Here are concerns and suggestions I sent to LC. Comments are welcome:
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How Lending Club can win back the trust of investors
The original peer-to-peer (P2P) business model is still the future. Investors receive an alternative asset class that generally will have lower correlation with stocks and high returns. Borrowers receive credit at lower rates than a traditional credit card or access to credit they previously didn't have. This is as true today as it was before Renaud Laplanche, CEO and Founder of LC, resigned on Monday.
The underlying challenges primarily focus on how to expand this winning business model in a manner that is sustainable, grows the trust of both stock holders and retail loan investors, grows the trust and appreciation of borrowers across risk grades, and convinces regulators and the public more generally that LC is a win-win for all parties involved.
Management needs to act quickly to repair the trust of investors. The secondary market has grown from 300,000 to 520,000 since Monday. Great loans have decreased in price through the week and are now selling at discounts of 2-4%. Why would an invest purchase a loan at par on the primary market when they can get the same loan at a discount with 12 months of perfect performance? The underlying credit risk of these loans cannot justify these discounts. What has changed in the minds of investors is counterparty credit risk and liquidity risk. The risks that LC will not be around long enough to service the loans or that if they ever wanted to liquidate their loans they would take material losses relative to intrinsic value. What this means is that there has been a tremendous drop in demand from retail loan investors, the original P2P investor which justified the LC market cap of $10 Billion.
In my view, LC's management should consider the following nine steps to win back the trust of both stock investors and those investing in their loans. In short,
How to win back the trust of stock investors
1. Convince them that growth in loan originations going forward will be sustainable.
2. Segregate growth in loans that are potentially in violation of state Usury laws in financial statements.
3. Convince them that LC's underwriting model is consistent with Fair Lending laws.
4. Avoid deterioration in loan quality with more than just tighter underwriting standards.
5. Finally, stock investors will need to see LC win back the trust of retail investors.
How to win back the trust of retail loan investors
6. Reach out directly to P2P lenders via lending blogs like Lend Academy and address their concerns.
7. Construct a Bankruptcy Remote Vehicle (BRV) for all issued notes and more robust backup servicing.
8. Convince them that institutional investors and insiders will not receive preferential treatment over retail investors.
9. Show how loan performance would likely be affected by a recession.
Best regards,
LC stock and loan investor
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How Lending Club can win back the trust of investors
The original peer-to-peer (P2P) business model is still the future. Investors receive an alternative asset class that generally will have lower correlation with stocks and high returns. Borrowers receive credit at lower rates than a traditional credit card or access to credit they previously didn't have. This is as true today as it was before Renaud Laplanche, CEO and Founder of LC, resigned on Monday.
The underlying challenges primarily focus on how to expand this winning business model in a manner that is sustainable, grows the trust of both stock holders and retail loan investors, grows the trust and appreciation of borrowers across risk grades, and convinces regulators and the public more generally that LC is a win-win for all parties involved.
Management needs to act quickly to repair the trust of investors. The secondary market has grown from 300,000 to 520,000 since Monday. Great loans have decreased in price through the week and are now selling at discounts of 2-4%. Why would an invest purchase a loan at par on the primary market when they can get the same loan at a discount with 12 months of perfect performance? The underlying credit risk of these loans cannot justify these discounts. What has changed in the minds of investors is counterparty credit risk and liquidity risk. The risks that LC will not be around long enough to service the loans or that if they ever wanted to liquidate their loans they would take material losses relative to intrinsic value. What this means is that there has been a tremendous drop in demand from retail loan investors, the original P2P investor which justified the LC market cap of $10 Billion.
In my view, LC's management should consider the following nine steps to win back the trust of both stock investors and those investing in their loans. In short,
How to win back the trust of stock investors
1. Convince them that growth in loan originations going forward will be sustainable.
2. Segregate growth in loans that are potentially in violation of state Usury laws in financial statements.
3. Convince them that LC's underwriting model is consistent with Fair Lending laws.
4. Avoid deterioration in loan quality with more than just tighter underwriting standards.
5. Finally, stock investors will need to see LC win back the trust of retail investors.
How to win back the trust of retail loan investors
6. Reach out directly to P2P lenders via lending blogs like Lend Academy and address their concerns.
7. Construct a Bankruptcy Remote Vehicle (BRV) for all issued notes and more robust backup servicing.
8. Convince them that institutional investors and insiders will not receive preferential treatment over retail investors.
9. Show how loan performance would likely be affected by a recession.
Best regards,
LC stock and loan investor