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Lending Club is Dead

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[Update: It looks rumors of Lending Club's death was premature. It was actually my best investment last year. You can sign up at Lending Club.]

lendingclubrip.jpgI, like many other Lending Club members, received a distressing e-mail a couple of days ago (Lending Club Reviewed). I waited until now to sort out how I feel about things. Here are the highlights that I found interesting:

Lending Club has started a process to register, with the appropriate securities authorities, promissory notes that may be offered and sold to lenders through our site in the future. Until we complete the registration process, we will not accept new lender registrations or allow new commitments from existing lenders... The borrowing side of our site will remain generally unaffected by this registration process; borrowers can continue to apply for loans and new loans posted after April 7, 2008, will be funded and held only by Lending Club... Until the registration process is completed, the company will undergo a quiet period and will not be able to respond to press and other inquiries about Lending Club or the registration process during that time.

In other words, they are shutting down the peer-lending service. They either are not willing to or unable to explain in more detail how long this may go for. The part about Lending Club fulfilling all borrow loans themselves is concerning. What happens if people don't pay them back, will the company go out of business? Will they have to fill every borrower's request that comes to their door? If not, how do they choose who to fund?

The biggest question is, "How long will everyone be in limbo?" Tech Crunch suggests that they might need to obtain a broker-dealer license from the SEC that would legitimize its operations. If this is the case, it might be quite a few months. You don't just get a broker-dealer license from the Dollar Menu. There are regulations on top of regulations.

I am incredibly disappointed by this news. I ran a contest less than two weeks ago and gave away Lending Club memberships with $50 just for signing up. I will be pulling my money out as fast as possible. It makes no sense to leave it there since you can't lend it and it earns no interest.

I have been worked for a number of start-up companies and they had one thing in common - they are extremely fragile. A high percentage of new companies fail. Often times they do everything right and the market conditions or something else just isn't right. In this case it looks like Lending Club has the right market conditions, but something internally just isn't right. I've talked to a few other Lending Club members - smart members who probably could have helped Lending Club avoid this problem in the first place - and they said they are gone and never coming back. They feel their trust has been violated. With each day that Lending Club can't or doesn't say anything to justify this inactivity, the more trust is lost. I might be blowing this out of proportion, but I'd rather err to the side of being conservative until I have reason to believe otherwise.

Note: I don't believe this affects Prosper.com. The lenders do have promissory notes from the borrowers. Furthermore, Prosper has filed with the SEC for a loan resale marketplace, which tells me they are cooperating with the SEC's requirements.

Last updated on July 29, 2011.

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P2P Lending

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28 Responses to “Lending Club is Dead”

  1. Trent Hamm says:

    Startups in the financial sector, like Lending Club and Prosper, *need* to be very well funded and be directed by people who know what they’re doing. If you hear about a nifty new startup that’s doing anything even close to lending or investing activity, check around and make sure they’re being funded by a good VC firm like Kleiner Perkins that can help guide such a business and provide the needed financial and legal backing.

    Dealing with finances isn’t something you can slap together like a Digg clone.

  2. Austin99 says:

    Hey Lazy Man,
    Just so you know, your RSS feed still advertises Lending Club as recommended by you. Last lines posted below:

    Note: I don’t believe this affects Prosper.com. The lenders do have promissory notes from the borrowers. Furthermore, Prosper has filed with the SEC for a loan resale marketplace, which tells me they are cooperating with the SEC’s requirements.

    Recommended by Lazy Man: Lending Club – Make money by lending money it to others

    Share This

  3. The lack of communication over the next few months is going to bread rumors and cause trust to be lost. I am still holding out hope that they are not dead, but I can understand your position. In a round up of posts about this situation, I agreed with the Jason (@ Amatureist Financial Journey) that the communication was poor on this. It makes one assume that they had no choice but to go quiet quickly due to issues.

    And the number of times I have accidentally typed QUIT instead of QUIET over the last few days must be a Freudian slip. :)

  4. Chuck says:

    Hey Lazy,

    I’m one of the guys who won in your giveaway two weeks ago. I didn’t get much of a chance to try things out, but I still want to say thanks and that I appreciate the effort on your part.

