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Lending Club Changes How Investors Can Ask Questions

by Peter Renton on April 15, 2011

Yesterday on the Lending Club blog, in a post titled Protecting Identity and Privacy, CEO Renaud Laplanche announced a change. There has always been a fertile Q&A area on every loan where investors could ask any question to a borrower. Not any more.

Starting today, investors will only be able to ask questions from a predefined list. No free format questions will be allowed. No doubt many investors will be distressed about this, but I see their point. Often as I read these Q&A’s it became clear that with a little digging I could find out the borrower’s identity.

Too Much Information

For example, a common question has always been about employment. Borrowers will often reply with complete detail about this. Someone might say I have been the office manager at ABC Company in Little Rock, Arkansas for 5 years. If I so choose, with a tiny bit of research on Google I could find the phone number and most likely the name for that person at their workplace. From there it is not that difficult to find a home address and social media profiles. No doubt some “enterprising” investors have done something like this, which likely prompted this change.

I don’t think this a big deal personally and I completely see Lending Club’s point. While the Q&A is a nice feature it is not something I focus on. What it shows me more than anything is the responsiveness of the borrower and their attention to detail. Did they answer the question and how long did they take? This is useful information, but I have to admit lately I am moving away from the importance I have placed on them. My reason? I have noticed on several of my defaults when I went back to look at the loan listing, I saw they answered the questions precisely and in detail and looked like a great risk for an investment. Then a few months later they defaulted on the loan.

The List of Questions

The preset questions that Lending Club will allow differs depending on the purpose of the loan. For a debt consolidation loan there are three questions only that may be asked:

1. What is your intended use of the loan proceeds?
2. What are your current monthly expenses (rent, transportation, utilities, phone, insurance, food, etc.)?
3. What are your current debt balances, interest rates, and monthly payments by type (credit cards, student loans, mortgages, lines of credit, etc)?

Considering debt consolidation is by far the most popular category it would have been nice if Lending Club allowed for a few more questions here. For a small business loan there are eight allowable questions, including questions one and two above. In fact, the first two questions are available for every loan category it seems and then the other questions vary depending on the category.

The one downside I see is that there is no space now for questions regarding specific verifiable information like the kind that ReadyForZero provides. It is sort of covered in question 3 above, but it is now completely up to the borrower to proactively provide this information. I would like to see more integration with a service like this and that may well come in the future. I am sure Lending Club is monitoring how this change lands with investors and may well make an adjustment or two as they see how everything plays out.

What do others think? Are you outraged or like me, do you think this is not a big deal for investors? Please share your thoughts in the comments.

[Update: Just heard from Lending Club and they said that the number of questions are not fixed. Investors can ask for questions to be added by sending their requests to [email protected].  It will take them 2-3 weeks to review questions and get them added (if approved). Also, as Ken from points out in the comments, it looks like Prosper has completely eliminated investor questions. No warning from them either. It can't be a coincidence that both companies made this change basically on the same day.]

[Update 2: I have been informed that this change has been mandated by WebBank, the company that underwrites the loans for Lending Club and Prosper]

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Matt Jabs April 22, 2011 at 12:31 pm

This is a tad worrisome, but considering your *update 1* stating investors can submit more questions for approval, it’s not a worrisome as first supposed. Like you, I don’t largely base my investment choices on the question/answer sessions, although I do love having it there for extra info.

Dan B April 22, 2011 at 2:25 pm

Incidentally………..MattSF may not be actively participating in Lending Club but the bulk of his invested money isn’t really going anywhere for at least another 4 years. Those high yielding 5 year notes that he’s been loading up on since last May will certainly see to that. It’ll be a super slow motion exit kind of like those discount suit businesses that have a going out of business sign year after year. Not that I’m comparing Matt to a cheap suit. :)

Peter Renton April 22, 2011 at 3:00 pm

Good point Dan. Assuming Matt doesn’t change his mind it will be fully five years before he will be able to close down his LC account and maybe a little longer if you account for some of the stragglers to fully repay their loan.

David April 22, 2011 at 3:00 pm

@Dan B

Actually if Matt wanted to dip his toes into the FOLIOfn trading platform, he could liquidate entirely for a 1% haircut in probably 2-3 weeks. If he decided to tack on 1-2% premiums to his notes (probably a bit more time than it’s worth, given this can’t be done automatically) it would probably be closer to a 2-3 month liquidation time frame.

