There was a time when companies like LendingClub Corp (NYSE:LC) and Prosper.com had a fantastic business model. The idea was simple and great.
Anybody could post a need for a loan of any amount for any purpose (e.g., pay off credit cards, repair a house). One simply sent information to LendingClub. It would evaluate the risk of lending to you, and anybody else could choose to lend a portion of that money at a rate of interest that reflected the risk. The company took fees from the process. It’s called peer-to-peer lending.
Essentially, LC was looking to become the eBay Inc (NASDAQ:EBAY) of lending and would issue LendingClub stock in its IPO.
Except the party poopers at the SEC decided this was the same as selling securities and shut the models down.
LendingClub reorganized and had an IPO. Now the model sounds like it should work, but it doesn’t. And that is frankly a shame. Now, a borrower applies for a loan, but LC management will score and underwrite based on rules of a partner bank.
The borrower get a take-it-or-leave-it loan offer, and if they take it, the loan is made into a note and dropped into the public market. Investors of different stripes may then purchase a participation.
Once the money for the loan has been raised, the partner bank writes the loan. Then, LC buys that loan from the bank using the money of the individual investors. It is on this transaction that LC makes its revenue — as a transaction fee.
For personal loans, individuals can borrow up to $40,000 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 and, more recently, auto-financing loans.
LendingClub makes revenue by charging fees for servicing the loans and for collecting defaulted payments.
Fees here, and fees there. Fees everywhere. And not a profit to show for it.
Despite record revenue in Q4 of $157 million, an increase of 20%, net loss was about $15 million. This also comes on originations of $2.44 billion, up 23% over last year.
Read that again. Despite originating $2.44 billion in loans, the fees were effectively wiped out by corporate expenses. In addition, LendingClub did generate $142 million in interest income, but that was wiped out by interest expense.
The $15-million net loss was, however, an improvement off of the $32-million loss from last year. That is due to lower interest expense.
For the full year, net loss was $77 million, an improvement from $108 million, again due to lower interest expense.
Bottom Line on LendingClub Stock
For LendingClub stock to be a worthwhile investment, it is going to have to do several things. First, it has to build originations to around $3 billion per quarter, which it can do because the U.S. consumer is levering up. Second, it must pay down debt. Third, it can’t raise any loans it actually finances because defaults would be catastrophic.
Auto finance loans, in particular, can destroy a business. I’ve seen the most skilled lenders go belly up or take massive write-downs by underwriting too loosely.
As of now, it makes zero sense to get involved in LendingClub stock.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance, and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 23 years’ experience in the stock market and has written more than 2,000 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.