and principal.  That principal part is, in effect, a delayed, lender paid, origination fee.

[yojoakak]

I would prefer if LC took a percentage of it's origination fee every month, instead of upfront all at once. (Equivalent to no origination fee and a bigger service fee.)

The current situation is equivalent to Lenders paying LC's Origination Fee in return for the Borrower paying back more in principal than they actually receive. Because this is in fact exactly what happens.

They do, most people just don't realize it.  When they take their 1%, it comes out of interest and principal.  That principal part is, in effect, a delayed, lender paid, origination fee.

LC makes 4 times a much on the Origination Fee. Immediately. And they don't give it back even if the loan defaults.

Are you not aware of this?

[rj2]

I will leave it to others if they wish to go down that rabbit hole with you.  For my part, I reject your initial premise (as does the data from
the last 10 years or so) that LC has anything but positive incentive to iterate its credit models appropriately, as is.  Don't 'fix' what works.

And, with that, for the moment, I've got to get back to work...

Have we learned NOTHING from the meltdown of Countrywide Financial?

[AnilG]

Based on latest quarterly earnings[1], revenue to origination ratio is 5.21%. Lending Club is making 5.21% (top line) on every dollar of origination while lenders on LC platform on average are making 7.84% (bottom line) [2].

It is already a bad business deal for Lending Club to make less in top line than the lenders on the platform (higher portion of economic profit going to lenders). Basically, Lending Club is borrowing funds from lenders at 7.84% to lend when it could easily borrow the same amount as debt at much lower interest rate. Recently, I was looking at a junk level corporate debt of a company, it's borrowing cost 3.8%. It makes no sense for Lending Club to be borrowing funds at 7.84% from lenders, when it could get same funds from a corporate debt at much lower rate. Or Lending Club could become a bank like Ally Bank which pays depositors 1% and lends majority of these funds at much higher rates to auto loans and keep all the profits for itself.

So, count your blessings that you are already getting extra returns. Sooner than later, this gravy train will need to stop for Lending Club to be a viable, standalone and scalable business and shareholders are going to demand that. Either Lending Club will have to become pure balance sheet lender or offer lenders a fixed return (or variable return within a fixed range) like some UK p2p platforms. In my estimates, if Lending Club becomes pure balance sheet lender, it can raise its top line from 5.21% to almost 10% with a combination of origination fees and interest received from loans.

[1] Lending Club Reports Fourth Quarter and Full Year 2015 Results and Announces $150 Million Share Buyback https://finance.yahoo.com/news/lending-club-reports-fourth-quarter-123000094.html

[2] Edited Transcript of LC earnings conference call or presentation 11-Feb-16 1:30pm GMT https://finance.yahoo.com/news/edited-transcript-lc-earnings-conference-210404329.html

LC makes 4 times a much on the Origination Fee. Immediately. And they don't give it back even if the loan defaults.

Are you not aware of this?