Lending Club Limits Investor Questions

Lending Club Limits Investor Questions

As I noted in my March update of my Lending Club performance, I haven’t been adding new notes to my portfolio. My NAR is still a respectable 8.98%, but I’ve been too busy to keep up with note picking, so instead I’ve been withdrawing any accumulated cash to my savings account.

With that as a backdrop, I wanted to share some news about Lending Club… According to a recent post on their blog:

Starting tomorrow [April 15th], investors will only be able to ask questions from a predefined set that was created based on the most frequently asked questions logs over the last 2 years and reviewed and edited by our compliance team. As an investor, feel free to submit additional questions that you would like to see added to list to [email protected]. As always, your comments are welcome as we continue to make improvements to our platform.

Okay, here’s my comment: This is a stupid idea that cripples the investing process. As things stand, investors are the ones taking all of the risk, so why reduce their ability to investigate their investment opportunities? It just doesn’t make any sense.

In case you didn’t know, investors had previously been allowed to ask borrowers free form questions. This has always been an imperfect system, in that the questions don’t appear until the borrower answers them. Thus, a borrower can easily ignore questions and only the investor(s) that asked would know. But still, at least you had the option of asking questions about troubling aspects of a borrower’s profile.

For example, I’ve frequently seen someone asking to borrow (say) $15k to pay off credit card debt when their credit profile only showed $8k in outstanding balances. There are sometimes good reasons for this – for example, a spouse’s credit balances may or may not have been included – and it’s helpful to see how the borrower handles the question. Unfortunately, that particular question doesn’t appear to be available from the list of approved questions.

A logical question might be why is Lending Club doing this? Once again, according to their blog:

At Lending Club we embrace new technologies and open communication, but also provide a financial service that calls for a higher level of privacy and identity protection.

Lending Club investors have the ability to ask questions of potential borrowers before committing investments into their loans. This ability has raised concerns in terms of protecting the privacy and identity of both borrowers and investors. These concerns led us to adjust our Q&A mechanism for the benefit of both borrowers and investors.

I’m sorry, but this explanation just doesn’t cut the mustard with me… Nobody is compelling investors or borrowers to breach privacy here. If you don’t get asked a question that you’re not comfortable with, don’t answer it. Or give as much information as you can without going overboard. For example, if asked about your job, be vague and then say that you’re not comfortable giving more specific information.

To me, this is a classic case of throwing out the proverbial baby with the bath water. I’ve heard rumors that this Propser (another P2P lending platform) has implemented something similar, so perhaps they’re being compelled to do this by an outside entity, but still… This makes their product significantly less attractive to investors.

Hat tip to Steadfast Finances for pointing this out.

11 Responses to “Lending Club Limits Investor Questions”

  1. Anonymous

    Hello…I am trying to find out how to file a complaint against Lending Club. By complaint, I mean with a regulatory agency. Problem is, I am not sure where/if they are registered. I know they file things with the SEC, but am not clear about if the SEC regulates them. Any suggestions?

    The issue is this: a Prime account with a large balance was opened with Lending Club. The 0.8% fee they charge was deducted the day the money arrived there. Then a month passed, and no investments were made or any notes funded. In the Prime account, they are supposed to invest for you, per your parameters stated when opening the account (which was all done).

    I inquired 3 separate times as to why nothing had been invested. In over 2 weeks, I got 2 emails back. Each said an “update” about the situation would be coming soon. None ever came. Now they are ignoring my inquires completely, and none of the money ever was invested.

    I recently withdrew the balance (less the 0.8% fee). I can do better things with the money than have it sit there idle, but mainly I am incensed at how unresponsive they have been to my inquiries. Since they did nothing, I am asking for the 0.8% fee to be credited back. Guess what? They have to date ignored that request as well, not even offering a response at all.

    I can’t imagine this crap is even legal when it comes to financial services. So am seeking to file a complaint (SEC?) to recover the “fee” I was charged, all for the privilege of them doing nothing.

    Appreciate any helpful comments…thanks.

  2. Anonymous

    BC, I’m intrigued by your trading platform system. Can you elaborate?

    I was extremely disturbed when Lending Club get rid of free-form questions, especially since they had such a limited selection of approved questions. But the list keep growing and has become modestly reasonable in the interim. Hopefully, it will continue to grow. They are open to suggestions which, I assume, they’re quantifying. So if there are any questions people on this forum feel are lacking, perhaps we can pile on and get them to add it.

  3. Anonymous

    Long time reader, first time poster.

