10-K 1 d634194d10k.htm FORM 10-K Form 10-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

 

 

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2013

Commission File Number: 000-54752

 

 

LendingClub Corporation

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   51-0605731
(State or other jurisdiction   (I.R.S. Employer
of incorporation or organization)   Identification No.)
71 Stevenson Street, Suite 300  
San Francisco, California   94105
(Address of principal executive offices)   (Zip Code)

(415) 632-5600

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: None

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of February 28, 2014, there were 13,976,419 shares of the registrant’s common stock outstanding.

 

 

 


Table of Contents

LENDINGCLUB CORPORATION AND SUBSIDIARIES

TABLE OF CONTENTS

 

PART I

     4   

Item 1. Business

     4   

Item 1A. Risk Factors

     33   

Item 1B. Unresolved Staff Comments

     47   

Item 2. Properties

     47   

Item 3. Legal Proceedings

     47   

Item 4. Mine Safety Disclosures

     47   

PART II

     48   

Item  5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities

     48   

Item 6. Selected Financial Data

     49   

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     51   

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

     61   

Item 8. Consolidated Financial Statements and Supplementary Data

     61   

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     61   

Item 9A. Controls and Procedures

     61   

Item 9B. Other Information

     61   

PART III

     62   

Item 10. Directors, Executive Officers, and Corporate Governance

     62   

Item 11. Executive Compensation

     68   

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     73   

Item 13. Certain Relationships and Related Transactions, and Director Independence

     76   

PART IV

     79   

Item 14. Exhibit Index

     79   

Reports of Independent Registered Public Accounting Firms

     80   

Consolidated Balance Sheets

     82   

Consolidated Statements of Operations

     83   

Consolidated Statements of Changes in Stockholders’ Equity

     84   

Consolidated Statements of Cash Flows

     85   

Notes to Consolidated Financial Statements

     86   

SIGNATURES

     104   

EXHIBIT INDEX

     105   


Table of Contents

Except as the context requires otherwise, as used herein, “Lending Club,” “LC”, “we,” “us,” and “our,” refer to LendingClub Corporation, LC Advisors, LLC (“LCA”), a wholly owned subsidiary of LendingClub and LC Trust I (“Trust”), an independent Delaware business trust formed in February 2011 to acquire and hold Loans for the sole benefit of certain investors that purchase trust certificates (“Certificates”) issued by the Trust and that are related to the underlying Loan.

Cautionary Note Regarding Forward-Looking Statements

All statements, other than statements of historical facts, included in this Report on Form 10-K (the “Report”) regarding borrowers, credit scoring, Fair Isaac Corporation (“FICO”) or other credit scores, our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans, objectives of management and expected market growth are forward-looking statements. The words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “will,” “would” or similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. These forward-looking statements include, among other things, statements about:

 

    our ability to attract potential borrowers to our marketplace;

 

    the degree to which potential borrowers apply for, are approved for and actually borrow via a loan;

 

    the status of borrowers, the ability of borrowers to repay loans and the plans of borrowers;

 

    interest rates and origination fees on loans;

 

    our ability to service loans and our ability, or the ability of third party collection agents, to pursue collection of delinquent and defaulted loans;

 

    our ability to retain WebBank or another third party banking institution as the issuer of loans facilitated through our platform;

 

    the available functionality of the secondary market trading program;

 

    expected rates of return provided to investors;

 

    our ability to attract additional investors to the platform, to our funds, to separately managed accounts (“SMAs”) or to purchase loans;

 

    our financial condition and performance, including our ability to remain profitable or cash flow positive;

 

    our ability to retain and hire competent employees and appropriately staff our operations;

 

    our ability to prevent security breaks, disruption in service, and comparable events that could compromise the personal and confidential information held in our data systems, reduce the attractiveness of the platform or adversely impact our ability to service the Loans;

 

    our compliance with applicable local, state and federal laws, including the Investment Advisors Act of 1940, the Investment Company Act of 1940 and other laws; and

 

    our compliance with applicable regulations and regulatory developments.

We may not actually achieve the plans, intentions or expectations disclosed in forward-looking statements, and you should not place undue reliance on forward-looking statements. We have included important factors in the cautionary statements included in this Report, particularly in the “Risk Factors” section, that could, among other things, cause actual results or events to differ materially from forward-looking statements contained in this Report. Forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.

You should read this Report carefully and completely and with the understanding that actual future results may be materially different from what we expect. We do not assume any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, other than as required by law.

 

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PART I

Item 1. Business

ABOUT LENDING CLUB

General Corporate Overview

Lending Club is an online marketplace that facilitates loans to consumers and businesses and offers investors an opportunity to fund the loans. Our goal is to transform the banking industry to make it more cost efficient, transparent and consumer friendly. We replace traditional bank operations with an online marketplace that uses technology and a more efficient funding process to lower operational costs and deliver a better experience to both borrowers and investors.

Lending Club is headquartered in San Francisco, California, was incorporated in 2006 and began operations in 2007.

At December 31, 2013, our marketplace had facilitated 240,322 Loans totaling approximately $3.2 billion since our inception.

At December 31, 2013, LC had 426 full-time employees and contractors.

Business and Growth Strategy

Our marketplace connects borrowers and investors and provides a variety of services including screening borrowers for loan eligibility and facilitating payments to investors. Our model has significantly lower operating costs than traditional bank lending and consumer finance institutions because there are no physical branches and related infrastructure, no deposit-taking activities, an automated loan underwriting and servicing process and other technology-enhanced processes. We believe that the interest rates offered to borrowers through our platform are generally better, on average, than the rates those borrowers could pay on outstanding credit card balances or unsecured installment loans from a traditional bank.

We also believe that our marketplace enables investors to earn attractive returns and enjoy a more direct, low cost access to consumer credit as an investment asset class. Investors include both individuals and institutions. We believe that diversity of our investor base allows us to rely on more predictable funding sources with a wide range of investment strategies and risk appetite, which helps us facilitate a wide range of loans.

Our platform offers consumer loans, which are unsecured obligations of individual borrowers that are issued in amounts ranging from $1,000 up to $35,000, depending on the applicable policy, with fixed interest rates, and three-year or five-year original maturities (“Consumer Loans”). Consumer Loans that have a FICO score of at least 660 and meet other strict credit criteria are classified as Public Policy Loans and are issued under WebBank’s Public Credit Policy and can be invested in through member payment dependent notes (“Notes”) pursuant to our shelf registration statement (“Note Shelf”). We and WebBank, a FDIC-insured, state chartered industrial bank organized under the laws of Utah, are also partnering with other sophisticated institutional investors to tailor credit and underwriting specifications to meet specific credit and investment criteria of these investors (“Custom Credit Policy”) that are outside of the Public Credit Policy and therefore are not publicly available (“Custom Policy Loans”). In addition, in March 2014, we launched a pilot program focused on loans to small businesses (“SB Loans”) with loan amounts between $15,000 to $100,000, fixed interest rates and maturities between one and five years. SB Loans and Consumer Loans are referred to as Loans in this Report. Investors can invest through the following products, Notes, Certificates or partnerships interests or buy Loans directly.

Competitive Environment and Market Dynamics

The markets for lending and investing are competitive and rapidly evolving.

For borrowers, we believe the following are the principal competitive factors in the lending market:

 

    Competitive interest rates versus other alternatives;

 

    A fast and convenient process;

 

    Positive customer experience.

For investors, we believe the following are the principal competitive factors:

 

    Attractive risk adjusted returns;

 

    Diversification from other asset classes;

 

    Positive customer experience.

 

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For borrowers, we compete with banking institutions, credit unions, credit card issuers and other consumer finance companies. However, we believe that by leveraging technology to acquire, facilitate and service Loans, we are able to operate at a lower expense structure relative to other competitors, giving us more flexibility to offer competitive rates along with a great borrower experience.

For investors, we compete with other investment vehicles and asset classes such as equities, bonds, and certificates of deposit. We believe that our diverse and customizable investment options and lower expense structure give us the flexibility to offer attractive risk adjusted returns that are uncorrelated with traditional asset classes.

We may also face future competition from new market entrants, which may include large, established companies. These companies may have significantly greater financial, technical, marketing and other resources than we do and may be able to devote greater resources to the development, promotion, sale and support of their lending platforms. We believe, however, that our acquisition channels and underwriting experience, which have been developed over several years, will be difficult to duplicate in the short-run. Investor confidence is earned over time and throughout credit cycles.

Business Overview

Consumer Loans

Consumer Loans are fully amortizing, unsecured obligations of individuals of $1,000 up to $35,000, dependent upon the applicable credit policy, with fixed interest rates, and three-year or five-year original maturities.

All Consumer Loans are funded and issued by WebBank. As part of operating our platform, we verify the identity of borrowers, obtain borrowers’ credit characteristics from consumer reporting agencies such as TransUnion, Experian or Equifax and screen borrowers for eligibility. We service issued Consumer Loans on an ongoing basis.

Our agreement with WebBank enables us to make Consumer Loans available to borrowers on a uniform basis nationwide. We currently do not offer Consumer Loans in Idaho, Iowa, Maine, Nebraska and North Dakota. We pay WebBank a monthly fee based on the amount of Consumer Loans issued by WebBank, subject to a minimum monthly fee.

Public Policy Loans

Borrower applications for Public Policy Loans are posted on our website pursuant to a program agreement with WebBank. We use a proprietary algorithm to assign one of 35 loan grades (A1 to G5), which is used to establish the borrower’s interest rate and origination fee.

Custom Policy Loans

Borrower applications that do not qualify as Public Policy Loans may qualify as a Custom Policy Loan under a Custom Credit Policy that focuses on potentially higher risk borrowers than those under the Public Credit Policy. An alternative proprietary algorithm is used to assign an interest rate and origination fee. Custom Policy Loans are also funded and issued pursuant to our program agreement with WebBank.

Small Business Loans

SB Loans are fully amortizing, unsecured obligations of small businesses in amounts that currently range from $15,000 to $100,000, with fixed interest rates, and maturities ranging from one to five years. We use a small business specific, proprietary algorithm to assign an interest rate and origination fee. While in the pilot phase, SB Loans are being invested in only by institutional investors.

While our agreement with WebBank enables us to make SB Loans available to borrowers on a uniform basis nationwide, we are limiting the availability of SB Loans during its pilot phase. We pay WebBank a monthly fee based on the amount of SB Loans issued by WebBank. We service SB Loans on an ongoing basis.

 

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Investing in Loans

Loans are invested in through three channels – (1) the public offering of Notes pursuant to our Note Shelf, (2) private placements to accredited investors and qualified purchasers of Certificates and limited partnership interests in funds managed by LCA (“Funds”), or (3) Loan sales to unrelated third party institutions, each described below:

 

    Public Offering of Notes Available to Investors: Pursuant to a prospectus, investors have the opportunity to purchase, directly on our website, Notes issued by us, with each Note corresponding to an individual Loan facilitated through our platform. The Notes are unsecured and the payment of principal and interest on the Notes is dependent on the receipt of principal and interest on the related Public Policy Loan.

 

    Private Placements of Certificates and Funds: LC offers private placements of funds to accredited investors and qualified purchasers. To facilitate these private placement offerings, LC established the Trust in February 2011 to acquire and hold Loans for the sole benefit of investors who purchase Certificates in private transactions. Accredited investors and the Funds each purchase a Certificate from the Trust and the Trust uses these proceeds to acquire and hold Loans for the sole benefit of the Certificate holders. Like the Notes, payment of principal and interest on the Certificates are dependent on the receipt of principal and interest on the corresponding Loan. The Certificates can only be settled with cash flows from the underlying Loan and the Certificate holder does not have recourse to the general credit or other assets of the Trust, LC, borrowers or other investors.

 

    Whole Loan Sales to Third Party Institutions: In December 2012, LC began selling Consumer Loans to unrelated third party institutions through our platform. In all these sales transactions, we retained the servicing rights on the Consumer Loans sold.

Sources of Revenues

We have three primary sources of revenues. We earn origination fees charged to borrowers for facilitating the funding of Loans by WebBank. We earn servicing fees from investors for processing principal and interest payments and passing such payments on to investors. Additionally, LCA earns management fees as the general partner for the Funds and SMAs. We expect that the volume of Loans facilitated through our platform will continue to increase, and that we will generate increased revenue from these sources.

Interest income on the Loans and the associated interest expense on related Notes and Certificates are reported on our Statement of Operations on a gross basis. Virtually all of the interest income is earned by and passed through to investors and Certificate holders resulting in no material net effect on our earnings.

Sales and Marketing

Our sales and marketing efforts are designed to build awareness of Lending Club as a brand and company as a responsible alternative to credit cards and other higher interest credit options for consumers and small businesses. We define marketing as owning the total customer experience. We use a diverse array of marketing channels to distribute our message and are constantly improving and optimizing our experience both on- and offline to deliver efficiency and a high level of customer satisfaction.

