Home > data science, finance, modeling > Larry Summers and the Lending Club

Larry Summers and the Lending Club

August 12, 2013

So here’s something potential Fed Chair Larry Summers is involved with, a company called Lending Club, which creates a money lending system that cuts out the middle man banks.

Specifically, people looking for money come to the site and tell their stories, and try to get loans. The investors invest in whichever loans look good to them, for however much money they want. For a perspective on the risks and rewards of this kind of peer-to-peer lending operation, look at this Wall Street Journal article which explains things strictly from the investor’s point of view.

A few red flags go up for me as I learn more about Lending Club.

First, from this NYTimes article, “The company [Lending Club] itself is not regulated as a bank. But it has teamed up with a bank in Utah, one of the states that allows banks to charge high interest rates, and that bank is overseen by state regulators and the Federal Deposit Insurance Corporation.”

I’m not sure how the FDIC is involved exactly, but the Utah connection is good for something, namely allowing high interest rates. According to the same article, 37% of loans are for APR’s of between 19% and 29%.

Next, Summers is referred to in that article as being super concerned about the ability for the consumers to pay back the loans. But I wonder how someone is supposed to be both desperate enough to go for a 25% APR loan and also able to pay back the money. This sounds like loan sharking to me.

Probably what bothers me most though is that Lending Club, in addition to offering credit scores and income when they have that information, also scores people asking for loans with a proprietary model which is, as you guessed it, unregulated. Specifically, if it’s anything like ZestFinance, could use signals more correlated to being uneducated and/or poor than to the willingness or ability to pay back loans.

By the way, I’m not saying this concept is bad for everyone- there are probably winners on the side of the loanees, and it might be possible that they get a loan they otherwise couldn’t get or they get better terms than otherwise or a more bespoke contract than otherwise. I’m more worried about the idea of this becoming the new normal of how money changes hands and how that would affect people already squeezed out of the system.

I’d love your thoughts.

Categories: data science, finance, modeling
  1. mb
    August 12, 2013 at 9:36 am

    Again, if you protect people from high interest (or high fees in the case checking accounts), you are REMOVING that as an option, not protecting them. Guess where they will go then? A real loan shark. I am sure they will be better off. You have the best intentions.


    • August 12, 2013 at 12:36 pm

      Agreed, mb. No one is holding a gun to these people’s heads when they seek to do business with a place like Lending Club. It’s their fee choice, and if they choose to use a loan from stupidly, or irresponsibly, they to will (thank God) reap the inevitable consequences. You can’t regulate against stupidity, and apparently stupidity will always be part of the human drama.


      • P
        August 12, 2013 at 3:19 pm

        Ummm, many, many regulations are to help people from their own stupidity (gambling, usury, safety, food coloring, food labeling, inability to sell your right to vote etc.).

        I’m sure you read every line of every Terms of Service of everything you’ve ever bought …


    • FogOfWar
      August 12, 2013 at 7:38 pm

      I think the point of usury laws is that removing the option is protecting the potential “customers”. At some point, the high interest rate makes it an option that is overwhelmingly value-destroying.

      That being said, I’m not sure Lending Club is at that point. Most people who spend a lot of time with this stuff are really concerned with the payday lenders who have an effective interest rate on their “loans” (which are often packaged as not-loans at least for bank regulatory purposes) of 300%+.


  2. josh
    August 12, 2013 at 10:02 am

    I am also skeptical of these new lending platforms. While it seems attractive to create person-to-person financial services, I think community-based approaches between people who know each other like Yunus’s micro-lending model are better than these rather anonymous and data-driven platforms.


    • FogOfWar
      August 12, 2013 at 7:40 pm

      FWIW, these people all read Yunus chapter and verse and universally deify his groundbreaking work. In their minds they’re moving it to the next level and adapting it to the local needs in the US.

      That’s not saying I’m convinced (I’m not sure yet on this one), jut that they’re aware of the history…


  3. M
    August 12, 2013 at 10:41 am

    I think you got this a bit wrong. First of all, Lending Club is facing significant regulatory pressure and is in fact not allowed in most states in the US.

    Second, they seem to be the good guys (at least relative to Chase and BoA). Peer lending is a good thing. It’s lower rates for borrower and higher returns for the lender. You didn’t mention at all that the Lending Club rates are significantly lower than credit card rates. Chase will take 20% interest on credit card debt and push 0.5% interest to their customers saving accounts. Sounds ridiculous to me. At lending club, borrowers mostly use it for reducing the burden of their credit card debt. Not a good thing?

    I don’t work for them, but I’ve used it for many years as a form of investment.


    • FogOfWar
      August 12, 2013 at 7:34 pm

      Their real competition is payday lenders, with effective rates of 300%.

      It’s a complicated issue, but I do think this is largely well intentioned.


      • P
        August 14, 2013 at 3:29 pm

        Agreed, they cutting out of the middleman here is probably a service to humanity.


  4. Filbert Gork
    August 12, 2013 at 4:09 pm

    Why do you hate Larry Summers so much? I mean sure he made a few sexist comments in public (which I agree are a part of why he’s unqualified to be the Fed chair). But seriously, it’s like you have this vendetta against him, complete with a caricature of him on your blog main page. Why do you select him amongst all the rich powerful jackasses of the world to be the focus of your wrath?


    • August 12, 2013 at 4:16 pm

      Great question!

      Answer: I don’t hate him so much. In fact I think he’s clever and not an evil person. But I do think he’s deeply flawed, and _not_ a good candidate for leader of the World Bank or Chairman of the Fed.

      In other words, if he was just some jackass, I would not spend any time at all on him – and for that matter, there are plenty of jackasses I never mention. I only mention him and single him out because he consistently gets considered for really important jobs that he shouldn’t be given.


  5. August 12, 2013 at 6:52 pm

    “…37% of loans are for APR’s of between 19% and 29%”

    awww, as the Church Lady would say, “isn’t THAT special!”


  6. Mario
    August 13, 2013 at 6:21 am

    i really did’t get the connection between lending club and larry summers; the term “involvment” implies kind of a negative context, but other than his concerns, no mention of his involvment?


    • August 13, 2013 at 6:23 am

      Sorry – he’s on the board.


      • Mario
        August 13, 2013 at 7:20 am

        yeah, i’ve also sensed some kind of a (negative) bias towards larry summer. but the jury is still out 🙂


        • P
          August 14, 2013 at 3:30 pm

          I’ve sensed a negative un-bias 🙂


  7. August 15, 2013 at 7:20 am

    Because I can’t help myself:

    “The first rule of Lending Club is that there is no Lending Club”


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