Jimmy B from So Cal April 22, 2011 at 3:02 pm

For what it’s worth:

I decided to leave LC a couple weeks back for a few reasons:

First, I had a couple loans that got into trouble on the first payment which seemed very problematic to me. One guy was military w/10+ years job history and the other I can’t remember other than their income wasn’t verified. I stopped doing unverified income in my filters. My current rate of return is about 13.60 to 13.75% depending on which day of the week payments come in. This puts me in the 80-81% investor performance range.
The defaults really pi** me off AND the default rate LC reports are annualized, not cumulative over the life of the loan. Do the math on default rates–they’re higher than you think.

Second, no one really talks about tax implications. I have most of my money in stocks and mutual funds. All of those are tax deferred gains until sold and I don’t sell winners only slight losers. LC is ordinary income. Take LC’s 9.xx% average return and back out taxes to get your effective annual rate of return. I’m opting for tax deferred capital gains and lower tax rates (until the gubment changes the rates that is).

So, every loan is on the Trading Platform. I’ve been on LC long enough to take the interest income and pay for the small trading fees. BTW the loans are selling pretty quickly. Do another check for yourself on the Trading Platform. Check “Never Late” when you look for loans. There are over 10,000 “Never Late” loans for sale. That’s a lot of inventory from investor who used to be sold on the business model. I’m not the only one with my foot out the door.

One last thing: I heavily relied on filters to pick my loans. I thought some of the questions were ridiculous and the answers more so. I was more concerned when I saw marginal quality loans funds quickly with only a question or two asked. LC offers a person to run your portfolio for you but you have a very limited set of parameters you can request they run. That didn’t work for me.

Like Matt, I’m out. Love the idea of P2P but for me, no mas, amigos.

Jimmy B

Jay April 22, 2011 at 3:20 pm

Matt_SF, to your post on April 21, 2011 at 10:31 am, couldn’t have said it any better. It is an unacceptable change for me as well. As Lou put it: “My money, my questions.” I have notified LC that I’m stopping all my investment activities until I see how this plays out. I can’t invest with confidence if I can’t ask questions (which isn’t often, but I do read responses to other pointed questions). The Q & A is just going to become a section where the predefined questions are posed to all or a majority of borrowers, regardless of relevance to the each individual’s situation. Why not just require ALL borrowers to answer each predefined question as a matter of routine? This change is silly and unnecessary. Borrowers who give up too much info in response to investor questions are responsible for the disclosure of their identity (Just because someone asks you for your SSN doesn’t mean you have to give it, duh?). Creating awareness and educating borrowers about what is and isn’t appropriate info to disclose in response to questioning would’ve been the better route. After all, borrowers don’t have to answer any question they choose not to answer. What is the problem???
I encourage all who feel the same way to contact LC directly, if you haven’t already, and let them know rather than just airing your opinions in this forum.

Dan B April 22, 2011 at 4:17 pm

@David……….Yes & no. Liquidity isn’t what it was even a few months ago. I sold almost 270 notes at a 2% average premium from Dec. 1st, 2010 to end of March 2011. I’ve only sold 11 notes so far this month. Now this is partially due to the fact that I have fewer notes for sale & partially because the quality of the remaining notes I’m trying to unload is presumably weaker. But even accounting for those factors it’s a sharp decline. And then of course there is the tax issue.

Matt SF April 22, 2011 at 4:42 pm

@ Peter

Thanks for the clarification and kind words.

But the fact that a third party could dictate a policy change of this magnitude makes it even worse. My opinion only.

Still love the idea of P2P lending, but I’m not going to play in a game where non-governmental regulatory agency can change LC’s policies.

@ Jay, Dan, Jimmy

Yep, I wrote up something along those lines today at my blog. It pains me to have to depart after two very happy years at LC, but you gotta stand for something.

I’ve defended Lending Club on a lot of issues over the last 2 years, even telling several big name bloggers their concerns were unfounded or their research was lacking, but when LC (or a 3rd party) begins setting policies that treads on investor liberties, I can’t help but wonder what’s next.

So telling me that my questions have to go through a compliance officer’s desk when I’ve never asked a single question about “borrower identity” is complete nonsense.

But yeah… I’m stuck in most of my notes until early 2016. I don’t mind holding onto the ones I have, but since I put large percentage of my due diligence into the Q&A section of the notes (I’m more of a qualitative analyst than a quantitative analyst), any future investments seems like an unnecessary risk.

