Latest / Bloomberg Intelligence / Direct Lending's Ross on LendingClub's Loan Sale Abuse (Audio)

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Direct Lending's Ross on LendingClub's Loan Sale Abuse (Audio) · Bloomberg Intelligence

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  Speaker 1: at Lending Club. The shares are down more than twenty
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  Speaker 1: investigation into the company's sales practices. We're going to get
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  Speaker 1: a detailed look at the peer to peer lending business
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  Speaker 1: with Brenton Ross. He as the founder and the chief
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  Speaker 1: executive of Direct Lending Investments. But right now, let's get
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  Speaker 1: to taking stock with pim Box at Kathleen Nays on
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  Speaker 1: Bloomberg Radio. Lending Club, this share is a lending club
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  Speaker 1: down more than twenty seven percent today. It's chief executive
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  Speaker 1: resigning after an internal review A found an investor was
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  Speaker 1: sold twenty two million dollars of loans that didn't meet
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  Speaker 1: that investor's explicit instructions. Let's find out more about peer
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  Speaker 1: to peer lending from Brendan Ross. He is the founder
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  Speaker 1: and the chief executive direct Lending Investments. Joining us from
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  Speaker 1: Los Angeles. Brendan, thank you very much for being with us.
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  Speaker 1: Thanks good to talk to you against him tell us
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  Speaker 1: about peer to peer lending. How is it supposed to work?
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  Speaker 1: Peer lending is supposed to work? Is a company like
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  Speaker 1: lending club is supposed to make loans to borrowers, and
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  Speaker 1: then it's supposed to match those borrowers with investors who
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  Speaker 1: can either buy a whole loan or pieces of a
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  Speaker 1: loan building a fixed income portfolio that delivers returns in
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  Speaker 1: the case of Lending Club around six to eight. And
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  Speaker 1: how does that differ from direct lending investments? And noting
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  Speaker 1: of course that you're a private company, so we're an
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  Speaker 1: institutional fund. We focus on a more conventional space instead
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  Speaker 1: of consumer loans, which is what Lending Club does. We
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  Speaker 1: do small business loans. We finance non bank lenders in
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  Speaker 1: that space, so we're doing something that's a little more
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  Speaker 1: tried and true. But the Lenning Club is something that
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  Speaker 1: I know about well. I was one of the first
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  Speaker 1: buyers personally of loans on their system back in the day.
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  Speaker 1: And having that experience, can you understand this internal review
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  Speaker 1: and the idea that the exstructions that the investor had
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  Speaker 1: made explicit apparently to the company weren't followed according to
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  Speaker 1: this uh, this internal review, and it all sounds very mysterious.
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  Speaker 1: So these loans were purportedly sold to Jeffreys, an investment
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  Speaker 1: bank that was going to build up a pool of
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  Speaker 1: these and sell them in a securitization, probably the institutional investors.
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  Speaker 1: What I'm guessing happened is that Jeffreys had specific criteria
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  Speaker 1: because it wanted to present its securitization with diversification along
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  Speaker 1: all sorts of dimensions. Could have been geography, could have
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  Speaker 1: been psycho scores, could have been anything. And the fact
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  Speaker 1: that these loans came maybe more from one particular origin
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  Speaker 1: amation month instead of another than may have monkeyed with
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  Speaker 1: Jeffrey's plans for the securitization. So it looked like there
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  Speaker 1: were some changes made that were untoward. And it's astonishing
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  Speaker 1: how rapidly this process corrects itself. I mean, you have
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  Speaker 1: that this is discovered, these loans were from March and April,
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  Speaker 1: and the CEO is gone, did not affect the company's earnings,
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  Speaker 1: which were positive. Is really, I think an extraordinary example
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  Speaker 1: of transparency in action. I really think there would be applauded.
