Lending Club Decision Making Dilemma Research Paper (Research Paper Sample)

Lending Club Decision Making Dilemma
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Lending Club Decision Making Dilemma
Lending club is an online peer-to-peer (P2P) lending platform that offers loans funded by lenders. The company issues notes to the lender members that beg a question whether the notes are indeed securities or not. This legal question has brought a dilemma to the Lending Club whether to move to new security model by filing with Securities and Exchange Commission (SEC) or stay with its original model. Any action the company takes has its own risks and benefits. The company is trying to weigh out the risks and opportunities associated with either action. Therefore, the dilemma is that will Lending Club be better off filing with SEC or will it be successful with its status quo. To answer this dilemma, it is necessary to conduct cost-benefit analysis to determine the best option with many benefits than costs/risks. The option that has few benefits than risks is the best cause of action the company should take.
Cost benefits analysis
This will analyze the benefits and risks of either registering with the SEC or maintaining the status quo and go ahead with creating the secondary market.
1 Moving to securities model (registering with the SEC)
If Lending Club moves to the new securities model, they will comply with SEC regulations that will eventually change the way they do business with their partners, borrowers and lenders. In fact the local cost of filing with SEC is about $3.5 million. Lending Club will also be compelled to temporarily stop allowing its lenders to fund loans when it is under SEC. once the review is successful, the company will move to a new securities model that requires new marketing campaign. All these other adjustments will cost the company $1.5 million. The company will also have to set aside $450, 000 annually to meeting the new filing as well as financial reporting requirements. However, SEC’s position would reform P2P lending and make companies like Lending Club to have influence in the market (Tufano, Jackson & Ryan, 2010).
The cost of SEC is indeed high and will selectively overburden P2P business which can also restrict the growth of the P2P lending industry. Verstein (2011) noted that for-profit P2P lending platforms will be harmed continuously by the process of registration to SEC. the P2P are not allowed to sell notes before the process of registration becomes effective. They must also continue to amend their fillings in post-effective period. Therefore, the delays and costs of SEC regulation have resulted in the reduction in number of these P2P lending platforms. This has restricted the competition and growth of P2P lending industry (p.511). In fact other P2P firms such as Virgin Money, Loanio, and Pertuity closed their operations due to burden of complying with SEC’s regulations (Lo, 2016).
Therefore, in total, the company must pay $5 million USD to get registered with SEC. More so, the registration process is going to halt the company’s operation. With the fact that the P2P lending industry is majorly a duopoly market with two main competitors, Prosper Inc. and Lending Club controlling 98% of the P2P market (Lo, 2016), it is likely that the company will lose its customers to Prosper and other small competitors if its operation is halted when its registration request is being reviewed by SEC. This will affect the company’s business that will be compelled to use a lot of resources for marketing to gain back its market share.
Verstein (2011) added that SEC lacks mandate to protect the borrowers and it might favor lenders over the borrowers when its needs information disclosures. More so, SEC involvement in P2P lending business is hurting lenders by introducing additional risks. A mandatory disclosure under SEC filings is compromising P2P borrowers’ privacy with limited benefits to lenders. In fact even SEC acknowledged that only a few people access information about P2P investment through EDGAR. The SEC lack the mandate to shield borrowers and this could potentially cause a ruthless pro-lender bias towards P2P disclosure. More so, SEC registration has the possibility of making lenders worse off. P2P lenders can only register with SEC under Securities Act Rule 415 through shelf registration. This is the only way of registering a group of securities. Nevertheless, shelf registration means that the platform must also serve as issuer but not as the individual borrowers. This exposes P2P lenders to credit risks of both the platform and the borrowers (Verstein, 2011).
Therefore, securities model will expose Lending Club to financial risks, and it will get bogged in privacy issues which will bring legal and ethical. These risks are very costly: privacy issues concerning borrowers can make them sue the company which can result into payment of damages and legal costs while the company’s reputation can be jeopardized. Financial risks can make the company lose a lot of resources which can halt is operation or even makes it undergoes liquidation.
However, SEC filing is also beneficial. Lo (2016) observed that unlike the traditional credit industry, lenders in P2P lending market requires more protection compared to borrowers because of their retail status. Therefore, it is likely that most of the problems about securities model has been contained or completely mitigated. Lo (2016) conducted analysis of 391,888 of Lending Club’s transactions between 2007 and 2013. From the analysis, 33,592 of these loans were matured hence they had been paid off or charged off. Each of the loan transaction contains borrower disclosures lenders rely on while making investment decisions. This empirical study significantly compares bifurcated and consolidated regulatory approaches. The result of the empirical analysis found that borrowers enjoy better rates of return than what they would have acquired from their credit cards, their immediate source of credit if they are subjected to no or fewer abusive practices. They are also protected from any exploitation from lenders. In fact credit card interest rates were 13-14% while that of Lending Club was 11-12%. They are also protected from collection polities as well as problems of small loans (Lo, 2016). Therefore, when there are regulations under SEC, borrowers will be protected from exploitation while the industry will be regulated to avoid unethical practices.
2 Status quo
In status quo condition, Lending Club will not move to the securities model. However, if Lending Club does not move to the new securities model, it will not incur these additional costs but they risk other legal and ethical issues. In status quo situation, Lending club will not be regulated with SEC. This will contravene the Securities Act which considers Lending Club notes as “securities”. Lending Club notes are securities because they are publicly tradable notes. Additionally, Lending Club has paired with WebBank, chartered traditional industrial bank, which issue loans to borrowers. Lending Club then buys loans and issues own promissory notes that are paid out to lenders (investors) only if a bower makes payment. Therefore, Lending Club, and to extent all P2P lending platforms, have broad market nature of investment opportunity. This means that it is a lender hence its notes falls under “securities.”
If Lending Club fails to register with SEC, it means that it will contravene Securities Act Rule 415 which requires securities like P2P lending notes to be registered under shelf registration with SEC. more so, the definition of “securities” under the Securities Act of 1933 is that it securities are “any note” or “investment contract.” P2P lending notes are “investment contracts” and “notes” under Securities Acts (Verstein, 2011). Therefore, if Lending Club fails to shift to securities model, it will face legal issues...