Sadly, I hope the powers that be see they’ve accomplished nothing but weaken the position of the people that fund their business model.

Dan B April 22, 2011 at 6:28 pm

Before any one goes ballistic at what I’m going to say please read my previous posts for an understanding as to where I stand. But……………’s a different look at this situation.
When you apply for a loan at a bank who gets to ask you questions? The bank, right? Do the shareholders of the bank also get to ask you questions? Do the bondholders of the bank? How about the people who deposited money at the bank, do they get to ask the borrower anything?
So now you’re applying for a loan at LC or Prosper. So why do the people who have lent money to LC or Prosper (i.e. us investors) get to ask any questions of the borrower??

Once again, as I’ve said countless times before………. we’re not lending money to borrowers. We’re lending money to LC & Prosper, who are then re-lending that money to the borrowers. They are then paying us the returns that they get from the borrower less their cut. We don’t own a part of each borrowers’ note. We are in fact unsecured bondholders of LC/Prosper’s notes. Anyone that doesn’t understand this or doesn’t understand the implications of this should read the prospectus.

Jay April 22, 2011 at 8:36 pm

Dan B -
I see where you can make this argument however, I counter with the following (and some of this is exactly what I wrote to LC):
1. Conventional financial institutions have underwriters who have access to much more detailed financial information, particularly for unsecured loans, than LC investors do; therefore there is less need for back and forth Q & A. Risk profiles are calculated much more precisely and buyers of loans, in this scenario, better understand what they’re getting for their money. In contrast, LC is only 3-4 years into its undertaking.
Also, conventional financial institutions provide due diligence prior to issuing the loans…LC does not. As we all know, not even all borrower income is confirmed!!! Try applying for an unsecured loan with employment information showing less than a year at the current employer without having to provide the previous 5 years of employment. You can do that as a LC borrower and now we investors cannot ask for the employment history (without first submitting a generic employment question for LC’s consideration as a one of the “predefined” questions – really lame).
2. As others have alluded to, LC started as a true P2P lending business….that was THE business model. Their business model has dramatically evolved in just 3-4 short years and is traveling further away from what I signed on for.
Interestingly enough, I responded to Renauld’s blog, regarding this change, more than 24 hours ago; at present I still see there are “no comments” posted in response his blog (which is not possible, because I commented). So, LC doesn’t even want my unflattering reply to the CEO blog post regarding the Q&A change, which entirely defeats the purpose of blogging…they’ve intercepted and discarded my reply, which makes me wonder how many other replies have been discarded….there cannot be “no comments” from anyone on the announcement of this issue.
Further, I found it to be a classless thing to announce this MAJOR change to the investor/borrower interface in an obscure blog rather than sending a letter or even an official email to the investors.

Peter Renton April 22, 2011 at 9:43 pm

@David, Good point on selling the notes, but as Matt pointed out, he has done his due diligence on them and it looks like he intends to stick it out.

@Jimmy B, The tax issue you bring up really is an important one. I keep saying this to anyone who will listen. You can avoid taxes completely by investing with Lending Club through their IRA. But as you are on the way out I am sure this doesn’t interest you now. Just as an aside, if you invest in a corporate bond fund you pay taxes on all income earned in a similar way to Lending Club.

Marginal quality loans will still get funded, particularly at the end of this week when the big money players come in. Right now, there are 520 loans on the platform, by Friday night this number will be about half with some of the loans funded of dubious quality. If the big institutional investors start to see high default rates then they will also vote with their feet.

@Jay, The funny thing is I bet Lending Club agrees with you here. I bet they would much rather have kept this feature on and educate borrowers. But one thing about this country (spoken by someone born outside the U.S.) is that corporations try desperately to protect the uneducated and plain stupid people from themselves. Just look at the warning labels on any product you buy. So I am not surprised this has happened in p2p lending.

As to your other points I would counter your counter by saying that many people with credit scores above 660 can get an unsecured loan with less than a year on the job and a poor employment history – it is called a credit card. I think you will find anyone who is approved for a Lending Club loan will have been able to also obtain multiple credit cards.

As to your blog comment not being approved for that I am not impressed. As someone who runs a blog this goes against what I believe. I will always approve every comment, no matter how critical (as long as it is not offensive) and I think Lending Club is making a big mistake there by not publishing your comment. And yes, an email would have better.

