How bad does a business have to be to essentially be a middleman for billions of dollars in loans and to still lose tons of money? Welcome to LendingClub Corp (NYSE:LC).
In its earliest incarnation, LendingClub was a fantastic idea. LC was a peer-to-peer lender, just like Prosper.com.
If you needed a loan of $10,000 to consolidate debt or pay off some medical bills, you submitted your personal information to LC. The risk of lending to you would be assessed, and individuals from around the world could loan as much or as little as they wanted for a set interest rate for a certain period of time.
Then the SEC decided this was the same as selling securities and spiked the whole idea.
So LC rejiggered itself. What happens now is that a borrower applies, LC scores and underwrites according to the criteria of a partner bank. The borrower chooses their financing option, and the Note is placed on the public market. Investors purchase a participation in that Note. Once all the money is gathered, the partner bank issues the loan itself, and LC buys that loan from the partner bank using investor’s money. LC picks up a transaction fee.
On the personal loan side, individuals can borrow up to $50,000 for up to seven years, with fixed interest rates, based on relatively standard underwriting criteria. The loans are unsecured. LC also makes education and patient finance loans, but rather than offer them publicly, they are only made to private accredited investors. It also offers small business loans.
LC charges fees for servicing the loans, and fees for collecting defaulted payments, as well.
Now, last year LC stock took a big hit when it turned out that its CEO played a little hanky-panky with some documentation on $22 million in loans. It also turned out that he and his family took out 32 loans themselves in 2009 — right before a VC funding round. Even worse, he and the former CFO used company shares to get some personal loans for themselves.
That’s the kind of stuff that undermines confidence in the business model and company and attracts attention from regulators.
Thus, not only did LC have to back-and-fill and fix their entire operation (and deal with the very expensive regulatory remediation process), but competition has since heated up. Unsecured personal loans and small business loans are all the rage at many finance companies like Enova International Inc (NYSE:ENVA).
The difference is that companies like ENVA originate and fund loans themselves (and have gobs of experience with underwriting and analytics that competitors don’t have) and have a model that allows them to actually make money in full from their loans.
The problem with LC stock and its business model is that it plays the middleman, yet absorbs all the costs normally associated with being the originator, servicer and collector. What a mess!
So thanks to competition and having to play catch-up, LendingClub issued 23% fewer loans during the quarter. Yet despite originating almost $2 billion in loans, it generated only $129 million in revenue — or about 6% of originations. Compare that to ENVA, which had originations of $516 million and generated revenue of $172 million, or 34% of originations.
The businesses are virtually identical, by the way. Enova makes the same unsecured personal, near-prime and small business loans. It just happens to fund them directly. LC stock lost money in FY16, and is expected to lose between $69 million and $84 million in FY17. Meanwhile, ENVA is expected to grow net income 20% to $55 million and trades at only nine times forward earnings.
LendingClub stock makes no sense to me, even at $6. It’s got a ton of cash and isn’t going under, but it’s also going nowhere fast.
Lawrence Meyers is the CEO of PDL Capital, and manager of the forthcoming Liberty Portfolio stock newsletter. As of this writing, has no position in any stock mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.