Origination and Servicing

We have developed proprietary technology that is efficient and highly scalable. Our platform enables us to take in a variety of data sources in a highly automated way and to decision Loans efficiently. Our models use the information we take in to dynamically condition Loans for underwriting treatment and pass them through to underwriters in real time for action. Our platform incorporates a variety of models that determine approvals, pricing and verification procedures.

Technology and Engineering

Our customer acquisition process, registration, underwriting, servicing and payment systems are highly automated and we use internally developed software. We have developed our own cash management software to process electronic cash movements, record book entries and calculate cash balances in our borrower and investors’ funding accounts. For the most part, we require the use of Automated Clearing House (ACH) payments as the preferred means to disburse Loan proceeds, receive payments on outstanding Loans, receive funds from investors and disburse payments to investors. We have no physical branches for Loan application or payment-taking activities.

Our system hardware for the platform is co-located in a data center hosting facility in Las Vegas, Nevada. We also maintain a “near” real time disaster recovery data center co-located in a hosting facility in Northern California. We own all of the hardware deployed in support of our platform and we continuously monitor the performance and availability of our platform.

 

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Key aspects of our technology include:

 

    Scalability: We strive to establish a scalable infrastructure that utilizes standard techniques such as virtualization, load-balancing and high-availability platforms. Our application and database tiers are designed to be scaled horizontally by adding servers as needed.

 

    Data Integrity and Security: We are making every effort to ensure that all data received from end users or from our business counterparties are transported in a secure manner. We have received a secure socket layer (“SSL”) certification from VeriSign and we require a dedicated, fully authenticated connection, in addition to the SSL encryption of the data. Our most sensitive information is stored using one-way encryption, which makes it impossible to read in the clear, and for other data, a set of access control rules have been created to limit the visibility of the data and to protect the privacy of each user. We utilize network firewall technology for perimeter level threat protection.

 

    Fraud Detection: We employ a combination of proprietary technologies and commercially available licensed technologies and solutions to prevent and detect fraud. We employ techniques such as knowledge based authentication, out-of-band authentication and notification, behavioral analytics and digital fingerprinting to prevent identity fraud. We use services from third-party vendors for user identification, credit checks and OFAC compliance. In addition, we use specialized third-party software to augment our fraud detection systems. In addition to our identity fraud detection system, we also have a dedicated team that conducts additional investigations of cases flagged for high fraud risk by verifying the income and employment data reported by borrowers. See “Item 1. Business—About the Platform—How the LC Platform Operates—Verification of Borrower Information.”

 

    Back up Servicing Arrangement: We have a backup and successor servicing agreement with Portfolio Financial Servicing Company (“PFSC”). Pursuant to this agreement, PFSC will prepare and then stand ready to service Loans. Upon PFSC becoming the servicer of the Loan, we will pay PFSC a one-time declaration fee and PFSC will be entitled to retain a servicing fee on the amounts it collects as servicer. Our agreement with PFSC was renewed as of September 2011 for a three year term with automatic annual renewals thereafter unless advance notice of non-renewal is provided by either party. If our agreement with PFSC were to be terminated, we would seek to replace PFSC with another backup servicer.

Intellectual Property

We rely on a combination of copyright, trade secret, trademark, and other rights, as well as confidentiality procedures and contractual provisions to protect our proprietary technology, processes and other intellectual property. Although the protection afforded by copyright, trade secret, trademark and patent law, written agreements and common law may provide some advantages, we believe that the following factors help us to maintain a competitive advantage:

 

    technological skills of our software and website development personnel;

 

    frequent enhancements to our platform; and

 

    high levels of borrower and investor satisfaction.

Our competitors may develop products that are similar to our technology. We enter into agreements with our employees, consultants and partners and through these agreements; we attempt to control access to and distribution of our software, documentation and other proprietary technology and information. Despite our efforts to protect our proprietary rights, third parties may, in an authorized or unauthorized manner, attempt to use, copy or otherwise obtain and market or distribute our intellectual property rights or technology or otherwise develop a product with the same functionality as our solution. Policing all unauthorized use of our intellectual property rights is nearly impossible. Therefore, we cannot be certain that the steps we have taken or will take in the future will prevent misappropriations of our technology or intellectual property rights.

“LendingClub” is a registered trademark in the United States.

Employees and Contractors

As of December 31, 2013, we had 380 employees and 46 contractors. The following table shows a breakdown by functions:

 

     Employees      Contractors      Total  

Sales and Marketing

     44         —           44   

Origination and Servicing

     191         1         192   

General and Administrative: Technology

     73         39         112   

General and Administrative: Other

     72         6         78   
  

 

 

    

 

 

    

 

 

 

Total

     380         46         426   
  

 

 

    

 

 

    

 

 

 

 

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None of our employees are represented by labor unions. We have not experienced any work stoppages and believe that our relations with our employees are good.

Regulation

The lending and securities industries are highly regulated. We, and the Loans made through our platform, are subject to extensive and complex rules and regulations, licensing and examination by various federal, state and local government authorities. These authorities impose obligations and restrictions on our activities and the Loans made through our platform. In particular, these rules limit the fees that may be assessed on the Loans, require extensive disclosure to, and consents from, our participants, prohibit discrimination and may impose multiple qualification and licensing obligations on platform activities. Failure to comply with any of these requirements may result in, among other things, revocation of required licenses or registration, loss of approved status, voiding of the Loan contracts, class action lawsuits, administrative enforcement actions and civil and criminal liability. While compliance with such requirements is at times complicated by our novel business model, we believe we are in substantial compliance with these rules and regulations. These rules and regulations are subject to continuous change, however, and a material change could have an adverse effect on our compliance efforts and ability to operate.

Licensing

State Licensing Requirements

We hold licenses in a number of states and are otherwise authorized to conduct activities on a uniform basis in all other states and the District of Columbia, with the exceptions of Idaho, Iowa, Maine, Nebraska and North Dakota. State licensing statutes impose a variety of requirements and restrictions, including:

 

    recordkeeping requirements;

 

    restrictions on loan origination and servicing practices, including limits on finance charges and fees;

 

    disclosure requirements;

 

    examination requirements;

 

    surety bond and minimum net worth requirements;

 

    financial reporting requirements;

 

    notification requirements for changes in principal officers, stock ownership or corporate control;

 

    restrictions on advertising; and

 

    review requirements for loan forms.

The statutes also subject us to the supervisory and examination authority of state regulators in certain cases.

Consumer Protection Laws

State Usury Limitations

Section 521 of the Depository Institution Deregulation and Monetary Control Act of 1980 (12 U.S.C. § 1831d) and Section 85 of the National Bank Act (NBA) (12 U.S.C. § 85), federal case law interpreting the NBA such as Tiffany v. National Bank of Missouri and Marquette National Bank of Minneapolis v. First Omaha Service Corporation and FDIC advisory opinion 92-47 permit FDIC-insured depository institutions, such as WebBank, to “export” the interest rate permitted under the laws of the state where the bank is located, regardless of the usury limitations imposed by the state law of the borrower’s residence unless the state has chosen to opt out of the exportation regime. WebBank is located in Utah, and Title 70C of the Utah Code does not limit the amount of fees or interest that may be charged by WebBank on loans of the type offered through our platform. Only Iowa and Puerto Rico have opted out of the exportation regime under Section 525 of DIDA and we do not operate in either jurisdiction. However, we believe that if a state in which we did operate opted out of rate exportation that judicial interpretations support the view that such opt outs only apply to loans “made” in those states. As the loan document states that “…the [Promissory] Note will be entered into in the state of Utah,” we believe that the “opt-out” of any state would not affect the ability of our platform to benefit from the exportation of rates. If a Loan made through our platform was deemed to be subject to the usury laws of a state that has opted-out of the exportation regime, we could become subject to fines, penalties, possible forfeiture of amounts charged to borrowers and we may decide not to originate Loans in that applicable jurisdiction, which may adversely impact our growth.

 

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State Disclosure Requirements and Other Substantive Lending Regulations

We are subject to state laws and regulations that impose requirements related to loan disclosures and terms, credit discrimination, credit reporting, debt collection and unfair or deceptive business practices. Our ongoing compliance program seeks to comply with these requirements.

Truth in Lending Act

The Truth in Lending Act (“TILA”), and Regulation Z, which implements it, require lenders to provide consumers with uniform, understandable information concerning certain terms and conditions of their loan and credit transactions. These rules apply to WebBank as the creditor for Loans facilitated through our platform, but because the transactions are carried out on our hosted website, we facilitate compliance. For closed-end credit transactions of the type provided through our platform, these disclosures include providing the annual percentage rate, the finance charge, the amount financed, the number of payments and the amount of the monthly payment. The creditor must provide the disclosures before the Loan is closed. TILA also regulates the advertising of credit and gives borrowers, among other things, certain rights regarding updated disclosures and the treatment of credit balances. Our platform provides borrowers with a TILA disclosure at the time a borrower posts a loan request on the platform. If the borrower’s request is not fully funded and the borrower chooses to accept a lesser amount offered, we provide an updated TILA disclosure. We also seek to comply with TILA’s disclosure requirements related to credit advertising.

Equal Credit Opportunity Act

The federal Equal Credit Opportunity Act (“ECOA”) prohibits creditors from discriminating against credit applicants on the basis of race, color, sex, age, religion, national origin, marital status, or the fact that all or part of the applicant’s income derives from any public assistance program or the fact that the applicant has in good faith exercised any right under the federal Consumer Credit Protection Act or any applicable state law. Regulation B, which implements ECOA, restricts creditors from requesting certain types of information from loan applicants and from making statements that would discourage on a prohibited basis a reasonable person from making or pursuing an application. These requirements apply both to a lender such as WebBank as well as to a party such as ourselves that regularly participates in a credit decision. Investors may also be subject to the ECOA in their capacity as purchasers of Notes, if they are deemed to regularly participate in credit decisions. In the underwriting of Loans on the platform, both WebBank and us seek to comply with ECOA’s provisions prohibiting discouragement and discrimination. ECOA also requires creditors to provide consumers with timely notices of adverse action taken on credit applications. WebBank and us provide prospective borrowers who apply for a Loan through the platform but are denied credit with an adverse action notice in compliance with applicable requirements (see also below regarding “Fair Credit Reporting Act”).

Fair Credit Reporting Act

The Federal Fair Credit Reporting Act (“FCRA”), administered by the Federal Trade Commission, promotes the accuracy, fairness and privacy of information in the files of consumer reporting agencies. FCRA requires a permissible purpose to obtain a consumer credit report, and requires persons to report loan payment information to credit bureaus accurately. FCRA also imposes disclosure requirements on creditors who take adverse action on credit applications based on information contained in a credit report. WebBank and ourselves have a permissible purpose for obtaining credit reports on potential borrowers and also obtain explicit consent from borrowers to obtain such reports. As the servicer for the Loan, we accurately report Loan payment and delinquency information to appropriate reporting agencies. We provide an adverse action notice to a rejected borrower on WebBank’s behalf at the time the borrower is rejected that includes all the required disclosures. We have implemented an identity theft prevention program.

Fair Debt Collection Practices Act

The Federal Fair Debt Collection Practices Act (“FDCPA”) provides guidelines and limitations on the conduct of third-party debt collectors in connection with the collection of consumer debts. The FDCPA limits certain communications with third parties, imposes notice and debt validation requirements, and prohibits threatening, harassing or abusive conduct in the course of debt collection. While the FDCPA applies to third-party debt collectors, debt collection laws of certain states impose similar requirements on creditors who collect their own debts. Our agreement with its investors prohibits investors from attempting to directly collect on the Loan. Actual collection efforts in violation of this agreement are unlikely given that investors do not learn the identity of borrowers. We use our internal collection team and a professional third-party debt collection agent to collect delinquent accounts. They are required to comply with the FDCPA and all other applicable laws in collecting delinquent accounts of our borrowers.

Privacy and Data Security Laws

The federal Gramm-Leach-Bliley Act (“GLBA”) limits the disclosure of nonpublic personal information about a consumer to nonaffiliated third parties and requires financial institutions to disclose certain privacy policies and practices with respect to information sharing with affiliated and nonaffiliated entities as well as to safeguard personal customer information. A number of states have similarly enacted privacy and data security laws requiring safeguards to protect the privacy and security of consumers’

 

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personally identifiable information and to require notification to affected customers in the event of a breach. We have a detailed privacy policy, which complies with GLBA and is accessible from every page of our website. We maintain participants’ personal information securely, and we do not sell, rent or share such information with third parties for marketing purposes unless previously agreed to by the participant. In addition, we take a number of measures to safeguard the personal information of our borrowers and investors and protect against unauthorized access.

Servicemembers Civil Relief Act

The federal Servicemembers Civil Relief Act (“SCRA”) allows military members to suspend or postpone certain civil obligations so that the military member can devote his or her full attention to military duties. The SCRA requires we adjust the interest rate of borrowers who qualify for and request relief. If a borrower with an outstanding Loan qualifies for SCRA protection, we will reduce the interest rate on the Loan to 6% for the duration of the borrower’s active duty. During this period, the investors who have invested in such Loan will not receive the difference between 6% and the Loan’s original interest rate. For a borrower to obtain an interest rate reduction on a Loan due to military service, we require the borrower to send us a written request and a copy of the borrower’s mobilization orders. We do not take military service into account in assigning Loan grades to borrower loan requests and we do not disclose the military status of borrowers to investors.

