Lending Club Response to Treasury Rf i

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Lending Club’s Response to Marketplace Lending RFI, September 2015 Page 1 of 51

Marketplace Lending RFI

Document ID: 80 FR 42866

71 Stevenson Street | San Francisco, CA 94105

September 30, 2015

Laura Temel Attention: Marketplace Lending RFI

U.S. Department of the Treasury

1500 Pennsylvania Avenue NW, Room 1325

Washington, DC 20220

Dear Ms. Temel,

On behalf of Lending Club Corporation (Lending Club), thank you for the opportunity to

contribute to the Department of the Treasury’s Request for Information concerning Marketplace

Lending. We also appreciate your hosting the Treasury Marketplace Lending Forum held on August 5, which we attended and found very valuable.

Lending Club (NYSE:LC) is the world’s largest online marketplace connecting borrowers and

investors. Our mission is to transform the banking system to make credit more affordable and

investing more rewarding. Our platform has facilitated over $11 billion in loans to more than one

million individual and small business borrowers since launching in 2007, and is continuing its

rapid and deliberate growth, fueled by the value we deliver to borrowers and investors and by

their high level of satisfaction with our products.

As important and sophisticated as our technology is, we start from a set of values that prioritize

acting in the customer’s best interests. For borrowers, our platform offers responsible creditproducts with standard program loans offering a fixed rate, fixed term, and no hidden fees. Our

platform’s products are generally offered at a lower interest rate than prevailing alternatives, and

we disclose all terms upfront in a manner that is easy for borrowers to understand and plan for.

For investors, we provide full transparency by posting on our website the performance of every

loan offered publicly since inception, as well as equal access and a level playing field with the

same tools, data, and access for all investors, small and large.


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We use technology to automate processes and reduce costs, and pass on these cost reductions

to borrowers in the form of lower interest rates and to investors in the form of better returns.

Technology-led cost reductions include many process improvements, the ability to operate

without a branch network, and the automation of tasks that remain highly manual at most

traditional banks. Our ability to collect and analyze data, process and service loans in a highlyautomated fashion, and simplify processes for our customers has fueled our growth and the

growth of marketplace lending over the last eight years.

As a two-sided technology-enabled marketplace, we deliver unique benefits to both borrowers

and investors. We believe that we also deliver strong benefits to the U.S. financial system as a

whole by bringing more transparency, removing friction, reducing systemic risk by requiring a

match between assets and liabilities, and offering traditional banks, including many local

community banks, the opportunity to participate on our platform and benefit from the same cost

reductions from which our other borrowers and investors benefit.

Borrower Benefits

We believe our platform’s low cost operating model enables it to make credit more affordable

and available for consumers and small business owners and helps community banks reach

more of their borrowers:

• For consumers:

o Significant cost savings: Over 70% of borrowers on our platform report usingtheir loan to pay off an existing loan or credit card balance and report that theinterest rate on their Lending Club loan was an average of 7 percentage pointslower than they were paying on their outstanding debt or credit cards.1

o

Responsible credit: Customers who use Lending Club to refinance their creditcard balance are replacing revolving, non-amortizing, variable rate debt with afully amortizing, fixed rate installment loan. This product provides for a moreresponsible way to manage their credit, and helps improve the customer’s creditscore by reducing the amount of open-ended credit. In fact, 77% of thesecustomers experienced a FICO score increase within three months of obtainingtheir loan through Lending Club, with an average score increase of 21 points.2

o Predictable payments: Our platform’s personal loan customers benefit from a

fixed interest rate and fixed monthly payments that help them better budget their monthly payments and plan ahead, and protects them against the risk of risinginterest rates.

• For small business owners:

1Based on responses from 14,986 borrowers in a survey of 70,150 randomly selected borrowers conducted from

July 1, 2014 – July 1, 2015, borrowers who received a loan to consolidate existing debt or pay off their credit cardbalance reported that the interest rate on outstanding debt or credit cards was 21.8% and average interest rate onloans via Lending Club is 14.8%.2 Average credit score change of all borrowers who took out a loan via Lending Club between January 1, 2013 and

January 31, 2015 with a stated loan purpose of debt consolidation or pay off credit cards.


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o Access to capital: Many small business owners cannot get the credit they needto finance their business expansion and create jobs. In particular commercialloans under $250,000 are underserved by traditional lenders, largely due to thehigh fixed costs of underwriting these loans through traditional methods. Bank

loans from $100k to $250k have fallen 22% since 2007, during a period whenbank loans of $1 million or greater increased by 56%.3 Our platform’s automatedprocesses allow us to provide smaller commercial loans that are less availablemore economically than traditional banks can.

o Transparency: Lending Club’s platform offers a more transparent process tosmall business owners looking for credit. We clearly disclose the interest ratebeing charged to the borrower and all fees. We also offer a simpler applicationprocess, faster credit decision, and faster funding than most traditional banks.

o Affordability: The same low operating cost model that powers our consumer lending marketplace also enables a lower cost of funding for small businesses.Small business owners looking for small loans often resort to merchant cashadvances that have implied annual interest rates of as much as 100%. LendingClub’s platform can help small businesses access capital at longer terms andlarger amounts with lower rates than typical credit cards or “alternative” businessloans or cash advances.

o Responsible products: Our platform’s use of 1-5 year terms and no

prepayment penalties keeps borrowers from over-levering or getting into cyclesof unnecessary repeat borrowing.

o Small Business Borrowers’ Bill of Rights: Lending Club joined with leadingCommunity Development Financial Institutions (CDFIs), think tanks, nonprofitsmall business advocates, and other responsible small business lenders,brokers, and marketplaces in the Responsible Business Lending Coalition andunveiled the Small Business Borrowers’ Bill of Rights on August 5, 2015

(http://www.responsiblebusinesslending.org/). It is the first-ever consensus set of principles and practices for responsible small business lending. Lending Club hassigned on to these principles and has committed to operate its business withinthem.

• For community banks:

o Lower cost of operations: Over the last 30 years, community banks have lostsignificant market share to larger banks because of their inability to compete withthe scale of large financial institutions. By partnering with Lending Club,community banks can offer loans to their customers using the Lending Clubplatform’s lower cost of operations to more effectively compete with these larger

financial institutions and their products. To strengthen these relationships, werecently announced a partnership with BancAlliance, a national consortium of over 200 community banks, to support this segment.

o Saying yes to more customers: Community banks can “offer more approvals”to more of their customers by partnering with Lending Club and accessing our breadth of investor risk appetites. Additionally, community banks can define their

3FDIC March 31, 2015 Call Report Data, C&I Loans and Nonfarm Nonresidential loans


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investment criteria and invest in loans that meet their specific criteria – allowingthese banks to expand their offerings to their borrowers while diversifying their own exposure. Providing their customers with access to loans also helpscommunity banks to retain and attract customers.

Regulatory Framework

Our borrowers benefit from the same regulatory protection as any bank customer as all loans

issued through our platform are issued by federally regulated banks. Working in partnership with

issuing banks has tremendous value to Lending Club and borrowers as it holds us to the highest

compliance and regulatory standard. As a result, borrowers benefit from all consumer protection

regulations including equal access to credit, fair lending, truth in lending disclosure

requirements, fair credit reporting, and fair debt collection. Our compliance with these rules and

regulations is monitored by daily oversight and review as well as quarterly and annual audits by

the issuing bank, monthly and annual audits by our internal audit and compliance teams, and an

annual audit by an independent auditor. This oversight is further supplemented by the diverse

investor base (federal and state chartered banks, insurance companies, pension funds, etc.)that operate through Lending Club’s platform and bring with them not only their internal audit

review and oversight process but also the review and oversight of their regulators, such as the

FTC, FDIC, and OCC (For example see: OCC bulletin 2013-29 Third Party Relationships),

which come together to create a robust compliance program that benefits all users of the

platform.

