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I am a client of Lending Club. Lending Club and its main competitor, Prosper, facilitate peer-to-peer lending. They offer slick online platforms that make it easy for me to lend money to another person living in the US. For example, I could invest in loans which will be used by the borrower to pay off their credit card bills. In exchange, I receive an interest rate on the loan which is much higher than I  even get on a high-yield bond. On average, the loans that I make through Lending Club have a 16% rate of interest. While a larger percentage of the people that I loan money too will not fully pay it back, I expect the returns to be about 9% per year after deducting loan losses.

Before I continue, I should also disclose that I am an affiliate for both Lending Club and Prosper. I run their advertisements on my site, Learn Bonds, and get paid when my ads lead to an account being opened.

Lending Club is Having a Problem Investing My Money

On January 3rd, 2013, I opened an IRA account. The account was for more than $50,000 and less than $1 million. Lending Club recommends diversifying among several hundred loans. To assist in this process Lending Club offers an optional service called Prime,  in which they take the work out of finding and investing in  loans. You provide them instructions on what type of loans you want to invest in (length, credit risk of borrower) and they handle the details on your behalf. I was told that my account would be fully invested within 3 to 4 weeks. On February 14th, about 10% of my funds are in cash or “in funding”.  You can learn more about their Prime service here.

The Ratio of Notes Listed / Issued

Every month thousands of loans are listed for investment on the Lending Club platform.  When investors commit to fund the amount of the loan, the loan is removed from being shown on the platform. However, just because a loan is fully funded doesn’t mean it will be issued. Recently, I noticed that only about half the loans which the “Prime” service places orders for on my behalf are getting funded.  In the beginning of January when my account was first funded, I noticed that the number was around 60%. As you can see from the below comment left on a forum hosted by Lend Academy  my experience doesn’t seem to be isolated.

“I’m not sure what other investors feel, but the low rate of issuance for loans on the platform is something that has come to bother me recently. From past orders, it seems safe to say that only 50% of loans you fund will be issued. LC investing is very time consuming to aggressively keep all your capital committed to fund loans, and the great returns justify it – it seems that LC should refine their initial credit criteria to see which borrowers are most likely to not follow-through with the application process, and introduce the funding stage notations like Prosper.”

As the post above indicates, Lending Club posts loans before they verify the information provided by the borrower. This leads to a large number of loans which investors pledge funds for investment, not being issued. For those that don’t use the prime service, the process of investing becomes time consuming. For those using prime, it means that cash must sit idle for longer periods of time.

Lending Club’s Response

When asked to comment on this issue, a representative from the firm’s PR agency e-mailed:

“Lending Club’s list-to-issue remains around 60-65% we had an unexpected increase in applications in January which resulted in a higher number of borrower withdrawals due to some marginal increase in processing time.”

Reading between the lines, the firm is admitting there was a problem in January. Furthermore, they are basically making a connection between application processing time and the activity of borrowers. The longer the processing time, the more borrowers find alternative sources of funding. As borrowers withdraw their applications,  the experience of investors becomes worse.

Why doesn’t Lending Club just verify loans before they post them?

I think the answer is that Lending Club is a victim of its own success. It appears that they don’t have the infrastructure developed to support verifying the increasing number of loan applications that they receive. My hunch is that if they changed their process to verifying loan information prior to posting, they would frequently have the problem of not having any loans on their platform to display. Imagine the headline, “Lending Club Runs Out of Loans”.

In January 2012, Lending Club issued 2,598 loans. A year later, the number of loans more than doubled to 6,872. However, Lending Club rejects 9 out of 10 loan applications. In January 2013, Lending Club rejected 43,065 loan applications. Assuming each loan application takes just 30 minutes to verify or reject, Lending Club would have to have over 150 people working in their loan verification department to keep up with the volume of incoming loan applications.

The Silver Lining

I am glad that Lending Club is verifying loans before issuing and not cutting corners. The problems that this article outlines, having too little infrastructure to support growing demand, are temporary and typical for a fast growing company. However, they are also the types of problems that a smaller competitor might use to gain market share from them.