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Marketplace Lending RFI

Document ID: 80 FR 42866

71 Stevenson Street | San Francisco, CA 94105

September 30, 2015

Laura Temel
Attention: Marketplace Lending RFI
U.S. Department of the Treasury
1500 Pennsylvania Avenue NW, Room 1325
Washington, DC 20220

Dear Ms. Temel,

On behalf of Lending Club Corporation (Lending Club), thank you for the opportunity to
contribute to the Department of the Treasurys Request for Information concerning Marketplace
Lending. We also appreciate your hosting the Treasury Marketplace Lending Forum held on
August 5, which we attended and found very valuable.
Lending Club (NYSE:LC) is the worlds largest online marketplace connecting borrowers and
investors. Our mission is to transform the banking system to make credit more affordable and
investing more rewarding. Our platform has facilitated over $11 billion in loans to more than one
million individual and small business borrowers since launching in 2007, and is continuing its
rapid and deliberate growth, fueled by the value we deliver to borrowers and investors and by
their high level of satisfaction with our products.
As important and sophisticated as our technology is, we start from a set of values that prioritize
acting in the customers best interests. For borrowers, our platform offers responsible credit
products with standard program loans offering a fixed rate, fixed term, and no hidden fees; our
platforms products are generally offered at a lower interest rate than prevailing alternatives; and
we disclose all terms upfront in a manner that is easy for borrowers to understand and plan for.

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For investors, we provide full transparency by posting on our website the performance of every
loan offered publicly since inception, as well as equal access and a level playing field with the
same tools, data, and access for all investors, small and large.
We use technology to automate processes and reduce costs, and pass on these cost reductions
to borrowers in the form of lower interest rates and to investors in the form of better returns.
Technology-led cost reductions include many process improvements, the ability to operate
without a branch network, and the automation of tasks that remain highly manual at most
traditional banks. Our ability to collect and analyze data, process and service loans in a highly
automated fashion, and simplify processes for our customers has fueled our growth and the
growth of marketplace lending over the last eight years.
As a two-sided technology-enabled marketplace, we deliver unique benefits to both borrowers
and investors. We believe that we also deliver strong benefits to the U.S. financial system as a
whole by bringing more transparency, removing friction, reducing systemic risk by requiring a
match between assets and liabilities, and offering traditional banks, including many local
community banks, the opportunity to participate on our platform and benefit from the same cost
reductions from which our other borrowers and investors benefit.
Borrower Benefits
We believe our platforms low cost operating model enables it to make credit more affordable
and available for consumers and small business owners and helps community banks reach
more of their borrowers:

For consumers:
o Significant cost savings: Over 70% of borrowers on our platform report using
their loan to pay off an existing loan or credit card balance and report that the
interest rate on their Lending Club loan was an average of 7 percentage points
o

lower than they were paying on their outstanding debt or credit cards.1
Responsible credit: Customers who use Lending Club to refinance their credit
card balance are replacing revolving, non-amortizing, variable rate debt with a

1 Based on responses from 14,986 borrowers in a survey of 70,150 randomly

selected borrowers conducted from July 1, 2014 July 1, 2015, borrowers who
received a loan to consolidate existing debt or pay off their credit card balance
reported that the interest rate on outstanding debt or credit cards was 21.8% and
average interest rate on loans via Lending Club is 14.8%.

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fully-amortizing, fixed rate installment loan. This product provides for a more
responsible way to manage their credit and helps improve the customers credit
score by reducing the amount of open-ended credit. In fact, 77% of these
customers experienced a FICO score increase within three months of obtaining
o

their loan through Lending Club, with an average score increase of 21 points.2
Predictable payments: Our platforms personal loan customers benefit from a
fixed interest rate and fixed monthly payments that help them better budget their
monthly payments and plan ahead. This product feature also protects them
against the risk of rising interest rates.