Investor Benefits

Our marketplace has attracted both individual and institutional investors who participate through

a variety of programs that generally present the same overall benefits:

• Access to credit asset classes that individual investors did not have access to

before and institutional investors only had limited access to on a pool basis.

• Steady cash flow and net annual returns averaging between 6%-9%4 since

inception.

• Full control over investment decisions: individual investors can build their own

portfolio of standard program loans or Notes based on their investment objectivesand risk appetite. Investors can use 32 different filters to build their portfolio(including FICO score, debt-to-income ratio, job tenure, home ownership, etc.) andreview credit loss forecasts for the specific portfolio they selected before making their investment decision;

•

Maximum transparency: investors can review statistics on credit performance bygrade and by credit attribute for every single loan that was made publicly available toinvest in since inception in 2007, as well as summary statistics by vintage of origination.

4For Retail investors with at least 100 Notes and 100 different borrowers and no Note accounting for more than 2.5%

of the portfolio assuming 24 to 30 months of average age of portfolio as of September 15, 2015.


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Our investment programs available to investors are regulated by the SEC under the Securities

Act of 1933 and the Exchange Act of 1934 and the rules and regulations thereunder.

Terminology

The term “marketplace” or “credit marketplace” is best used to refer to two-sided marketplacesthat facilitate lending between borrowers and investors, and do not take balance sheet risk by

investing in the loans they facilitate. We believe that companies that use their balance sheets to

make loans are not marketplace lenders, and may be better described simply as balance sheet

lenders. Throughout this response, we use “marketplace” to refer only to two-sided

marketplaces that do not predominately self-fund loans. The term “platform” may describe a

marketplace or other technology made accessible to third parties.

Recommendations to Enhance Marketplace and Other Online Lending

We have included in our response to the RFI a number of recommendations for legislative or

regulatory consideration that Lending Club believes would enhance or clarify the development

and operation of online credit marketplaces to the benefit of consumers, small businesses, and

the financial system more broadly. For ease of reference, we have listed these below, along

with the particular questions where the recommendation is discussed in this submission.

1. Small business lending protections – We believe existing regulations adequately

protect consumers borrowing through online credit marketplaces. However, we areconcerned that small business owners may not benefit from the right level of protectionsand transparency. We believe there is an opportunity for the industry to fully adopt thepractices and principles enumerated in the Small Business Borrowers' Bill of Rights, andfor the appropriate regulatory agencies to continue to monitor the industry’s progress inthat respect. (Q11)

2. Alignment of interest and disclosure requirements – Lending Club has a tremendousamount of “skin in the game” (starting with over 20% of our revenue from each loanbeing subject to loan performance over time) and an ongoing alignment of interests withinvestors. Therefore, we believe that any mandated capital-based risk retentionrequirement for marketplaces would be misguided and detrimental to both borrowersand investors. To ensure investors have all the necessary information to make informedinvestment decisions and continue to exercise full control over the quality of loans beingissued through marketplaces, we are proposing additional mandatory disclosurerequirements. (Q10)

3. Tax incentives to increase access to credit in underserved segments – We proposethat investors who provide capital in defined underserved areas and to low- to moderate-income small business borrowers be taxed at the capital gains tax rate, rather than thecurrent marginal income tax rate, if the loan is held for over 12 months. Additionally, wepropose, similar to the UK framework, that all investors be able to offset losses directlyagainst interest income and gains and have returns on the first $5,000 of investmentsmade tax-free. (Q9)


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4. More efficient income verification – We urge that the IRS create an applicationprogramming interface (API) for its 4506t tax return transcript process. This would makeit easier for consumers and small business owners to give lenders access to their taxinformation voluntarily. We believe this relatively simple improvement to the current

4506t process would make a meaningful difference in lenders’ ability to offer lower cost,faster, easier, safer, and greater access to credit, across consumer and small businesslending. (Q2 and Q9)

Please find below answers to the specific questions asked in the RFI and thank you again for

the opportunity to offer input.

Renaud Laplanche

Founder and CEO

Lending Club


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1. There are many different models for online marketplace lending including platform lenders

(also referred to as “peer-to-peer”), balance sheet lenders, and bank-affiliated lenders. In

what ways should policymakers be thinking about market segmentation; and in what ways

do different models raise different policy or regulatory concerns?

There are many ways to segment the market, and each segmentation has its own positive andnegative aspects. We believe the three lines of partition below, which differ from the Treasury’s

proposed scheme and definitions, draw key distinctions and more accurately describe the

regulatory framework and control environment in which online lenders operate.

A. Balance sheet lenders vs. marketplace lenders

Many online lenders finance loans with their own equity and/or borrowed capital before reselling

these loans to investors either privately or through the securitization markets. We refer to these

lenders as non-bank balance sheet lenders and not as marketplace lenders, as they do not

facilitate a marketplace (as defined above). While this method has its merits, it is different in

nature from the business model of true marketplaces such as those operated by Lending Clubor Prosper. The marketplace operator lists loan applications that meet certain underwriting

standards, established by a banking partner in some cases. These approved applications are

shown to investors along with risk ratings, and investors decide which loans to invest in.

The structure of a marketplace with an issuing bank brings with it regulatory scrutiny at the

federal level (SEC, OCC, FDIC, CFPB, FTC) and state level through applicable state agencies

and the issuing bank itself, as well as daily acceptance testing by thousands of users. In

addition, each category of institutional investor brings a layer of additional due diligence,

scrutiny, and controls. These investors include banks, investment advisors, hedge funds,

endowments, and pension funds, which bring the following additional levels of oversight:

a. Large institutional investors perform significant investment, credit, and legal duediligence before making an investment. They also generally employ investment andcredit professionals to monitor the marketplace’s credit performance and servicingquality as well as portfolio performance.

b. As a vendor or third party partner to banks, we are subject to strict vendor managementcompliance requirements. Bank investors on the platform like Union Bank bring anadditional layer of audit and control requirements, particularly in areas such as BankSecrecy Act and Anti-Money Laundering, in order to satisfy their own compliance andregulatory requirements.

c. Investment advisory firms offer an additional and different type of oversight to satisfy thefiduciary duty they have to their clients. The satisfaction of that duty includes an initialdue diligence often involving an accounting and process audit as well as a traditionalinvestment and legal review, and ongoing monitoring of performance.

B. Marketplaces that offer private vs. public investments


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Some marketplaces are financed mostly or exclusively through private placements, while other marketplaces like Lending Club offer investments only through a public offering, which began inOctober 2008. In 2011, Lending Club’s wholly-owned subsidiary LC Advisors (an SECregistered investment advisor) began making available private offerings to accredited investors

and qualified purchasers only in investment funds. At the same time, a separate business entity,LC Trust I, was created to provide certain, qualified investors the ability to purchase trustcertificates in a vehicle that holds loans facilitated by the Lending Club platform.

We believe that a public offering of securities offers transparency to investors and the public atlarge in terms of the risk factors associated with the investment, performance of the Notes andunderlying loans, and the issuer’s financial standing and financial performance. A public offeringof securities entails periodic disclosure and reporting requirements (on Forms 8-K, 10-Q, and10-K), audited financials, accounting controls (SOX), and strong corporate governance. As apublicly traded company, Lending Club is now also subject to additional public scrutiny and hasexpanded its obligations under the ‘33 and ‘34 Acts and taken on the requirements of the NYSE.Private investors through LC Advisors receive the same level of data and transparency asLending Club’s public investors and are not advantaged or disadvantaged in any material way.The purpose of the private offerings was to increase the efficiency of investing larger sums of capital as opposed to investing in $25 increments via the public offering.