The Dodd-Frank Wall Street Reform and Consumer Protection Act

In July 2010 the Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) was signed into law. The Dodd-Frank Act is extensive and significant legislation that, among other things:

 

    created a liquidation framework under which the Federal Deposit Insurance Corporation (“FDIC”) may be appointed as receiver following a “systemic risk determination” by the Secretary of Treasury (in consultation with the President) for the resolution of certain nonbank financial companies and other entities, defined as “covered financial companies,” and commonly referred to as “systemically important entities,” in the event such a company is in default or in danger of default and the resolution of such a company under other applicable law would have serious adverse effects on financial stability in the United States, and also for the resolution of certain of their subsidiaries;

 

    created a new framework for the regulation of over-the-counter derivatives activities;

 

    strengthened the regulatory oversight of securities and capital markets activities by the SEC;

 

    created the Consumer Financial Protection Bureau (“CFPB”), a new agency responsible for administering and enforcing the laws and regulations for consumer financial products and services; and

 

    increased regulation of the securitization markets through, among other things, a mandated risk retention requirement for securitizers and a direction to the SEC to regulate credit rating agencies and adopt regulations governing these organizations and their activities.

With respect to the new liquidation framework for systemically important entities, no assurances can be given that such framework would not apply to us. Guidance from the FDIC indicates that such new framework will largely be exercised in a manner consistent with the existing bankruptcy laws, which is the insolvency regime which would otherwise apply to us. The SEC has proposed significant changes to the rules applicable to issuers and sponsors of asset-backed securities under the Securities Act and the Securities Exchange Act of 1934, as amended, or the Exchange Act. With the proposed changes we could potentially see an adverse impact in our access to the asset-backed securities capital markets and lessened effectiveness of our financing programs. We believe we will at some point become subject to the oversight of the CFPB in addition to its current authority over various lending regulations, such as Regulation Z, TILA and Regulation B.

Other Regulations

Electronic Fund Transfer Act and NACHA Rules

The federal Electronic Fund Transfer Act (“EFTA”), and Regulation E, which implements it, provides guidelines and restrictions on the electronic transfer of funds from consumers’ bank accounts. In addition transfers performed by ACH electronic transfers are subject to detailed timing and notification rules and guidelines administered by the National Automated Clearinghouse Association (“NACHA”). Most transfers of funds in connection with the origination and repayment of the Loan are performed by ACH. We obtain necessary electronic authorization from borrowers and investors for such transfers in compliance with such rules. Transfers of funds through the platform are executed by Wells Fargo and conform to the EFTA, its regulations and NACHA guidelines.

 

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Electronic Signatures in Global and National Commerce Act/Uniform Electronic Transactions Act

The federal Electronic Signatures in Global and National Commerce Act (“ESIGN”) and similar state laws, particularly the Uniform Electronic Transactions Act (“UETA”), authorize the creation of legally binding and enforceable agreements utilizing electronic records and signatures. ESIGN and UETA require businesses that want to use electronic records or signatures in consumer transactions to obtain the consumer’s consent to receive information electronically. When a borrower or investor registers on the platform, we obtain his or her consent to transact business electronically and maintain electronic records in compliance with ESIGN and UETA requirements.

Bank Secrecy Act

In cooperation with WebBank, we have implemented various anti-money laundering policy and procedures to comply with applicable federal law. With respect to new borrowers, we apply the customer identification and verification program rules and screen names against the list of Specially Designated Nationals maintained by the U.S. Department of the Treasury Office of Foreign Asset Control’s (“OFAC”) pursuant to the USA PATRIOT Act amendments to the Bank Secrecy Act (“BSA”) and its implementing regulation.

New Laws and Regulations

From time to time, various types of federal and state legislation are proposed and new regulations are introduced that could result in additional regulation of, and restrictions on, the business of consumer lending. We cannot predict whether any such legislation or regulations will be adopted or how this would affect our business or our important relationships with third parties. In addition, the interpretation of existing legislation may change or may prove different than anticipated when applied to our novel business model. Compliance with such requirements could involve additional costs, which could have a material adverse effect on our business. As a consequence of the extensive regulation of commercial lending in the United States, our business is particularly susceptible to being affected by federal and state legislation and regulations that may increase the cost of doing business.

In addition, see “Risk Factors — Financial regulatory reform could result in restrictions, oversight and costs that have an adverse effect on our business” regarding the risks of government financial regulatory reform plans.

Foreign Laws and Regulations

We do not permit non-U.S. based individuals to register as borrowers on the platform and the lending platform does not operate outside the United States. It is, therefore, not subject to foreign laws or regulations for borrowers.

 

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ABOUT THE PLATFORM

How Our Platform Operates

Borrower and Investor Registration

New borrowers and investors must agree to the terms and conditions of our website, including agreeing to conduct transactions and receive disclosures and other communications electronically. We verify the identity of all members by comparing supplied names, social security numbers, addresses and telephone numbers against the names, social security numbers, addresses and telephone numbers in the records of a consumer reporting agency, as well as other databases.

Borrowers on the platform:

 

    must be U.S. citizens, permanent residents or be in the United States on valid long term visas;

 

    must be at least 18 years old;

 

    must have valid email accounts;

 

    must meet the requirements of either the Public Credit Policy or a Custom Credit Policy;

 

    must have U.S. social security numbers; and

 

    must have an account at a U.S. financial institution with a routing transit number.

WebBank serves as the true creditor for all Loans facilitated through our platform. Borrowers enter into a credit profile authorization and a loan agreement with WebBank. The borrower also grants us a limited power of attorney to complete on the borrower’s behalf, a promissory note in the amount and on the terms made to the borrower by WebBank. These agreements set forth the terms and conditions of the Loan and allow a borrower to withdraw a loan request at any time before the Loan is funded. In the credit profile authorization, the borrower authorizes us and WebBank to obtain and use a consumer report on the borrower. The loan agreement addresses the application process and the role of investors’ commitments to invest in the underlying borrower Loan. For applicants whose credit has been pre-screened, full loan funding is guaranteed. If a Loan is extended to the borrower, the borrower agrees to be bound by the terms of a promissory note, the form of which is attached as an exhibit to the loan agreement. The borrower authorizes LC to debit the borrower’s designated account by ACH transfer for each Loan payment due under the promissory note, although a borrower can pay by check if he or she chooses. The loan agreement also describes the parties’ rights in regard to arbitration. The borrower agrees that WebBank may assign its right, title and interest in the loan agreement and the borrower’s promissory notes to others, including LC, without notice, and that LC may do the same without notice.

During investor registration, potential Note investors have their identity verified and agree to a tax withholding statement and bank account verification. Additionally, potential investors must enter into an investor and other agreements with us, which will govern all purchases of Notes the investor makes. Investors must be residents of certain states and meet minimum financial suitability requirements. The investor agreement and additional information about eligible states of residency and financial suitability requirements are available on our website (www.lendingclub.com).

Consumer Loan Requests

Borrowers submit loan requests online through our website. Loan requests must be between $1,000 and $35,000. Each loan request is an application made to WebBank. WebBank lends to qualified borrowers and allows our platform to be available to borrowers on a uniform basis throughout the United States, excluding those states in which we have no agreements to conduct business (Idaho, Iowa, Maine, Nebraska and North Dakota). We allow borrowers to have up to two Consumer Loans or three Loans outstanding at any one time, if the borrower continues to meet the applicable credit criterias. In addition, to apply for a second Consumer Loan, the borrower must have already made consecutive, timely payments for a specified period. Borrowers are limited to two concurrent Consumer Loans with a maximum combined initial loan amount of $50,000.

Borrowers supply a variety of unverified information that is included in the borrower loan listings on our website and in the posting reports and sales reports we file with the SEC for Public Policy Loans. Requested information also includes a borrower’s income or employment, which may be unverified. Procedures are in place to determine if verification is necessary. If we verify the borrower’s income, we will display an icon in the loan listing indicating that we have done so. Investors have no ability to verify borrower information and we do not verify a borrower’s income or employment solely at the request of an investor. See “Item 1. Business – About the Platform – How the LC Platform Operates – Public Policy Loan Postings and Borrower Information Available on our website.”

 

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Public Credit Policy: Credit Criteria and Underwriting

Public Policy Loan grading is determined using an internally developed credit model and proprietary algorithm that was created in conjunction with WebBank, which we refer to as the Public Credit Policy. This algorithm is based primarily upon the historical loan performance of actual prior borrowers that met the requirements of the algorithm, the assumed performance of applicants that would have been approved under the current algorithm but were declined by prior methodologies, and the exclusion of borrowers that were approved under prior methodologies but would have been declined under the new algorithm, in addition to other factors and assumptions. For qualified borrowers, our proprietary algorithm assigns one of 35 loan grades (A1 to G5), which establishes the loan interest rate and origination fee

The Public Credit Policy may not be changed without the consent of WebBank.

Under the current Public Credit Policy, borrower requirements include the following:

 

    minimum FICO score of 660 (as reported by a consumer reporting agency);

 

    debt-to-income ratio (excluding mortgage) below 35%;

 

    acceptable debt-to-income ratio (including mortgage and the requested Public Policy Loan amount); and

 

    credit report (as reported by a consumer reporting agency) reflecting:

 

    at least two revolving accounts currently open;

 

    6 or fewer inquiries (or recently opened accounts) in the last 6 months; and

 

    a minimum credit history of 36 months.

A FICO score is a numeric rating that ranges between 300 and 850 that rates a person’s credit risk based on past credit history and current credit situation. FICO scoring was developed by Fair Isaac Corporation. FICO scores reflect a mathematical formula that is based on information in a consumer’s credit report, compared to information on other consumers. Consumers with higher scores typically represent a lower risk of defaulting on their loans. There are three different FICO scores, each with a separate name, which correspond to each of the three main U.S. consumer reporting agencies. Equifax uses the “BEACON score”; Experian uses the “Experian/Fair Isaac Risk Model”; and TransUnion uses the “EMPIRICA score.” The score from each consumer reporting agency considers only the credit data available to that agency. Fair Isaac Corporation develops all three FICO scores and makes the scores as consistent as possible across the three consumer reporting agencies. Nevertheless, the three agencies sometimes have different information about a particular borrower, and that means the three FICO scores for that borrower will vary by agency. We obtain consumer credit information from several consumer reporting agencies.

The FICO scoring model takes into account only five categories of data: historical timeliness of bill payments; total outstanding debt and the total amount of credit the consumer has available; length of credit history; mix of credit; and new credit applications within the last year. Information such as: age; race; sex; job or length of employment; income; whether the consumer has been turned down for credit or information not contained in the consumer’s credit report are not taken into account in calculating a FICO score.

During the loan application process, we also automatically screen borrowers using the OFAC lists, as well as our fraud detection systems. See “Item 1. Business—About LendingClub—Technology and Engineering—Fraud Detection.”

After submission of the application, we inform potential borrowers whether they qualify to list a Public Policy Loan request on our platform.

Verification of Borrower Information

Approximately 79% of the listed applicants during the year ended December 31, 2013 had their employment or income verified. To verify income, we will request documents such as recent paystubs, tax returns or bank statements. To verify employment, we may contact the employer or use other databases.

We may perform income and/or employment verification in situations such as:

 

    if we believe there may be uncertainty about the borrower’s employment or future income;

 

    if we detect conflicting or unusual information in the loan request;

 

    if the loan amount is high;

 

    if the borrower is highly leveraged;

 

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    if we suspect the borrower may have obligations not included in the borrower’s pre-loan or post loan debt level, such as wage garnishment collection accounts; or

 

    if we suspect a fraudulent loan request.

From time to time, we may also randomly select listings to verify information for the purpose of testing our policies and procedures for statistical analysis.

If the borrower fails to provide satisfactory information in response to an income or employment verification inquiry, we will remove the borrower’s loan listing or request additional information from the borrower.

We conduct income or employment verification based on proprietary verification models and our policies and procedures. Investors should not rely on a borrower’s stated employment or income, except when such income has been verified as indicated on the Loan details page, or on our ability to perform income and employment verifications. We cannot assure investors that we will continue performing income or employment verifications. See “Item 1A. Risk Factors – Information supplied by borrowers may be inaccurate or intentionally false.”

Our participation in funding Loans on the platform from time to time has had, and will continue to have, no effect on our income or employment verification process, the selection of loan requests verified or the frequency of income and employment verification.

Loan Interest Rates

Interest rates are set by our Interest Rate Committee (“Committee”), which is comprised of our Chief Executive Officer, Chief Financial Officer, Chief Risk Officer, Chief Operating Officer and General Counsel. The Committee’s objective in setting rates is to offer competitive rates to borrowers relative to other unsecured credit options for the applicable borrower while also providing attractive risk adjusted returns to investors.