For small business owners:

o Access to capital: Many small business owners cannot get the credit they need
to finance their business expansion and create jobs. In particular commercial
loans under $250,000 are underserved by traditional lenders, largely due to the
high fixed costs of underwriting these loans. Bank loans from $100k to $250k
have fallen 22% since 2007, during a period when bank loans of $1 million or
greater increased by 56%.3 Our platforms automated processes allow us to
provide smaller commercial loans that are less available more economically than
o

traditional banks can.

Transparency: Lending Clubs platform offers a more transparent process to
small business owners looking for credit. We clearly disclose the interest rate
being charged to the borrower and all fees. We also offer a simpler application

process, faster credit decision, and faster funding than most traditional banks.
Affordability: The same low operating cost model that powers our consumer
lending marketplace also enables a lower cost of funding for small businesses.
Small business owners looking for small loans often resort to merchant cash
advances that have implied annual interest rates of as much as 100%. Lending
Clubs platform can help small businesses access capital at longer terms and
larger amounts with lower rates than typical credit cards or alternative business
loans or cash advances.

2 Average credit score change of all borrowers who took out a loan via Lending Club
between January 1, 2013 and January 31, 2015 with a stated loan purpose of debt
consolidation or pay off credit cards.
3 FDIC March 31, 2015 Call Report Data, C&I Loans and Nonfarm Nonresidential
loans

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o

Responsible products: Our platforms use of 1-5 year terms and no prepayment
penalties keeps borrowers from over-levering or getting into cycles of

unnecessary repeat borrowing.

Small Business Borrowers Bill of Rights: Lending Club joined with leading
Community Development Financial Institutions (CDFIs), think tanks, nonprofit
small business advocates, and other responsible small business lenders,
brokers, and marketplaces in the Responsible Business Lending Coalition and
unveiled the Small Business Borrowers Bill of Rights on August 5, 2015
(http://www.responsiblebusinesslending.org/). It is the first-ever consensus set of
principles and practices for responsible small business lending. Lending Club has
signed on to these principles and has committed to operate its business within
them.

For community banks:

o Lower cost of operations: Over the last 30 years, community banks have lost
significant market share to larger banks because of their inability to compete with
the scale of large financial institutions. By partnering with Lending Club,
community banks can offer loans to their customers using Lending Club
platforms lower cost of operations to more effectively compete with these larger
financial institutions and their products. To strengthen these relationships, we
recently announced a partnership with BancAlliance, a national consortium of
o

over 200 community banks to support this segment.

Saying yes to more customers: Community banks can offer more approvals
to more of their customers by partnering with Lending Club and accessing our
breadth of investor risk appetites. Additionally, community banks can define their
investment criteria and invest in loans that meet their specific criteria allowing
these banks to expand their offerings to their borrowers while diversifying their
own exposure. Providing their customers with access to loans also helps
community banks to retain and attract customers.

Regulatory Framework
Our borrowers benefit from the same regulatory protection as any bank customer as all loans
issued through our platform are issued by federally regulated banks. Working in partnership with
issuing banks has tremendous value to Lending Club and borrowers as it holds us to the highest
compliance and regulatory standard. As a result, borrowers benefit from all consumer protection
regulations including equal access to credit, fair lending, truth in lending disclosure
requirements, fair credit reporting, and fair debt collection. Our compliance with these rules and
regulations is monitored by daily oversight and review as well as quarterly and annual audits by

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the issuing bank, monthly and annual audits by our internal audit and compliance teams, and an
annual audit by an independent auditor. This oversight is further supplemented by the diverse
investor base (federal and state chartered banks, insurance companies, pension funds, etc.)
that operate through Lending Clubs platform and bring with them not only their internal audit
review and oversight process but also the review and oversight of their regulators, such as the
FTC, FDIC, and OCC (For example see: OCC bulletin 2013-29 Third Party Relationships),
which come together to create a robust compliance program that benefits all users of the
platform.
Investor Benefits
Our marketplace has attracted both individual and institutional investors who participate through
a variety of programs that generally present the same overall benefits:

Access to asset classes that individual investors did not have access to before and

institutional investors only had limited access to on a pool basis.