In addition to the disclosure requirements required with a continuous public offering, LendingClub and other leading marketplaces have elected to provide additional loan-level creditattributes and performance data publicly on their websites for the publicly available Notes (andunderlying loans) so anyone can monitor underwriting and servicing quality, without making anyinvestment through or even signing up for the platform.

In contrast to this loan level transparency, certain other platforms and lenders finance loans with

their own equity or borrowed capital and then subsequently issue securities publicly through thesecuritization market to create additional capacity on their balance sheet. While this structurebrings some level of transparency into the underwriting and servicing performance, thistransparency is limited to the performance of loans at a pool level, rather than an individual loanlevel, which can mask individual loan performance.

C. Marketplaces that issue loans under states licenses vs. marketplaces that partner

with issuing banks

The two most common regulatory frameworks for issuing loans are the use of state lender

licenses and partnerships with issuing banks. Both of these models are well established and

have been relied upon for many years by many lenders. Under the latter framework, used byLending Club and others, Lending Club acts as a third-party vendor under the direct oversight

and control of the issuing bank that originates and issues loans to borrowers. Later the bank

then sells these loans to the marketplace operator, who may, in the case of Lending Club or its

affiliate, issue securities to investors to raise the capital needed to acquire the loan from the

bank or may subsequently sell the loan to an investor who is looking to hold the assets, such as

a community bank. These securities are special, limited obligations of the issuer that require the

issuer to make payments to investors if the borrower makes a payment to the marketplace,


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thereby matching the asset (the borrower promissory note) with the liability (the obligation of the

issuer to pay the investor). We believe that this “perfect matching,” combined with the spreading

of any such risk over thousands of investors, greatly reduces systemic market level risk related

to defaults. This matching materially differs from banks, which typically make loans at 10x the

value of equity held on their balance sheet.

As noted above, a marketplace that partners with an issuing bank is subject to an additional

level of regulatory oversight as it performs a number of tasks on behalf of the bank: applying the

bank’s credit policy, underwriting loans on behalf of the bank, conducting identity and credit

verifications - all at the bank’s daily direction, oversight, and control. In essence, the

marketplace is acting almost as “part of” the issuing bank and that program is subject to

supervision by the issuing bank’s prudential regulator and held to the standard of regulatory

compliance and consumer protections of the bank itself.

We believe that extremely robust and highly efficient compliance management and consumer

protections result from the model of: (i) acting as a two-sided marketplace with a wide variety of investor types, each of which brings with it an additional level of diligence, oversight, and

scrutiny, (ii) conducting a public offering of securities that provides additional controls,

transparency, and disclosure and publicly disclosing loan-level data on our website beyond the

requirements of our securities offering, and (iii) partnering with a federally regulated issuing

bank to directly oversee and audit the loan program (along with its prudential regulators).


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2. According to a survey by the National Small Business Association, 85 percent of small

businesses purchase supplies online, 83 percent manage bank accounts online, 82 percent

maintain their own website, 72 percent pay bills online, and 41 percent use tablets for their

businesses. Small businesses are also increasingly using online bookkeeping and

operations management tools. As such, there is now an unprecedented amount of onlinedata available on the activities of these small businesses. What role are electronic data

sources playing in enabling marketplace lending? For instance, how do they affect

traditionally manual processes or evaluation of identity, fraud, and credit risk for lenders?

Are there new opportunities or risks arising from these data-based processes relative to

those used in traditional lending?

As electronic credit data has increased in availability, particularly on small businesses, it has

been critical to the development of Lending Club’s marketplace and that of other innovative

firms that utilize data-driven underwriting models to provide nearly instant credit offers with an

experience that is substantially better and more efficient than traditional small business bank

lending. Newer types of electronic data sources are useful when traditional small business credit

data is less predictive, but they introduce privacy and fair lending issues – issues that many

lenders within and outside of marketplace programs are now addressing. Electronic data access

creates the opportunity to increase the convenience of and access to affordable and responsible

financing for borrowers underserved by traditional lending systems, and makes borrowing a

faster and simpler process for everyone while reducing the potential risk of fraud. Specific

benefits include:

• More convenient access to credit – A traditional business loan requires an overly

burdensome amount of documentation that can take hours to prepare.5 The recent

Federal Reserve Bank of New York surveys have found that the average credit-seeking

small business owner spends about 24 hours just getting ready to initially apply for

credit6. In contrast, with online applications and the use of electronic credit data,

applications can be submitted faster and completed at the convenience of the borrower

as electronic credit data sources quickly provide technology platforms with the required

information, replacing the reams of information used by traditional lending decisions.

This speed and convenience allows small business owners to focus on running their

businesses and also makes it easier to comparison shop, driving down the cost of credit.

• Faster access to credit – By using electronic data, the platform leverages automated

credit decisioning that removes problematic discretionary credit decisions while allowing

a quicker decision that enables loan proceeds to be delivered to small businesses faster

than traditional lenders, typically five business days or less.

• Reduced identity fraud – Without a face-to-face relationship, online lenders usevarious electronic data sources to prevent fraud and to protect both borrowers and

investors. By using electronic data and highly trained fraud reduction professionals,

Lending Club has developed excellent fraud detection capabilities across small business

5https://www.sba.gov/content/business-loan-checklist

6http://www.newyorkfed.org/smallbusiness/SBCS-2014-Report.pdf


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and consumer lending, enabling our marketplace to lower pricing and prevent harmful

identity theft. In the first nine months of 2014, the net identify fraud loss of the top credit

card issuers in the ID Analytics network was 10-15bps of portfolio outstanding. For LC

during the same time period, identity fraud losses were less than 1bp of loan principal

issued.• Broader access to credit – By leveraging electronic data and in partnership with

community banks and CDFIs, Lending Club’s marketplace is broadening access to smallbusiness financing. For example: Lending Club's partnership with Opportunity Fund(described in Q5) combines the benefits of a technology-based platform and CDFIapproaches to small business lending. This type of partnership builds CDFI capacity andincreases access to thousands of potential borrowers that the CDFI might otherwise beunable to reach.

As electronic data types expand and electronic data generally is made more accessible, it must

be used thoughtfully with continued testing and oversight to prove it is effective and stable, and

limit the risks inherent in blindly using and trusting new data. As a result, credit models based on

electronic data should be applied for less critical purposes initially, such as improving fraud

verification procedures. As electronic data is used for less critical procedures, users can test the

quality of the data to make sure that it performs as expected from a credit perspective. Once

electronic data is used for determining credit risk, users must also continually invest, test, and

refresh these models as electronic data can quickly change and its efficacy diminish. For

example, the Department of Justice noted that a model used by a major ratings agency to rate

mortgage backed securities failed to take into account new data as the mortgage products and

economic environment changed.7 As this example illustrates, while electronic data can make

credit more affordable and accessible, its use comes with a requirement of continual,

responsible, and diligent review and oversight.

7 http://www.justice.gov/iso/opa/resources/849201325104924250796.PDF


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3. How are online marketplace lenders designing their business models and products for

different borrower segments, such as: Small business and consumer borrowers; •

Subprime borrowers; • Borrowers who are “unscoreable” or have no or thin files; Depending

on borrower needs (e.g., new small businesses, mature small businesses, consumers

seeking to consolidate existing debt, consumers seeking to take out new credit) and other segmentations?