The Committee considers the following factors when establishing rates:

 

    general economic environment, taking into account economic slowdowns or expansions;

 

    the balance of funds and demand for credit through our platform, taking into account whether borrowing requests exceed investor commitments or vice versa;

 

    estimated default rates per loan type; and

 

    competitive factors, taking into account the consumer credit rates set by other lending platforms and major financial institutions.

Standard Terms for Loans

Consumer Loans are unsecured obligations of individual borrowers with a fixed interest rate and a maturity of three years or five years. Loans have an amortizing, monthly repayment schedule and may be repaid in whole or in part at any time without prepayment penalty. In the case of a partial prepayment, we reduce the outstanding principal balance and the term of the Loan is effectively reduced as the monthly payment remains unchanged.

SB Loans are unsecured obligations of companies with a fixed interest rate and a maturity between one to five years. Loans have an amortizing, monthly repayment schedule and may be repaid in whole or in part at any time without prepayment penalty. In the case of a partial prepayment, we reduce the outstanding principal balance and the term of the loan is effectively reduced as the monthly payment remains unchanged.

Public Policy Loan Listings and Borrower Information Available on our Website

Once a Public Policy Loan request is complete and we have assigned a loan grade and interest rate to the loan request, the request is listed on our website and becomes available for viewing by investors. Investors are then able to commit to invest in securities that will be dependent for their payments on that loan. Loan requests appear under screen names, not actual borrowers’ names. Investors are able to view:

 

    the loan amount;

 

    loan grade (determined using the process described above) and interest rate;

 

    term (three or five years);

 

    the borrower’s self-reported income and job title and whether that income has been verified by us;

 

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    total amount of funding committed to such loans by investors; and

 

    the borrower’s self-reported intended use of funds.

We do not verify or monitor a borrower’s actual use of funds.

Investors are also able to view the following information provided by borrowers, which we typically do not verify:

 

    home ownership status;

 

    length of employment with current employer; and

 

    debt-to-income (DTI) ratio, as calculated by us based on (i) the total monthly debt payments, excluding mortgage and loan payment, reported by a consumer reporting agency including the pending loan request; and (ii) the income reported by the borrower, which is not verified unless we display an icon in the loan listing indicating otherwise.

We also post the following credit history information from the consumer reporting agency report, and label the information as being provided by a credit bureau:

 

    numerical range within which the borrower’s FICO score falls;

 

    borrower’s earliest credit line;

 

    borrower’s number of open credit lines;

 

    borrower’s total number of credit lines;

 

    borrower’s revolving credit balance;

 

    borrower’s revolving line utilization;

 

    number of credit inquiries received by the consumer reporting agency with regard to the borrower within the last six months;

 

    number of reported delinquencies in the past two years and amount;

 

    months since last derogatory;

 

    public records and months since last public record; and

 

    months since last delinquency.

Loan and borrower information available on our website will be statements made in connection with the purchase and sale of securities, and therefore subject to Rule 10b-5 of the Exchange Act. Loan and borrower information filed in prospectus supplements will be subject to the liability provisions of the Securities Act. In this document, we advise potential investors in the Notes as to the limitations on the reliability of borrower-supplied information. An investor’s recourse in the event this information is false will be extremely limited.

Loan requests remain open for up to 14 days, during which time investment commitments that will be dependent on the Loans may be made by investors. The borrower may request that their loan request be re-listed on our platform for the unfunded amount of the initial application.

Only loans that conform to WebBank’s current Public Credit Policy are shown on our website to Note investors.

Borrowers pay an origination fee to WebBank upon the successful closing of the Loan. As requested by WebBank, we deduct and retain the origination fee from the Loan amount prior to the disbursement of the net amount to the borrower. The Consumer Loan origination fee is determined by the term and credit grade of the Loan and ranges from 1.11% to 5.00% of the original principal amount.

 

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Identity Fraud Reimbursement

We reimburse investors for the unpaid principal balance of a Loan obtained through identity fraud. We generally recognize the occurrence of identity fraud upon receipt of a police report regarding the identity fraud. This reimbursement for identity fraud only provides an assurance that our borrower identity verification is accurate; in no way is it a guarantee of a borrower’s self-reported information (beyond the borrower’s identity) or a borrower’s creditworthiness. We expect the incidence of identity fraud on our platform to be low because of our identity verification process. From the time we began issuing Notes in October 2008 through December 31, 2013, we have reimbursed investors a total of $0.5 million in 51 cases of confirmed identity fraud.

How the Investment Process Works

After a Public Policy Loan request has been listed on our website, investors who have registered with us and who reside in states in which the Notes are available for sale may commit to purchase Notes dependent on the loan requested by the borrower.

Certificate holders can also commit to invest in a Public Policy Loan through the platform. Certificates are sold in private transactions between the Trust and accredited investors or qualified purchasers. The terms of Certificates are substantially identical to those of Notes, except that investors in Certificates may pay an asset-based management fee instead of the cash flow-based servicing fee paid by investors in Notes.

Investors navigate our website as follows. Investors may browse all active loan listings and they may also use search criteria to narrow the list of loan listings they are viewing. The available search criteria include loan grade, borrower credit score range, number of recent delinquencies and Loan funding status, as well as a free-search field. The free-search field returns results based on the word entered as the search. As investors browse the loan listings, they can click on any of the Loans to view additional detail. The Loan detail page includes general information about the borrower and the loan request that is viewable by non-members, and more detail (including credit data) viewable only by signed-in investors. Once signed-in, investors may select any of the displayed loan listings and add them to their “order,” which is akin to a shopping basket. Investors may add as many loans as they want to their order, provided that the aggregate amount of their order does not exceed the funds available. Once an investor has finished building an order, the investor may click the “check out” button, review the “order” one more time and then click the confirmation button to commit funds to the order. Funds committed represent commitments to purchase Notes or invest through a Certificate that are dependent on the selected loan for payment. From that point on, the funds committed by the investor are no longer available for use by the investor and may no longer be withdrawn or committed to other loans (unless and until loans included in the order are not issued, in which case the corresponding funds become available to the investor again).

A single borrower’s loan request can be funded by many different investors in various amounts that are in $25 increments.

Portfolio Tool and PRIME

In making investment commitments, investors may use our “Portfolio Tool,” a search tool that creates a listing of available loans that meet all of the investment criteria selected by the investor. Investors may adjust the search or its output without committing to invest.

The Portfolio Tool is provided for informational purposes only and should not be considered as investment criteria regarding an investor’s particular investment situation. Lists may be modified or rejected in whole or in part. Investors should always review the list created and modify it to suit their particular needs and risk profile.

PRIME is a service for accounts with at least $5,000 that automatically matches the investor investment criteria with available inventory. Investors are able to update their investment criteria and are able to turn on and off this service at any time. There is no fee for using PRIME. Standard servicing, asset under management and / or collection fees still apply.

Loan Funding and Treatment of Investor Cash Balances

Investors’ funds, other than those held by investors in Certificates purchased through the Funds or through SMAs, are held in a bank account maintained by us at Wells Fargo Bank. This account is a pooled non-interest bearing demand deposit account, titled in our name as trustee for investors, and is known as the “in trust for” (“ITF”) Account.

Individual investors have no direct relationship with Wells Fargo via the ITF Account; LC initiates cash transfers into and out of the ITF Account in its role as account trustee. In addition to outlining the rights of investors, the trust agreement provides that we disclaim any economic interest in the assets in the ITF Account and also provides that each investor disclaims any right, title or interest in the assets of any other investor in the ITF Account.

 

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Under the ITF Account, we maintain sub-accounts for each of the investors on our platform to track and report funds committed by investors to purchase Notes or loans, as well as payments received from borrowers that are paid on the related Note or loan. These record-keeping sub-accounts are purely administrative and reflect balances and transactions concerning the funds in the ITF Account.

The ITF account is FDIC-insured on a “pass through” basis to the individual investors, subject to applicable limits. This means that each individual investor’s balance is protected by FDIC insurance, up to the limits established by the FDIC. Other funds that a specific investor has on deposit with Wells Fargo, may count against any applicable FDIC insurance limits for that investor.

Funds from investors in Certificates are held in custodial accounts titled in the name of an independent custodian. These funds may only be invested or reinvested in Certificates issued by the Trust, temporarily invested to avoid idle cash, or may be returned to investors via scheduled distributions or requested withdrawals. Each custodial account balance is protected by FDIC insurance up to the limits established by the FDIC for such custodial (non-trust) accounts. We believe that the custodial bank accounts are not FDIC-insured on a “pass through” basis to the individual investors pursuant to FDIC deposit insurance provisions and requirements.

LC monies are not commingled with the assets of investors held in the ITF or custodial accounts.

Loan Closings and Purchases of Notes or Certificates

Once investors have committed to invest in Notes or Certificates, we facilitate the closing of the corresponding Loan and subsequent purchase of the Loan. An individual Loan generally closes the first business day after: (i) we receive commitments in an aggregate amount equal to the amount of the loan request; or (ii) when the borrower agrees to take a lesser amount equal to the aggregate amount of commitments received up to the expiration date.

At the closing of a Loan, we execute an electronic promissory note on the borrower’s behalf for the final Loan amount under a power of attorney on behalf of the borrower. WebBank uses us as paying agent for the disbursement of the Loan proceeds due to the ACH transfer capability we established with the borrower in order to verify the borrower and service the Loan. WebBank then sells the Loan to us at par, electronically indorses the promissory note to us, and assigns the loan account to us without recourse to WebBank. To the extent that the purchased Loan is to be financed by Certificates, we resell the Loan at par to the Trust. The promissory note and the Loan agreement contain customary terms and covenants requiring the borrowers to repay their Loan and acknowledge our role as servicer for Loan and that we may assign or sell the Loan without notice.

When we issue a Note to an investor and register the Note on our books and records as an obligation of LC, we transfer an amount equal to the principal amount of the Note from such investor’s sub-account under the ITF Account to a clearing account. At a Certificate closing, we issue or update the Certificate for the investor’s transaction and transfer an amount equal to the principal amount of the Certificate investment from such investor’s sub-account under the custodial account through the Trust to the clearing account. These transfers to represent payments by all Investors, which equal 100% of the principal amounts of the Notes and Certificates issued.

We maintain custody of the electronically-executed promissory notes in electronic form on our platform. For those Loans sold to the Trust, an independent custodian for the Trust also maintains custody of the electronically-executed promissory notes in electronic form in their records.

Participation in the Funding of Loans by LC and Its Affiliates

We are obligated to ensure funding for Consumer Loans originated through direct mail marketing campaigns and will fund these Consumer Loans as needed. As of December 31, 2013, we had funded no such Consumer Loans under this program. We have and may in the future choose to invest in Loans or portions of Loans for various reasons including customer service accommodations. During the year ended December 31, 2013, we funded $1.2 million in Consumer Loans. As of December 31, 2013, the outstanding principal balance of all Consumer Loans owned by us was $0.4 million.

Our executive officers, directors and 5% stockholders, also have funded portions of loans requests from time to time in the past, and may do so in the future (see Note 8 – Related Party Transactions).

Any loan funded by LC or our executive officers, directors and 5% stockholders is on the same terms and conditions as available to other investors.

Trading Platform

Investors cannot sell their Notes except through the resale trading platform operated by FOLIOfn Investments, Inc. (“FOLIOfn”), an unaffiliated registered broker-dealer. This internet-based trading platform allows LC investors who establish a brokerage relationship with FOLIOfn (who we refer to as subscribers) to offer their Notes for sale. Only previously issued Notes can be traded through the

 

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FOLIOfn trading platform. The trading platform does not handle any aspect of the initial offer and sale of Notes by us. It also does not handle transfers or resales of Certificates. Subscribers may post orders to sell their Notes on the trading platform at prices established by the subscriber. Other subscribers have the opportunity to view these prices, along with historical information from the original Loan posting for the Loan corresponding to the Note, an updated credit score range of the borrower and the payment history of the Note.

Subscribers pay a 1% transaction fee charged by the registered broker-dealer when selling Notes. All Notes traded through the trading platform will continue to be subject to LC’s ongoing fees, including the ongoing service fee.

We are not a registered national securities exchange, securities information processor, clearing agency or broker-dealer. All securities services relating to the trading platform are provided by FOLIOfn. Neither we nor FOLIOfn will make any recommendations with respect to transactions on the trading platform. There is no assurance that investors will be able to establish a brokerage relationship with the registered broker-dealer. Furthermore, we cannot assure subscribers that they will be able to sell Notes they offer for resale through the trading platform at the offered price or any other price nor can we offer any assurance that the trading platform will continue to be available to subscribers. The trading platform is not available to residents of all states. During 2013, it took an average of 5.1 days to sell a Note with an offer price at or below par.

