Lending Club, Middleman for Small Loans, Plans Stock Offering

Updated, 8:19 pm | Obtaining a loan was once a matter of heading down to the bank and applying. But the technology boom of the last decade has given rise to a new way, where web-savvy investors can connect directly with would-be borrowers.

Now, by filing to go public on Wednesday, the leader in the so-called peer-to-peer lending industry, Lending Club, plans to test how popular and durable the business model can be.

Though companies like Twitter and Uber draw a huge amount of attention in the consumer technology universe, the nearly eight-year-old Lending Club has carved out a special niche online: lending. And in the process, it has garnered fans across Wall Street and Silicon Valley.

Together with competitors like Prosper Marketplace, the company functions largely as an intermediary connecting those with money with those who want it. It is an industry that supporters say is becoming a robust alternative to traditional bank lending and largely sky-high credit-card interest rates.

Since it began making loans in 2007, Lending Club has become the clear leader in the field, overtaking older rivals like Prosper in the process. From its founding through the first half of this year, the company says that it has financed more than $5 billion worth of loans and paid nearly $494 million in interest to investors in those loans.

That success has fed into high ambitions for future growth, although it is not currently turning a profit. In its prospectus on Wednesday, Lending Club listed $500 million as a preliminary fund-raising target — but it could seek to raise even more, according to a person briefed on the matter.

That initial goal would still be enough to rank the prospective public offering as one of the 10 biggest stock market debuts of an Internet company. That would put it in the company of Groupon, Orbitz and other big online consumer brands. It also remains to be seen whether it can sustain the demand from investors when interest rates rise, which would make other investments like bonds more attractive.

The emergence of Lending Club and others reflects the Silicon Valley determination to shake up traditional industries using the latest technologies. Its chief executive, Renaud Laplanche, was partly inspired by reading through his mail years ago. His credit card statement listed an interest rate of 17 percent. His savings account disclosed a rate of just 0.5 percent.

“I believe we can transform the current banking system into a frictionless, transparent and highly efficient online marketplace that provides affordable credit to borrowers and creates great investment opportunities for investors, helping millions of people achieve their financial goals,” Mr. Laplanche wrote in a letter in the prospectus.

From the start, the company has focused on relatively safe loans, using advanced computer algorithms that measure borrowers’ creditworthiness. Customers with a FICO score of at least 660 can borrow up to $35,000 for three- or five-year loans. That is largely the kind of lending that big global banks have shied away from, since they are too small to pay meaningful profits.

Yet for Lending Club, the enterprise can prove lucrative. While rates on loans can start at below 7 percent, the average interest rate is about 14 percent, which still remains below standard credit cards. (The lenders can choose how risky of a loan they want to underwrite.) The company takes a small cut of that percentage and pays the rest to investors in the loans.

The demand for peer-to-peer borrowing has propelled Lending Club’s expansion in recent years. It originated $1.8 billion worth of loans in the first six months of the year, more than doubling what it did in the same time last year.

Its revenue surged 134 percent, to $86.9 million. And its adjusted earnings before interest, taxes, depreciation and amortization which excludes some noncash charges, rose 55 percent, to $5.9 million.

But marketing expenses and the costs of growth have weighed on the bottom line. The company slid to a $16.5 million loss in the first half of the year from a small $1.7 million profit in the same time last year.

Still, the promise of the peer-to-peer industry has attracted some of the very institutions that Lending Club and others have sought to displace. Drawn by the promise of returns as high as nearly 9 percent, big mutual funds and hedge funds have flocked to help fund loans on these online marketplaces.

So popular has peer-to-peer lending been among big institutions that Lending Club and its competitors have had to put limits on how many loans they can buy, as well as how quickly they can bid on coming loans.

The presence of Wall Street is also on its board, which includes Lawrence H. Summers, the former Treasury secretary; John J. Mack, the former chief executive of Morgan Stanley; and Mary Meeker, the venture capitalist and onetime star Internet analyst.

The company, which has already raised nearly $400 million in venture funding to date, counts among its backers heavyweights like Google, the venture capital firm Kleiner Perkins Caufield Byers and the mutual fund giants T. Rowe Price and BlackRock.

And anticipation over Lending Club’s impending IPO. had been so high that many of Wall Street’s biggest investment banks battled to claim a piece. The filing disclosed that the stock sale would be led by Morgan Stanley and Goldman Sachs.

As it has grown, Lending Club has moved beyond debt consolidation into newer, potentially more lucrative offerings like loans for small businesses, students and elective surgery.

Left unsaid in the filing were several crucial details about Lending Club’s public offering. Among them: the price range that the company will seek for its shares, which of its existing investors plan to sell their holdings, and on which exchange the company will list.

Bank lending mounts a comeback

One part of the economy is back to normal — the old normal, that is.