Like other marketplaces, Lending Club’s approach is to use a single technology platform that

can serve many markets. Lending Club’s marketplace started in prime consumer credit, then

expanded to custom consumer credit programs for both super- and near-prime borrowers,

specialized consumer lending (Springstone acquisition), and small business lending; we are

also continually assessing other markets. While each lending product has specific requirements

that are unique, the business model and platform used is consistent.

Marketplaces are building their platforms to leverage technology in order to: (i) reduce operating

costs, (ii) improve user experience, (iii) increase access to and affordability of credit, and (iv)

provide investor access to a new and attractive asset class. The application of these benefits

may differ by market. For example, in mortgage origination and issuance, user experience and

funding timelines are likely to be the main drivers of improvements to the process.

The technological sophistication of Lending Club’s marketplace enables it to leverage a broad

investor base with varying risk-return requirements. These varying risk-return requirements then

enable Lending Club’s marketplace to efficiently serve a variety of borrower segments matched

to these risk-return levels. These include some market segments currently underserved by

traditional bank lending, such as:

• Credit card payoff personal loans: where traditional banks may not lend because of

concerns about cannibalizing their profitable credit card businesses• Small business loans under $300,000: where banks are hindered by legacy systems and do

not have the robust and scalable technology to efficiently and profitably underwrite and

process these loans (and alternative business finance companies are not as affordable or

transparent in their terms as most credit marketplaces).

Additionally, Lending Club’s diverse acquisition channels enable it to cost-efficiently acquire

borrowers in different segments. Partnerships are a major acquisition channel for small

business loans, while direct marketing channels are primarily used to acquire personal loan

borrowers.

Marketplaces have built technology platforms designed to be flexible around the needs of different products and borrowers and to manage a diverse set of investors with a variety of risk

tolerances. As a result, marketplaces have efficiently delivered affordable credit to underserved

markets including small businesses and low- to moderate-income borrowers while offering

investors access to a new and attractive asset class.


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4. Is marketplace lending expanding access to credit to historically underserved market

segments?

Marketplaces are providing increased access to credit to historically underserved market

segments, particularly to small business owners and low- to moderate-income individuals. We

believe that this trend is likely to increase as the industry develops because marketplaces have

structural advantages in serving underserved market segments, including lower cost of

operations, diverse capital sources with a breadth of risk-return tolerances, and technology and

data expertise.

Drivers of expanded access: Structural advantages

Marketplaces can bring structural advantages to serving underserved borrowers, by use of their

lower cost structure, expanded capital sources, no legacy systems, and core competencies in

data innovation. Lending Club, as an example, has an operating ratio estimated to be 2%, when

holding monthly originations constant, in contrast to the 5-7% operating ratios of traditional bank

lenders.8 This lower operating cost ratio enables the Lending Club platform to facilitate loans toborrowers that a traditional bank may deem to be unprofitable, such as smaller sized loans that

underserved borrowers more often require. The minimum loan through the Lending Club

platform is $1,000 for consumer loans (in most states), and $15,000 for business loans.

Additionally, a diversity of capital sources enables marketplaces to serve borrowers that a

traditional bank lender may not. The risk tolerance of Lending Club investors varies significantly,

and therefore the platform is able to facilitate loans to a broader risk/return profile in contrast to

the more narrowly focused risk appetite of a balance sheet lender, including traditional banks.

The technology and data expertise of many marketplaces is a third important advantage.

Marketplaces have typically built their own technology and are not inhibited by a traditionalbank’s complex, legacy systems. This purpose built technology base, when coupled with a core

competency in data innovation, allows Lending Club and other marketplaces to efficiently serve

creditworthy borrowers with lower credit scores by discovering alternative indicators of

creditworthiness and effectively utilizing them in an automated underwriting process.

By leveraging these advantages of lower cost structure, expanded capital sources, and

technology and data expertise, marketplaces can serve more customers than traditional

lenders, and we believe marketplaces will increasingly serve the historically underserved over

time.

In practice

As a result of these structural advantages, marketplace lending delivers a significant amount of

affordable credit across the country to low- to moderate-income families and individuals. Over

8Operating ratio is expressed as expenses as a percentage of outstanding loan balance. To adjust for rapid growth,

Lending Club’s estimated operating ratio is estimated on a “run rate” basis, assuming no growth in monthly rate of origination volumes.


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the last 12 months, Lending Club’s platform, for example, has facilitated more than $200 million

in loans to low- and moderate-income individuals9 across the United States. Lending Club

believes it will continue to expand its platform’s reach to this underserved population, through

partnerships like the innovative partnership announced this year with Citi and Varadero Capital,

which is designed to deliver $150 million of affordable credit to underserved, low- to moderate-income borrowers.

These platforms also facilitate loans to other underserved constituencies such as smaller

businesses. The underserved nature of these smaller businesses is evidenced in the Federal

Reserve's Joint Small Business Credit Survey, which shows microbusinesses (those with

revenue of less than $250,000) only succeed in obtaining credit 25% of the time10 while large

firms with annual revenues of $10 million or more succeed in accessing credit 70% of the time.

Moreover, this survey also notes 86% of microbusinesses are seeking credit for an amount of

$250,000 or less. Lending balances for smaller loans ($100,000 to $250,000) are down 22%

since 2007, while booked commercial loans of greater than $1 million have increased 56% in

the same period.11 To meet this emerging need, our platform is focused on serving the segmentseeking loan sizes less than $300,000 with an average loan size of $55,000. Our partnership

with Opportunity Fund, one of the largest Community Development Financial Institutions

(CDFIs), is structured to provide credit access to small businesses in underserved parts of

California in order to leverage our platform and deepen its access to and broaden the benefit for

this underserved population.

Successfully serving underserved populations, however, requires more than simply making

credit accessible to them. To truly serve these populations effectively, the credit product must

be designed to provide for the timely and successful repayment of the loan and allow the

borrower to end the cycle of debt that many currently available products encourage. The

Lending Club platform focuses on providing access to loans whose terms are fair, transparent,

and responsible for all borrowers with features for standard program loans such as a fixed term,

fixed monthly payments, and no prepayment penalty, in amounts that do not unduly burden the

borrower, which overall reflect responsible borrowing principles. Our position on these principles

is further reflected in the Small Business Borrowers' Bill of Rights (“BBOR”) that was created by

a coalition of lenders, brokers, nonprofits, and industry participants. (See Question 11 for further

detail on the BBOR). We believe that our marketplace’s structural advantages, continued focus

on fair and transparent terms, and innovative partnerships will aid in broadening access to

responsible credit for these historically underserved populations.

9Borrowers who have reported adjusted household income is less than 80% of the median income of their zip code

and live in majority or greater low to moderate income (LMI) census tracts as of June 30, 2015.10

Federal Reserve Banks of New York, Atlanta, Cleveland, and Philadelphia, Joint Small Business Credit Survey Report, 2014. http://www.newyorkfed.org/smallbusiness/joint-small-business-credit-survey-2014.html11

FDIC March 31, 2015 Call Report Data, C&I Loans + Nonfarm Nonresidential loans


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5. Describe the customer acquisition process for online marketplace lenders. What kinds of

marketing channels are used to reach new customers? What kinds of partnerships do

online marketplace lenders have with traditional financial institutions, community

development financial institutions (CDFIs), or other types of businesses to reach new

customers?Lending Club uses a diverse array of direct and partnership marketing channels to attract

borrowers to our platform, including:

• Online Partnerships: We work with companies that sell products or services that are

suitable for financing or that help potential borrowers manage their finances, manage

their credit, or find the best lending options.

• Search Engine Optimization: We seek to ensure that our marketplace is optimized to

achieve meaningful organic traffic from search engines.

• Search Engine Marketing: We also use paid placement on major online search

engines.