@Matt, I can tell you that your departure from the scene has not gone unnoticed, including by the people at Lending Club. I will be talking with them next week about this (hopefully on the record) to dig a bit deeper into this. They may well have underestimated the negative response from investors.

@Dan, You make a great point here but even though the facts are clear, many investors still feel like they are lending money directly to the borrower. And they want complete control of this process. But as has been made clear now, investors have little control of how this process works.

Despite what Matt and the other investors here feel, I think you can beat the average by quantitative analysis alone. I am going to prove this with my new account. I just opened a new LC IRA and I am putting new money to work there this week. I will be publicly stating my goals with this account (a real world return of more than 12%). I will be blogging about it in a week or so and if you want to have a friendly wager contact me off the blog.

Dan B April 23, 2011 at 1:26 am

@Jay………..I don’t understand your #1 comment. Risk profiles may be better calculated by banks, but how can we investors invest in the personal loans issued by banks? I know of no way.
Secondly, as I’ve said before, I think that LC/Prosper should include a set of directly applicable questions that are part of the application process, as opposed to waiting for one of us to ask it. To me this is just a silly misdirection ploy to give us investors the illusion that we are still participating in the vetting process……………..which is clearly not the case.

I’m not the least bit surprised that your blog post didn’t make it to print. About a year ago I posted a comment on LC’s blog in response to a LC blog article regarding “returns” complaining about the whole NAR exaggeration. Yes, I was complaining about that even back then. Anyway it was posted, then deleted. I emailed LC & complained about the deletion & got a email saying they would investigate why it was deleted etc. Never heard from them again.

Dan B April 23, 2011 at 1:39 am

@Peter…………As a lifelong gambler I can tell you that one should normally look very warily at wagers/dares that are suggested by others. However…………. in this case your belief in a 12%+ real world return is so outrageous that I will happily contact you shortly on a friendly or not friendly wager. Furthermore I will publicly state right now that if you can achieve an average of 12%+ a year over 3 years……I’ll eat a bug of your choosing!

Jay April 23, 2011 at 8:00 am

Dan – Sorry if I wasn’t clear. I made a variation to your analogy without explaining. I was writing about the loans that get processed by the banks, packaged and sold to third parties; the bank does the due diligence ahead of time so third party “buyers” of the loan know, much better than we LC investors do, what they’re getting.

I understand that’s not exactly what you meant; your scenario, which is depositor money funding the loans indirectly, is not a good analogy to the LC model. As we saw 2 years ago with the many bank failures, if a bank uses my deposits to fund risky loans and then widespread default cause the bank to fail, the FDIC will give me 100k (believe it’s more now with reforms) of my deposits back. That’s why savings rates are no higher than 1.2%….there’s no risk incurred. No such luck at LC.

which brings me to my next rebuttal….

Peter – Good points. However, credit card companies, issuing unsecured “loans” to risky borrowers bear no resemblance to LC investors. CC companies have all sorts of ways to ensure a rate of return (even with the CARD Act in place) despite extending credit to risky lenders. High rates of returns, fees, and better collection processes ensure CC companies will remain extremely profitable. No such luck at LC.

Again, for me, it is all about due diligence. There are LC borrowers who are no-brainers, in terms of whether or not to lend (both ways, yea and no). It’s the people in the middle for whom I want the ability to ask whatever pointed question I want.

I can almost guarantee this change came about because an LC/Prosper quack-investor (or two) contacted a defaulter. But it’s on the defaulter for divulging the type of information that allowed the quack to figure out who he/she is, not on the investor and not on LC/Prosper. If people can’t figure out how to control their information at the appropriate times, in the age of social media, it’s on them. I don’t use any social media for this exact reason….I feel social media is getting and will continue to get entire generations feeling too comfortable about giving up seemingly mundane information about themselves (I’ll climb off the soap box now and continue w/o digression)

Dan – your statement “To me this is just a silly misdirection ploy to give us investors the illusion that we are still participating in the vetting process” is spot on and is exactly why I’m stopping investment activities at LC. It’s a wide departure from LC’s original business model.

Peter Renton April 23, 2011 at 9:16 am

@Dan, Well if you think my 12% real world return at Lending Club is outrageous then I probably shouldn’t tell you I am going for 15% real world return at Prosper. This is what I want to average over the next three years. I feel like it will be easy in the first year but get tougher come year two and year three.

