By Chris Gillock
Lending Club has had a tough year. The CEO “resigned” in the midst of a major kerfuffle regarding phony data provided to a purchaser of loans originated by the on-line lender. Funding tightened substantially due to a loss of confidence in the veracity of the company’s information. The stock price, which was over $14/share in December 2015, fell to under $4/share by May 2016. Credit losses also began to tick up. The company has yet to achieve consistent profitability. What to do?
The answer from Lending Club’s management is “play offense!!” The company is opening up an entirely new line of business – secured lending in the auto refinancing market.
It is clear that the auto lending market is ripe for the development of an organized and efficient refinancing segment. Auto loan refinancing is driven by credit arbitrage rather than a decline in general interest rates. In the mortgage market, most conforming mortgages are priced the same because the risk is homogeneous. Mortgage financing booms happen when market rates decline. This is not the case in auto lending, which is a form of risk-adjusted lending with no government subsidy or support. When a consumer loses his job, defaults on his debt and his credit score tanks, he can get a new job and claw his way back to prime credit status. He might take out a subprime auto loan and buy a car to get to that new job. If he pays as agreed for 6 months, his credit score improves substantially and a broader universe of auto lenders might be willing to finance him on much improved terms. Many banks and credit unions are eager to make these loans, but it is hard to originate them. The folks that succeed in the auto loan re-fi segment will be the enterprises that use sophisticated data analysis and tech-enabled origination to select and entice the consumers who are good candidates for refinancing. This is probably not a “build it and they will come” market. Unless Lending Club has some “secret sauce” for originating these loans, they will have a tough time.
Kevin Wack of the American Banker wrote a terrific article about Lending Club’s foray into auto refinance. Here it is:
Is Lending Club Late to the Auto-Finance Party?
By Kevin Wack, October 25, 2016
Lending Club is pivoting back to the strategy it was pursuing prior to the abrupt ouster of its chief executive officer in May.
The San Francisco-based online lender, which grew rapidly by refinancing Americans’ credit card debt, now plans to make a similar pitch to consumers who have car loans. On Tuesday, Lending Club started offering to refinance auto loans of up to $50,000 at annual percentage rates of 2.49% to 19.99%.
Initially, only California residents who have FICO credit scores of at least 640 are eligible to apply. But the company said that it is planning a nationwide rollout in the next few months, and will eventually lend across the credit spectrum.
Lending Club sees an opportunity in the decades-old structure of the auto-lending market, where borrowers typically arrange financing inside of showrooms and end up paying both the dealer and the lender. The markup charged by auto dealers, on top of the interest rate that the borrower qualifies to receive, is often around two percentage points.
“For most consumers, this is the second largest purchase that they’ll make, after their home. So the opportunity for savings is pretty considerable,” Lending Club CEO Scott Sanborn said in an interview.
But Michael Tarkan, an analyst at Compass Point Research & Trading, expressed skepticism about Lending Club’s strategy, which comes at a time when some banks are reducing their exposure to auto loans amid fierce competition.
“In our view, while the launch opens up a new category for Lending Club, the auto lending industry remains highly competitive and unfavorable cyclical trends have begun to develop surrounding slowing sales, falling used car prices, and weaker credit performance,” he wrote in a research note.
Lending Club had planned to start refinancing auto loans back in June. But just a few weeks prior to the launch date, then-CEO Renaud Laplanche resigned in a scandal involving falsified information that was provided to a buyer of the firm’s loans.
Sanborn, who joined Lending Club in 2010 and became CEO following Laplanche’s departure, has spent recent months focusing on regaining the trust of investors who purchase the firm’s loans through an online marketplace. So Tuesday’s announcement served as a signal that Lending Club is moving beyond triage and is again eyeing growth.
Lending Club has yet to achieve sustained profitability, and expanding into auto lending could help the firm get there, since acquiring customers is a big expense for online consumer lenders. If Lending Club can sell more products to its existing base of customers, its marketing costs will become less onerous.
Numerous online lenders are pursuing strategies of selling multiple products to their customers.
For example, Social Finance, better known as SoFi, offers student loans, personal loans, mortgages and wealth management products to its relatively young and well-heeled clientele.
Avant, which makes personal loans to consumers with lower credit scores, had planned to start refinancing auto loans this year. But the Chicago-based company delayed those plans in May after running into funding woes similar to those encountered by Lending Club.
Sanborn said Tuesday that part of Lending Club’s plan is to offer auto refinancing to its existing customers. But the firm also sees a broader opportunity in making more U.S. consumers aware of the opportunity to save money by refinancing their car loans.
“They think a lot about refinancing their mortgage. They don’t think as much, or aren’t aware, that the option to refinance the car loan is there,” he said.
Today, about $40 billion in U.S. car loans get refinanced each year, according to Lending Club. That amounts to less than 10% of the nation’s annual auto loan originations, and less than 4% of all U.S. consumer auto debt outstanding.
Lending Club is betting that it can make inroads in that market by improving the customer experience. The firm’s applicants will see a simple comparison between their existing auto loan and Lending Club’s offer, the company said. Customers will be able to upload documentation on their smartphones, and to sign documents electronically in states where that process is allowed.
Lending Club is venturing into auto lending in what appears to be the late stages of a credit cycle, as some banks are pulling back, citing tighter spreads. Regulators have also been issuing warnings about deteriorating underwriting standards.
One typical way for lenders to make their offers more attractive to consumers is by offering longer loan terms, which results in lower monthly payments, but also carries greater risk for the lender. Lending Club is offering loans of up to 72 months, and it will give applicants the choice of a loan with a lower interest rate or one with a lower monthly payment.
Sanborn said Tuesday that Lending Club is shielded from some of the competitive pressure in the auto lending market because it is not competing for business inside of dealerships. And he said that some of the market’s problems involve loans to borrowers with very low credit scores, which is not a segment where Lending Club is competing initially.
“I would add that when we entered the personal loan market, it was in steady decline, and Lending Club has been able to significantly grow its business and add share at a time when a lot of banks were pulling out of personal loans,” Sanborn said. “I’d say we’re very aware of the trends. We’re taking a conservative approach to the underwriting.”
Lending Club’s stock price, which has fallen by 66% over the last year, was up by 1% in late-day trading Tuesday, to $4.93.
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