  5. No Debt Plan says:

    You would think if they were dead in the water that they would come out and say it. I don’t have any of my real money sitting around in Lending Club, just the sign up bonus. I’m going to hang out and see what happens. I’m playing with house money right now.

    I can only imagine the cheers going on at Prosper HQ!

  6. Lazy Man says:

    Trent: I know what you mean. Handling people’s money is expensive stuff – many laws and regulations are involved. I did see that they secured 10M last August and had most of the platform built. There might be an underlying money issue, but it might be more of a situation of not handling the regulations right. The fact that they are still taking borrowers tells me that it’s not likely a funding issue.

    Brett: I’m with you, I hope they aren’t dead. I will be happy to see them get back to doing business as before. Perhaps not having that trust is the biggest thing.

    Austin99: Thanks for reminding me. I don’t read my RSS feed, so I imagine it might have looked funny to a number of people this morning. I’ve now gotten rid of that.

    No Debt Plan: I suppose I should have said they are in coma. They are obviously looking to come back strong after this. Fate might say something else in the meantime.

  7. Jeff says:

    The thrill is gone… I’m pulling out of LendingClub.com altogether (even though my blog states a possible return once they ‘come back’) since I, like so many other lenders, feel violated since I’ve put in $1k per month since November only to get screwed by this event. I went ahead and started up my lending at Prosper.com again in earnest ($500+ instant transfer) as I believe there will only be two P2P’s (for profit) left standing in a month or two (Zopa and Prosper). Love the tombstone, made it my desktop wallpaper as a reminder of the mishandling of fiduciary responsibility on the part of LC to make sure all their ducks were in a row before opening up to the public and grabbing my cash. My condolences to other lenders… May other opportunities come your way soon! I’m just awaiting final notice of the failures of LC to stay solvent and alive, then I can have complete closure.

    Jeff (aka FANAFI)

  8. Eden says:

    Is that really surprising? One successful P2P lending site sticking around is asking enough (Prosper I suppose is the likely winner right now) so it makes sense that others would fail.

    These are highly risky/speculative places to put your money. No one should be shocked if they walk away from any of these companies with zero dollars left.

  9. Jesse says:

    I wasnt joking when I made the picture of lending club in the trash can: I think we all know this is their end.

  10. Lazy Man says:

    @Eden: I think the business model for P2P lending is sound. At it’s base it’s just letting the masses be the bankers – collecting that money for themselves rather than earning a couple of percent in a bank.

    I think the challenges that P2P companies have largely comes from the regulatory issues that arise when you have 50 different states and the federal government making laws. Over time, I believe the companies or the laws will adapt to make it work. I’m convinced that Lending Club would be operating as normal and everyone would be happy if the law was simplified.

  11. Four Pillars says:

    I don’t think you are exaggerating at all. Since when does a company stop selling a product while they “are developing a new one”.

    I think I might post about this tomorrow – I don’t think this changes the fundamentals of p2p lending but it obviously doesn’t help the industry very much.


  12. I kinda liked LendingClub better than Prosper. Probably because bidding on ledning to people was not as competitive as it is on Prosper :-)
    Maybe now is the time that a big company steps in a buys LendingClub?

  13. Jonathan says:

    What’s weird is that LC looks like they are still taking borrowers. So maybe it’s not dead, but taking a different path?

    I’ve heard of SEC quiet periods before, so maybe they are thinking of holding the notes themselves, and then reselling them in the aggregate. Not P2P, but still allowing people to lend to each other. A $1,000 investment could be spread across 1,000 loans.

  14. Brip Blap says:

    At this point those of us who are “in” as P2P borrowers really have to be more concerned about how this affects perception of the industry as a whole. I can’t begin to imagine anyone will be leaping in to commit funds to LC once they come back, so they are done. But it also gives me a pause in thinking about upping my position in Prosper or any other P2P lending business.

    Growing pains in a toddler-aged industry!