Steady cash flow and net annual returns averaging between 6%-9%4 since

inception.
Full control over investment decisions: investors can build their own portfolio of
standard program loans or Notes based on their investment objectives and risk
appetite. Investors can use 32 different filters to build their portfolio (including FICO
score, debt-to-income ratio, job tenure, home ownership, etc.) and review credit loss
forecasts for the specific portfolio they selected before making their investment

decision;
Maximum transparency: investors can review statistics on credit performance by
grade and by credit attribute for every single loan that was made publicly available to
invest in since inception in 2007, as well as summary statistics by vintage of
origination.

Our investment programs available to investors are regulated by the SEC under the Securities
Act of 1933 and the Exchange Act of 1934 and the rules and regulations thereunder.
Terminology

4 For Retail investors with at least 100 Notes and 100 different borrowers and no
Note accounting for more than 2.5% of the portfolio assuming 24 to 30 months of
average age of portfolio as of September 15, 2015.

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The term marketplace or credit marketplace is best used to refer to two-sided marketplaces
that facilitate lending between borrowers and investors, and do not take balance sheet risk by
investing in the loans they facilitate. We believe that companies that use their balance sheets to
make loans are not marketplace lenders, and may be better described simply as balance sheet
lenders. Throughout this response, we use marketplace to refer only to two-sided
marketplaces that do not predominately self-fund loans. The term platform may describe a
marketplace or other technology made accessible to third parties.
Recommendations to Enhance Marketplace and Other Online Lending
We have included in our response to the RFI a number of recommendations for legislative or
regulatory consideration which Lending Club believes would enhance or clarify the development
and operation of online credit marketplaces to the benefit of consumers, small businesses, and
the financial system more broadly. For ease of reference, we have listed these below, along with
the particular questions where the recommendation is discussed in this submission.
1. Small business lending protections We believe existing regulations adequately
protect consumers borrowing through online credit marketplaces. However, we are
concerned that small business owners may not benefit from the right level of protections
and transparency. We believe there is an opportunity for the industry to fully adopt the
practices and principles enumerated in the Small Business Borrowers' Bill of Rights, and
for the appropriate regulatory agencies to continue to monitor the industrys progress in
that respect. (Q11)
2. Alignment of interest and disclosure requirements Lending Club has a tremendous
amount of skin in the game (starting with nearly 20% of our revenue from each loan
being subject to loan performance over time) and an ongoing alignment of interests with
investors. Therefore, we believe that any mandated capital-based risk retention
requirement for marketplaces would be misguided and detrimental to both borrowers and
investors. As a result, we are proposing additional mandatory disclosure requirements
that would help ensure investors have all the necessary information to make informed
investment decisions and continue to exercise full control over the quality of loans being
issued through marketplaces. (Q10)
3. Tax incentives to increase access to credit in underserved segments We
propose that investors who provide capital in defined underserved areas and to low-tomoderate income small business borrowers be taxed at the capital gains tax rate, rather
than the current marginal income tax rate, if the loan is held for over 12 months.
Additionally, we propose, similar to the UK framework, that all investors be able to offset

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losses directly against interest income and gains and have returns on the first $5,000 of
investments made tax-free. (Q9)
4. More efficient income verification We urge that the IRS create an application
programing interface (API) for the IRSs 4506t tax return transcript process to make it
easier for consumers and small business owners voluntarily to give lenders access to
their tax information. We believe this relatively simple improvement to the current 4506t
process would make a meaningful difference in lenders ability to offer lower cost, faster,
easier, safer, and greater access to credit, across consumer and small business lending.
(Q2 and Q9)
Please find below answers to the specific questions asked in the RFI and thank you again for
the opportunity to offer input.