Bank lending in the second quarter jumped by the largest amount since the end of 2007–when the last recession technically began–and is now at the highest level ever. If you erased the last seven years from the record books, the trajectory of lending would actually look healthy and normal.

Of course, those intervening seven years were a time of massive disruption, including a financial crisis, deep recession and very weak recovery. As layoffs mounted and borrowers defaulted, banks cut back sharply on lending, which in turn crimped the recovery. Now, the numbers show banks have shaken off much of the lending hangover, as Yahoo Finance Editor-in-Chief Aaron Task and I discuss in theabove video.

Here’s a breakdown of bank lending for the second quarter of 2014, according to the latest figures from the FDIC.

Loans to individuals, excluding mortgages: Total amount outstanding: $1.37 trillion, highest ever.

Credit card lending: $678 billion, highest since 2013.

Auto loans: $371 billion, highest on record (data breaking out auto loans only go back to 2010).

Commercial and industrial loans: $1.66 trillion, highest ever.

Residential mortgages: $1.84 trillion, still down 18% from 2007 peak.

Total amount of loans and leases: $8.1 trillion, highest ever.

Credit-card and auto lending have aided the recovery, with car sales strong, as one example. Auto lenders have granted loans to more subprime borrowers, extended loan durations and come up with other ways to get money into people’s hands so they can buy vehicles. The result has been a strong pace of sales comparable with prerecession levels. More credit-card spending, meanwhile, has helped prop up consumption, even though incomes and wealth levels are still below earlier peaks.

Some critics worry about a lending bubble, but there’s virtually no sign of trouble (yet). Credit-data firm Experian recently noted a tiny uptick in the delinquency rate on auto loans, but delinquencies remain low by historical standards and theres no reason to think a one-time increase will generate a default crisis. The Federal Reserve’s latest report on credit and debt, meanwhile, shows default and delinquency rates have been falling steadily since the recession ended. Unless there’s a sudden change, these types of consumer lending are reverting to historical norms, otherwise known as the old normal.

The new normal applies to two other categories of lending: One is student-loan debt, which has exploded during the past several years and now totals more than $1 trillion. The default rate on those loans has been rising, revealing the financial stress many young adults struggle with. The default rate ought to come down as the labor market improves and jobs for recent grads become more plentiful, but many of those borrowers will remain scarred all the same.

The other outlier is housing debt. Mortgage lending remains depressed, one of the factors holding back a strong housing recovery. Lending standards for mortgages remain painfully high, with many potential home buyers still unable to get approved. And fewer people seem interested in buying a home in the first place, after seeing the investment backfire for so many homeowners during the housing bust. In these two markets, the new normal might be lasting, and the old normal, eventually, forgotten.

Rick Newman’s latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.

John Archibald

| 2012-01-19 — John Archibald thinks Shelby County residents share the blame for a long-time teacher whos admitted molesting young girls and why Birmingham is the kick-off of a federal campaign against pay day loan operations.

Wells Fargo may get windfall with Lending Club

Wells Fargo will be the biggest winner when Lending Club – its friend and foe – goes public.

The bank, through its venture capital arm, is the biggest investor in Lending Club, a peer-to-peer lender based in San Francisco. Lending Club also does its corporate banking through Wells Fargo and chose Wells Fargo Securities as one of eight underwriters for its initial public offering.

But in January, Wells banned some of its employees from investing in Lending Club loans without prior approval because it competes with Wells.

Lending Club operates an Internet platform that connects people who need money with investors willing to lend it to them. Lending Clubs chief operating officer said in January that he was puzzled by the ban, since Wells Fargo, through Norwest Venture Partners, is Lending Clubs biggest shareholder.

Norwest Venture Partners X (the firms 10th venture capital fund) owns 16.5 percent of Lending Club, according to the prospectus filed this week.

Norwest Venture Partners became part of Wells Fargo when its former parent, the Minneapolis banking and financial services company Norwest Corp., acquired Wells in 1998, adopted its name and moved its headquarters to San Francisco. Norwest Venture Partners is based in Palo Alto and operates separately from Wells Fargo.

In January, a Wells Fargo spokesman described Norwest Venture Partners as a wholly owned subsidiary. But a Norwest spokeswoman told me the wholly owned language is misleading because Wells Fargo doesnt own 100 percent of our funds. She acknowledged that Wells Fargo has always been our main capital source.

A managing director with Norwest told the Wall Street Journal in May that Wells is the firms sole limited partner.

In a typical venture capital fund, the managing partner keeps 20 percent of the profit and the limited partners get 80 percent.

Its too soon to say what Norwests stake in Lending Club will be worth when it goes public. But using Lending Clubs most recent private-company valuation of $3.8 billion, Norwests 16.5 percent stake in Lending Club is worth $627 million. Assuming a normal 80-20 split, Wells Fargos share of that is right around half a billion dollars, CNBC wrote on its website.