• Social Media and Press: We leverage social media outlets and the press to help drive

brand awareness.

• Offline Partnerships: We work with companies that sell products offline that oftenrequire affordable financing, such as swimming pools, home improvements, andfurniture.

• Mail-to-Web: We have developed a highly targeted direct marketing program that

selects from a given population of consumers and small business owners who would

benefit from our products.

• Radio and Television Advertising: We utilize radio and television advertising to

enhance the impact of our other marketing channels.

Other Partnerships

• Traditional Financial Institutions: We work with a large number of traditional financial

institutions that invest directly on the platform and / or partner with us to facilitate

personal loans to their customers. Banks are a natural partner for marketplaces as their

strong relationships with their customers and low cost of capital, combined with the

efficient and cost-effective technology offered by marketplaces, creates a “best of both

worlds” advantage for banks and their customers. These partnerships enable banks to

provide their existing customer base with access to credit products other than traditional

credit cards, which are an efficient payment solution but a poor long-term financingoption. These partnerships also enable banks to invest in these new loans that the bank

would not otherwise be able to procure, underwrite, and fund as efficiently, resulting in a

stronger borrower relationship and a more diverse bank balance sheet. Examples of

Lending Club’s banking partnerships include:

o BancAlliance: In February 2015 Lending Club announced a partnership with

BancAlliance, a national consortium of 200 community banks in 39 states, to offer

access to co-branded personal loans to their customers through the Lending Club


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6. How are borrowers assessed for their creditworthiness and repayment ability? How

accurate are these models in predicting credit risk?

Lending Club and its issuing bank partners have developed sophisticated systems to assess

creditworthiness (which should take into account, through a variety of assessments, the

probability of a borrower’s successful on-time repayment of the loan) and prevent fraud. As a

result, the Lending Club platform’s risk model is currently twice as effective as generic bureau

risk scores, and our fraud prevention systems minimize fraud losses to rates currently much

lower than industry standards.

Effective Assessment of Creditworthiness

All lenders should assess a borrower’s creditworthiness that focuses on a borrower’s ability to

successfully repay the loan in full and on time, consistent with responsible lending practices.

The foundation of the Lending Club’s platform’s loan decisioning is automated credit models

that provide borrowers with instant loan offers. These models draw on current and past credit

behavior data provided by credit bureaus, application information provided by the applicant, andcredit and payment data from other third parties. We believe that these models are strong

predictors of credit risk, with actual losses generally tracking forecast losses.

Lending Club has invested significantly in its credit expertise and continuously enhanced the

risk models. To develop these risk models, Lending Club’s risk team, data scientists, and credit

modelers work in close partnership with our issuing bank partners’ credit and risk teams to

develop and deploy risk assessment systems at a pace and scope that exceeds that of most

traditional lenders. The platform’s risk models are regularly reassessed and rebuilt to

incorporate recent and additional data and any changes to electronic data. The teams

collectively examine thousands of potential credit attributes to enhance the risk prediction

capabilities of the credit model and sub-models.

Lending Club is not only able to deploy credit model improvements on the platform more

frequently, but also can respond more quickly to changes in the portfolio or economic

environment. After design, review and internal testing, and validation of new models,

independent third parties are engaged to validate these new custom risk models. Once this

independent validation is complete, new models are moved onto the platform and into

production in approximately eight weeks. Updates to these new models can be developed and

placed into production in as little as two to three weeks. In contrast, a traditional bank loan

program may require months to complete similar processes needed to develop, validate, and

implement a new model into production. Our risk infrastructure and automated Q/A systemsensure that we are able to both develop quickly and test and validate models in a

comprehensive and efficient fashion.

The high quality of the platform’s risk assessment systems can be demonstrated in two ways: (i)

the currently deployed model on the platform outperforms industry generic scores such as FICO

by more than double in the Kolmogorov–Smirnov test, an industry standard measure of the

effectiveness of a risk model and (ii) as evidenced by declining platform losses (on a percentage

basis) and increasing investor confidence, the platform’s pricing has correspondingly declined


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over time, resulting in a benefit to borrowers with even more affordable credit—over the last

three years, the risk premiums required by investors on Lending Club’s platform have

decreased by 270 basis points.12

Effective Income and Employment Verification

Lending Club and its issuing banks have developed and refined statistical models over the last 8

years to determine the amount of verification necessary for any given loan application. We have

also developed processes to cost-efficiently verify income and/or employment when such

verification is necessary and is likely to improve loan performance, yet we do this in a way that

minimizes the burden on the borrower.

The chart below shows that these models and processes have been effective at identifying the

lowest risk loans that do not require income or employment verification. Loans that have not

been subject to verification of income have on average performed better than loans that were

income verified.

Effective Fraud Prevention

Fraud prevention is critical to reducing risk and improving loan performance. Lending Club has

developed industry leading fraud prevention systems that protect investors from investing in

fraudulent loans and also protect borrowers who may be subject to identity theft. Similar to

creditworthiness, Lending Club’s fraud detection system begins with models that analyze a wide

variety of credit and other data to predict the likelihood that a loan application may be

fraudulent. Our fraud team then performs additional verifications in order to proceed with the

application. In the first nine months of 2014, the platform’s fraud loss rate related to verified ID

12The weighted average interest rates on 36-month loan portfolio have declined from 13.2% in June 2012 to 11.2% in

June 2015, down 200 bps. Meanwhile, 3-year treasury yields have increased 70 bps over the same period, resultingin a 270 basis point spread reduction. Spread based on weighted average monthly interest rate on 36-Month loanportfolio minus monthly 3-year treasury yield. Source: FactSet, www.factset.com/


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theft was less than 0.01%. By comparison, the net identify fraud loss of top credit card issuers

was generally 0.10%-0.15%.13

How does the credit assessment of small business borrowers differ from consumer borrowers?

For both consumers and small businesses, Lending Club employs a consistent approach with a

data and technology-enabled highly automated process; our underwriting approach is

specifically tailored to the repayment behavior of the segment. Small businesses and

consumers have different credit characteristics and require different underwriting processes.

The Lending Club platform loan decisioning for small businesses underwrites the business and

a guarantor with available data, using a credit model designed specifically for the repayment

behaviors of the types of businesses that we serve. The applicant’s financial statements, credit

history and behavior, additional data, and other information are analyzed to properly decision

each business loan application.

Does the borrower’s stated use of proceeds affect underwriting for the loan?

For consumer loans, the use of proceeds can influence pricing and loan amount available based

upon historical risk performance, but Lending Club does not verify the actual use of the loan

proceeds. For small business loan applications, the stated use of proceeds can allow us to tailor

the terms of the loan to the business’s need. For example, a business borrowing for expansion

may be best served with a longer loan term, while a business borrowing to purchase and sell

inventory may be best served with a shorter term. Additionally, when the stated use of proceeds

can be verified based on the product by sending money directly to the supplier of inventory, it

reduces risk and therefore can result in lower pricing.

13Source: ID Analytics


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7. Describe whether and how marketplace lending relies on services or relationships provided

by traditional lending institutions or insured depository institutions. (Note: relates to theanswer in Q1.)

We believe that marketplace lending is a catalyst that brings together a variety of service

providers and other relationships to create a more accessible and affordable lending

mechanism. We also strongly believe that marketplace lending provides benefits to bank

partners including: (i) an efficient lending mechanism for products essentially vacated by

traditional banks due to cost and competitive product constraints and (ii) the opportunity to

enhance our partners' product offerings to borrowers in a more efficient and affordable manner.

In addition, the marketplace’s product offerings have helped our partners grow their balance

sheet with investments in the platform’s high quality assets and benefited our platform through

our partners’ guidance and feedback on enhancing compliance, controls, and risk infrastructure.

