Lending Club was privileged to present this week at Finovate, a one-day conference focused on innovative companies that are creating the next generation of financial services. Kudos to Jim Bruene and NetBanker for a meeting that let each company demonstrate its offering to an overflow audience of press, bloggers, bankers, techies, and beyond.

At a high level, there were two kinds of companies at the conference: Web 2.0 and Mobile. The mobile technology available to banks and consumers is becoming more and more impressive with time – allowing people to manage everyday finances directly from their mobile devices. Someday, we will all be paying bills with our cell phones.

The Web 2.0 lineup was great as well. The participants included loan companies, personal finance companies, and even a virtual collection agency. Every company had a good presentation – most all of them were able to show the new and improved experience that financial services customers can have thanks to recent innovations.

We had the pleasure of talking with executives from all across the industry about possible deals and new ways to apply our technology and services. We spoke with bloggers and reporters, who put up a video blog and an article about Finovate.

I am particularly proud of our 7-minute demonstration of Lending Club where John Donovan explained our company's approach and market strategy while I lent $500 to 20 different borrowers using our leading edge LendingMatch™ technology. Each of the borrowers got great rates, the audience response to our p2p lending platform was excellent, and the overwhelming interest after the demonstration was great to see. We think making loans to people at great rates using our p2p lending approach will be a big and growing part of financial services going forward.

Thanks again to Finovate and congratulations to all of our co-presenters on moving financial services into the future.

Building a p2p lending company from the ground up is a great challenge, and with each big release of features and functionality, our team takes a few minutes to cheer and then begins to look ahead.

Now that we have expanded beyond Facebook and can serve borrowers and lenders in (almost all of) the United States, we are extending and revising our product roadmap. This is our chance to look ahead and confirm where we want to go next. We have lots of ideas – some clearly need to happen, some are great opportunities, and some are fairly speculative.

Some ideas will be rolled out to the site without fanfare and be made available generally. We will have others where we will use a test-driven approach.

To accomplish this, we may survey our current members for their input on proposed features and pilot programs to ensure that we take your own needs and experiences into account as we evolve the site. We may also ask people who are not yet members for input in order to evaluate different marketing
approaches.

If you have ideas that you would like to see implemented or concepts that could make Lending Club more useful, please send us your thoughts at feedback@lendingclub.com. We want Lending Club to address the market’s needs, and you are all important players in that market.

The credit crunch is just getting started. How long it will last and how big it will be in the final tally is anyone’s guess, but my personal forecast is: “a while” and “really big”. There will be first-order and second-order effects that the economy will need to handle.

The first order effects will be those affecting hedge funds and banks that are facing degrees of financial crises. Several hedge funds have gone under this month. Banks are beginning to shed departments which have been originating subprime debt into the secondary markets. Mortgage companies, both big and small, are laying off employees and in some cases shutting down. Investors in those funds and in those particular financial services companies will lose some portion of their investments. Some analysts are even worried about money market funds’ exposure to subprime – albeit at a level capped by the SEC at 5% of their assets.

Second order effects will be more pervasive, and could last a lot longer. Homeowners seeking new mortgages on their properties are running into tough new underwriting criteria. Jumbo and Super-jumbo loans are much harder to qualify for. Creditworthy borrowers are still able to get loans, but the rates are going up as banks are forced to keep the loans on their books for a longer period of time than they have done recently. Subprime borrowers will get a very high interest rate quote from lenders, if they even qualify for a mortgage. Many of the “clever” innovations in the mortgage industry, like Alt-A mortgages and 100% financing, seem to be a thing of the past.

Then there is another set of borrowers: people with Adjustable Rate Mortgages whose loans are resetting beginning this fall. According to analysis by Banc of America Securities, there are upwards of $295BB of other-than-subprime Adjustable Rate Mortgages resetting by the end of 2008. These resets are likely to lead to higher house payments, lower cash flow for homeowners, and let’s not forget higher prices on home equity lines of credit. In short, there will be a cash crunch because of the credit crunch.

What are people who need affordable credit supposed to do? We believe that Lending Club presents a great alternative for both borrowers and lenders. When the banks tighten, and the traditional credit providers dry up or raise rates to untenable levels, credit worthy people still need credit.

At Lending Club, we believe that now is the right time for people to come together. Even with concerns about subprime, there are millions of potential borrowers with good credit histories who need loans, and there is a big opportunity for people to become lenders and serve borrowers’ responsible credit needs fairly and profitably.

Better Rates. Together.

These are tough times in the financial markets. As we discussed last Saturday in our post on subprime, borrowers are beginning to feel the pinch of higher interest rates and much tougher underwriting criteria. Even for borrowers with prime credit (FICO score above 620), it is difficult to qualify for a loan now. Those that do qualify face tougher terms, limits, and more.