    Your article was the nail in the coffin for my relationship with lending club. While I’ve only invested a modest amount (about $350 total, over the course of a year), I’ve had two loans charged off. One that was purchased with the free $25 signup bonus (very risky borrower) and one $25 loan for someone with superb credit (boggles my mind). I’m averaging a negative rate of return. It’s frustrating.

    Yesterday I took a look at all my loans and put 7 of them up for sale on the trading platform. 6 of them got sold. The other one is late more than 30 days, so it probably won’t sell. My rationale was to look at loans with no credit score change and a positive rate of return: payments received, plus accrued interest and outstanding principle, divided by the original loan amount (and minus the 1% transaction fee). In all I averaged about 7% returns just from selling the notes to get my money back.

    At the end of the day, I just want my money back. It can be put to better uses, like my dividend portfolio. And it’s not that I’m risk-averse, I trade options for crying out loud…but my track record trading options is much better than the ROI with lending club. If I lose money trading options, it’s my own fault and it’s money that I was willing to lose. But if I lend to someone with A+ credit on LC and they default, I get pretty upset.

    One more point then I’ll stop my rant: since LC started offering 5 year loan terms it has become much less rewarding to reinvest capital in P2P. Practically every loan on there is 5 years now, presumably because people want lower monthly payments. It just takes too long to get my money back, and reduces my cash flow stream for reinvesting in new notes.

    Thanks for letting me share my opinion, I enjoy your site!

  4. Anonymous

    I’ve been investing in LC for 18 months now. I buy all my notes on the trading platform and only buy good notes (stong payment history and same/higher credit rating). I have over 250 notes. I put every note for sale at a premium on the trading platform, unless I see problems with the note (credit deteriorating more than 2 notches, payment failed, etc.), I immediately put it on sale at a discount and have been successful cutting my losses early. I’ve “flipped” 74% of my notes and track every one on a spreadsheet – a lot of churn, but this active management has my return at over 15% LTD (including idle cash time). I’ve never had a default. Finding time to track is the hardest part, but if you put some pretty mindless time into it (while drinking a glass of wine in front of the tube at night) and track each note, you can make nice returns on LC. My approach is not for everyone, but it’s pretty easy money if you ask me. You just have to work harder than the other investors/traders. Work = Payoff (15%+ is most reliable investment I know of)

  5. Anonymous

    Good point man. I am seeing more and more people become leery of this type of investment. I wrote a little piece on it myself recently. Thanks for bringing this up.

  6. Anonymous

    I was planning to start investing in P2P lending, and had looked at lending club. When I had more money, I had decided this would be a great way to invest my “extra” money. However, with this change I just cannot do it. This makes P2P lending so much more risky and for no greater reward. I, too, wonder why they did this.

  7. Anonymous

    Right with ya brother! The reason Q&A is vital is b/c a few of Lending Club’s quantitative metrics are flawed – dare I say incorrect.

    1) Debt to Income: this calc doesn’t factor the borrower’s mortgage into the calculation. (Read the FAQs)

    2) Revolving credit balance: LC only uses one credit rating agency, so I’ve seen more cases than I can remember of a borrower asking for a 25k debt consolidation loan and the RCB value is off by as much as 100% of the amount.

    So all those who say quantitative analysis is enough might want to do a little more digging.

    With LinkedIn, Facebook, and millions of CVs posted in the internet ether, all a motivated [rule breaking] investor needs is a borrower’s employer, job title and relative location which is included on the loan app. You may only find a very small percentage, but that alone is enough to say the policy is flawed.

    So the excuse of identity protection seems more like an ineffective attempt to give the illusion of anonymity by papering over it vs solving it.

    Whether this is an underwriter issue or a regulatory issue, I don’t know.

    Lending Club hasn’t commented on what prompted the issue but I really wish they would. If it’s something outside their control, perhaps I could have cut them a break, but I do think they mishandled the PR on this issue.

    For the record, I still love Lending Club’s business model and the concept of P2P Lending, but I will not participate in a venture where my ability to perform due diligence is compromised.

  8. Anonymous

    I’ve stopped investing money into Lending Club when I realized they were doing this. The risk has increased too much.

    The listing of questions gives the borrower too much time to prepare, it’s like having a job applicant prepare to give you all the answers you want to hear because the know what you’re going to ask already.

    Lending Club might as well ask the borrower to answer all these questions up front during the application process. Which will save me the trouble of clicking through and submitting each of the question.

  9. Anonymous

    This is a terrible idea. As an investor from a state that only allows people to access Lending Club through the secondary trading market, I especially depend on the Q&A from the original listings to flesh out my investing decisions.

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