The key relationships that marketplaces may have with traditional lending institutions desiring to

participate as borrowers and/or investors on a marketplace platform include the following:

Borrower-Side Banking Relationships

Issuing bank relationships

Marketplaces may rely on issuing banks to originate and issue all loans facilitated by the

platform and to provide strict oversight and control over the platform’s compliance and risk

capabilities. Lending Club’s primary issuing bank is WebBank, a FDIC-insured Utah-chartered

industrial bank that handles a variety of consumer and commercial financing programs. Lending

Club also partners with NBT Bank, NA and Comenity Capital Bank as the issuing banks for its

K-12 education and patient finance programs. These relationships subject the marketplace to asubstantial degree of regulation and regulatory oversight that does not apply to non-bank

programs.

Referral or Joint Marketing banks

Over the last 30 years, there has been a tremendous shift in how credit is delivered to

consumers. In 1990, community banks accounted for approximately 80% of the consumer

lending market but they now account for less than 10% of that market.14 This shift was driven

largely by the inability of smaller banks to compete with large financial institutions given their

lack of scale and resources and the move towards credit cards and away from more traditional

loan products.In order to increase the accessibility of the platform’s loan products, we continue to develop

partner opportunities with banks and other traditional lending institutions in order to leverage the

cost efficiency of our platform and make its products available to our partners’ customers under

14Ryan Tracy, " Lending Club, Small U.S. Banks Plan New Consumer-Loan Program," Wall Street Journal , February

9, 2015


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co-branded offerings. These partnerships also allow the banks to strengthen their balance sheet

by investing in their own customers.

Our partnership with BancAlliance, a national consortium of over 200 community banks, is

representative of the collaborative relationship between marketplace lending and traditionalbanking. We are working with a variety of consortium banks to enable them to deliver a co-

branded loan product to their customers where previously none existed and allow the bank to

invest in these very loans and demonstrate their commitment to their community and clients.

Improve access to affordable credit to bank customers

Another notable partnership that illustrates the benefits of collaboration between the Lending

Club platform and banks is our initiative with Citi and Varadero Capital. This innovative

partnership aims to deliver $150 million of affordable credit to underserved, low- to moderate-

income borrowers. Through our marketplace and its innovative online process, we are able to

reach underserved populations with a level of efficiency that we believe traditional lending

institutions will increasingly find attractive as a complement to their overall lending strategy.

Investor-Side Banking Relationships

Banks as investors

As discussed above, traditional lenders are not only expanding the suite of credit products to

their customers through Lending Club’s marketplace; they are also are becoming a growing

source of investor capital for our marketplace. We believe insured depository institutions are

one of the key components of our strategy to attract diverse and stable investors. These

relationships further strengthen and balance our marketplace and provide us with additional

flexibility to facilitate an even wider variety of loans through a range of business and economiccycles.

Other Benefits of Banking Relationships

In addition to the rigorous review and audit by our issuing bank partners, our marketplace

benefits from the increased scrutiny, diligence, and on-going audits of bank participating on the

platform both as investors and joint marketing partners.

Bank diligence and vendor management review enhance our compliance and controls

With the diligence that our bank and other partners perform on us prior to participating on the

platform, we have developed a rigorous compliance management program to ensure

compliance with laws applicable to our users and also to satisfy the scrutiny of our bank

partners’ internal compliance functions. As outlined in the following question, we regularly

review our compliance management policies and procedures to ensure our program complies

with the evolving regulatory environment.

What steps have been taken toward regulatory compliance with the new lending model by the

various industry participants throughout the lending process?


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Lending Club takes its regulatory compliance very seriously and sees it as a competitive

advantage. Lending Club has established a robust compliance management that enables it to

assess, monitor, and test its platform’s compliance with applicable lending and other rules to

which it is subject. To support its compliance management program, Lending Club has

established three lines of defense (the business unit/QA & QC, an independent compliancegroup, and an internal audit function) to continually assess, monitor, and test the operation of its

platform. The results of Lending Club’s internal testing are shared with our issuing bank to

ensure they remained informed of all findings.

In addition to this internal review, Lending Club is subject to three quarterly audits and one

annual audit from its primary issuing bank. The platform is also subject to an annual audit for the

issuing bank from an independent third party in line with good vendor management policy. In

addition to the bank’s testing, Lending Club is also subject to review by the bank’s prudential

regulator (the FDIC and the Utah Department of Financial Institutions) on a periodic basis as the

regulator assesses the oversight and controls exhibited by the bank over the program.

Furthermore, the platform undergoes a multitude of testing, auditing, and diligence from our

financial institutions and investment partners, which further strengthen our compliance

management program. In order to process and understand the findings of these various reviews

and audits (both internal and external), Lending Club has established a management level risk

committee chaired by our Chief Risk Officer that meets at least quarterly to assess and

understand the status of the platform’s compliance program. This committee reports into a

Board of Directors Risk Committee that meets formally at least four times a year to assess and

discuss both current and future platform risks. Lending Club also requires all employees,

consultants, and directors to undergo annual compliance training commensurate with their

respective roles. The depth and breadth of this training is approved by the issuing bank and

reported to the bank quarterly. Employees who do not complete their training timely are subject

to discipline up to and including termination. Lending Club feels that other marketplace

participants, whether they use an issuing bank or otherwise, should have a similarly robust

compliance management program to that described above.

What issues are raised with online marketplace lending across state lines?

Marketplaces that operate with an issuing bank rely on two basic tenets regarding the issuance

of the loan. One is the basic rule that a loan, after origination, can be sold to a third party, and

the third party can then enforce the terms of the loan as written. Sometimes called the “valid

when made doctrine,” this rule determines whether a loan is compliant with usury laws at the

time the loan is originated, and recognizes that subsequent events (including assignment of theloan) do not change that conclusion. This rule has been widely applied across U.S. jurisdictions

for more than a century. The second rule is that of choice of law, which looks to the state law of

the issuing bank to determine the validity of the terms of the loan when made.

In the case of marketplace programs, the issuing bank is the creditor of the loans, and the loan

terms are compliant with the bank’s ability to charge interest under federal law, typically 12

U.S.C. § 1831d (the Federal Deposit Insurance Act, applicable to state banks) or 12 U.S.C. § 85


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(the National Bank Act, applicable to national banks). Programs other than marketplaces have

long operated under these principles, which have been viewed as settled law. In May 2015, the

Second Circuit Court of Appeals issued its decision in Madden v. Midland (Madden), 786 F.3d

246 (2d Cir. 2015). In that case, the court ruled that the National Bank Act, 12 U.S.C. § 85, did

not preempt state usury law as applied to a debt buyer that was seeking to collect a charged-off credit card debt originated by a national bank. The court ruled that preemption did not apply

because the defendant was not a national bank, and because application of state law would not

significantly interfere with the business of a national bank. The case remanded to district court

the determination of the choice of law for the debt in question.

We believe Madden was wrongly decided, as it applied the wrong preemption standard and

failed to recognized the established “valid when made doctrine.” We also believe that the facts

of Madden (the collection of a charged off debt) are far different from most marketplace lending

programs, such that the conclusion in Madden would not apply. Finally, we believe that state

law separately recognizes the “valid when made doctrine,” even if not recognized (per Madden)

as a matter of federal law. We also believe that the strong choice of law establishment inmarketplace lending further supports our position.

