Lending Club has cut some great deals with big names such as Alibaba and Google. Most recently they have established an agreement with BancAlliance, a consortium of community banks, to lend on its platform. Lending Club promises better rewards for investors and increased affordability for borrowers. However, many of the borrower inputs that go into Lending Club's credit analysis (such as debt-to-income ratio, employment status, and borrower income) never gets verified. With the stock trading at 196x forward earnings, is the price too high given the underlying risk?
Why would community banks team up with Lending Club? For years, smaller banks have lost market share to big banks when it comes to consumer loans. The cost of underwriting small personal loans is supposedly cost prohibitive. Having Lending Club underwrite the loan is aimed at allowing smaller banks to expand into loans they otherwise wouldn’t make. Part of the way Lending Club achieves lower costs is that it doesn’t have things like retail branches and bank tellers. Another is through scale and technology. By aggregating loan demand and performance data across a broad universe of borrowers, Lending Club can theoretically evaluate credit risk and pricing similar to the way big banks do. Yet there is a possibly problematic reason for lower underwriting costs. Much of the information supplied by borrowers never gets verified by Lending Club.