Credit markets are tightening. The Federal Reserve has been busy boosting interest rates and, amid a macroeconomic environment that could be charitably described as uncertain, the buying and selling of consumer loans winds up being a fraught process.
As institutional investors seek more ways to access those loans and loan portfolios, they face an array of challenges, LendingClub CEO Scott Sanborn told PYMNTS’ Karen Webster. But technology, along with the evolution of online marketplaces that match buyers and sellers, is making access, pricing and options transparent and real time.
Sanborn said that the steps contained within institutional investing are myriad. Teams of investors evaluate the interest and attractiveness of an asset class, the risk/reward potential, the liquidity and the historical track record of that would-be investment through different macro environments.
The track record of the underwriter also gets consideration, said Sanborn.
“And one avenue that gets overlooked,” he told Webster, “is the counterparty risk of the lender.”
Inefficiency has been a hallmark of the overall process. Excel spreadsheets, with thousands of rows of data, a dizzying array of formulas and manual inputs (which leave room for error) have been the norm.
Institutional investors need help with due diligence, Sanborn said, and with drafting the contracts and investment schedules once they do make the decision to buy or sell. What winds up happening is that each contract to buy and sell becomes an individual tailored activity, with its own bespoke transaction.
LendingClub, for its part, had a greenfield opportunity to mollify those pain points, and the company had “invested all of this energy into the process of onboarding borrowers … but hadn’t yet done it on the investor side.”
And now, he said, the company has addressed those issues. In May, LendingClub launched a pair of initiatives designed to give institutional investors more access to loans on LCX, the company’s automated auction platform.
Related: LendingClub’s LCX Platform to Get Client-to-Client Transactions
The Marketplace Advantage
The online marketplace, he said, is especially valuable in a dynamic lending environment.
“The marketplace provides a continuous feedback mechanism,” he said, and it does it in real time. By way of example: If dozens of investors are bidding on the same “type” of loan, the platform and underwriters have a clear signal that more loans of that type should be minted.
The investors are themselves sophisticated, and run their own models that in turn offer feedback to the platform that can improve pricing and underwriting.
The Mechanics of It All
LCX now allows institutional investors to sell LendingClub loans to each other while users can also buy loan portfolios on the platform. All this comes as the San Francisco-based firm reached a milestone of more than $2 billion in loans transacted over LCX since its launch in 2019.
The network uses technology (including application programming interfaces, or APIs) and the marketplace model to deliver what it calls dynamic pricing and same-day settlement of LendingClub loans. Loans can be purchased through fixed prices on fixed issues; investors can also choose their own loans based on credit criteria.
See also: LendingClub Says Client-to-Client Loans Mark Evolution for Its Online Marketplace
“Even if you don’t have an API,” he added, “we can offer a simple clickable interface that allows the platform to interact with you.”
For LendingClub, there’s the added advantage of operating with a streamlined back office team, where staffing levels are a fraction of what they were a few years ago, even as loan volumes have surged.
Looking ahead, as consumers continue to feel the pinch of inflation, Sanborn said that loan issuance will be about 85% tied to prime borrowers. Much depends on how soft the economic landing is amid the Fed’s tightening.
“We’re being selective — but the balances held by our customers in checking and savings accounts haven’t moved over the last nine months,” he said. “They’ve been remarkably stable. Interesting. So our core customer has been able to absorb the cost of living increase without dipping into their savings.”
He noted that at present, the environment is still sanguine for institutional investing. For example, banks have been flush with excess deposits, and the cost of capital is relatively low.
LendingClub’s consumer-facing operations are helping stimulate demand for personal loans as individuals and families grapple with the rising costs of credit card debt. Bundling those personal loans for institutional clients, or taking them onto the LendingClub balance sheets, are still generating strong returns.
“We’re eating our own cooking,” he told Webster, “and this helps set the marketplace price and boost investor confidence that our interests are aligned.”
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