I recently got an e-mail from a reader who was concerned about the long-term stability of peer lending outfits like Lending Club. In it, he asked:
Is there any credible data as to how long companies such as Lending Club are likely to persist (5, 10, 20, 50 years)? That’s probably one of my biggest concerns… I worry that I’ll add money every month until one day they file for bankruptcy, and I’ll lose everything. I’m very interested in your thoughts.
That’s a great question, and unfortunately I don’t have a crystal ball. I can, however, comment on what might happen if Lending Club gets into financial trouble. Here’s what the Q&A in their prospectus has to say about it:
Q: If Lending Club were to become subject to a bankruptcy or similar proceeding, who would service the member loans?
A: We have executed a backup and successor servicing agreement with Portfolio Financial Servicing Company (â€œPFSCâ€). Pursuant to this agreement, PFSC stands ready to service the member loans. Following five business daysâ€™ prior written notice from us or from the indenture trustee for the Notes, PFSC will begin servicing the member loans. If our agreement with PFSC were to be terminated, we would seek to replace PFSC with another backup servicer.
In other words, if Lending Club runs into trouble, there are plans in place for a backup servicer to step in and take over the loan servicing.
That being said, there is a large section in the prospectus devoted to risks of investing through Lending Club. Included in this section are a number of possible risks associated with Lending Club itself.
They go through a variety of scenarios, but the upshot is that a bankruptcy or similar proceeding could cause delays in payments on notes and, in the extreme, it’s possible that you could wind up as an unsecured creditor of Lending Club.
It’s worth noting here that uninvested funds are held in a Wells Fargo bank account that offers “pass through” FDIC coverage to individual investors (subject to FDIC limits).
So… What does this mean for me? I remain cautiously optimistic, but Lending Club only represents a small percentage of our overall portfolio. As such, I’m comfortable with the attendant risks.