The credit crunch looks like it is here to stay for a while. The markets will continue to react to ongoing disclosure of subprime exposure. The Fed is doing a good job of trying to inject confidence into the markets by lowering the discount rate, and we think that they are likely to lower the fed funds rate at their September meeting. According to a poll conducted by Reuters, 71.4% of economists think the Fed will cut the fed funds rate at or before its September 18 meeting.

Until then, companies are having a hard time issuing commercial paper – the buyers have all pulled out of the market. This is leaving a number of deals at risk. For example, one of the big private equity deals this year was the sale of Home Depot Supply is supposedly facing pressure because the banks are having a hard time lining up the financing for it. There is even speculation that private equity debt issuance will stay dried up for months – because commercial debt is so hard to place. Mortgage companies and mortgage units of financial services companies have responded to the crisis by cutting costs. Lehman Brothers, Accredited Home Lenders Holding, and HSBC Holdings announced thousands of job cuts this week.

What should consumers do? If you do not need to borrow or refinance, you should be fine from a credit perspective. You may want to talk with your financial advisor about your overall portfolio during the time of turmoil.

If you need to borrow, shop around for great rates. If you need to borrow 25,000 or less, and you have good credit (640+ FICO, 20% or lower DTI), consider getting a loan with Lending Club.

If you are looking for somewhere to put your money to work, consider lending it at Lending Club, where you can put it into a diversified portfolio of loans that can earn from 7% to 17% before losses.

Please send us your comments.

By now, most people have noticed that something is going on in the financial markets. For those of us who follow the equity and debt markets as closely as I do, it has been a gut-wrenching few weeks. What exactly is going on? The financial press is calling it the Subprime Meltdown. We think the situation is serious, and we want to let you know how we think it impacts you and Lending Club.

What is subprime? Subprime, short for subprime debt, is credit that has been extended to riskier borrowers. In credit score terms, most lenders consider borrowers subprime when they have FICO scores below 620 – there is no fixed definition. For individuals, subprime loans were made by mortgage companies and, to a lesser extent, by banks to people who were not creditworthy by traditional standards. Basically, these institutions were lending too much money to people who could not afford the houses they were purchasing. For the markets, subprime investments were debt instruments comprised of thousands and thousands of loans, including some percentage of subprime loans.

What happened in the markets? Mortgage lenders securitize their loan portfolios periodically to raise money for new mortgages. These portfolios are sold in the market through collateralized debt obligations (CDOs) that are split into risk tranches so that investors (including hedge funds, financial institutions, investment banking companies, trusts, mutual funds, and individuals) can invest in the higher-yielding risky portions (the subprime pieces) or the lower-yielding, less-risky portion of the portfolios. This approach creates liquidity in the economy by allowing financial institutions to lend to more borrowers, which is generally a good idea.

However, one of the key triggers for the subprime meltdown was that CDOs were often rated AAA because the higher-risk tranches of the CDOs were set up to take all losses first, hopefully leaving the lower-risk AAA pieces of the CDOs unaffected by losses. These high credit ratings led to hedge funds and other investors investing in debt that looked less risky than it really was. Adding to the risk, many investors buying the securitized mortgages were highly leveraged in an attempt to maximize their returns. Based on market conditions, the lenders to these investors called for payment of these loans that had allowed them to leverage their investments. The credit markets froze and values of good investments plunged as the borrowers sold their good investments to generate cash.

We believe that the entire mess was originally caused by aggressive lending practices – loans and mortgages given to people whose likelihood to pay the loan back was low. Additionally, the practice of piggyback lending – offering additional loans on top of mortgages – contributed to the practice. Why did mortgage brokers and financial institutions do this? They could maximize profits by originating as many loans as possible and then selling off the resulting loan portfolios to the market. This approach took advantage of people with weak credit who are now facing serious financial problems.

We understand that many lenders are worried about potential losses, and that many borrowers are concerned that they will not be able to qualify for or afford new credit. What is the impact of subprime on Lending Club and its members?

• First of all, the impact on our members will be limited. As the Fed continues to make moves to settle the markets and to increase liquidity, we think there is a high probability of the fed funds rate being reduced following the 50 basis point reduction in the discount rate. Since our loans are fixed rate loans, current borrowers and lenders will see no changes in their payments

• Second, we think that borrowers will see us as a great alternative to banks. There are a growing number of banks that have had to raise their credit standards because they have not been able to sell their loan portfolios on the open market very easily, leaving them with less capital to lend to new customers. Our credit policy and risk management practices are conservative, but we are not planning on drastically changing our underwriting practices in response to the market situation – we believe that we have been originating loans correctly since we got started

• Third, we think that lenders will see us as a safe haven from the fixed income market. Our borrowers’ strong credit (640+ FICO score and non-mortgage debt-to-income ratio no higher than 20%), our members’ shared affiliations, and our portfolio-based diversification make lending money at Lending Club attractive. We offer good returns and relatively low risk, making lending a good strategy for many people over the long term

Please watch our video interview that discusses the subprime situation on YouTube: http://www.youtube.com/watch?v=HClLkBM4obc

We welcome your comments.