To put that in perspective, Wells Fargo has been earning about $5 billion to $5.5 billion per quarter after taxes. Its market value, the largest for a US bank, is $267 billion.

Although its still a gnat compared to Wells Fargo, the banking giant is right to see Lending Club – and companies like it – as a threat. Investors can earn high single digits lending money through online platforms, and the loans also offer diversification, says Morningstar analyst Jim Sinegal. Making direct loans to individuals is not correlated with investing in stocks and bonds.

Originally, mom-and-pop investors made most of the loans through Lending Club and its rival Proper Marketplace. But hedge funds and other institutions have become such big investors that both companies have had to take steps to prevent the big guys from cherry picking the best loans and crowding out retail investors.

People can borrow $1,000 to $35,000 through Lending Club for three to five years, often at rates that are lower than what banks charge. The rates are lower because Lending Club doesnt have branches or the other overhead banks need. Its what happened to brick-and-mortar retailers. Its just financial products rather than televisions or books, Sinegal says.

Sinegal calls Wells Fargos investment in Lending Club ironic to some extent, but its a smart move. If you see a threat coming, its better to be a part of it rather than ignore it or try to compete against it.

Analyst Dick Bove of Rafferty Capital Markets agrees that peer-to-peer lenders are a real threat to the banking industry.

Since 2008, lending in the United States has grown by $2 trillion, but the regulated banking industry did not get any of that increase because of what I call excessive regulation, he says. They have been building capital, building liquidity, but not building their loan books.

Taking their place are less-regulated companies including peer-to-peer lenders, small mortgage companies, real estate investment trusts, master limited partnerships, all the way down to pawn shops, Bove says. Any of them alone is not a serious threat, but in aggregate, they have made $2 trillion worth of loans the banking system could not.

Kathleen Pender is a San Francisco Chronicle columnist. Net Worth usually runs Tuesdays, Thursdays and Sundays. E-mail: kpender@sfchronicle.com Blog: http://blog.sfgate.com/pender Twitter: @kathpender

The Biggest Peer-to-Peer Lending Site Just Filed for an IPO

Lending Club is the biggest marketplace in the peer-to-peer lending space, which helps investors connect with borrowers seeking funds online. To qualify for a loan on Lending Club, borrowers need FICO scores of 640 or higher and clean credit histories. Interest rates average 14 percent. To date, Lending Club says it has financed more than $5 billion worth of loans (of which $1 billion were started last quarter) and paid nearly $500 million in interest to investors on the site.

Peer-to-peer lending can boost your income

Americans are cleaning up their debt, according to Federal Reserve data. But they still have a long way to go. Aside from the more than $1 trillion of student-¬≠loan debt outstanding, there’s still more than $800 billion in credit-card debt borrowed at terms that often exceed 20percent annually. Meanwhile, the same banks that see fit to charge 20percent or more for revolving debt continue to pay savers 1percent or perhaps 2percent on their deposits.

Lending Club’s Brilliant Charade

If you think the Lending Club is Silicon Valleys answer to banking or the financial worlds Uber, the companys filing for its planned $500 million initial public offering should help disabuse you of that notion. That said, it might still be the bank of the future.

Lending Clubs founder and chief executive, Renaud Laplanche, has repeatedly portrayed the business as a high-tech marketplace bringing together borrowers and lenders. As he put it in a 2013 interview, We do the matchmaking and perform important risk management functions. We underwrite, price and service the loans on behalf of investors.

Thats not quite right. According to the IPO filing, Lending Club has $2.36 billion worth of loans on its books. The actual loan origination is done by WebBank, a Utah-chartered financial institution that sells the loans to Lending Club. Theres nothing peer-to-peer about it. The company is an intermediary between a bank and institutional investors, a structure that moves the lending business out of a regulated environment and into an unregulated one.

What differentiates Lending Club isnt the lack of legacy software, costly brick-and-mortar branch networks or any of the other things Laplanche likes to talk about when he explains his business models advantages. WebBank, established in 1997, has all the same advantages, but its regulators would never allow it to take on the $2.36 billion in assets it has helped generate for Lending Club — the current $39.5 million in delinquent loans alone would be enough to eat through its capital. Lending Club can do so because its not a regulated bank. Rather, it relies on regulated banks to originate all loans and to comply with various federal, state and other laws, according to the IPO filing.

My colleague Matt Levine does a great job of explaining why Lending Club is less risky than a traditional bank. The durations of its assets and liabilities are perfectly matched, and the notes it issues to investors neatly transfer default risk to them. Unlike pre-2008 mortgage lenders such as Countrywide, Lending Club doesnt hold any residuals, or risky bits left over after loans are bundled into securities and sold. Investors take on all the risk in exchange for high returns. The biggest single group of loans issued by Lending Club, $311 million worth, pays 11.8 percent. The investors are all qualified professionals who know what the risks are and do not require government protection.