ABOUT THE FUNDS AND TRUST

In October 2010, we formed LCA, a SEC-registered investment advisor wholly owned by LendingClub. LCA is the general partner of five investment funds: Broad Based Consumer Credit Fund, L.P. (“BBF”), Broad Based Consumer Credit (Q) Fund, L.P. (“BBF-QP”), Broad Based Consumer Credit II Fund, L.P. (“BBF II”), Conservative Consumer Credit Fund, L.P. (“CCF”), and Conservative Consumer Credit (Q) Fund, L.P. (“CCF-QP”), which we refer to collectively as the Funds. In connection with the Funds, the Trust is structured as a bankruptcy-remote entity for holding portions of Loans related to Certificates purchased by the Funds separate and apart from the Loans and other assets of ours. We and the Trust have entered into a loan purchase agreement and a servicing agreement whereby we service the loans acquired by the Trust in a manner identical to other Loans; the Trust earns a fee equal to 40 basis points for each Certificate holder and we earn a servicing fee equal to 35 basis points, which is paid by the Trust.

Beginning January 2012, LCA began offering SMAs to individual accredited investors. Investors with SMAs invest in Certificates issued by the Trust.

LCA’s contribution to the Company’s overall consolidated financial results will be primarily driven by the combination of assets under management, the investment performance of the Funds and SMA investors and the ability to attract additional investors. Competitive investment performance in rising markets and preservation of fund investor capital during periods of market volatility or declining economic conditions are key determinates of the long term success of LCA’s business.

 

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LOAN, NOTE, AND CERTIFICATE SERVICING

Post-Closing Loan Servicing and Collection

The following table summarizes the fees that we charge and how these fees affect investors:

 

Description of Fee

  

Fee Amount

  

When Fee is Charged

  

Effect on Investors

Service fee on Notes    1.00% of the principal, interest and late fees received by LC from borrowers on each corresponding loan (in each case excluding any payments due to LC on account of portions of the corresponding loan, if any, funded by LC itself)    At the time of payments on the Notes, including Note payments resulting from prepayments or partial payments on corresponding loans    The service fee will reduce the effective yield on Notes.
Management fee, charged to Certificate holders    Up to 1.25% annualized fee, based on month-end capital balance.    Management fee is charged monthly.    The management fee reduces the net return from investments in Certificates.
Late payment fee    Assessed in our discretion; if assessed, the late fee is the greater of 5.00% of the unpaid installment amount, or $15.00, unless a lesser amount is required by law, and may be charged only once per late payment    In our discretion, when a loan is past due and payment has not been received after a 15-day grace period    Amounts equal to any late payment fees we receive are paid to holders of the Notes corresponding to the relevant loan, net of our 1.00% service charge
Loan unsuccessful payment fee    $15.00 per unsuccessful payment, unless a lesser amount is required by law    May be assessed each time a payment request is denied, due to insufficient funds in the borrowers’s account or for any other reason    We retain 100% of this unsuccessful payment fee to cover our costs.
Loan collection fee    For pre- and post- charged off loans: Charged only if collection agency or LC is able to collect payment; collection fee is up to 35%, excluding litigation    At the time of successful collection    Collection fees charged by us or a third-party collection agency may be charged to investors which will reduce payments and the effective yield on the related Notes and Certificates
Check processing fee    $15.00 per check processed for any payments made by check    At the time a payment by check is processed    We retain 100% of this check processing fee to cover our costs.

Collections

We disclose borrower payment performance on our website to the relevant investors and also report that information to consumer reporting agencies. We have collection procedures in place to deal with defaults by borrowers. When a loan is past due, we contact the borrower to request payment. After a 15-day grace period, we may, in our discretion, assess a late payment fee. We often choose not to assess a late payment fee when a borrower promises to return a delinquent loan to current status and fulfills that promise. We may also work with a borrower to structure a new payment plan without the consent of any holder of the Notes or Certificates related to that loan. Under the indenture for the Notes, we are required to use commercially reasonable efforts to service and collect loans, in good faith, accurately and in accordance with industry standards customary for servicing loans.

If a loan becomes 31 days overdue, we identify the loan on our website as “Late (31-120),” and we either refer the loan to an outside collection agent or to our in-house collections department. We generally use our in-house collections department as a first

 

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step when a borrower misses a loan payment. In the event that our initial in-house attempts to contact a borrower are unsuccessful, we generally refer the delinquent account to the outside collection agent. Amounts equal to any recoveries we receive from the collection process are payable to Note and Certificate investors on a pro rata basis, subject to our deduction of our service charge, if applicable, and an additional collection fee. The investor is only charged the additional collection fee if we or the collection agency are able to collect a payment.

Investors are able to monitor the status of collections as the status of a loan switches from “Late (15-30 days)” to “Late (31-120 days)” to “current” for example, but cannot participate in or otherwise intervene in the collection process.

If a borrower dies while a loan is in repayment, we require the executor or administrator of the estate to send a death certificate to us. We then file a claim against the borrower’s estate to attempt to recover the outstanding loan balance. Depending on the size of the estate, we may not be able to recover the outstanding amount of the loan. If the estate does not include sufficient assets to repay the outstanding loan in full, we will treat the unsatisfied portion of a loan as defaulted with zero value. In addition, if a borrower dies near the end of the final maturity of a loan, it is unlikely that any further payments will be made on any Notes or Certificates corresponding to such loan, because the time required for the probate of the estate may extend beyond the initial maturity date and the final maturity date of the Notes.

Our collection process changes in the event of a borrower bankruptcy filing. When we receive notice of the bankruptcy filing, as required by law, we cease all collection actions on the loan. The status of the loan, which the relevant investors may view, switches to “bankruptcy.” We next determine what we believe to be an appropriate approach to dealing with the borrower’s bankruptcy. If the proceeding seeks liquidation, we attempt to determine if the proceeding is a “no asset” proceeding, based on instructions we receive from the bankruptcy court. If the proceeding is a “no asset” proceeding, we take no further action and assume that no recovery will be made on the loan.

We file a proof of claim involving the borrower when permitted. The decision to pursue additional relief beyond the proof of claim in any specific matter involving a borrower will be entirely within our discretion and will depend upon certain factors including:

 

    if the borrower used the proceeds of a loan in a way other than that which was described in the borrower’s application;

 

    if the bankruptcy is a Chapter 13 proceeding, whether the proceeding was filed in good faith and if the proposed plan reflects a “best effort” on the borrower’s behalf; and

 

    our view of the costs and benefits to us of any proposed action.

Customer Support

We provide customer support to our borrowers and investors. For many of our members, their experience is entirely web-based. We include detailed frequently asked questions on our website. We also post detailed fee information and the full text of our borrower and investor legal agreements.

We make additional customer support available to members by email and phone. Our customer support team is located at our headquarters in San Francisco, California.

 

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Statistical Information on the Public Policy Loan Portfolio

The tables and charts set forth below relate only to Public Policy Loans.

In regards to the following historical information, prior performance is no guarantee of future results or outcomes.

From inception to December 31, 2013, we facilitated Public Policy Loans with an average original principal amount of approximately $13,701 and an aggregate original principal amount of $3.2 billion. Out of 230,716 facilitated Public Policy Loans, 36,316 Public Policy Loans with an aggregate original principal amount of $411.2 million, or 13.01%, were fully paid.

The following table presents aggregated information about Public Policy Loans for the period from inception to December 31, 2013, grouped by the loan grade assigned by us.

Public Policy Loans Issued from Inception to

December 31, 2013 by Grade

 

   

Loan Grade

   Number of
Loans
     Average
Interest Rate
    Total Amount
Issued
 
A1      5,395         5.98   $ 61,252,875   
A2      5,722         6.58     63,489,650   
A3      6,727         7.49     83,195,650   
A4      9,921         7.86     123,483,525   
A5      10,998         8.76     146,093,100   
B1      12,242         9.94     148,544,250   
B2      15,173         10.91     197,049,475   
B3      18,615         11.83     233,235,800   
B4      17,033         12.70     223,038,700   
B5      11,949         13.28     147,319,775   
C1      13,461         13.92     171,335,575   
C2      12,780         14.69     171,091,700   
C3      11,529         15.28     161,666,150   
C4      11,015         15.85     160,672,225   
C5      9,964         16.67     148,783,150   
D1      8,382         17.26     113,069,725   
D2      7,503         17.71     94,120,350   
D3      6,435         18.10     83,876,775   
D4      6,220         18.58     91,053,925   
D5      5,368         19.23     85,407,650   
E1      3,445         19.59     59,115,500   
E2      3,838         20.29     65,988,950   
E3      3,075         20.74     55,039,500   
E4      2,891         21.35     54,056,575   
E5      2,389         21.77     45,378,150   
F1      2,006         22.31     38,237,000   
F2      1,647         22.69     32,380,300   
F3      1,387         23.22     26,387,000   
F4      1,104         23.44     22,646,500   
F5      865         23.70     19,023,025   
G1      582         23.91     12,706,050   
G2      396         23.96     8,576,400   
G3      278         24.10     6,114,525   
G4      208         23.15     4,419,725   
G5      173         22.94     3,149,100   
  

 

 

      

 

 

 
Total      230,716         13.89   $ 3,160,998,325   
  

 

 

      

 

 

 

 

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The following table presents aggregated consumer reporting agency information for the period from our inception to December 31, 2013, grouped by the loan grade assigned by us. This information is reported in the table as of the time of the loan application. As used in this table, “Delinquencies in the Last Two Years” means the number of 30+ days past-due incidences of delinquency in the borrower’s credit file for the past two years. We do not independently verify this information. All figures other than loan grade are agency reported at the time of application.

Consumer Reporting Agency Information for Public Policy Loans issued from Inception to December 31, 2013, grouped by Grade

 

Loan Grade

   Average
FICO
     Average
Open
Credit
Lines
     Average
Total
Credit
Lines
     Average
Revolving
Credit
Balance
     Average
Revolving
Line
Utilization
    Average
Inquiries in
the Last Six
Months
     Average
Delinquencies
in the Last
Two Years
     Average
Months Since
Last
Delinquency
 

A1

     773         11         26       $ 13,886         23.78     0         0         40   

A2

     754         11         26         14,419         30.20     1         0         38   

A3

     744         11         25         16,450         35.67     1         0         38   

A4

     734         10         25         15,952         41.40     1         0         38   

A5

     726         11         25         17,572         45.51     1         0         38   

B1

     715         11         24         15,758         49.24     1         0         36   

B2

     709         11         24         16,491         52.87     1         0         36   

B3

     703         11         24         15,584         55.82     1         0         35   

B4

     699         11         24         15,867         57.17     1         0         36   

B5

     696         10         23         14,711         59.04     1         0         36   

C1

     694         11         24         15,479         59.99     1         0         35   

C2

     693         11         24         15,286         61.01     1         0         35   

C3

     692         11         24         15,926         61.20     1         0         35   

C4

     689         11         24         16,204         62.93     1         0         35   

C5

     688         11         24         16,341         63.56     1         0         34   

D1

     683         11         23         15,514         65.18     1         0         34   

D2

     683         10         23         14,700         64.77     1         0         34   

D3

     684         10         23         14,780         64.72     1         0         34   

D4

     684         10         23         15,127         66.11     1         0         34   

D5

     684         11         24         16,617         66.24     1         0         34   

E1

     683         11         24         16,316         67.32     1         0         34   

E2

     684         11         24         16,663         66.83     1         0         32   

E3

     682         11         24         17,441         68.44     1         0         33   

E4

     681         11         24         18,222         68.95     1         0         33   

E5

     680         11         25         18,795         68.79     1         0         33   

F1

     679         11         25         17,865         69.06     1         0         32   

F2

     679         11         25         17,811         69.75     1         0         32   

F3

     678         11         25         17,309         69.67     1         0         31   

F4

     677         12         26         17,844         69.75     2         0         31   

F5

     677         12         27         19,099         70.63     2         0         32   

G1

     675         12         27         18,035         69.03     2         1         29   

G2

     674         12         27         23,120         72.40     2         0         28   

G3

     674         12         27         19,471         74.14     2         0         28   

G4

     672         13         30         24,716         71.49     2         0         30   

G5

     667         13         30         33,140         73.10     3         0         28   

Total

     702         11         24       $ 15,946         56.68     1         0         35   

 

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The following table presents aggregated information for the period from inception to December 31, 2013, about current and paid off Public Policy Loans, grouped by the loan grade assigned by us.

