The Three Channels on the Lending Club Platform

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Lending Club is a public company and therefore, discloses more detailed information than the private lending marketplaces like Prosper. Looking into their annual reports, the three distinct channels of their matchmaking business (Borrowers matched with Lenders) and their growth can be found. To put things in perspective:

Lending Club has facilitated $16 billion in loans since its launch in 2007 (up to Dec 2015)!

Mostly consumer loans (all in the US) with the exception of a brief business shift into SMEs that didn’t take off. Indirectly, Lending Club does cater to the funding needs of entrepreneurs that choose to borrow on their personal account and fund business endeavors at the very early stage.

Lending Club’s channels of distribution:

–       The original P2P business

which is executed through “Notes” on it’s fractional loan platform

–       The 20th century asset management business

which functions through LC Advisors, a wholly owned investment advisor &

which is executed through “Certificates and Funds” distributed by conventional third party marketers

–       The Whole loan platform

which executes through “Whole Loan Purchases” on the Lending Club Whole loan paltform

 It all started in 2007 with the P2P platform and the other two channels were added on the way as the business grew. The $16 billion facilitated in the past 9 yrs, were channeled roughly

20% through the fractional loan platform (Notes); 35% through certificates and funds (LC Advisors); and 45% via the Whole loan platform.

The pure P2P channel in 2015, issued $1.57billion Notes. The growth through this channel has been x1.5 year-on-year over the past two years (2013-2015). Flat growth of the fractional loan platform business.

LC Advisors, a SEC registered advisory wholly owned by LC

The asset management business of LC Advisors offers the possibility to lend through ownership of a fund. Both qualified individuals and institutional investors can hold loans through this channel.

Lending club’s managed Funds:

  • Conservative Consumer Credit Fund (CCF)
  • Broad-Based Consumer Credit Fund (BBF)
  • High yield Consumer Credit Fund (HYF)

This channel was opened in 2011 and the CCF fund invested only in the two top quality grade notes (i.e. less risky credit spectrum) and the BBF is a diversified fund investing in all loan grades; and HYF picks the more risky credits for those seeking higher yields. The required minimum is $500k and therefore, only qualified investors can invest in these private placements. Most of the subscriptions have come through third party marketers, like Morgan Stanley internationally and Oppenheimer in the US.

The diversified BBF fund is the largest, $882million with more than 800 investors reported and 17% non-US holdings. The CCF fund has $108mil and the HYF $74mil with less than 100 investors. The CCF however, has more than 40% non-US investors.

These managed funds (hedge fund packaging in other words) were in the press in 2012 but since have been in stealth mode in the media, despite the fact that the volume and the servicing fees from this part of the business have been growing more than the Notes business.

The third channel, the whole loan platform, currently accounts for 48% of the volume of loans facilitated and for 56% of the servicing fees.

What is the whole loan platform?

Banks and other institutional investors want to own loans as assets on their balance sheet or want to serve their customer base with loans. Lending Club offers the Whole Loan platform which allows a bank to actually own the loan on their balance sheet. Lending Club simultaneously has a servicing agreement with the bank (so earns all the servicing fees). Such purchase agreement programs can be customized. Regulations require that the investor-bank has access to the underlying borrower information but wont contact directly the borrower or use that information in ways that violate privacy laws. This is exactly the part that the disclosure dispute with Jeffries came about (LC wasn’t disclosing appropriately to the borrowers on the LC platform the fine details of the whole loan purchase agreements that gave access to the bank-investor to their info).

The whole loan platform is the channel that was “hit” last November when Santander withdrew from the consumer loan market. Santander had to offload $1billion of Lending Club consumer loans that they were holding on their books through this channel. The interruption of their whole loan purchase agreements were due to regulatory pressure with regards to capital requirements and nothing to do with any frictions between LC and Santander.

Lending Club’s business breakdown by distribution channels

  Screen Shot 2016-05-16 at 9.52.54 AM

Source: Daily Fintech; Lending Club 10-K report 2015

Over the past three years,

Lending Club’s whole loan platform business has grown Tenfold. The certificate business has Tripled and the Notes business has doubled.

The roughly $9billion processed in 2015, were channeled 18% from the pure P2P channel, 34% from LC advisors and 48% from the whole loan platform.

What do you think?

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