Sunday, January 20, 2013

Is Lending Club A Ponzi Scheme?

Lending Club is a peer-to-peer financial service enabling individuals to bypass conventional lenders to get loans. Lending Club was incorporated in 2007 and at first was a Facebook app. In 2008 Lending Club had to file with the SEC because the loans made could be considered risky investments. For a borrower, Lending Club has almost no risk. You fill out an application for a loan, get approved, and Lending Club investors invest funds in your loan. Investors of Lending Club loans do have risk when borrowing out their money. The two potential potential risks are:

The debtor defaulting
Lending Club files for bankruptcy

At present Lending Club filing for chapter 11 is not likely. Lending Club currently is well financed by investment capital. Lending Club has obtained several rounds of funding. They initially obtained a million in angel investment. The company then got a million A round in August of 2007 from Norwest Venture Partners and Canaan Partners. They then got million Series B round, and as of April 2010 .5 Million in Series C backing. As of today they have a total of million in investments.

Lending Club finished SEC registration in 2008. In complying with the SEC, Lending Club must file quarterly reports which can be accessed online. At the time of the writing, September 30th, 2010 is the latest document. They have million of cash available. A fact is many loans are funded by Lending Club themselves. So some of their venture capital is tied up within the Lending Club notes . In theory if Lending Club needs cash, they could sell their own loans on the secondary market via FolioFN. Also each note Lending Club owns is generating income. According to the most current 10-Q statement, they have million in Lending Club notes out of a total of 5 million. This means if they did file for bankruptcy the financiers would most definitely want to keep loans going to ensure they do not loose their entire investment.
If you're nervous about Lending Club going chapter 11, Lending Club addresses this situation on their web site. According to Lending Club's FAQ, if whatever reason they go out of business or cannot service their notes they have another business that is a successor. Lending Club has an contract with Portfolio Financial Servicing Corporation ( to take over personal loan maintenance.

Its not likely Lending Club is a ponzi scheme. The sheer volume of labor, paper trails as well as the amount of individuals involved makes this highly not likely. Based upon their SEC documents they are fiscally stable and have a contingency plan should their company operations be no longer viable. The greater threat as a Lending Club investor is the choice of the personal loans you invest into.

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