  15. Nathan says:

    I personally don’t think LC is dead, nor will they be when this “quiet” period is over (unless it lasts more than 3 years). First, they’re still taking borrowers and offering them the same rates. Thus, their appeal to a borrower should be no different than it was before. Second, those that lent money (myself included) are pretty much stuck with them for 3 years… unless ALL our loans get paid back early. So, we’re pretty much forced to wait and see what this “new” LC is going to be like. I think LC will lose ground to Prosper, Zopa, and any others during this period – advertising and maintaining a presence in the market place do mean something – but they won’t be dead, just behind. I’m not sure what they have in store with respect to P2P lending, but I hope their new business model will still be as attractive as the old. I don’t like Prosper’s model, so I may drop out of P2P all together if they don’t come back with something similar or better.

  16. Patrick says:

    To be honest, I’m not so sure LC is dead. I just got off the phone with their customer service and I found out a few interesting things (by reading between the lines of what they said and could not say). I am still going over my notes and running everything through my internal computer… I will definitely write about this next week… so be sure to stop by.

  17. Lazy Man says:

    Well, I’m not going to call their customer service to try to read between the lines. If they can send e-mails out to all their customers and their customer service can say such things on the phone, they should send out an e-mail of whatever they said to you. If they can’t send out such an e-mail due to the quiet period, they shouldn’t be saying such things to you.

  18. nwdirector says:

    I, like Chuck, won your contest, yet didn’t get my account set up before the April 7th DEADline.

    Let me echo my thanks as well for the opportunity. Sounds like maybe I can use your SmartyPig card instead! Ha! :)

  19. DebtKid says:

    Lazy ~ Man, you know how to pick the controversial titles, huh? I just posted my thoughts on the whole Lending Club registration….we disagree a bit, but I still like your new theme : )




  20. Eric says:

    LendingClub is back from the dead and now Prosper is in hibernation. I wonder if Prosper will survive the registration process?

  21. Lazy Man says:

    Prosper will, they are in much better shape now than Lending Club was back then (IMO).

  22. jimbo says:

    hey.. i just wanted to mention that i’ve
    been investing for about 1 year with
    the lending club + prosper. Lending
    club checks the borrowers out much much
    better than prosper.. i have had
    absolutely 0 defaults, with the grade A
    loans there viritually is zero risk, but
    carefully choosing all grades, the few
    that go into a grace period always follow
    thru.. i don’t think prosper screens the
    borrowers nearly as good.. i’ve had a good
    solid return of 10% on very conserative
    lending including their service fee and
    with prosper somewhere between 5 – 7% at
    the very best.. overall i am very
    impressed with the lending club

  23. David says:

    They are only being shutdown since the government doesn’t want people to help each other out easily. They want us to keep going to banks to pay outrageous interest and other fees to keep us down. When I was younger I wanted to be a successful millionaire, however the more money I made the more restrictions corporations and the government placed to keep us down. That killed all of my motivation since I realized they will do anything to keep us down. The only millionaires are probably people who accidentally slipped through the cracks of the system, before the government had time to put up a new rule to block people from making money.

  24. Rob says:

    Uhhhhmmm….Lending Club is alive and well right now folks.

  25. Anonymous says:

    I dont think lending club is dead. At least I know it works for some of my friends. I think I will still try it.

  26. AW Shaw says:

    It’s 2010 and Lending Club seems fine to me. They are bucking the trend.

  27. roger says:

    I love lending club 0 defaults to date, better returns than prosper. I have several defaults in prosper in the high scoring grades, do they even check the borrowers? i even got a loan in prosper and they said I had a credit score much higher than it should have been. I like lending club because they check the borrowers credit much more thouroughly. By the way prosper is in a quiet period also, i live in Indiana and am unable to loan money in Prosper, I have no problems lending in lending club.

  28. Butch Davies says:

    I read the reviews and a number seemed less than positive, However I noticed that these remarks were made in 2008 and the most recent in 2010. Now I understand that companies will have a tendancy to publish those which put themselves in a good light.
    The simple fact that they are still in the marketplace after all the commenter projected their demise after three years speaks much louder than the remarks.
    So Says I

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