Disciplined Lending

Posted by Renaud Laplanche :: November 3, 2007 @ 11:36 am

“It's only when the tide goes out that you discover who's been swimming naked.”

-- Warren Buffett

Disciplined lending is about adopting credit standards and enforcing them with very little or no exceptions. Disciplined lending is hard. Lenders are businesses, and businesses need to grow. There is often pressure, and temptation, on lenders to make all kinds of exceptions and lower credit standards, particularly at times when the economy is doing well and defaults are generally below historical average levels. Lack of discipline is one of many factors (including the housing slow down) that contributed to the situation that the subprime mortgage industry is facing today.

The temptation to approve a loan application or issue a loan could be even higher in the case of person-to-person lending, where the originator (such as Lending Club) is financially rewarded for every loan that is being issued but does not bear the credit risk.

At Lending Club, we strive to maintain a solid credit standard that reduces the credit risk for our lenders. This means adhering to our promise of accepting only prime borrowers, verifying income when such a verification is necessary, reducing the amount of a loan listing when credit utilization is too high, and cancelling a loan listing when income cannot be verified or high credit utilization puts repayment at risk. All of these additional precautions are taken to protect lending members from risky loans and to keep our borrowing members from being associated with bad loans, as well as to keep defaults low and interest rates attractive to the borrowers.

Our vigilance sometimes results in loan listings being delayed or canceled when borrowers are unable to provide us with the requested information. In such cases, the loan listings go from an “In Review” status to a “Removed” or “Expired” status. It might be frustrating for lenders when their money is not put to work and instead comes back into their accounts for reinvestment in other loans. We believe, however, that this frustration is a small price to pay in exchange for the removal of loans listed by borrowers who might have trouble making payments and could eventually default.

This discipline is all the more important as the Lending Club community is growing fast. Our coverage on National Public Radio yesterday helped us pass the bar of 6,000 unique daily visitors for the first time! Going forward, lenders should remain confident that our credit team is diligently working to protect their interests and to keep the community a safe place to transact.

Better Rates. Together.