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  Speaker 1: So having said that, I'm wondering if you can draw
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  Speaker 1: the analogy to the larger banking system of the aftermath,
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  Speaker 1: let's say, of the housing crisis, if it had reacted
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  Speaker 1: with the same kind of speed and the same kind
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  Speaker 1: of tone. Yes, I mean, the housing crisis would have
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  Speaker 1: been over in UH in a month, and much smaller.
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  Speaker 1: I mean, just to put things in perspective, this is
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  Speaker 1: about sixteen billion dollars in loans that they've originated, including
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  Speaker 1: a billion. In the last month, they had twenty two
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  Speaker 1: million dollars in loans for which the dates were miss marked. Again,
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  Speaker 1: completely unethical, totally outside of the bounds of what of
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  Speaker 1: what's acceptable, and what did they do? They bought the
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  Speaker 1: loans back at PAR and within days had sold them
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  Speaker 1: to another investor at PAR. So these were not bad loans,
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  Speaker 1: They just what happened wasn't right, and the company addressed
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  Speaker 1: pretty quickly. Again, I think, you know, this is where
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  Speaker 1: we're a long way from the housing crisis, and I
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  Speaker 1: think this kind of transparency is something would be amazing
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  Speaker 1: to see everywhere in the financial system. Just pick up
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  Speaker 1: on that and tell people a little bit about direct lending.
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  Speaker 1: Because you're very upfront about telling people where you get
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  Speaker 1: the loans from, we have a little bit more information.
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  Speaker 1: We are a little more conventional. So one of the
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  Speaker 1: things that lending club does is when they sell loans
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  Speaker 1: to individual investors. You have confidence in lending clubs underwriting,
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  Speaker 1: but you don't know who the borrowers are, and that's
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  Speaker 1: to protect anonymity and create a marketplace. In the case
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  Speaker 1: of us, because we're a private fund, we don't make
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  Speaker 1: loans where we don't know the identity, so we have, uh,
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  Speaker 1: you know, the full information about the borrowers, so we're
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  Speaker 1: less subject to the types of issues that can crop
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  Speaker 1: up in a middleman type of a situation. But um
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  Speaker 1: uh you know that's that's I don't think a reflection
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  Speaker 1: on the fact that lending Club is making consumer loans.
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  Speaker 1: We're making small business a little bit different. And the
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  Speaker 1: information that you're getting about those loans does it tell
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  Speaker 1: you anything about the health or strength of the small
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  Speaker 1: business market. We get the same information that the underwriter sees,
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  Speaker 1: so there's not a stripping away of variables the way
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  Speaker 1: there would be with consumer loans. So for example, I
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  Speaker 1: can look online now and I can look at seven
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  Speaker 1: thousand different businesses bank statements from last month. I can
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  Speaker 1: look at the business owners personal credit files. Now these
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  Speaker 1: are all this is all sensitive information that's available to
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  Speaker 1: the twenty people that worked for me, not to the
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  Speaker 1: folks who are investors in my fund. There's the transparency
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  Speaker 1: that's been enabled by techno oology has been a wonderful thing,
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  Speaker 1: and it's increased investor's confidence in this type of fixed
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  Speaker 1: income at a time when regular fixed income yields are
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  Speaker 1: really really in the downa tubes. Any chance we're going
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  Speaker 1: to see this rolled out on a larger institutional basis.
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  Speaker 1: You know, it's very interesting. In the last vintage as
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  Speaker 1: lending club of their loans were purchased by banks, and
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  Speaker 1: actually only about were purchased by individuals, hedge funds making
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  Speaker 1: up the difference. So this is actually becoming much more
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  Speaker 1: attractive to banks. And it's fascinating because you would think
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  Speaker 1: of banks as being the companies that would do these
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  Speaker 1: types of originations. In fact, they're doing less of them
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  Speaker 1: and buying them from companies like lending clubs. Brendan Ross, Founder,
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  Speaker 1: chief executive Direct Lending Investments, based in Los Angeles, thank
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  Speaker 1: you very much for spending time with us. You're listening
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