 

Loan Grade

   Number of
Current

Loans
     Current Loan
Outstanding
Principal ($)
     Number of
Loans Fully
Paid
     Fully Paid ($)      Fully Paid (%) of
Originated Issued
Loans
    Number of
All Issued
Loans
     Total Origination
Amount for All
Issued Loans
 

A1

     4,104       $ 36,079,653         1,030       $ 8,689,625         14.19     5,395       $ 61,252,875   

A2

     3,949         34,757,783         1,346         10,320,675         16.26     5,722         63,489,650   

A3

     4,441         45,561,938         1,641         13,680,800         16.44     6,727         83,195,650   

A4

     6,543         60,591,834         2,333         22,247,075         18.02     9,921         123,483,525   

A5

     7,302         79,921,807         2,467         25,036,975         17.14     10,998         146,093,100   

B1

     9,268         92,855,988         1,793         18,676,525         12.57     12,242         148,544,250   

B2

     11,706         125,461,476         2,039         22,563,600         11.45     15,173         197,049,475   

B3

     14,061         138,369,372         2,694         31,415,175         13.47     18,615         233,235,800   

B4

     12,915         139,171,210         2,381         26,952,300         12.08     17,033         223,038,700   

B5

     7,959         76,378,433         2,263         24,779,200         16.82     11,949         147,319,775   

C1

     9,819         101,554,062         1,980         21,881,700         12.77     13,461         171,335,575   

C2

     9,186         103,662,464         1,931         22,146,050         12.94     12,780         171,091,700   

C3

     8,498         106,515,965         1,524         17,264,550         10.68     11,529         161,666,150   

C4

     8,269         109,451,679         1,403         15,879,950         9.88     11,015         160,672,225   

C5

     7,408         101,621,414         1,265         14,545,175         9.78     9,964         148,783,150   

D1

     6,081         71,226,802         1,104         12,484,500         11.04     8,382         113,069,725   

D2

     5,096         51,300,879         1,171         13,689,600         14.54     7,503         94,120,350   

D3

     4,329         44,413,591         1,002         12,478,725         14.88     6,435         83,876,775   

D4

     4,389         54,366,616         861         11,164,425         12.26     6,220         91,053,925   

D5

     3,749         52,257,349         764         10,778,775         12.62     5,368         85,407,650   

E1

     2,208         33,441,126         542         8,018,125         13.56     3,445         59,115,500   

E2

     2,695         41,798,071         515         7,708,250         11.68     3,838         65,988,950   

E3

     2,112         34,283,149         456         6,993,175         12.71     3,075         55,039,500   

E4

     2,064         35,049,166         364         6,178,325         11.43     2,891         54,056,575   

E5

     1,657         28,882,120         322         5,390,550         11.88     2,389         45,378,150   

F1

     1,434         24,992,355         235         3,969,325         10.38     2,006         38,237,000   

F2

     1,167         20,632,174         206         3,797,400         11.73     1,647         32,380,300   

F3

     969         16,965,923         175         3,235,725         12.26     1,387         26,387,000   

F4

     773         15,124,375         121         2,088,375         9.22     1,104         22,646,500   

F5

     606         12,464,476         98         1,940,525         10.20     865         19,023,025   

G1

     378         7,699,107         83         1,629,625         12.83     582         12,706,050   

G2

     251         5,036,318         56         1,042,225         12.15     396         8,576,400   

G3

     170         3,709,706         44         809,250         13.23     278         6,114,525   

G4

     107         2,218,180         53         990,925         22.42     208         4,419,725   

G5

     78         1,530,777         54         712,450         22.62     173         3,149,100   
  

 

 

    

 

 

    

 

 

    

 

 

      

 

 

    

 

 

 

Total

     165,741       $ 1,909,347,338         36,316       $ 411,179,650         13.01     230,716       $ 3,160,998,325   
  

 

 

    

 

 

    

 

 

    

 

 

      

 

 

    

 

 

 

 

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The following table presents outstanding Public Policy Loan balance in dollars, delinquent Public Policy Loan balance in dollars, principal amount of Public Policy Loans charged-off during the quarters presented, delinquency rate and annualized charge-off rate as of December 31, 2013. This information excludes Public Policy Loans that we classified as identity theft. In cases of verified identity theft, we write-off the Public Policy Loan and pay the holder of the related Notes or Certificates an amount equal to the unpaid principal balances due.

Outstandings (1)

 

    2013-Q4     2013-Q3     2013-Q2     2013-Q1     2012-Q4     2012-Q3     2012-Q2     2012-Q1     2011-Q4     2011-Q3     2011-Q2     2011-Q1  

Total

  $ 2,189,445,604      $ 1,750,364,599      $ 1,377,063,925      $ 1,058,994,336      $ 805,762,673      $ 614,888,789      $ 464,367,269      $ 372,219,576      $ 300,981,599      $ 242,940,789      $ 198,898,230      $ 164,293,968   

Grade A

    295,721,571        230,596,152        199,205,136        167,636,091        130,844,888        108,620,465        89,352,446        74,014,114        56,698,297        45,181,116        35,321,605        29,898,683   

Grade B

    645,779,511        524,253,037        416,396,255        328,331,100        241,219,434        184,014,545        136,784,984        108,646,899        86,458,634        69,077,649        56,298,108        47,119,722   

Grade C

    595,966,727        471,686,103        351,183,654        253,471,907        169,705,649        122,985,071        89,615,401        70,356,879        57,785,257        47,469,986        39,947,631        33,414,866   

Grade D

    325,608,069        249,748,219        199,912,034        153,861,310        127,701,086        94,518,339        67,602,607        53,707,947        44,554,881        37,435,226        31,682,765        26,324,025   

Grade E

    200,314,776        166,244,847        130,030,180        99,328,925        86,250,040        65,672,747        50,561,701        41,235,661        34,242,722        26,804,123        21,554,533        16,697,416   

Grade F

    102,390,271        88,311,217        66,519,207        46,616,552        40,438,437        30,864,095        23,706,878        18,276,540        15,679,970        12,229,462        9,863,641        7,383,441   

Grade G

    23,664,679        19,525,024        13,817,459        9,748,451        9,603,139        8,213,527        6,743,252        5,981,536        5,561,838        4,743,227        4,229,947        3,455,815   
Outstandings of Delinquent Loans (2)                   
    2013-Q4     2013-Q3     2013-Q2     2013-Q1     2012-Q4     2012-Q3     2012-Q2     2012-Q1     2011-Q4     2011-Q3     2011-Q2     2011-Q1  

Total

  $ 32,903,987      $ 24,627,790      $ 17,262,327      $ 14,850,107      $ 12,788,662      $ 9,586,950      $ 7,374,699      $ 5,527,306      $ 5,849,888      $ 5,501,713      $ 4,006,570      $ 3,704,724   

Grade A

    1,372,994        1,172,286        1,037,058        986,293        844,494        645,906        501,586        244,111        356,477        272,859        186,715        163,243   

Grade B

    6,242,415        4,974,684        3,484,961        2,865,740        2,283,231        1,851,870        1,449,389        1,283,207        1,109,586        1,061,620        774,299        936,193   

Grade C

    7,994,336        5,762,595        3,588,468        3,025,989        2,551,721        1,991,462        1,299,900        1,162,852        1,172,263        1,203,663        963,323        798,484   

Grade D

    7,214,800        5,393,265        3,963,875        3,605,332        2,870,124        2,069,916        1,492,371        1,162,834        1,364,443        1,278,711        958,866        895,225   

Grade E

    5,623,282        4,298,361        2,680,574        2,334,809        2,328,965        1,613,169        1,239,647        1,009,578        950,776        848,841        690,453        499,757   

Grade F

    3,552,169        2,501,975        1,970,257        1,450,438        1,461,271        1,014,141        1,085,956        437,866        581,478        532,081        282,089        302,024   

Grade G

    903,991        524,624        537,134        581,506        448,856        400,486        305,850        226,858        314,865        303,938        150,825        109,798   
Charge-Off Amount (3)                       
    2013-Q4     2013-Q3     2013-Q2     2013-Q1     2012-Q4     2012-Q3     2012-Q2     2012-Q1     2011-Q4     2011-Q3     2011-Q2     2011-Q1  

Total

  $ 18,335,295      $ 12,500,153      $ 10,597,523      $ 8,949,564      $ 6,116,909      $ 4,878,122      $ 3,342,427      $ 3,365,817      $ 2,888,000      $ 1,757,029      $ 1,658,883      $ 1,439,029   

Grade A

    906,116        848,544        857,591        655,065        515,654        361,014        130,494        225,833        156,802        106,810        90,020        31,252   

Grade B

    3,675,808        2,730,955        2,155,828        1,833,203        1,265,295        932,505        709,000        602,278        551,128        365,884        486,199        357,292   

Grade C

    4,603,132        2,574,208        2,122,310        1,671,987        1,251,676        972,305        867,763        722,553        727,826        500,547        319,313        310,886   

Grade D

    4,073,692        2,723,486        2,585,059        1,879,307        1,282,636        852,728        694,218        652,686        587,904        377,842        327,527        422,338   

Grade E

    3,112,628        1,921,466        1,467,947        1,607,602        963,260        853,769        631,853        553,774        470,002        289,469        241,649        203,713   

Grade F

    1,660,584        1,261,300        992,258        1,029,190        606,623        736,042        220,482        371,949        288,267        63,786        131,729        72,513   

Grade G

    303,335        440,194        416,530        273,210        231,765        169,759        88,617        236,744        106,071        52,691        62,446        41,035   
Delinquent Rate (4)                       
    2013-Q4     2013-Q3     2013-Q2     2013-Q1     2012-Q4     2012-Q3     2012-Q2     2012-Q1     2011-Q4     2011-Q3     2011-Q2     2011-Q1  

Total

    1.50     1.41     1.25     1.40     1.59     1.56     1.59     1.48     1.94     2.26     2.01     2.25

Grade A

    0.46     0.51     0.52     0.59     0.65     0.59     0.56     0.33     0.63     0.60     0.53     0.55

Grade B

    0.97     0.95     0.84     0.87     0.95     1.01     1.06     1.18     1.28     1.54     1.38     1.99

Grade C

    1.34     1.22     1.02     1.19     1.50     1.62     1.45     1.65     2.03     2.54     2.41     2.39

Grade D

    2.22     2.16     1.98     2.34     2.25     2.19     2.21     2.17     3.06     3.42     3.03     3.40

Grade E

    2.81     2.59     2.06     2.35     2.70     2.46     2.45     2.45     2.78     3.17     3.20     2.99

Grade F

    3.47     2.83     2.96     3.11     3.61     3.29     4.58     2.40     3.71     4.35     2.86     4.09

Grade G

    3.82     2.69     3.89     5.97     4.67     4.88     4.54     3.79     5.66     6.41     3.57     3.18
Annualized Charge-off Rate (5)                     
    2013-Q4     2013-Q3     2013-Q2     2013-Q1     2012-Q4     2012-Q3     2012-Q2     2012-Q1     2011-Q4     2011-Q3     2011-Q2     2011-Q1  

Total

    3.35     2.86     3.08     3.38     3.04     3.17     2.88     3.62     3.84     2.89     3.34     3.50

Grade A

    1.23     1.47     1.72     1.56     1.58     1.33     0.58     1.22     1.11     0.95     1.02     0.42

Grade B

    2.28     2.08     2.07     2.23     2.10     2.03     2.07     2.22     2.55     2.12     3.45     3.03

Grade C

    3.09     2.18     2.42     2.64     2.95     3.16     3.87     4.11     5.04     4.22     3.20     3.72

Grade D

    5.00     4.36     5.17     4.89     4.02     3.61     4.11     4.86     5.28     4.04     4.14     6.42

Grade E

    6.22     4.62     4.52     6.47     4.47     5.20     5.00     5.37     5.49     4.32     4.48     4.88

Grade F

    6.49     5.71     5.97     8.83     6.00     9.54     3.72     8.14     7.35     2.09     5.34     3.93

Grade G

    5.13     9.02     12.06     11.21     9.65     8.27     5.26     15.83     7.63     4.44     5.91     4.75

 

1) Principal balance at quarter-end.
2) Principal balance as of quarter-end for Public Policy Loans that are “Late 31-120” or in Default status at quarter-end.
3) Principal balance charged off during the quarter.
4) Principal balance at quarter-end for Public Policy Loans that are “Late 31-120” or in Default status at quarter-end divided by Principal balance at quarter-end.
5) Principal balance charged off during the quarter multiplied by four then divided by Principal balance at quarter-end.

 

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The following table presents dollars collected on delinquent Public Policy Loans and recoveries received on charged-off Public Policy Loans (which include collection recoveries on charged-off Public Policy Loans and proceeds from the sale of charged-off Public Policy Loans), in the quarter presented. This information excludes Public Policy Loans that we classified as identity theft. In cases of verified identity theft, we write-off the Public Policy Loan and pay the holder of the related Notes or Certificates an amount equal to the unpaid principal balances due.

