Renaud Laplanche, co-founder and chief executive officer for LendingClub.… (David Paul Morris/Bloomberg )
On a June morning in midtown Manhattan, more than 300 investors cram into a conference room at the Convene Innovation Center, nibbling on pastries and waiting for Renaud Laplanche to take the stage. As founder and chief executive of LendingClub, Laplanche has rock-star status at this inaugural LendIt conference, where Wall Street investment managers clamor for insight into the world of peer-to-peer lending.
Laplanche, 42, a French securities lawyer turned Silicon Valley entrepreneur, expects San Francisco-based LendingClub to originate $2 billion in loans this year and double that in 2014. As he takes the stage, he’s fresh off a $125 million investment led by Google.
Armed with a muscular board that includes former Morgan Stanley chief executive John Mack and former Treasury secretary Lawrence H. Summers, Laplanche aspires to create the go-to Internet site for borrowers in need of funds for credit card consolidation, home improvement and small-business expansion.
When Laplanche leaves the stage, he is mobbed by money managers and clients, who spend two hours grilling him about LendingClub’s loan programs.
LendingClub is one of a dozen firms in the United States, Europe and Australia whose model is to create a marketplace for loans similar to eBay’s market for goods and services, with ordinary people lending money to other ordinary people through an online platform.
The other large U.S. peer-to-peer lender is Prosper Marketplace, two blocks from LendingClub in San Francisco’s South of Market district. Prosper expects to originate more than $500 million in loans next year.
“What we’ve done is radically transform the way consumer lending operates,” Laplanche says in his speech. He says that LendingClub keeps staffing low by using algorithms to screen prospective borrowers for risk — rejecting 90 percent of them — and has no physical branches like banks. “The savings can be passed on to more borrowers in terms of lower interest rates and investors in terms of attractive returns.”
Prospective borrowers go to the firms’ Web sites to sign up. If they’re accepted, they pay interest rates ranging from 6.7 percent to 35 percent a year, depending on their credit history, on three-to-five-year loans of as much as $35,000. They pay that interest directly to a group of lender-investors, with LendingClub and Prosper acting as underwriters and taking a fee from each transaction. Lenders scan the Web sites, read over prospective borrowers’ plans for using the money and buy pieces of individual loans.
Masood Raja, an English professor at the University of North Texas in Denton, took out a three-year, $3,500 loan from LendingClub this year to buy a Vespa motor scooter on eBay. He was assigned a rate of just over 10 percent.
“I liked that I didn’t have to go to a bank,” says Raja, 48. “The idea that small investors would be able to invest in this loan was very enticing.”
Raja says that 72 lenders put money into the loan, buying chunks of as little as $25.
LendingClub says that from June 2007 to July 31 of this year, lender-investors earned an average annualized return of 9.5 percent, compared with 0.1 to 1.5 percent in a bank savings account. Prosper’s average return for the period from July 2009 to June 2013 was 9 percent.
The new debt category’s high returns have brought Wall Street money managers running, along with pension funds, sovereign wealth funds and family offices desperate for higher yields at a time when 10-year U.S. Treasurys generate less than 3 percent. They’ve offered to take over all of the loans the peer-to-peer lenders can gather in.
The outside investors are now bundling the small loans into much larger pools so they can be more easily sold to big institutions. LendingClub runs a subsidiary called LC Advisors, which sells funds made up of LendingClub loans to high-net-worth individuals.
LendingClub is also working with a Massachusetts-based investment firm called Arcadia, which has proposed to up the ante by applying leverage — that is, take bank loans to fund more loan purchases.
“This is without doubt an emerging asset class,” says Andrew Hallowell, an Arcadia founder.
Peer-to-peer loans can be high-risk. When they were first introduced, default rates topped 17 percent. The loans remain unrated because the asset class is still too new for Moody’s Investors Service and Standard & Poor’s to take notice.
“The big problem is the whole issue of credit risk,” says Bert Ely, a banking consultant in Alexandria. “To the extent the person putting up the money is relying on someone else to do the screening, you have to ask whether this is an appropriate investment for some.”