How to Avoid Issues Like Borrowers and Investors Run into with LendingClub
There are a ton of online lenders that offer loans to individuals. Most often these companies have looser credit score requirements. This means borrowers that have no luck getting a loan at a traditional bank may be able to get a loan with them with little trouble. One such lender is LendingClub.
They have been around for 12 years, going public in August of 2014. The company brought an innovative idea to the lending table by joining investors and borrowers directly. This effectively cut out the bank as a middle man.
How Does it Work?
The platform works to give investors a fixed income alternative by investing in personal loans, while offering borrowers loans with investors funds.
Investor’s Side
Investors buy fractions of loans called notes, in amounts starting as low as $25. You can choose an automatic diversification program or browse loans and manually choose the notes you want to invest in based on criteria you set.
How Does Investing Work?
You can invest as little as $25, but you have to open an account with Lending Club with a minimum of $1,000. These are the funds you invest in the loans of your choosing. As borrowers make payments with interest, your pro rata portion goes into this account. For the funds to continue growing you would need to continually invest them in new loans.
What Exactly is the Risk?
If a borrower is late with a payment, the investor pays 18%. Should the loan go into litigation, the investor pays 30% to help cover attorney costs and fees. When it becomes apparent that a loan is not going to get better, it written off after 150 days.
The remaining balance is the investor’s responsibility. Their share of the balance comes out of their investment account. If any loan funds come in later, the lender is repaid on a pro rata basis.
To minimize risk, you can set your own requirements for the loans you choose to invest in. For example, you may only want to invest in loans that meet a certain credit score requirement. You can choose a score that is higher than that required for loan approval by LendingClub.
Perhaps you want to focus on employment stability. You can choose to invest in loans to borrowers that have been at their current job for a certain length of time.
Requirements
Investors are subject to income requirements that vary by state. Most states require a minimum income of $70,000 per year. If net worth is at least $250,000, the income requirement does not apply. Additionally, investors can invest no more than 10% of their net worth.
Lending Club also offers traditional and Roth IRA accounts.
Funds invested with Lending Club are not FDIC insured.
The Borrower’s Side
Borrowers can apply for loans to consolidate credit card debt at a lower interest rate or to consolidate other debt. They can also borrow funds to make home improvements, or to help with unexpected expenses or large purchases.
The process is simple and fast. Enter the amount your wish to borrow, choose the type of loan you are looking for, and provide some very basic information. You’ll see at least two different offers. One will have a lower payment but a higher interest rate.
The other will have a lower interest rate but a higher monthly payment.
Details
Loans range in amounts from $1,000 to $40,000 with an origination fee of 1% to 6%. This fee comes off the top before funds go into the borrower’s account. That means if you have a $1,000 loan with a 1% origination fee, you will only receive $990 in your account.
You still have to pay back the full loan amount of $1,000 of course.
Interest rates range from 6.16% to 35.89%, and repayment terms are typically monthly over 3 to 5 years. After approval it can take up to a week to receive loan funds.
Loan Requirements
The minimum credit score for a loan is 600. In addition, you must have a credit history that goes back at least 3 years.
LendingClub Asset Management
This is a team of investment advisers that work to help investors reach their investing goals. LendingClub Corporation is their parent company. As asset managers, or investment advisers, they have a fiduciary responsibility to work in the best interests of their clients.
So this means the financial decisions they encourage their clients to make are in the best interest of the client.
This is where things with Lending Club gets a little dicey.
The Charges Against LendingClub Asset Management
In September 2018, the SEC charged Lending Club Asset Management LLC, along with its former president Renaud Leplanche, and Carrie Dolan with fraud. Renaud was also the CEO of Lending Club Corporation, and Dolan was the CFO.
What did they do? Essentially, they improperly used fund money to benefit LendingClub Corporation. This was despite the fact that this use was not in the best interest of the investor.
They caused a particular fund to invest in loans that were at risk. This was a benefit to LendingClub Corporation, not the investors. It was a clear breach of fiduciary duty.
In addition, Leplanche and Dolan adjusted monthly returns for the fund so that the numbers reported looked better than what was actually happening with the fund. By doing these things, they violated the anti-fraud provisions of the “Investment Advisers Act of 1940.”
The Punishment
In the end, LendingClub Asset Management had to pay $4million, while Leplanche had to pay $200,000. Dolan had to pay $65,000. Leplanche was also barred from the securities industry, though he can reapply after 3 years.
The Fall Out
The SEC Enforcement Division did not recommend charges against LendingClub Corporation. They self-reported the misconduct after it was discovered during a review. This review came as the result of a request from their own Board or Directors.
They also reimbursed $1 million to those investors that were negatively affected by the adjusted monthly returns.
Since their public release in 2014, shares have declined 70%. However, there hasn’t been a ton of activity major activity since the charges were brought.