Dollars Collected From Delinquent Loans (1)

 

     2013-Q4    2013-Q3    2013-Q2    2013-Q1    2012-Q4    2012-Q3    2012-Q2    2012-Q1    2011-Q4    2011-Q3    2011-Q2    2011-Q1

Total

   $1,891,652    $1,205,268    $942,995    $1,029,297    $739,462    $652,039    $507,211    $680,986    $532,827    $424,017    $342,323    $360,570

Grade A

   82,042    80,834    66,387    96,335    65,755    44,749    44,220    39,668    30,111    38,300    17,429    23,810

Grade B

   391,622    244,118    159,187    236,565    150,778    160,700    128,276    143,189    108,863    78,490    73,769    80,299

Grade C

   466,808    241,163    227,713    188,263    154,334    105,295    77,107    170,695    148,714    102,996    94,162    99,284

Grade D

   410,139    290,585    187,328    191,224    156,524    139,382    105,488    137,298    121,470    105,590    80,008    70,315

Grade E

   227,562    184,173    168,219    136,542    121,224    105,764    77,000    135,629    74,396    57,604    39,829    39,561

Grade F

   250,891    140,889    70,430    110,949    51,239    61,677    61,331    33,056    26,824    26,545    22,294    19,886

Grade G

   62,588    23,506    63,731    69,419    39,608    34,472    13,789    21,451    22,449    14,492    14,832    27,415
Recoveries (2)                              
     2013-Q4    2013-Q3    2013-Q2    2013-Q1    2012-Q4    2012-Q3    2012-Q2    2012-Q1    2011-Q4    2011-Q3    2011-Q2    2011-Q1

Total

   $703,715    $463,035    $460,127    $549,061    $104,885    $78,283    $383,403    $88,771    $36,163    $91,431    $52,137    $46,898

Grade A

   42,046    30,391    35,150    39,526    8,989    7,919    15,345    2,752    2,575    18,818    —      7,894

Grade B

   125,685    82,742    66,124    120,147    9,856    2,282    76,198    10,265    5,777    5,503    6,580    12,395

Grade C

   178,147    89,982    101,307    106,854    39,125    27,206    84,423    22,392    10,170    23,323    21,817    9,829

Grade D

   150,192    104,636    103,187    112,834    10,645    13,875    109,490    14,959    5,801    15,047    8,572    10,023

Grade E

   116,996    87,642    76,261    87,943    14,051    13,189    53,773    12,076    4,321    2,777    632    3,566

Grade F

   67,707    46,776    58,489    57,885    8,166    2,006    23,765    17,830    4,519    22,784    12,186    3,091

Grade G

   22,942    20,866    19,609    23,872    14,053    11,806    20,409    8,497    3,000    3,179    2,350    100

 

1) Dollars collected during the quarter for Public Policy Loans that are in “Late 31-120” or in Default status.
2) Total payments received from borrowers of charged-off Public Policy Loans and proceeds from sale of charged-off Public Policy Loans.

The following graph presents the dollar weighted average interest rate for Public Policy Loans originated from inception to December 31, 2013, by grade.

 

LOGO

 

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Cumulative Charge-off Rate

The graph and corresponding table below shows the cumulative net lifetime charge-offs by grades for Public Policy Loans, by annual vintage, meaning each line represents all Public Policy Loans originated in that year, booked from January 1, 2008 through December 31, 2013, as a percentage of the aggregate principal amount of originations.

 

LOGO

 

     Cumulative Charge-off Rate by Booking Year—All Grades  

Mo #

   Y2008     Y2009     Y2010     Y2011     Y2012     Y2013  
1      0.0     0.0     0.0     0.0     0.0     0.0
2      0.0     0.0     0.0     0.0     0.0     0.0
3      0.0     0.0     0.0     0.0     0.0     0.0
4      0.0     0.0     0.0     0.0     0.0     0.0
5      0.0     0.3     0.1     0.2     0.1     0.0
6      0.0     0.9     0.2     0.4     0.3  
7      0.1     1.3     0.6     0.7     0.6  
8      0.4     1.6     0.9     1.0     0.9  
9      1.2     2.2     1.2     1.4     1.4  
10      1.7     2.7     1.4     1.9     1.8  
11      2.6     3.1     1.9     2.3     2.2  
12      3.0     3.5     2.4     2.7     2.7  
13      3.2     4.0     2.7     3.2     3.1  
14      3.8     4.4     3.3     3.6     3.5  
15      4.9     4.8     3.6     4.0     3.8  
16      5.6     5.2     4.0     4.4     4.1  
17      6.5     5.5     4.3     4.8    
18      7.0     5.9     4.6     5.2    
19      8.0     6.1     4.9     5.6    
20      8.8     6.3     5.1     6.0    
21      10.1     6.7     5.4     6.3    
22      10.8     6.9     5.6     6.6    
23      11.8     7.2     5.8     6.9    
24      12.2     7.5     6.0     7.2    
25      12.5     7.8     6.3     7.4    
26      12.9     8.0     6.5     7.7    
27      13.2     8.1     6.7     7.8    
28      13.5     8.3     6.9     7.9    
29      13.7     8.4     7.1     8.0    
30      13.9     8.5     7.2      
31      14.0     8.6     7.4      
32      14.1     8.7     7.5      
33      14.2     8.8     7.6      
34      14.3     8.9     7.7      
35      14.5     8.9     7.8      
36      14.5     8.9     7.9      

 

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The graphs and corresponding tables below show cumulative net charge-offs for Public Policy Loans as a percentage of the aggregate principal amount of originations for each grade (A-G) presented by annual vintage from January 1, 2008 to December 31, 2013.

 

LOGO

 

     Cumulative Charge-off Rate by Booking Year—Grade A  

Mo #

   Y2008     Y2009     Y2010     Y2011     Y2012     Y2013  
1      0.0     0.0     0.0     0.0     0.0     0.0
2      0.0     0.0     0.0     0.0     0.0     0.0
3      0.0     0.0     0.0     0.0     0.0     0.0
4      0.0     0.0     0.0     0.0     0.0     0.0
5      0.0     0.0     0.0     0.0     0.1     0.0
6      0.0     0.0     0.0     0.0     0.2  
7      0.0     0.0     0.0     0.2     0.4  
8      0.1     0.1     0.1     0.3     0.6  
9      0.1     0.1     0.1     0.4     0.7  
10      0.1     0.2     0.2     0.5     0.9  
11      0.1     0.4     0.3     0.6     1.1  
12      0.6     0.7     0.5     0.8     1.2  
13      0.6     0.8     0.6     0.9     1.4  
14      0.6     1.5     0.7     1.2     1.6  
15      0.7     1.6     0.7     1.3     1.7  
16      1.1     1.8     0.8     1.4     1.8  
17      1.1     1.8     1.0     1.5    
18      1.1     2.0     1.0     1.7    
19      1.7     2.3     1.1     1.9    
20      1.9     2.3     1.2     2.0    
21      1.9     2.5     1.3     2.2    
22      1.9     2.5     1.4     2.3    
23      2.0     2.6     1.4     2.3    
24      2.3     2.7     1.5     2.4    
25      2.3     2.8     1.5     2.4    
26      2.3     3.0     1.6     2.4    
27      2.5     3.1     1.6     2.5    
28      2.5     3.3     1.6     2.5    
29      2.7     3.4     1.7     2.5    
30      3.2     3.4     1.7      
31      3.2     3.5     1.8      
32      3.2     3.5     1.8      
33      3.3     3.6     1.8      
34      3.3     3.6     1.9      
35      3.3     3.6     1.9      
36      3.3     3.6     1.9      

 

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LOGO

 

     Cumulative Charge-off Rate by Booking Year—Grade B  

Mo #

   Y2008     Y2009     Y2010     Y2011     Y2012     Y2013  
1      0.0     0.0     0.0     0.0     0.0     0.0
2      0.0     0.0     0.0     0.0     0.0     0.0
3      0.0     0.0     0.0     0.0     0.0     0.0
4      0.0     0.0     0.0     0.0     0.0     0.0
5      0.0     0.2     0.1     0.0     0.1     0.0
6      0.0     0.8     0.2     0.2     0.2  
7      0.0     1.2     0.4     0.4     0.4  
8      0.4     1.3     0.6     0.6     0.7  
9      0.6     1.6     0.9     0.9     0.9  
10      0.7     2.4     1.2     1.2     1.2  
11      1.3     2.8     1.4     1.4     1.6  
12      1.7     3.0     2.0     1.6     1.9  
13      1.7     3.3     2.2     1.8     2.2  
14      2.2     3.8     2.8     2.0     2.4  
15      2.8     4.2     2.9     2.4     2.6  
16      3.0     4.5     3.1     2.7     2.8  
17      4.1     4.7     3.3     3.0    
18      4.2     5.4     3.5     3.2    
19      5.1     5.4     3.8     3.4    
20      6.4     5.6     4.0     3.6    
21      7.5     5.7     4.1     3.7    
22      7.9     5.9     4.4     4.0    
23      8.2     6.2     4.5     4.3    
24      8.7     6.6     4.7     4.5    
25      9.1     6.7     4.9     4.7    
26      9.4     7.0     5.0     4.8    
27      9.6     7.0     5.1     4.9    
28      9.7     7.2     5.2     5.0    
29      10.0     7.2     5.3     5.1    
30      10.0     7.4     5.4      
31      10.2     7.4     5.6      
32      10.2     7.5     5.7      
33      10.2     7.5     5.8      
34      10.2     7.6     5.8      
35      10.4     7.6     5.9      
36      10.5     7.7     6.0      

 

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LOGO

 

     Cumulative Charge-off Rate by Booking Year—Grade C  

Mo #

   Y2008     Y2009     Y2010     Y2011     Y2012     Y2013  
1      0.0     0.0     0.0     0.0     0.0     0.0
2      0.0     0.0     0.0     0.0     0.0     0.0
3      0.0     0.0     0.0     0.0     0.0     0.0
4      0.0     0.0     0.0     0.0     0.0     0.0
5      0.0     0.2     0.2     0.3     0.1     0.0
6      0.2     1.1     0.3     0.9     0.3  
7      0.2     1.9     0.5     1.1     0.6  
8      0.2     2.2     0.9     1.6     0.9  
9      0.9     3.1     1.1     2.1     1.4  
10      1.6     3.5     1.4     2.5     1.8  
11      1.9     3.8     2.1     3.0     2.3  
12      2.2     4.3     2.5     3.6     2.8  
13      2.4     4.8     2.8     4.1     3.2  
14      3.5     5.0     3.4     4.5     3.6  
15      4.1     5.4     3.8     5.0     3.9  
16      4.8     5.8     4.3     5.3     4.1  
17      6.1     6.2     4.7     5.8    
18      7.3     6.3     5.1     6.2    
19      8.0     6.4     5.4     6.3    
20      8.4     6.6     5.5     6.7    
21      9.8     7.0     5.8     6.9    
22      10.7     7.4     6.1     7.3    
23      11.6     7.6     6.2     7.6    
24      11.9     7.8     6.4     8.1    
25      12.1     8.2     6.7     8.4    
26      12.6     8.3     7.2     8.6    
27      12.7     8.5     7.4     8.7    
28      12.8     8.7     7.5     8.9    
29      13.3     8.8     7.8     9.0    
30      13.4     9.0     7.9      
31      13.6     9.1     8.0      
32      13.6     9.2     8.0      
33      13.8     9.2     8.1      
34      13.9     9.4     8.2      
35      13.9     9.4     8.3      
36      13.9     9.5     8.4      

 

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LOGO

 

     Cumulative Charge-off Rate by Booking Year—Grade D  

Mo #

   Y2008     Y2009     Y2010     Y2011     Y2012     Y2013  
1      0.0     0.0     0.0     0.0     0.0     0.0
2      0.0     0.0     0.0     0.0     0.0     0.0
3      0.0     0.0     0.0     0.0     0.0     0.0
4      0.0     0.0     0.0     0.0     0.0     0.0
5      0.0     0.5     0.1     0.1     0.1     0.1
6      0.0     1.0     0.4     0.4     0.4  
7      0.3     1.3     1.2     0.9     0.8  
8      0.6     1.6     1.9     1.4     1.3  
9      2.4     2.7     2.3     1.9     2.1  
10      2.7     3.5     2.9     2.6     2.7  
11      4.2     4.2     3.3     3.4     3.3  
12      4.4     4.5     4.0     3.9     3.9  
13      5.2     5.1     4.4     4.5     4.6  
14      5.2     5.5     5.0     5.0     5.0  
15      7.7     5.8     5.3     5.5     5.4  
16      8.3     6.5     5.9     6.0     5.7  
17      9.3     6.6     6.5     6.7    
18      9.4     7.2     6.7     7.3    
19      10.7     7.4     6.9     8.1    
20      11.7     7.9     7.2     8.5    
21      12.9     8.5     7.8     8.8    
22      14.3     8.9     7.9     9.2    
23      16.0     9.4     8.3     9.7    
24      16.6     9.6     8.6     10.0    
25      17.0     10.0     8.7     10.4    
26      17.3     10.2     9.0     10.8    
27      18.0     10.2     9.2     10.9    
28      19.0     10.4     9.5     11.2    
29      19.1     10.5     9.7     11.3    
30      19.1     10.6     9.8      
31      19.3     10.8     10.0      
32      19.6     10.8     10.1      
33      19.7     10.9     10.2      
34      19.9     10.9     10.4      
35      19.9     10.9     10.5      
36      20.0     11.0     10.6      

 

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Table of Contents

 

LOGO

 