@Jay, So, I have a question for you. You paint a dark picture for LC investors and yet i would guess in your time there you have seen a decent ROI on your money – is that correct? For me, as long as I can get an ROI I am happy with, both Lending Club and Prosper can change their models all they like and I won’t mind.

Because I am much more of a quantitative investor (studying the trends in credit data) than qualitative investor the Q&A issue had little impact on me. Now, if either company starts to withdraw some pertinent credit information, then I will be hopping mad. But that hasn’t happened. I want an investment that can scale to thousands of notes – and there is no way to do that by studying the Q&A of each note.

Jay April 23, 2011 at 11:17 am

Peter – Not trying to “paint a dark picture”; it’s simply a matter of preference in investment strategies and LC has now narrowed the preference to quantitative based on what seems to be a knee jerk reaction. What’s next? In what other direction do they want to go. You mention you don’t care as long as you keep earning a return but there isn’t enough data to determine what’s the right strategy. Please read on…
I completely agree quantitative is the only feasible strategy in terms of scalability. I’m not sure how you’re scaling based upon 3 years of data though. In the absence of reliable quantitative data (3 years is not enough; the original 36 mo. LC loans are just now, over the last several months, being paid in full), I preferred to choose investments based more on qualitative data. You must admit that your portfolio return right now may not be accurate or reliable for another few years. The same is true of my return.
You have to know that a lot of borrower applicants go to LC, not because of the emotional “I’d rather pay individuals than the big banks” reason but because the big banks won’t lend to them. Why? Because the banks have more detailed financial information on them than we do and they won’t give them a loan. I didn’t set up my portfolio as though I was a CC company extending unsecured credit to anyone who happens to fall into a “quantitative category.” I don’t use LC’s auto portfolio builder for this reason. My return is about 9% (about what you’d look for in an IRA over the long term. But as someone mentioned, unlike an IRA this is not taxed deferred money, which further reduces our return. Admittedly, I was a little too conservative in my mix early on, otherwise I may be seeing a higher return. But my default rate, as a percentage of investments, is only about 7%.
Scalability is probably the reason, people aren’t flocking to P2P (or, as you say, whatever it’s now called). I would think it’s hard to scale by lending money to the rejects of traditional financial institutions (I don’t mean rejects in a nasty way).

Dan B April 23, 2011 at 12:20 pm

@Peter………..You mean your ATTEMPT at a future 12% real return at Lending Club, don’t you? Let’s not confuse the masses here in believing that you’ve somehow already done this.
As for Prosper, I can’t comment since I have so little experience there. But I sincerely wish you luck on that.

Peter Renton April 23, 2011 at 3:57 pm

@Jay, Thanks for the detailed response. You are dead right in assuming their isn’t enough data to make an accurate prediction. But there is some data that can give you some idea as to the best way to earn an above average return. Now, this data will evolve over time, in fact my quantitative strategies have evolved over the past six months as I see more data from the current portfolio of loans.

The fact is that like any analysis of previous returns, you can never know for certain if the future will repeat the past. All you can try and do is minimize your risks and follow what is working. And then re-examine your criteria as more data becomes available.

I completely disagree that it is hard to scale by lending money to the “rejects of traditional financial institutions” as you put it. The consumer credit market is massive – multiple trillions of dollars. If just a tiny percentage of consumer credit moves to p2p lending in the coming decade then this will be a large and thriving industry. Despite your dire predictions I think p2p is still a win-win for borrowers and investors. I remain as convinced as ever as to its long term viability.

I just want to say one time: Lending Club IRA! You can use an IRA to invest in Lending Club notes and completely negate the impact of taxes.

@Dan, Thanks for clarifying. Yes, the 12% mentioned is my goal for a real world return from my brand new Lending Club IRA that I just opened. My current real world annual return for my three existing Lending Club accounts is just over 9%.

Johnny April 28, 2011 at 7:58 am

I am deeply troubled by the new policy of pre-set questions. The credit data provided for each borrower is crucial for undertsanding the risk profile, but the q&a added another layer of protection for lenders (and in my view good for borrowers as well). Often times the initial responses are not comprehensive enough and with the old policy, you could re-focus the borrower on what you want answered. That is no longer the case. If a borrower fails to respond completely, say, by providing the interest rates on outstanding credit card debt, there is no way to re-ask the question. This could have been an oversight by the borrower (or intentional evasion), but without the ability to re-ask the question, as an investor I am forced to move on and not invest. Furthermore, sometimes the borrower writes information inconsistent with the credit data provided by lending club, but of course the pre-set questions are so vague that there is no way to find out the reasons behind the inconsistency. I also like to see through the responses by the borrower what sort of level of education he/she has. I certainly base my investment decisions to some extent on the quality of the responses. I also noticed you cannot ask for an explanation of an inquiry or delinquency.