What People Are Saying about LendingClub?
A quick glance at the Better Business Bureau file on LendingClub Corporation will be fruitful if you are considering using their services. They have a B rating, which isn’t bad. Be sure to read through the complaints though. There are a lot of them.
While most of them are due to borrowers not reading the fine print, they can give you an idea of what you could be in for so that you can keep an eye out. The general consensus among users is that if you go in with your eyes wide open, this is a viable option for both investing and borrowing.
Know that they offer little leeway when it comes to reporting late payments however. Many of the complaints had to do with the fact that they report late payments to the credit agencies well before the 30-day grace period offered by many lenders.
The Investment Advisers Act of 1940
If you are an investor, it is important to understand the Act that was violated by Lending Club Asset Management. In 1935 the SEC issued a report to congress in response to the market crash and resulting Great Depression. The report warned of the lack of regulation over investment advisers.
Because of this report, congress went to work on the bill that would become “The Investment Advisers Act of 1940.” 
In it they define the nature of investment advice.
They also define exactly who counts as an adviser, and who must register with state and federal regulators.
Adviser, Defined
The bill lays out exactly who falls under it as an investment adviser. Classification as an adviser, or not, has to do with:
The nature of the advice offered. How the person giving the advice receives compensation, or the method of compensation. And whether or not most of their income comes from providing investment advice.
Also, if a person leads someone to believe they are an investment adviser, then under the act that is what they are.
If advice occurs secondary to the nature of the true business, that person is not considered an investment adviser under “The Investment Advisers Act of 1940.”
Other Options to Finance a Business
If you are considering using Lending Club to fund your business, it could work. The credit limit required is lower than what traditional lenders require. However, there are other options as well. If you work to separate your business from yourself and build business credit rather than relying on your personal credit, it may work out better.
Why is Business Credit Better?
If your personal credit isn’t high enough to get funding, your business credit could be. This means you could fund your business even without a great personal credit score. Another benefit is that your do not have to worry about business expense maxing out your personal credit card. Because it would increase your debt to credit ratio.
That will damage your credit score regardless of how good you are at making your payments on time.
When you have business credit, you can access business credit cards to help fund your business. Business credit cards fall into credit tiers, and as you climb up the tiers you business credit can continue to grow stronger.
How Do You Build Business Credit?
There is a process, and the process takes time. However, if you work the process and trust it, you can build business credit that will open up many business funding options. Where do you start? At the beginning of course.
The Beginning
To start, you must ensure your business is an entity separate from you in every way. This is difficult for many new business owners. Running a business as a sole proprietorship and mingling personal and business expenses is much easier in the early stages of a small business.
Whether your business is brand new or has been around awhile, it is never too late to start this process. It can be somewhat easier to take some of these steps as a newer company. But if you are already in business, there is no time like the present. Here is what you need to do:
What to Do
Get an EIN through the IRS website. It is free, and it will allow you to apply for credit without using your SSN. But you may have to put your SSN on the application. It is only for identity verification to prevent fraud, not for credit checking purposes.
Formally incorporate your company as a corporation, S-corp, or LLC. Your business needs an address separate from yours and its own phone number from a toll-free exchange.
It needs a professional website and separate email address as well. Don’t use a Gmail, Yahoo, or other free email address. It should contain the website URL.
Set up a separate business bank account and run all business transactions through that account.
In addition, you will need to get a D-U-N-S number from the Dun & Bradstreet website. They are the largest and most widely used business credit reporting agency. You cannot have a credit report with them without a D-U-N-S number. It is free on their website.
Then What?
After you have your business established as a separate entity, you can make purchases from trade vendors that are part of the vendor credit tier. These are vendors that will offer net 30 invoice terms without a credit check.
Then, they will report your payments on those invoices to the credit agencies. In this way, you can begin to build business credit without having business credit to begin with.
As you gain more accounts reporting from the vendor credit tier, you can begin to apply for credit from the retail credit tier, the fleet credit tier, and then finally the cash credit tier.
What type of companies makes up each tier?
There are different types of cards that make of each of the other tiers after the vendor credit tier.
Tier 2
These are usually retail store cards, often with revolving terms.
Tier 3
These are cards from major companies and often require some degree of time in business.
Tier 3
Cards in the cash credit tier include more universal business credit cards such as American Express, Mastercard, and Visa.
LendingClub Got into Some Trouble, but That Shouldn’t Stop You from Funding Your Business
Lending Club Asset Management got into some trouble for violating their fiduciary duty as investment advisers. The parent company, Lending Club Corporation wasn’t charged.
However, they have complaints made against them almost daily with the Better Business Bureau by borrowers. They still have a B rating, so obviously they are not all bad.
If you build business credit separate from your own however, you can get business financing without ever having to worry about using your personal credit score. Get started today.
