Gaby Lapera: Besides the economics and regulatory
issues that these people potentially face, the other thing is a lot of these companies
started in 2007, 2008, and they’re very, very small and their growth has been huge since
then. You wouldn’t expect them to grow a lot during the middle of the financial crisis.
Jay Jenkins: Their timing was perfect. It really was.
Lapera: It was. Because there’s a lot of people looking for loans with easy money. […] A
lot of banks, they have ridden out multiple credit cycles. We have no idea what’s going
to happen to these online lenders. Jenkins: That’s right. To me that’s the biggest
question mark. That’s the elephant in the room. It’s a true unknown and it’s extremely
dangerous. The credit cycle is a fact of life. Credit expands. Money is easy. Economy hits
a bump, maybe recession. Maybe even just like deceleration of growth. The credit cycle will
contract. Defaults go up. Loan losses mount. You mentioned Dodd-Frank. Nowadays, especially,
banks have so much capital, so much liquidity, more than likely they’re going to be okay
to ride out those losses while the credit cycle does its thing before it turns back
to a positive growth cycle. These online lenders have never dealt with that. There’s a couple
of different scenarios that I think could cause serious problems.
On the peer-to-peer side, where do those investors and those loans go after they take some pretty
big losses? If you are used to a savings account or a CD where your money’s there, backed by
the FDIC, you put it into this loan with a 10% interest rate, and then suddenly that
loan loses 50% of its principal balance, because the person just stops paying. Do you ever
come back? Does the market for investors just disappear overnight? It could. It might not.
We don’t know, and that’s the big point here, is we don’t know. Will some of these big mega
banks be willing to continue funding online lenders if default rates triple or quadruple
from what they were projected to be? We don’t know. Could those lines of credit dry up,
and if they do, what does On Deck do, what does Lending Club do? How do they fund their
loans at that point? Lapera: Right. Part of this is that the people
that thank you are giving loans out to, Lending Club and On Deck potentially, these people
tend to be higher credit risks. These are already the people who maybe they’re choosing
to go online because the traditional bank wouldn’t work with them. Potentially. I’m
sure there’s plenty of other people on the platform who are good credit risks. I think
you said your girlfriend was using Lending Club to pay off her student loans, right?
Jenkins: Yeah, to great effect. Saved a bunch of money on interest. Knocked it right on
out. For her it was a great match. Lapera: I’m sure there’s plenty of people
like that on the platforms, but I think proportionately you’re going to have a lot more people who
are higher credit risks than you would with banks.
Jenkins: Absolutely. I doubt very seriously there’s many high net worth customers coming
to Lending Club for a personal loan. Lapera: Yeah. Overall, it’s a very, very complicated
environment and there’s a lot of questions right now about the feasibility of the model,
what’s going to happen with regulation. I would personally have a really, really hard
time investing in these stocks. Jenkins: I’m right there with you. To me,
the risk is just far too great at this point, and these companies have kind of shown us
they’re not equipped, today, to manage the risk of what they’re doing. That’s a shame,
too, because like I said, the market is huge, and when someone figures this out, it’s going
to be a game changer, I think. That’s day’s just not today.
Lapera: Yeah. Who knows, maybe traditional banks will figure it out. That could totally
be coming down the pipeline. Jenkins: Absolutely. In my view, that’s probably
the odds on favor to what happened. Wells Fargo’s already doing it pretty effectively.
It’s already been on the credit card market. You can apply online seamlessly for years
now. Quicken Loans has their new Rocket Mortgage product which they’re marketing like crazy,
where you apply online. You go through the process really quick, really easy. That’s
the next generation of lending. Lapera: I got my credit limit increased the
other day. I went on the Bank of America website, and a button had appeared saying “would
you like to raise your credit limit?” and I said sure, I would love to.
Jenkins: Automatic. Lapera: It came through in five minutes that
my limit had been raised by X amount. I don’t think I should say how much on the air, right?
That’s like a please hack me thing. I don’t know. Do you have any closing thoughts that
you’d like to say on this? Jenkins: It’s been an interesting couple of
weeks, and I think it’s only going to get more interesting as we move through the rest
of this year. Lending Club and On Deck, they need to respond, and I’m not sure exactly
what or how they’re going to do it. Can’t wait to find out.
Lapera: Lending Club did fire their CEO, but is that enough? I don’t think so. If you go
online right now and type in “Lending Club class action suit”, they’ve got a ton that
have popped up because of this whole mess. Jenkins: That’s right. It’s probably going
to get uglier before it gets pretty. Lapera: An interesting ride.
Jenkins: That’s right.