To give lenders the ability to ask questions and then revoke it with little useful explanation, is a shame. I was pretty happy with the service until now and most likely will begin pulling out my money of lending as the loans are paid back. In my mind, the most effective way to show your displeasure is to pull your money out.

Nathan April 28, 2011 at 10:08 am

I just posted this on the LC blog entry about the same issue, sent it to LC, and then found the conversation going on here an wanted to add it. Thanks.

As a Lending Club investor, I feel that the move to allow predetermined questions has greatly reduced my ability to judge the quality of a loan and decide if I want to invest in it. I hope Lending Club will reconsider this change in policy and return to allowing investors to ask whatever they want.

75% of the my decision to help fund or not fund a loan was based on the answers a borrower gave to questions asked by myself and (mostly) other LC investors, especially the USMC Retired guy.

If the borrower wrote a thoughtful, measured answer in good English explaining why they need the loan, that was usually most of what I needed to decide to fund the loan. It is usually more important than a credit score to me. Borrowers that seemed flippant or lackadaisical were passed over. This was my investment strategy on LC and, based on my rate of return and low amount of walkoffs, it seems to be working.

However, the new, limited questions remove the ability of investors to get a sense of who they’re trusting their money with. These questions don’t encourage personal replies from borrowers because they’re very sterile, cold, and lack nuance. There is no way, for example, for an investor to tell a borrower something like, “Thanks for the information, I’m interested in funding your loan. Please remember that this isn’t a big bank and that these are real people spending their hard-earned money on your loan.”

Thus, I feel like over the last two weeks since this change I’ve end up looking mostly at numbers and brief, unhelpful replies to soulless stock questions. I would consider moving the Lending Club part of my investment strategy to another company that let me have more insight into who I’m giving money to.

I’m sure Lending Club received complaints from borrowers that some questions were too personal. I can imagine if I signed up for a loan and people from the internet started asking me about what I do at my company and the specifics of my monthly budget, I would raise an eyebrow. Privacy on the net is a big deal. However, these questions are important and the culture that rose up around LC investors asking questions is also an important part of the site that I strongly value.

The answer is not to add additional questions to the box of stock questions available to us. There is no way to have an ongoing conversation with a borrower amongst different investors with only stock questions. There is no set of stock questions that would work for every situation. If an borrower replies to a question and it spurs another question from investors, how do we deal with that using only stock questions?

I propose the following fixes, in order of preference:

1 – Go back to allowing lenders to ask whatever they want, but include a note from Lending Club in each question sent to the borrower to the effect of, “If you feel like this question requests too much personal information, you are not obligated to answer it and your loan will continue to be available to fund. Please understand that your answers help our investors feel comfortable sending their money to you.”

Hopefully that would deal with the privacy concerns but still allow us to ask questions that are actually useful and more revealing about a borrower’s character. Alternately…

2 – If the above is not an option, could Lending Club please make it a requirement or at least strongly encourage borrowers to write at least a few sentences about why they need the money in the loan description? So frequently there isn’t -anything- written in the loan description and it’s another perfect place to address my concerns. Even just a few sentences written by the borrower would do so much for our ability judge the quality of a loan.

While I appreciate the transparency with which Lending Club has made this move, I don’t appreciate the move itself. The quality of the site for investors has, in my opinion, dropped significantly since the change and I hope something can be done to reconsider this move.

Thank you for your time and attention.

Peter Renton April 28, 2011 at 4:54 pm

@Johnny, I have heard that Lending Club is looking at improving the Q&A to take into account the situation where the borrower doesn’t adequately address the lender’s question. What form that will take I don’t know but there may well be a change on this front soon. And as I have said in the second update on this post this decision was imposed on Lending Club (as well as Prosper), they had no choice but to remove the open ended Q&A.

@Nathan, Lending Club are pretty strict on their blog comments, but I am happy to post your comment here. It is highly unlikely that your number 1 fix will come to pass – this decision was imposed on Lending Club and I think it is very unlikely that it will be reversed. As for number 2, I could see something like this being implemented. I have always wondered why someone who is a asking complete strangers to lend them money would not bother giving a couple of sentences about the loan. Are these people busy, lazy, worried about revealing too much or do they not think it will make any difference? Mandating they not leave this field blank could reveal some useful information.