Lending Club has a great business model. It performs a useful function that is difficult and expensive for banks to perform. This leads to interesting conclusions about banking in its current form.

Traditional banking consists of many separate businesses. There are unsecured consumer loans like the ones Lending Club handles, credit cards, trade and project financing, mortgages, car financing, current accounts and payments, term deposits and more. All these businesses could, in theory, stand on their own. With the exception of the bits that involve private deposits, most wouldnt need to be regulated. Lending Clubs business is an excellent example.

The full-service bank is an obsolete concept. Given the current state of technology, it would not be difficult for a customer to assemble a portfolio of services from different providers. Getting banks to split up along business lines would solve most of the sectors systemic-risk problems. Perhaps Lending Clubs disruptive role is to demonstrate the benefits of narrowly focused banking.

We need tougher planning laws to improve our town high streets

Since the controversy in Worksop over the opening of a shop selling so-called legal highs a number of people have contacted me regarding the need to toughen up planning laws for our high streets.

The Department for Local Government has now launched a consultation on future changes it would like to introduce to the planning process which would include closer regulation of pay-day loan stores.

I believe that it does make sense that a planning application should have to be submitted to turn a newsagents into a pay-day lending shop for example.

This would give local councils the power to prevent the high street from being overcrowded with these types of stores.

The consultation also asks whether there should be a broader definition of a “pay-day lending shop.”

In my opinion it covers a variety of areas from offering quick loans to offering cash for gold and other goods.

These changes should be introduced together with more power locally to stop “legal highs” shops.

The consultation will run until 26th September.

If you would like to take part please contact my office on 01909 506200.

It has recently come to light that UK Export Finance, an arm of the British Government established in 1919, has used taxpayers’ money to underwrite ¬£140 million of deals for a company registered in the Cayman Islands.

The company in question is owned by Terra Firma, one of the world’s largest private equity firms.

I have raised this issue in Parliament and have yet to receive any answers as to why this company has received tax payer backing when it does not pay tax in the UK.

The Cayman Islands is a notorious tax haven that is home to thousands of companies who trade around the world but refuse to pay their fair share of tax.

I have worked closely with the all-party group on anti-corruption to highlight how these large multinational companies are exploiting tax loopholes in order to avoid paying their fair share of tax and will continue to campaign for stricter regulation.

One of the responses to the UK banking crash in 2008 was a Government-launched inquiry into how we prevent our banks from becoming “too big to fail”.

In the resulting report it was recommended that UK banks must separate their retail – everyday banking to customers like us – from their investment sector, meaning casino-style banking.

I support this measure as it would force banks to act in a more responsible manner.

HSBC, however, has written to the Chancellor asking him to delay this change which is due to be in place by 2019.

The big banks are complaining about the cost of changing the way they operate with no regard to the cost to the taxpayer from bailing them out.

My view is simple: Press ahead with the ring fencing and get banks to start acting in a responsible manner.

John Archibald

| 2012-01-19 — John Archibald thinks Shelby County residents share the blame for a long-time teacher whos admitted molesting young girls and why Birmingham is the kick-off of a federal campaign against pay day loan operations.

CYPRUS: ERC says recession to continue in 2015

Recession in Cyprus is projected to continue next year as well, the Economics Research Centre of the University of Cyprus said in its July Economic Outlook, forecasting a contraction in GDP of 0.7% in 2015, unlike a weak growth of 0.4% projected in the adjustment programme.
For the current year, the ERC forecasts a moderate recession compared to 2013.
ERC says its projections indicate a milder recession for 2014 compared to the contraction of real GDP by 4.2% forecast in the economic adjustment programme. For 2015, the projections indicate that activity will continue to decline, albeit at a slower pace than this year.
According to the ERC, real GDP growth for 2014 is projected at -2.7%, with the same rate of contraction recorded in the second quarter, while in the third and fourth quarters real activity is forecast to decline by 2.3% and 1.6%, respectively.
The Centre estimates that recession will persist in 2015 but the contraction of real GDP is estimated to decelerate further at -0.7%. Real output is projected to fall by 1.1% in the first quarter of 2015 and by 0.8% in the second and third quarter; in the final quarter of 2015 real GDP is forecast to remain flat.
Although the error pertaining to the projections for 2015 presented here is relatively large, the evidence for a more protracted activity contraction is consistent with some of the attributes of this recession, such as high private and public sector indebtedness levels, adverse credit conditions and deleveraging, weighing further on domestic demand, most notably investment, the ERC said.
The decline in output for 2014 is estimated to be less severe than in previous quarters, as the recession in Cyprus eased further during the first quarter of the year and economic conditions in the EU continued to improve, it noted.
Domestic leading indicators associated with real activity and the labour market have also been picking up, adding to the less negative economic outlook. it added.