Trust, relationship, and money are words that should go great together. Today’s banking system, especially as it relates to unsecured loans and credit cards, does not fully recognize trusted connections and relationships. Lending Club is changing that.

Facebook provides Lending Club with a solid platform of potential borrowers and lenders. These users are connected via alumni relationships, geographic relationships, and hundreds of others. While no one trusts every Facebook friend, what’s critical is that they are not completely anonymous. Borrowers can decide to keep their identity anonymous and disclose only the groups and networks they belong to. In this case, the privacy of the borrowers is protected but the lenders gain valuable information such as verified affiliations to university or companies. Borrowers can also decide to publicly link their Lending Club anonymous screen name to their Facebook profile, and invite friends and members of their groups to lend them a hand.

We use the best of the financial system and banking infrastructure to take care of the rest of the problem: we verify identity, credit score and bank account, and handle electronic payments through our partner Bankserv, a financial service processor that supports over 400 banks in 52 countries and operates a PCI-compliant data center.

The lender feels safe, as they know that Lending Club pre-screens all potential borrowers. We pull a credit report on each borrower. Facebook members that are interested in borrowing must have a 640 FICO score or greater to qualify for a loan. Therefore, we do not facilitate sub-prime borrowing.

All borrowers’ identities are verified. Their privacy is not compromised, but we must be confident the person is who they say they are. The lender can feel secure in knowing that the screening process is all handled just like a bank or credit card company. We have obtained all the necessary licenses to be a lender.

We do not share personal information, or sell it. We couldn’t be in a trust-based business if we did! The only entities that receive updates are credit agencies and, when needed, collection agencies.

We are presenting another, and new, financial option to Facebook users. This option leverages trusted relationships and connections. We present a more human option.

FICO actually stands for the Fair Isaac Corporation. This is the standard credit scoring system that was created in 1958. The company was founded by engineer Bill Fair and mathematician Earl Isaac. They started their consulting services and decision management systems in 1956. Today FICO is headquartered in Minneapolis, MN, with revenue of about $800 million dollars. They have about 3,000 employees world wide.

Now that you have the background on FICO, what does it mean to you, the borrower or lender? FICO scores are available to all 3 credit reporting services in the USA and Canada: Equifax, Experian and TransUnion. Lending Club has a partnership with TransUnion.

How does it work? The FICO score (or credit score) is a statistical analysis of a person’s credit files. This can be a number that is typically between 300 and 850. The higher the number you have, the more representative of your creditworthiness.

Why use a credit scoring system? Credit scoring systems are in place to determine the potential risks posed by lending money. Banks and credit cards use this score to determine if the risk in lending money will be rewarded back. Anytime you give someone a loan, there is risk involved. FICO just helps to lessen the risk for both the borrower and the lender. Keep in mind, there are no magic formulas, as people are still people, and we are glad they are.

To use the services of Lending Club, you must currently have a FICO score of at least 640. This qualifies about 75% of potential members. We believe that lowers the risk for all involved.

Other factors taken into account in Lending Club’s pre-qualification and scoring algorithm include a person’s debt-to-income ratio, and that person’s affinities with other users. More on Lending Club’s own scoring system (including our use of FICO score) in a later post.

Every site and service online can be compromised unless there are precautions taken and vigilance is ongoing. Lending Club has undertaken heavy self-scrutiny and testing before launching our service publicly. We are taking every precaution to harbor a safe and private environment in which to conduct transactions of money.

So how do we currently protect you, the Lending Club member, from having your data compromised?

All sensitive data is stored off-site in a PCI-compliant location. Bankserv is our PCI-Compliant partner. Once the data is delivered to them, the data is electronically shredded on our end. If by chance something would happen, they would find only a list of member names, which is available on Facebook anyway.

What is PCI-compliant? Simply put, it is a standard that banks, credit card companies, and other consumer financial organizations such as credit card companies must follow. The data we receive from your application with us is only used to calculate interest rates. Once we are done processing that information, the sensitive data is passed over to Bankserv.

Additionally, all of our off-site servers located at our partner site are being guarded by AK-47 armed guards. Did I catch you sleeping? We are only kidding about the guards with Russian assault rifles -- they really have American guns.

All jokes aside, your data is safe here at Lending Club. Just like everything else we do, we bring you all the advantages of big corporate lenders without the cost and hassle.

Rex from Lending Club

The basic principle of peer-to-peer lending is very simple: by removing an intermediary in the financing process, direct peer-to-peer lending helps borrowers get better rates, and lenders get better returns. I will discuss lenders’ benefits in a later post; let’s focus here on the benefits to borrowers.

What exactly do I mean by “removing an intermediary” in the financing process? Well, banks pay up to 5.5% interests to savings accounts, and then lend the money collected through these accounts out to borrrowers, charging borrowers up to 12.5% interest rate on personal loans. The 7% difference goes into paying the banks profits and expenses, like maintaining thousands of branches and mailing promotions and special offers to acquire new customers. Lending Club is a service that lets people borrow and lend money directly with each other, bypass the banks, and save most of that 7% difference. The service operates fully online and includes users authentication, credit check, bank account verification and reporting to the credit agencies.

Lending Club rates start at 7.45% APR for members with a high credit score. Most members will pay between 8% and 12% interest, depending on their credit score and the amount of the loan they are taking: larger loans carry a higher interest rate. Interest rates of 8% to 12% are very attractive rates for “unsecured” loans (i.e., loans not secured by a vehicle or a home). In comparison, the average interest rate banks charge on personal loans is 12.32% , and the average interest rate on credit card balances is 13.82%*.

In addition to being a better financing option, Lending Club also provides a more responsible approach to credit: all loans to and from members are “amortization” loans, with equal monthly installments, meaning that you effectively repay part of the loan every month. This is a more responsible, cheaper, and more predictable way of borrowing than revolving credit cards, which let borrowers make minimum payments each month, with the balance continuing to accrue interest every month.

We truly believe we are doing a civic good here at Lending Club. We’d love to hear your comments!

Rex from Lending Club

*Federal Reserve G.19 weekly survey of commercial banks and finance companies, 4/6/07

Congratulations to the Facebook team on the launch of the new Platform! We are extremely happy to be a part of it and become the first financial service to launch on a leading social network!! And, we congratulate all of the application developers for creating something truly unique.

Well, a new company was born today thanks to Facebook. We were happy to see several hundred Facebook members install the Lending Club application and look forward to welcoming more members.

We had a few technical gliches, but we are really proud that all of our employees were able to contribute and make this happen. We will strive to improve every day and listen to your feedback. We appreciate your support!

Better rates. Together.

Renaud from Lending Club