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Weekly Industry Update: Lending Club and The Rise of Club Deals

By Vy Phan

June 12, 2017

President Trump will nominate Joseph Otting as the head of the Office of the Comptroller of the Currency, responsible for overseeing federal banks. Otting served as CEO of OneWest Bank where current Treasury Secretary, Steve Mnuchin, previously served as Chairman. If confirmed by the Senate, Otting will play a role in the Trump administration's efforts to ease rules written under the Dodd-Frank Act. House Republicans passed the Financial Choice Act sponsored by Jeb Hensarling (R-TX). The bill has little chance of passing the Senate in current form. We recommend the following WSJ article What’s in the Financial Choice Act? which summarizes the key provisions of the bill. On the securitization front, Lending Club has filed papers with the SEC for a new ABS deal consisting of unsecured consumer loans. We note that LendingClub Corp. is the deal sponsor – an important shift indicating the new Lending Club leadership team is re-visiting a long-held practice of avoiding deal sponsorship. The issuer of the deal is Consumer Loan Underlying Bond Credit Trust 2017-NP1. The shelf acronym “CLUB” appears to be a reference to Club Deals, or multi-seller programs. A club deal program enables Lending Club to drive standardization – in offering docs, covenants, structure, servicing, collateral consistency, and offering cadence. As a sponsor, Lending Club is able control its brand in the public ABS markets and manage competing interests amongst issuers, placement agents, and investors. (See this week’s article from Structured Credit Investor on the emergence of multi-seller deals citing PeerIQ data.) A club deal structure enables Lending Club to offer its whole loan investors a repeat, reliable path to liquidity and permanent financing. Moreover, participating investors can spread the substantial fixed costs of securitization, which may be quite onerous for a sole investor, over a larger deal size and multiple parties. The larger deal size begets greater interest from ABS investor community that can now justify the up-front due diligence costs with the expectation of large, repeat issuance. (PeerIQ describes the Club Deals in our prior newsletter and special considerations such as 3rd party valuation.) The pattern is consistent with the “multi-seller” deals seen in SoFi transactions and exemplified recently in Marlette’s MFT 2017-1 which included players such as Cross River Bank, Marlette, and Goldman Sachs. Given the diversity of whole loan buyers, we expect other platforms to follow suit. We also note an improvement in the ABS 15-G SEC filing associated with CLUBT 2017-NP1. ABS-15G SEC fillings improve transparency and independence with respect to reps and warranties related to the collateral pool in a securitization. Below is a list of attributes that are verified under “Agreed Upon Procedures” in an offering process for two recent Lending Club deals. The inclusion of Credit Score at Origination is a welcome addition to the list of attributes subject to verification. Nevertheless, there is still much more to do to raise the standard of verification across the industry. We cite the deficiencies in the current art of the ABS 15-G process in our prior newsletter. Namely, the process is manual, costly, incomplete in scope and breadth, and the verification is “skin-deep” as the data to be verified is sourced only from parties motivated to complete the transaction (against the spirit of independence in SEC Rule 15G). Issuers that lead on transparency and offer enhanced verification – across a broader set of attributes and over a 100% sample – can significantly differentiate on building trust with investors. The conflict-laden ABS 15-G process needs to be replaced with technology solutions that enable loan-level verification at scale. We look forward to sharing more in the months ahead. Investors and issuers should feel free to contact PeerIQ to learn more or participate in a trial.