As an aside, there was this interesting analysis of loan description length and investment return that supports your number 2 suggestion.

I also want to mention that investors are definitely split on this issue. There has certainly been many people like yourself who are angry at this move and others (like myself) who don’t see it as a big deal. It all depends on your investment strategy and whether you rely on the Q&A. Some investors do and some don’t – and that has dictated whether you are angry or indifferent to the change.

Blake April 29, 2011 at 12:13 am

I’m another bugged investor over the removal of Q&A.

While using metrics can obviously be helpful over the long-term, having better data regarding employment, lifestyle, purpose via non-cookie cutter questions is a huge help.

If metrics were so great, then why not use portfolio builder.

I have held back money from borrowers who answer questions poorly or refuse to answer questions at all. To me, if they can’t answer a legitimate question well or at all, why would I want to invest in them.

I propose that investors can ask questions which LendingClub then approves to post to the note, at which time, the borrower can choose to answer or not. Lending Club can put the onus on the investor by having standards for the questions we are allowed to ask and then by screening them much like a blog comment board.

Peter Renton April 29, 2011 at 11:24 am

@Blake, Thanks for your comments. I don’t think your idea to ask questions which Lending Club approve before being posted on the platform will ever fly. While it is great in theory, this month Lending Club will fund over 1,500 loans. Let’s say investors want to ask an average of two questions per loan, that is over 3,000 questions to vet per month or about 150 per workday. They would need an additional one or two staff members to handle that, which is the main reason why it won’t happen.

As for why not just use the portfolio builder is I rely on metrics? On Lending Club the filtering isn’t flexible enough, but on Prosper I actually do use the portfolio builder (they are called automated plans there) and I find it a big timesaver.

Like many others here you are annoyed by this change and I understand that. In a perfect world I think Lending Club and Prosper would be happy to keep the Q&A the way it was, but in business what lawyers (and government regulators) want often trumps what customers want unfortunately.

Nathan April 30, 2011 at 12:37 pm

Just a quick follow-up to my lengthy comment above. I had also sent that comment to Lending Club’s feedback email address. I actually got a call from Jeff at Lending Club later in the afternoon that same day. We had a 10 minute conversation about the change and it was pretty enlightening.

Jeff explained Lending Club’s side of the issue. Most of it comes down to finding a balance between not losing quality borrowers and keeping investors happy. The amount of questions and their content could become badgering to a borrower and they might be inclined to simply walk away from the process. Borrowers are used to filling out a simple application for something like a credit card and being approved in a few minutes.

Some other points Jeff emphasized were:
– It’s difficult to empirically evaluate the benefits of a qualitative, read-all-the-questions approach to investing. Borrowers with Prime accounts are still reaching their target returns and they never even see a question. There might be a 1 or 2 percent gain in returns due to a qualitative approach, but it’s impossible to prove.

- Lending Club benefits from word-of-mouth recommendations amongst borrowers and it’s thus beneficial to create a positive experience for a borrower who will in turn recommend the site to a friend.

- Lending Club is proactively covering their asses (he put it more eloquently than that) by dealing with legal/compliance ramifications of the questions.

- As the size of an account and the amount of loans one invests in grows, it becomes difficult to devote the amount of time required to actually vet loans by asking and reading questions. I do see this being an issue in the future for myself.

- There is a substantial amount of work going on behind the scenes to categorize loans which makes a quantitative approach feasible.

- There are enough investors now that loans tend to fund regardless of whether or not a borrower answers a bunch of questions. He did not say this flippantly and emphasized that they’re not interested in biting the hand that feeds them, which is why he was calling in the first place.

Props to Lending Club for reading my concerns and getting back to me — and not just via email, but via a substantial phone call. I didn’t ask them to call, but I’m glad that they did. Even if the policy isn’t going to change, I appreciate that level of proactive customer service.

It would still be nice to see borrowers write more descriptions of their loans, but my concerns about the change have generally been quelled.

Thought it was important to update my comment.


Peter Renton May 2, 2011 at 9:43 am

@Nathan, I am really glad that Lending Club reached out to you and I appreciate you sharing this. I have also spoken with people at Lending Club about the change and have heard similar things.

