Below is our review of Lending Club as it was in 2011.
There seems to be a great debate going on the web regarding investing in Lending Club. As an investor of Lending Club notes, you have a chance to ask questions to the borrower.
Asking questions is somewhat unique in the investment world. You normally don't get to ask direct questions to the board, or on the quarterly conference call before buying a stock like Apple (APPL). The issue was the questions on Lending Club were open ended. As of last week, Lending Club changed their question and answer section to only allow a set of predetermined questions. Keep in mind the Q&A section was not removed altogether.
The official reason was because of privacy concerns. Investors were asking too many probing questions, and the borrowers gave away too many details possibly revealing who they were. From their blog:
Starting tomorrow, 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@example.com.
As always, your comments are welcome as we continue to make improvements to our platform.
When I saw the change last week, I didn't think much of it. In the almost two years of investing with Lending Club (see my initial review of Lending Club) notes, I never asked a borrower a single question. I felt most already asked the proper questions, or based upon quantitative information didn't think the note was a good investment. When I did look at the questions and answers section, I would use it to help tip me in one direction or another. For the most part I would quickly scan this section. Most of my time is spent filtering out unwanted notes because Lending Club's search filter is too limited.
It's a Big Stink About Nothing
I personally prefer quantitative and fundamental analysis of my investments, than get my emotions involved. If I do get my emotions involved, it because the analysis is mixed. Which also means it's a risker investment. In addition, with the amount of loans you should be investing (over 200), how much time is required to do this work? It's not scalable, or at least the time to return ratio is low. If you spend this time, will your net return be any higher? Every investment requires an amount of initial, and reoccurring time. You should maximize your return, while minimize your time. Asking questions for each investment is a very time consuming, and I don't believe you will see a positive return from the effort.
Keep in mind a good portion of Lending Club investors use automated methods to invest. They never even see the Q&A section. I'm not suggesting Lending Club investors should go down this path. I will continue to use my aggressive filters, and manual review every note. I do believe this yields a higher return, and so far my returns have proved this.
From the two defaulted notes I have so far, both completely passed the “sniff test” if you looked at their Q&A section. One of them in fact only made two payments before defaulting, and more than likely was a scammer. I understand two examples does not make a statistical trend.
My point is someone can be very good liar, and a Lending Club investor would never catch this in the question and answer process. One of the comments from Matt at Steadfast Finances was how do you know they aren't lying about their income? Since last year, almost all of my loans are to Lending Club borrowers who's income has been verified. Since these loans are unsecured I make sure every borrower has over 10 years of credit history, never defaulted, and never late on a payment. These in my opinion are better quantitative indicators a borrower will not default. After all, that's the only net result we care about right?
I not criticizing the investors who no longer invest with Lending Club. That's fine with me, there are other traditional and alternative investments available. They are free to determine what's the best place to put their money for investing.
Sure I have some Lending Club complaints. Peer to peer lending is not perfect, and does have areas that need improvement. Not only do I think Lending Club should be verifying income for almost all loans, but require an initial comment from the borrower for the loan purpose.
My position is this change with comments shouldn't affect performance. Most investments with a marketplace (ie NASDAQ, NYSE, etc.) you do not ask direct questions before making an investment. You should be getting transparency, and Lending Club provides quite a bit of quantitative detail about each investment. It is possible Lending Club could make some improvements in the transparency. Though there are very valid concerns to what degree without revealing the identity of the borrower. I myself will continue to invest with Lending Club, and my positive opinion about Lending Club hasn't changed.