FTC Files Complaint Against LC, Accuses of Deceptive Practices

[MoMoney]

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.

[Fred93]

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 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 mvoe 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?

[MoMoney]

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.

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."

[SLCPaladin]

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.

[MoMoney]

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.

[Fred93]

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.

I understand completely.  I'm not arguing with the math.

I just think packaging that up so that most investors will understand is probably beyond the current managment's ability.

[Rob L]

LC would take a hit on a change from origination fees to higher APR.

IIRC most loans are paid off early. If LC were to eliminate origination fees and charge a higher monthly service fee then prepayments would hurt them. Rather than a fixed upfront fee LC would receive an indeterminate number of monthly payments. Fewer payments less fee. Prepayments already hurt investors as they are charged a service fee by LC on the final payment for the privilege of simply getting their money (principal) back. To mitigate the investor loss LC does not charge the full 1% on prepayments made within the first 12 months. Very nice they made that change. After 12 months though LC gets a tidy windfall for prepayments as they charge the investor a service fee for returning the remaining principal without actually having to service the remainder of the loan.

There's also the unsubstantiated "conspiracy theory" that LC re solicits its current borrowers that have made a year or more of prompt payments with an offer to refinance their current loan at a much lower interest rate. Marketingwise they are the perfect target. LC gets a new origination fee and the servicing windfall from the original loan described above. Only the current investor(s) get hurt. If true, a switch to higher APR would end this game.

Finally there's cash flow. Those nice up front fees would be spread over the life of the loan. Not a good thing.

Of course LC could up the APR enough to cover all this (they'd have to predict future prepayment rates to do so).
Whether or not the new APR would be competitive is an open question.
 

[Johnwick88]

Hard to believe that this was "sudden" and Larry didn't know it was going done when he left the Board only 3 weeks ago. It is completely f*cked up that FTC currently only has 2 of the five directors positions filled and I guess one is leaving. Tough to deal with a gutted government, MAGA and whatnot

Gclub mobile

[hdsouza]

The biggest deceptive practice that LC employs is their cash flow system.
If you notice they take 5 days from the time the client makes a payment till the time the payment is effective.
To the normal eye it makes little difference, although LC makes tons of money on it

Again this is my assumption and I apologize if I am incorrect but....
... I was recently researching companies to buy Stocks and I stumbled on m1finance.com. I was surprised when they do not charge any fees for stocks and have an amazing system. So how do they make their money See https://www.reddit.com/r/m1f/comments/7lj33z/how_does_m1_finance_makes_money/ as the owner mentions "They believe eventually every investment platform will be free".

So I would conclude LC is doing the same with the funds they hold for 5 days. Investing it.
Another way.. It should not take 5 days for money to be credited to your account. When i transfer money between banks it is 24 hours.  Transferring money to m1finance was 4 hours!!!!

The difference of 5 days may not make a huge difference to the small investor like us, but i am sure if I received the Borrower payments without the 5 day holdup, I would have invested 5 days earlier.

Dont get me wrong. I am not saying I do not like LC. Actually I love them . I have to.. I have thousands of dollars invested