- LendingClub, founded in 2007, is a matchmaker for loans, where consumers and small businesses who need money can access investors who have money to lend.
- In 2016, the company’s chief executive officer stepped down amid internal investigations into altered loans and his own conflicts of interest in potential LendingClub investments.
- Investors stopped buying up the consumer loans, the US Department of Justice announced its own investigation, and the company’s stock price fell.
- Valerie Kay joined LendingClub in 2016 on the investor side of the business. She was tasked with digging the company out of a hole by reestablishing trust with existing investors and bringing in new ones.
- To do this, Kay has launched structured products for larger investors like banks and asset managers — a shift from the company’s initial pure peer-to-peer model. Kay wants to make consumer loans mainstream investment products, like mortgages.
- Kay joined LendingClub after 20 years at Morgan Stanley, where her roles included heading up the asset-backed securities group (which included mortgage-backed securities) during the financial crisis.
- Click here for more BI Prime stories.
In May 2016, LendingClub was in a downward spiral.
The marketplace lending platform — which was a pioneer in connecting consumer borrowers with individual and institutional investors online — was investigating an issue with $22 million of loans that were altered to meet an investor’s requirements.
Its chief executive Renaud Laplanche stepped down after the same investigation revealed that he failed to disclose a conflict of interest in a potential LendingClub investment.
In one month, its stock price tumbled, investors like asset managers and pension funds halted loan purchases, and the Department of Justice announced an investigation. LendingClub, which just went public in 2014, had to dig itself out of a hole.
Following the departure of its CEO, LendingClub made changes across its top ranks. Then-president & chief operating officer, Scott Sanborn, took over as CEO. Tom Casey came in as the new chief financial officer, leaving the same position at medical device company Acelity, and Patrick Dunne joined as the chief capital officer (CCO) after a 25 year run at BlackRock.
For full-year 2016, LendingClub reported that a net loss that widened to $146 million, compared to a net loss of $5 million in 2015. When it reported its most recent quarterly earnings in early November, the company said it hopes to return to profitability (on an adjusted basis, at least) for the second half of this year, and called out two-year-old “structured programs” as helping it stem losses.
And behind those structured programs is Valerie Kay, who joined LendingClub in August 2016 as head of its institutional investor group, where she was tasked with re-establishing investor confidence and bringing big players like hedge funds and banks into the marketplace.
Kay came from 20 years at Morgan Stanley, and among other roles, she headed up the group that structured mortgage-backed securities and other products as the financial crisis hit. At LendingClub, she’s been focused recently on packaging consumer loans into products that institutional investors may find more palatable than the pure peer-to-peer model.
“I like turn-arounds,” Kay told Business Insider.
Kay is currently the chief capital officer of LendingClub, where she is responsible for the investor side of the marketplace.
The broader marketplace-lending industry suffered an existential crisis in 2016 as the institutions providing capital largely stepped away, and moving past that has been challenging. Prosper, a pioneer of the peer-to-peer lending industry, has been exploring a sale, Business Insider has reported.
LendingClub, founded in 2007, is an industry leader in alternative consumer lending. It’s a matchmaker for loans, where consumers and small businesses who need money can access investors who have money to lend.
Investors range from other consumers to large institutions, all looking for exposure to the consumer credit market. LendingClub charges borrowers loan origination fees and investors service fees. It got its start as a direct peer-to-peer (P2P) lending platform, where investors cherry-pick specific loans.
“I was fascinated that they were able to do that when I got there,” Kay said. “It was almost like organized chaos.”
But with the direct P2P model, it can be hard to match investor demand with borrower supply, she said. Larger investors like asset managers and insurance companies want to make sure they are picking the right loans for their risk appetites.
“In order to get big asset managers and big banks involved in our product, we have to make sure that they feel like they’re not getting adversely selected, that they’re buying a representative sample of LendingClub loans,” she said.
Kay has been developing new products at LendingClub to attract larger investors, and leaning heavily on securitization — the process of pooling assets to create a product, and selling pieces of that product to investors.
These securitized products provide investors with exposure to the underlying assets without requiring them to pick and choose a portfolio of individual loans.
Since Kay joined, LendingClub now offers two ways to invest. Its “Select” platforms stay true to LendingClub’s roots of direct peer-to-peer lending. The “Scale” program, where investors can buy representative samples of a LendingClub pool of loans, is the company’s largest growth area.
As part of the “Scale” program, LendingClub launched asset-backed securities (ABS) and equity certificates called Consumer Loan Underlying Bond (CLUB) Certificates. The “Scale” program is only available to institutional investors.