Walter May 7, 2011 at 10:32 am

Per Nathan’s post, my guess is that LC is much more concerned with legal CYA than anything else (I’m betting a couple bad apples can really spoil the bunch when they’re talking with the SEC, and also having banks eager to put LC in regulatory knots) and the number of lenders funding on quantitative analysis alone reduces the benefit of having individualized Q/A. The other stuff is relevant but doesn’t seem as critical.

Already my added reliance on quantitative analysis makes the site feel much less like a “social” lending club. LC is still the best option around, but it certainly feels like reduced best option with the new rules. Perhaps it was inevitable, given the size and speed of growth, but there is certainly room for improvement. The changeover to the standardized questions has coincided with what appears to be far fewer responses (to any questions). One would think that given LC’s great rates for borrowers, they could also communicate to borrowers that part of what helps those rates to be so low is borrower’s ability to answer basic questions (better rates for a few more obvious, standardized questions is a good trade, I would say). Perhaps the borrower could be incentivized for such answers, eh?

Part of the reason I liked LC was because I felt comfortable with the combination of LC’s screening tools and my ability to weed out the obvious potential problems from there (usually based on Q/A). Now it feels like its much more in LC’s hands, and I’m not entirely comfortable with that (yet). Since the change, I have reduced the number of loans I have funded and shifter to higher quality borrowers. I’ll let other lenders blaze the pure quant trail and wait to here back from them. For now, I’ll spare a little return for preservation of principal.

I’m interested in what lenders have to say about if the new system reduces their zeal to recommend this to other lenders, and whether this will have any sort of impact (word-of-mouth goes for lenders and borrowers). I already feel a bit more reluctant to recommend it. Having been on the site a few years, I trust LC for the most part. New lenders, not having that experience, might feel differently (or, not having experienced the individualized Q/A, they might not care about what they never had).

This is a good thread. Thanks to all who have posted.

Peter Renton May 9, 2011 at 9:20 am

@Walter, Thanks for joining the conversation. I think it is true that “social” lending is becoming less social, and I think this trend has been happening for some time. You will notice that virtually nowhere on Lending Club’s site are the terms social lending or peer to peer lending. They don’t really name this investment vehicle any more.

While I don’t know the exact numbers, lenders who look at each loan are in the minority at Lending Club. Most people use the automated plans or just do some simple filtering before choosing loans. For these people this change in the Q&A has made absolutely no difference.

As I have said before I use a mostly quantitative strategy where I only look at individual loans occasionally. So, I continue to put new money in and continue to recommend peer to peer lending to my friends. But I know other investors (you can read many of them in the comments above) have either stopped lending or are actively trying to pull their money out. These are the people who no longer recommending Lending Club.

Judging by the fact that Lending Club had another record month last month and that almost all the loans on the platform are still funding I would guess that despite the negative reactions of a few lenders there has been no material impact on the amount of money being invested.

steve May 9, 2011 at 4:14 pm

I just learned of this change on returning home from my Winter holiday.

Seems to me the primary purpose of the current LC management team is to grow the business enough to permit them to do an IPO and make a lot of money personally. I’ve no objection to that, but I don’t buy the automated approach to underwriting these loans when it is my money. The worst performing portfolios I have were the ones created by LC.

What offends me the most about this whole episode is the caviler way they communicated this; via a blog. They send email all the time about promotions, but they can’t send one to advise they are changing the rules.

As I just got done writing to LC, it is your game, and you make the rules, but I don’t have to play.

Peter Renton May 10, 2011 at 11:11 am

@Steve, In case you missed it this change was mandated on Lending Club (and Prosper), they had no choice but to comply and quickly. I believe they had less than a week to make the change. I know they adding to the list of approved questions very shortly but the free form q&a mechanism is likely gone forever.

Yosef Katz July 19, 2011 at 10:12 am

Not to pry but where will Matt_SF be putting his money that comes out of LC?! I, on the other hand, do not think that the profitability of my experience with LC will change due to the comments issue, and I do respect privacy, though I do understand Matt_SF’s issue and kind of agree that that sort of influence should not be allowed to come easily and the company should take a stance and hold it firm.

Peter Renton July 19, 2011 at 12:06 pm

@Yosef, I have no idea where Matt_SF will be putting his money. He is a sophisticated investor so I am sure he has thought of that. If you want to comment on his blog he is usually pretty responsive to reader comments, so he might tell you what he is doing.

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