While Lending Club firmly believes in the distinguishing facts of its marketplace program from

Madden, Lending Club and its issuing bank partners are assessing a variety of options to try

and further strengthen their position including:

• further clarifying the choice of law elements of the issuing bank’s documents and overalltransaction elements as to more firmly tie the transaction to the issuing bank’s charter

jurisdiction;

• enhancing the aspects of the program, including the issuing bank’s ongoing involvement

in the program, to further distinguish the facts of Madden; or • the acquisition of licenses by non-bank buyers of loans to enable the continued

enforcement of the agreed upon contractual rate.

We believe these changes will continue to allow the marketplace program to operate in its

efficient manner.


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8. Describe how marketplace lenders manage operational practices such as loan servicing,

fraud detection, credit reporting, and collections. What, if anything, do marketplace lenders

outsource to third party service providers? Are there provisions for back-up services?

Loan Servicing

Lending Club services all loans originated through its marketplace (with the exception of

education and patient finance loans facilitated through its subsidiary Springstone Financial, LLC,

which are serviced by the issuing bank partners). Servicing is performed through its proprietary

platform and comprises account maintenance, payment processing from borrowers, and

distributions of payments to investors. Lending Club’s goal is to provide our users with a

superior customer experience. We provide as much detail on our website as possible to allow

borrowers to manage their loan online. In accordance with our contractual servicing

relationships, Lending Club uses commercially reasonable efforts to service and collect the

loans in good faith, accurately and in accordance with industry standards customary for

servicing such loans.

Borrowers can make payments either by ACH or via check. Most borrowers sign up for

automatic payment via ACH for the scheduled monthly principal and interest payments due on

their loan due to the cost-free convenience of the process. This automated payment process

allows a higher degree of certainty for timely payments, as well as prompt notice and the ability

to quickly inform a borrower of a missed loan payment and work with them to rectify the issue.

Borrowers are notified automatically each month prior to the payment due date, with ample time

to cancel via a simple email or call should they desire. Borrowers who pay by ACH are less

likely to incur a late fee.

Collections

Collections are facilitated through a process involving both in-house and outsourced collections

staff. The intent of our collections process is to maximize asset recovery through early

intervention. Generally, in the first 30 days that a loan is delinquent, our in-house collection

team works to bring the account current. After that time, we typically outsource collection efforts

to third-party agencies that are licensed to conduct activities in each state where borrowers

reside. As part of Lending Club’s vendor management program, Lending Club performs

diligence on its outsourced collections agencies, and carefully audits and monitors these

agencies on an ongoing basis to ensure policies and practices are in accordance with

applicable law. Lending Club also conducts quarterly business reviews, annual audits, and site

visits to its providers.

Customer Advocacy

In the interest of achieving the highest standard of consumer protection, support, and

satisfaction, Lending Club created a Customer Advocacy team within its Member Support

Department, and staffed it with the most experienced associates we have in production roles.

This team handles all customer complaints, attempting to resolve each in a way that addresses

the concerns raised. In addition, this team performs root cause analysis and, with our legal and


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compliance team, trend analysis on complaints that it then shares with the management risk

committee, and has monthly goals in using this data to improve the business.

Operational Governance

Lending Club has created a team within consumer-facing operations (Operations Development)

that is responsible for developing and optimizing processes and managing risk. This group has

members who do quantitative analysis, design processes, document policies and procedures,

train agents, perform quality and risk monitoring, create scorecards, and lead performance and

risk-related business initiatives. This heavy investment in scalable operational infrastructure is

designed to ensure the highest standard of consumer protection and experience.

Investor Funds Processing

Investor funds, including cleared payments collected by Lending Club from borrowers, are held

in a bank account at Wells Fargo in trust for (“ITF”) and for the benefit of investors. This account

is a pooled, non-interest-bearing demand deposit account. This account is governed by a trustagreement that provides that Lending Club disclaim any economic interest in the assets in the

ITF account. It also provides that each investor disclaim any right to the assets of any other

investor. Lending Club’s assets are not commingled with the assets of investors held in the ITF.

In addition to the ITF account, Lending Club maintains sub-accounts for each investor on the

platform. Sub-accounts are used to track and report funds committed by investors, as well as

payments received from borrowers that are paid on the related loan.

Investors authorize Lending Club, as account trustee, to initiate cash transfers out of the ITF

account to finance the investment in loans selected by the investor. Lending Club will collect

principal and interest payments and deposit funds back into the same account, net of a

servicing fee.

Vendor Management

Like many banks and other businesses, Lending Club engages vendors and third-party service

providers for a wide range of other products and services. In today’s business environment,

financial industry regulations and commercial best practices require Lending Club to proactively

identify and manage vendor relationships, minimizing risk exposure to Lending Club. Lending

Club’s Vendor Management Program provides the company with a framework and guidance for

managing the full vendor lifecycle relationships. We also work in partnership with our issuing

bank to ensure that our vendor review and management process is consistent with their

standards and subject to their review and ongoing oversight. As discussed above in“Collections” for instance, active vendor management includes performing risk assessments and

additional vendor due diligence commensurate with assessed risk(s). Additionally, developing

and sustaining effective vendor relationships after contract execution enables Lending Club to

optimize vendor performance and value, as well as manage any associated or residual risks.

Post-contract monitoring activities include, but are not limited to, ongoing monitoring of vendors,

monitoring of service level agreements, onsite audits, collecting market intelligence (e.g., M&A

activity, bankruptcy), and reassessing vendor risk profiles on a periodic basis.


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Credit Reporting

Lending Club and its issuing bank partners comply with the federal Fair Credit Reporting Act

(FCRA), as amended by the Fair and Accurate Credit Transactions Act (FACTA). The FCRA

requires our issuing bank partners and us, as the case may be, to have a permissible purposeto obtain a consumer credit report and requires persons to report loan payment information to

credit bureaus accurately. FCRA also imposes disclosure requirements on creditors who take

adverse action on credit applications based on information contained in a credit report.

In the application process, we obtain explicit consent from borrowers to obtain such reports. As

the servicer for the loan, we report loan payment and delinquency information to all three

consumer reporting agencies. We provide an adverse action notice to a declined borrower on

the issuing bank’s behalf at the time the borrower is declined that includes the required

disclosures under the Equal Credit Opportunity Act (ECOA) and FCRA.

We also have processes in place to ensure that consumers are given “opt-out” opportunities, as

required by the FCRA, regarding the sharing of their personal information.

Back-up Servicer and Back-up Issuing Bank Partner

Lending Club has a backup and successor servicing agreement with a back-up servicer,

Portfolio Financial Servicing Company. The back-up servicer is ready to service loans should

Lending Club cease to be able to service loans. Upon the back-up servicer becoming the loan

servicer, the back-up servicer would be entitled to earn servicing fees paid by our investors.

Lending Club also executed an agreement with Cross River Bank, a New Jersey chartered

bank, to operate as a back-up issuing bank in the event WebBank can no longer be an issuing

bank for our marketplace program.

Business Continuity and Disaster Recovery

As part of our issuing bank relationship and based upon sound business practices, Lending

Club maintains a Business Continuity Program that ensures the continuation or recovery of our

operations following a disruptive event. Dependencies on resources such as people, facilities,

information technology, data, and third-party service providers may put the organization at risk

should a disruptive incident occur. Lending Club takes a pragmatic approach to risk, recognizing

that while not every risk can or should be mitigated, often there are solutions that lessen

likelihood of disruption or impact or enable continuation of services.

Our Business Continuity Program identifies the resources the business relies upon to meetstakeholder expectations, risks that could influence resource availability, and strategies that will

reasonably mitigate or manage those risks. Our goal is to implement effective strategies that

enable a timely, effective response and recovery effort within stakeholder expectations following

a disruptive incident.