“It’s an easy entry-point for large, well-diversified global asset managers to come and participate at LendingClub,” Kay said. “Doing this has allowed us to scale to a point where we’re able to fund $1 billion a month.”
Taking a leap
In 2014, before she joined LendingClub, Kay took on a senior relationship management role at Morgan Stanley. After leading the structured asset finance group, which included mortgage-backed securities, through the financial crisis, Kay said she felt her learning curve start to flatten.
“You always have peaks and valleys in your professional life. I was kind of hitting a valley,” said Kay. “I just felt like I wasn’t learning as much and I wasn’t contributing as much as I could to the firm. I felt that perhaps I needed to take a risk and do something different.”
Kay was one of seven relationship managers that covered the bank’s 75 top clients. Kay’s job was to build ties with Morgan Stanley’s top clients, and drum up interest not just in asset-backed securities, but in all of the firm’s businesses.
“It was great for me in terms of learning how to act more presidential. I had to elevate my game and have more presence,” Kay said about her role as a relationship manager. Still, she wanted a more direct tie to the underlying business.
“What I also learned is that I like running businesses and I’m great at building relationships, but sales is just not for me. I missed running the business. I missed being accountable to revenue,” said Kay.
By May 2016, Kay had already been in touch with LendingClub through former coworkers and others she knew at the company.
“They wanted me to get involved somehow,” Kay said, but nothing materialized.
Eventually, a date was set for Kay to fly out to San Francisco to meet with LendingClub’s senior leaders. That happened to be a week after Laplanche, LendingClub’s former CEO, stepped down.
“Most of the people I was talking to were no longer there,” said Kay. LendingClub called and asked if Kay would like to come out at a later date.
“I was like, “why don’t we talk in a month or so? Why don’t you get your stuff together, and then we can talk,'” said Kay.
Kay was intrigued by the opportunity, but uncertain if LendingClub was the right move, she said. She wondered if it would be a big enough job to leave Morgan Stanley after two decades.
Kay met with LendingClub’s new CEO. She also met with Hans Morris, the newly-appointed chairman of LendingClub’s board of directors and a 27-year Citigroup alum.
“I really identified with both of them. I was excited. They were organized. They knew what they needed to do. They were on top of things,” said Kay.
Weathering the financial crisis storm
Kay was no stranger to rebuilding strained investor relationships. During the financial crisis in 2008, the US mortgage market imploded. A housing bubble burst, mortgage delinquencies rose, and the value of mortgage-backed securities plummeted.
At the time, Kay was running the structured asset finance group at Morgan Stanley.
“We were right in the eye of the storm,” said Kay.
Kay said the financial crisis was one of the most challenging times in her career, especially because of her role leading the securitization group.
“I had to dig deep as a leader because it was impacting my team exponentially relative to everyone else.”
“Some people would just try to run and hide,” Kay said. “I think one of the key things when that happens is this awareness of what’s happening, and then communicating and not just your team, but more broadly.”
As the crisis waned and a recession set in, the culture of Wall Street changed, Kay said.
“We had to re-establish and regain trust not just with our clients, but also just at large, and really focus on executing, and rebranding our business,” said Kay.
When Kay joined LendingClub, she would be tasked with the same thing.
Bringing consumer loans mainstream
LendingClub’s institutional investors paused investing following the 2016 investigation into the altered loans that were sold — and ultimately repurchased — by LendingClub to investment bank Jefferies.
“It was humbled,” Kay said. “Particularly on the investor side.”
When there wasn’t enough investor demand to meet borrower supply, LendingClub started buying loans with its own money.
“We had lots of management change, a lot of negative press. There was a sense of humility, and wanting to make this better,” said Kay.
In addition to the new securitized product launches, Kay launched LendingClub’s own transaction platform called LCX in October. The platform provides same-day settlement of LendingClub’s loans, which allows investors to find loans faster.
The LCX platform lays the groundwork for a secondary market of consumer loans.
“The goal is to take the two to three weeks settlement period and bring it down to one day, and create a secondary market that’s much more efficient,” said Kay.
“I never thought three years ago that I’d be in a position where I would be trying to create a new trading market for a consumer launch,” she said.
Kay wants to make consumer loans mainstream investment products, similar to mortgages.
Fannie Mae and Freddie Mac, which were created by Congress, buy mortgages from lenders. Mortgage money remains in stable supply in the US because lenders can sell the mortgages to Fannie and Freddie—who in turn, securitize the mortgages and sell them on the secondary market.
“Just like what Fannie and Freddie have done for mortgages,” Kay said. “That’s aspirational, but why not?”