About Risk
Participating in any financial transaction carries elements of risk, and online person-to-person lending is no exception. We strive to create an easy, secure and private environment for people to borrow or lend money at better rates. Below, we address the main types of risks associated with online financial transactions in general, and explain the measures we have taken to reduce these risks.
Data Security
A key area of risk to be concerned about is the degree to which a company can protect the security of the information it receives and stores from its customers. Lending Club takes strong steps to safeguard your personal and financial information through vigorous physical, electronic and operational policies and practices. We use the latest technology available to provide a safe and secure platform. We store all sensitive financial data such as Social Security numbers in encrypted form at a secure, off-site database. We help protect the security of all accounts through implementation of session time-outs, policies protecting account numbers, and a rigid ID theft policy. For more information on our security practices, please refer to our Privacy Policy, which includes all security measures.
Operational
Lending Club has established internal security procedures with real time monitoring, as well as periodic external reviews and audits. Internal operations personnel constantly monitor our systems and transactions, as well as those of our partners, to ensure that there is no compromise.
Authentication
Lending Club employs state-of-the-art authentication technologies to verify members' identities. This process reduces the chance for identity theft by using multiple sources of information to establish the authenticity of the online user. In addition, Lending Club also tracks transactions internally and monitors potential fraud and other illegal activities.
Credit Worthiness of Transaction Partners
When entering into an online transaction, it is important to be able to trust the screening practices of the host platform. Lending Club uses proven methods to determine a borrower's credit worthiness. We start with the borrower's credit score. We don't support any subprime loans, so anyone with a credit score below 640 will be prevented from borrowing. We also look at the borrower's Debt-to-Income (DTI) ratio and the amount of the loan to ensure that the borrower can afford to pay back the loan. Finally, we do not allow anyone with a current delinquency or fewer than 12 months of credit history to list a loan on the site. One key area of credit worthiness that separates Lending Club from any other company is the fact that most Lending Club members are also members of other trusted communities. We believe that borrowers are more likely to pay back their loans that have been extended by neighbors, fellow alumni, and friends-of-friends.
Fraud
Lending Club is committed to protect its members and takes financial fraud extremely seriously. We realize that even with the strong securities measures in place, criminals might try to exploit and abuse our systems. Lending Club will work with law enforcement agencies to seek full prosecution of anyone attempting to commit illegal acts using Lending Club's systems.
Investment/Portfolio Diversification
In general, diversification is a sound principle of investing. Lending Club encourages this safe practice by generating well-diversified loan portfolios automatically based on lenders' chosen risk levels and affinities. Using portfolios, it is possible to lend small amounts to a large number of borrowers who present different risk characteristics. Lending Club employs a complex form of Harry Markowitz's Modern Portfolio Theory in calculating the optimal portfolio allocation based on the number of loans selected and the amount invested. Following the diversification principles, Lending Club calculates the portfolio loss risk using statistical methods. Lending Club then constructs a recommended portfolio by identifying the degree to which lenders and borrowers are connected.
Balancing Risk vs. Reward
There are seven main grades of Lending Club loans: A, B, C, etc., where A-rated loans correspond to the highest credit scores. Because loan listings can differ in risk within each of these grades, we created 35 different risk subgrades in an attempt to more accurately reflect the risk-reward proposition. Balancing risk and reward protects the portfolio because it is constructed based on the level of expected losses that can occur for a given risk grade. Lending Club continuously monitors and reviews its interest rates to ensure that they provide the right risk/reward balance.
Summary
Lending money subjects the lender to multiple types of risk, including credit risk, opportunity cost risk, and more specifically, interest rate risk.
- Credit risk is the risk that the borrower will not pay the interest or principal that he or she has promised to pay.
- Opportunity cost reflects the risk that the value that your loan portfolio will underperfom relative to the general market.
- Interest rate risk reflects the fact that the values of fixed-interest loan portfolios tend to fall as interest rates rise.
We encourage diversification, and urge you to use LendingMatch™ for building a diversified portfolio. You might, however, decide to construct your loan portfolio in a manner that is classified as "nondiversified." Nondiversified portfolios may experience greater risk.
Inflation may influence the direction of interest rates and decrease the value of interest income. Fixed interest loan portfolios with longer maturities are more sensitive to inflation.
Although lenders are covered by pass-through insurance from the Federal Deposit Insurance Corporation for uncommitted lender funds, once the loans are funded they no longer have FDIC coverage. Also note that although recommend portfolios are constructed in such a way to seek preservation of capital, it is possible to lose money using a portfolio approach.
This information is provided for education purposes only. You will need to evaluate the merits and risks associated with relying on any information provided. Although this article may provide information relating to approaches to using Lending Club it is not providing recommendations, advice, or endorsements. We make no warranties and bear no liability for your use of this information. The information made available to you is not intended, and should not be construed as legal, tax, or investment advice, or a legal opinion.