Lending Club’s Business Continuity Program includes:

• Business continuity governance and program management


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• Business impact analysis and risk assessment

• Strategy identification and implementation

• Business continuity plan documentation

• Training and awareness

• Exercising and testing• Continual improvement

Lending Club reviews its Business Continuity Program, documentation, and strategies at

planned intervals and when significant changes occur within the organization.

Lending Club’s Business Continuity Program addresses operations at Lending Club’s San

Francisco, California, and Westborough, Massachusetts, locations, and expands to address

future facilities as applicable. The scope of the Business Continuity Program, defined using an

analysis of customer dependencies, expectations, and willingness to accept downtime, includes

key processes and business capabilities.

The satisfactory performance, reliability, and availability of our technology and our underlying

network infrastructure are critical to our operations, customer service, and reputation, as well as

our ability to attract new and retain existing borrowers and investors. Much of our system

hardware is hosted in a facility located in Las Vegas, Nevada that is third-party owned and

operated. We also maintain a real-time backup system at a third-party owned and operated

facility located in Santa Clara, California.


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9. What roles, if any, can the federal government play to facilitate positive innovation in

lending, such as making it easier for borrowers to share their own government-held data

with lenders?

The federal government could create significant benefits for borrowers by improving borrowers’ability to share government-held data with lenders with the express consent of the borrower, by

creating incentives in the tax code to increase economic growth in underserved communities

and promote savings, and by simplifying the tax reporting and statement delivery for

investments in marketplace loans.

Automation of sharing of government-held data

The most promising government-held data opportunity would require only a small improvement

in the current process used to share tax return data—the creation of an API for the IRS’s 4506t

tax return transcript process. This simple improvement could enable lenders to offer lower cost,

faster, easier, safer, and more access to credit, across consumer and small business lending.

The IRS’s 4506t process15 allows taxpayers to request a summary transcript of their filed tax

returns to be provided to a third party such as a lender. The IRS’s processing of these forms is

currently manual. Bringing this process up to current technology in order to make that data

available instantly for analysis would provide great benefits to borrowers. We believe this would

be relatively easy for the federal government to accomplish. The IRS currently accepts

electronic signatures, and has since 2011. The IRS currently sends this tax transcript data to

third parties, which is a purpose of the 4506t. However, currently an unnecessary manual

process, including paper forms rather than current API technologies that provide instant online

transmission of data, adds 2-8 days of delay to access the data. This prevents the use of tax

data in credit models that price and approve loan applications instantly.

Tax returns and the 4506t are an important part of the platform’s loan underwriting process, but

also the most cumbersome and underutilized. (Please note that the benefits of the 4506t API

apply similarly throughout the mortgage, personal finance, auto lending, and other lending

industries. We focus here on Lending Club’s small business lending for the sake of illustration.)

Lending is increasingly structured around providing applicants with instant loan offers online.

The platform’s process provides applicants a loan decision and interest rate online, immediately

after they complete our 5-minute online application. This is an attractive experience that credit-

seekers prefer to submitting an application and waiting uncertainly for days or weeks to receive

a decision.

As a result, our pricing and approval decisions are largely limited to using information that we

can access instantly via APIs. We collect tax returns from the borrower, but only after we've

decided to make a loan offer at a specific price. In this process, we do not know which

businesses we declined but might have been able to approve if we had seen their tax data

15http://www.irs.gov/pub/irs-pdf/f4506t.pdf


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before making a decline decision. It is also expensive for lenders to pay a third party vendor to

manage and expedite the manual IRS 4506t submissions for us, but also unthinkable to use the

IRS’s 4506t process without a third party expediter, who can accelerate the process by up to 45

days.

Tax return data could do so much more if the existing IRS 4506t process were upgraded with an

API. A 4506t API providing instant, online access to tax records could benefit borrowers by

allowing lenders to offer: (i) faster loan decisions, (ii) lower pricing, (iii) higher loan approval

rates, (iv) more attention to smaller loan requests, (v) easier application process, and (vi) higher

income verification rates.

An API would benefit the IRS in two ways: (i) lowering IRS costs by decreasing the need for

manual processing of the 4506t and (ii) potentially increasing tax revenue by encouraging

people and businesses not to under-report earnings, given that those tax returns would be more

likely to be used to evaluate and price loan applications.

See the Appendix for additional information on a 4506t API.

Government incentives to support investment in underserved segments

The federal government also has the opportunity to increase investment and economic growth

in underserved communities and certain economic sectors by creating incentives in the tax code

that parallel existing tax programs. Currently investors only have the ability to offset charge-offs

against capital gains, which is very unfavorable.

We propose that investors who provide capital in defined underserved areas and to low- to

moderate-income small businesses borrowers be taxed at the capital gains tax rate, rather than

the current marginal income tax rate, if the loan is held for over 12 months. This sort of tax

incentive to encourage investment in underserved areas parallels the Treasury Department’s

successful New Markets Tax Credit program, which attracts investment in commercial real

estate development in low-income census tracts.

Additional tax incentives to encourage investment and saving

Policymakers in the United Kingdom have taken a broader approach to encouraging investment.

In the UK, investors are able to invest in “P2P loans” tax-free though an Investment Savings

Account (ISA) called an Innovative Finance ISA, or “IFI”. Investors can deposit up to £15,240

per year (standard for ISAs), or transfer in money from other ISAs. Unlike a U.S. IRA, there is

not a tax penalty for withdrawing before retirement. The proposed U.S. marketplace investingincentive could similarly attract investment in underserved consumers in the same geographies,

and in small businesses nationwide. By encouraging investment in underserved communities,

the federal government could create economic growth in the communities where it is needed

most.

Additionally we propose that investors in marketplace loans have the ability to offset losses and

charge-offs against interest income and gains and earn tax-free returns on the first $5,000 of


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investment in order to encourage savings and stimulate access to affordable credit. Currently,

the IRS does not directly address how Notes are treated for U.S. federal income tax purposes.

As a result, the tax treatment for the investor is uncertain and the related rules are complex. We

propose clarity from the IRS to promote consistency among investors and within the industry,

similar to the IRS’ guidance on Virtual Currency (Notice 2014-21). Currently, Lending Clubtreats Notes as debt instruments issued with original issue discount (“OID”). As a borrower

makes payments on the loan, Lending Club’s treatment of the Notes requires the investor to

include these payments as ordinary income. However, when a borrower stops payments on the

loan, the losses are treated as a capital loss to the investor. Due to the capital-loss rules, the

investor may only deduct net capital losses up to $3,000 against the investor’s ordinary income.

If investors were to only invest their savings in LC Notes, the investor could only generate

capital losses without ever generating capital gains to offset their losses. We propose that the

IRS’s tax treatment of the losses match the treatment of income from marketplace lending.

Further, given the attractive returns profile for these investments, the Treasury could encourage

savings for investors, particularly in retirement accounts, by reducing or eliminating the tax

burden on small dollar investments up to $5,000.

Simplifying tax reporting and statement delivery

The federal government can also play a positive role in consolidated tax reporting and electronic

statement delivery.

Consolidated Tax Reporting

Currently, investors purchase Notes in $25 increments to diversify their portfolio and reduce the

impact of any single loan loss. $2,500 can be invested in 100 borrowers. If an investor were to

sell all 100 Notes of their investment, 100 separate tax forms would be sent to the IRS. The IRS

should view the investor’s disposition as one transaction with a yearly consolidated

reporting. This consolidated reporting will save time in investor tax reporting and increase

accuracy in reporting because the investment, viewed as one transaction and reported on one

form, will agree to LC’s year-end investor statement.

Electronic delivery of tax forms

As with many online marketplace companies, a valid e-mail address is a requirement to open an

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Lending Club Response to Treasury Rf i

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