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He was so taken by Lending Club that he began listening to the company’s earnings calls. “Like a weirdo,” he said. It was on one of these calls, in 2015, that he heard Chief Executive Officer Renaud Laplanche say that 14 percent of Lending Club’s borrowers, or more than 100,000 people, “returned for a second loan.” That struck Sims as curious. He knew that for all the information the company made public about its borrowers—incomes, employment histories, their reasons for borrowing—one thing it didn’t list was repeat customers....
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Two loans caught his eye. Both had been issued to individuals with the same employer in the same small town. So far, so coincidental. But looking deeper, Sims found that the salaries were nearly identical. Both borrowers had opened their first line of credit in the same month.This, Sims realized, is the same dude. It wasn’t a borrower who’d paid off one loan and happily returned for a second. It was one person with two active loans, and Lending Club was treating them as completely unrelated, charging wildly different interest rates. The borrower was paying about 15 percent interest on one loan of about $15,000; on the other, he was paying 9 percent on twice the principal. That meant the investors who held only the second loan were leaving money on the table. And Lending Club didn’t seem to be doing anything to help them.
Sims saw a business opportunity: a research service that would independently rate Lending Club loans the way Morningstar rates mutual funds. ...
... Sims asked a data scientist, Allen Grimm, to help design an algorithm to identify loans that seemed to have been taken out by the same person and yet were assigned different rates. They called it the Financial Genome Project....
... On his laptop, Simms pulled up a spreadsheet showing 32 loans totaling $722,800. The loans ranged from $20,000 to $24,000 and were taken out over the course of eight days in late December 2009. Sims said he believed the loans, ostensibly from 32 different individuals, were taken out by just four borrowers. ...
...Two and a half weeks later, Lending Club disclosed that in December 2009, Laplanche and three of his family members had taken out 32 loans, totaling $722,800—the same amount Sims had discovered. The goal, the company said, was “to help increase reported platform loan volume for December 2009.” ...
...several former senior executives say the practice of insiders borrowing money was widespread during the company’s early days, and widely known. ...
....Sims has discovered dozens of other loans he suspects were made to company insiders, as well as lending practices that seem to have been designed to push growth above all else...
...Laplanche didn’t invent the concept of allowing consumers to lend money to one another online—one competitor, Prosper, was founded in 2005—but Lending Club took the concept mainstream by using its own algorithms to set interest rates and winning SEC approval for the practice. Elements of Lending Club’s model were adapted by Prosper, Avant, and others, and now there are marketplace lenders that focus on solar panels, commercial real estate, elective medical procedures, and even weddings....
...Not everyone is eligible to get a loan through Lending Club. Borrowers need a FICO score of 660 or above. The standards were high enough that starting around 2010, demand from investors began to outpace the supply of borrowers. ...
...Later that month the same person, according to Sims, borrowed the difference, $4,475, at an interest rate of just 7.5 percent. (Sims guessed that Lending Club’s algorithms gave the second loan a higher rating because it was smaller and thus less risky.) To the outside, it looks like one reliable loan and one risky loan; in fact they were both risky...
...Sims’s model has identified about 30,000 loans that were likely taken out by repeat borrowers...
...Laplanche was forced to resign over a $22 million debt portfolio sold to the investment bank Jefferies containing loans that Lending Club employees had misdated. At the same time, he’d encouraged Lending Club to invest in Cirrix Capital, an outside fund in which he was personally invested....
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