     Cumulative Charge-off Rate by Booking Year—Grade E  

Mo #

   Y2008     Y2009     Y2010     Y2011     Y2012     Y2013  
1      0.0     0.0     0.0     0.0     0.0     0.0
2      0.0     0.0     0.0     0.0     0.0     0.0
3      0.0     0.0     0.0     0.0     0.0     0.0
4      0.0     0.0     0.0     0.0     0.0     0.0
5      0.0     0.7     0.1     0.5     0.1     0.1
6      0.0     1.9     0.1     0.7     0.3  
7      0.0     2.1     0.7     1.3     0.6  
8      0.1     3.2     1.2     1.6     1.3  
9      0.6     3.8     1.3     2.4     2.0  
10      1.1     4.2     1.3     3.0     2.5  
11      3.5     4.7     1.9     3.6     3.1  
12      4.4     5.7     2.7     4.2     3.8  
13      4.7     6.8     3.5     5.1     4.7  
14      4.7     7.4     4.7     5.3     5.2  
15      5.5     7.5     5.7     6.2     5.9  
16      7.2     8.6     6.6     6.9     6.2  
17      7.7     9.4     7.0     7.5    
18      8.1     10.3     7.7     8.3    
19      8.8     11.1     8.3     8.9    
20      9.6     11.1     8.7     9.8    
21      10.5     11.3     9.2     10.1    
22      11.6     11.6     9.2     10.6    
23      12.0     12.0     9.6     11.2    
24      12.5     12.0     10.3     11.7    
25      12.8     12.3     10.8     12.1    
26      13.4     12.7     11.3     12.5    
27      13.4     13.2     11.7     12.7    
28      13.7     13.3     12.2     12.8    
29      14.2     13.5     12.5     13.0    
30      14.3     13.8     12.6      
31      14.3     13.8     12.8      
32      14.7     13.8     13.0      
33      14.9     14.0     13.3      
34      15.2     14.0     13.4      
35      15.3     14.0     13.9      
36      15.3     14.0     14.0      

 

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LOGO

 

     Cumulative Charge-off Rate by Booking Year—Grade F & G  

Mo #

   Y2008     Y2009     Y2010     Y2011     Y2012     Y2013  
1      0.0     0.0     0.0     0.0     0.0     0.0
2      0.0     0.0     0.0     0.0     0.0     0.0
3      0.0     0.0     0.0     0.0     0.0     0.0
4      0.0     0.0     0.0     0.0     0.1     0.0
5      0.0     0.0     0.1     0.2     0.4     0.2
6      0.0     1.2     0.7     0.2     0.7  
7      0.0     2.7     1.7     0.7     1.4  
8      1.6     3.5     2.2     1.4     2.1  
9      2.6     3.8     3.0     2.3     2.9  
10      4.6     5.1     3.6     3.5     3.9  
11      6.0     5.9     4.6     4.7     4.9  
12      6.0     6.6     5.7     5.5     5.6  
13      5.9     7.0     6.0     7.1     6.8  
14      7.3     7.8     7.1     8.2     7.7  
15      9.4     9.9     8.3     9.0     8.4  
16      11.2     10.2     8.9     9.8     9.0  
17      11.8     10.2     9.0     10.7    
18      12.8     10.7     9.5     12.0    
19      15.5     12.5     10.1     12.9    
20      16.0     13.2     10.7     13.7    
21      19.1     14.1     11.2     14.8    
22      19.2     14.1     12.2     15.4    
23      21.6     14.5     12.9     15.7    
24      21.6     15.2     13.1     16.6    
25      22.8     16.6     13.9     16.6    
26      23.4     17.1     14.3     17.2    
27      23.8     18.3     15.1     17.6    
28      23.8     18.5     15.8     18.0    
29      23.9     18.6     16.2     18.1    
30      23.9     18.9     16.6      
31      24.1     18.9     16.8      
32      24.1     19.0     17.3      
33      24.1     19.6     17.9      
34      24.5     19.6     18.2      
35      24.9     19.6     18.3      
36      25.1     19.6     18.5      

 

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Item 1A. Risk Factors

RISKS RELATED TO LC AND THE LC PLATFORM

We have a limited operating history. As an online company in the early stages of development, we face increased risks, uncertainties, expenses and difficulties.

To be successful, the number of borrowers and investors and the volume of loans facilitated through our platform will need to increase, which will require us to increase our facilities, personnel and infrastructure to accommodate the greater servicing obligations and demands on our platform. Our platform is dependent upon our website to maintain current listings and transactions in the loans and Notes. We must constantly add new hardware and update our software and website, expand our customer support services and retain an appropriate number of employees to maintain the operations of our platform, as well as to satisfy our servicing obligations on the Loans and make payments on the Notes. If we are unable to increase the capacity of our platform and maintain the necessary infrastructure, you may experience delays in receipt of payments on the Notes and periodic downtime of our systems.

If we are unable to sustain our positive growth and become insolvent or bankrupt, you may lose your investment.

As of December 31, 2013, our accumulated deficit was $50.3 million and our total stockholders’ equity was $68.1 million. Prior to the quarter ended March 31, 2013, we incurred net losses. For the year ended December 31, 2013 we had net income of $7.3 million. We believe we will continue to generate positive operating cash flows. However, if our assumptions regarding our growth and operating plan are incorrect, we may need to slow our investment spending and/or find new funding to continue to operate our business. We believe that such funding would be available to us on terms that we would find acceptable. Any delay in securing, or failing to secure, any necessary funding could result in delays and operational slowdowns that could adversely affect the regularity of our processing payments, the cash flows on your investment and ultimately the value of your investment.

If we are unable to increase transaction volumes, our business and results of operations will be adversely affected.

To grow, we must continue to increase transaction volumes on our platform by attracting a large number of borrowers and investors in a cost-effective manner, many of whom have not previously participated in an online marketplace. We have experienced a high number of inquiries from potential borrowers who do not meet our criteria for submitting a loan request. We have also experienced, from time to time, loan requests for amounts that exceed the aggregate amount of investor purchase commitments. If there are not sufficient qualified loan requests, investors may be unable to deploy their capital in a timely or efficient manner. If there are not sufficient investor purchase commitments, borrowers may be unable to obtain funding for their Loans and become discouraged from using our platform for their borrowing needs.

If we are not able to attract qualified borrowers and sufficient investor purchase commitments, we will not be able to increase our transaction volumes. Additionally, we rely on a variety of methods to drive traffic to our website. If we are unable to use any of our current or future marketing initiatives or the cost of these initiatives were to significantly increase, we may not be able to attract new borrowers and investors in a cost-effective manner and, as a result, our revenue and results of operations would be affected adversely, which may impair our ability to maintain our platform.

The market in which we participate is competitive and, if we do not compete effectively, our operating results could be harmed.

The consumer and small business lending market is competitive and rapidly changing. We expect competition to persist and intensify in the future, which could harm our ability to increase volume on our platform.

Our principal competitors include major banking institutions, credit unions, credit card issuers and other consumer finance companies, as well as other online lending platforms. Competition could result in reduced volumes, reduced fees or the failure of our online lending platform to achieve or maintain more widespread market acceptance, any of which could harm our business. In addition, in the future we may experience new competition from more established internet companies who possess large, existing customer bases, substantial financial resources and established distribution channels. If any of these companies or any major financial institution decided to enter the online lending business, acquire one of our existing competitors or form a strategic alliance with one of our competitors, our ability to compete effectively could be significantly compromised and our operating results could be harmed.

Most of our current or potential competitors have significantly more financial, technical, marketing and other resources than we do and may be able to devote greater resources to the development, promotion, sale and support of their platforms and distribution channels. Our potential competitors may also have longer operating histories, more extensive customer bases, greater brand recognition and broader customer relationships than we have. These competitors may be better able to develop new products, to respond quickly to new technologies and to undertake more extensive marketing campaigns. Our industry is driven by constant innovation. If we are unable to compete with such companies and meet the need for innovation, the demand for our platform could stagnate or substantially decline.

 

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If we fail to promote and maintain our brand in a cost-effective manner, we may lose market share and our revenue may decrease.

We believe that developing and maintaining awareness of our brand in a cost-effective manner is critical to achieving widespread acceptance of our online financial community and attracting new borrowers and investors. Successful promotion of our brand will depend largely on the effectiveness of our marketing efforts and the member experience on our platform. Historically, our efforts to build our brand have involved significant expense, and it is likely that our future marketing efforts will require us to incur significant additional expenses. These brand promotion activities may not yield increased revenues and, even if they do, any revenue increases may not offset the expenses we incur to promote our brand. If we fail to successfully promote and maintain our brand, or if we incur substantial expenses in an unsuccessful attempt to promote and maintain our brand, we may lose our existing members to our competitors or be unable to attract new borrowers and investors, which would cause our revenue to decrease and may impair our ability to maintain our platform.

Our arrangements for backup servicing are limited. If we fail to maintain operations, you will experience a delay and increased cost in respect of your expected principal and interest payments on the Notes, and we may be unable to collect and process repayments from borrowers.

We have made arrangements for only limited backup servicing. If our platform were to fail or we became insolvent, we would attempt to transfer our Loan servicing obligations to our third party back-up servicer. There can be no assurance that this back-up servicer will be able to adequately perform the servicing of the outstanding Loan. If this back-up servicer assumes the servicing of the Loan, the back-up servicer will impose additional servicing fees, reducing the amounts available for payments on the Notes. Additionally, transferring these servicing obligations to our back-up servicer may result in delays in the processing and recovery of information with respect to amounts owed on the Loan or, if our platform becomes inoperable, may prevent us from servicing the Loan and making principal and interest payments on the Notes. If our back-up servicer is not able to service the Loan effectively, investors’ ability to receive principal and interest payments on their Notes may be substantially impaired.

If we were to become subject to a bankruptcy or similar proceeding, the rights of the holders of the Notes could be uncertain, and payments on the Notes may be limited and suspended or stopped. The Notes are unsecured and holders of the Notes do not have a security interest in the corresponding Loans or the proceeds of those corresponding Loans. The recovery, if any, of a holder on a Note may be substantially delayed and substantially less than the principal and interest due and to become due on the Note. Even funds held by us in accounts “in trust for” the holders of Notes may potentially be at risk.

If we were to become subject to a bankruptcy or similar proceeding, the recovery, if any, of a holder of a Note may be substantially delayed in time and may be substantially less in amount than the principal and interest due and to become due on the Note.

A bankruptcy or similar proceeding of us may cause delays in borrower payments. Borrowers may delay payments to us on account of Loans because of the uncertainties occasioned by a bankruptcy or similar proceeding of us, even if the borrowers have no legal right to do so, and such delay would reduce, at least for a time, the funds that might otherwise be available to pay the Notes corresponding to those Loans.

A bankruptcy or similar proceeding of us may cause delays in payments on Notes. The commencement of the bankruptcy or similar proceeding may, as a matter of law, prevent us from making regular payments on the Notes, even if the funds to make such payments are available. Because a bankruptcy or similar proceeding may take months or years to complete, the suspension of payment may effectively reduce the value of any recovery that a holder of a Note may receive (and no such recovery can be assured) by the time any recovery is available.

Interest accruing upon and following a bankruptcy or similar proceeding of us may not be paid. In bankruptcy or similar proceeding of us, interest accruing on the Notes during the preceding may not be part of the allowed claim of a holder of a Note. If the holder of a Note receives a recovery on the Note (and no such recovery can be assured), any such recovery may be based on, and limited to, the claim of the holder of the Note for principal and for interest accrued up to the date of the bankruptcy or similar proceeding, but not thereafter. Because a bankruptcy or similar proceeding may take months or years to complete, a claim based on principal and on interest only up to the start of the bankruptcy or similar proceeding may be substantially less than a claim based on principal and on interest through the end of the bankruptcy or similar proceeding.

In a bankruptcy or similar proceeding of us there may be uncertainty regarding whether a holder of a Note has any priority right to payment from the corresponding Loan. The Notes are unsecured and holders of the Notes do not have a security interest in the corresponding Loan or the proceeds of the corresponding Loan. Accordingly, the holder of a Note may be required to share the proceeds of the corresponding Loan with any other creditor of ours that has rights in those proceeds. If such sharing of proceeds is deemed appropriate, those proceeds that are either held by us in the clearing account at the time of the bankruptcy or similar proceeding of ours, or not yet received by us from borrowers at the time of the commencement of the bankruptcy or similar proceeding, may be at greater risk than those proceeds that are already held by us in the “in trust for,” or ITF, account at the time of the bankruptcy or similar proceeding. To the extent that proceeds of the corresponding Loan would be shared with other creditors of ours, any secured or priority rights of such other creditors may cause the proceeds to be distributed to such other creditors before, or ratably with, any distribution made to you on your Note.

 

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In a bankruptcy or similar proceeding of us, there may be uncertainty regarding whether a holder of a Note has any right of payment from assets of ours other than the corresponding Loan. In a bankruptcy or similar proceeding of us, it is possible that a Note could be deemed to have a right of payment only from proceeds of the corresponding Loan and not from any other assets of us, in which case the holder of the Note may not be entitled to share the proceeds of such other assets of us with other creditors of ours, whether or not, as described above, such other creditors would be entitled to share in the proceeds of the Loan corresponding to the Note. Alternatively, it is possible that a Note could be deemed to have a right of payment from both the Loan corresponding to the Note and from some or all other assets of ours, for example, based upon the automatic acceleration of the principal obligations on the Note upon the commencement of a bankruptcy or similar proceeding, in which case the holder of the Note may be entitled to share the proceeds of such other assets of ours with other creditors of us, whether or not, as described above, such other creditors would be entitled to share in the proceeds of the Loan corresponding to the Note. To the extent that proceeds of such other assets would be shared with other creditors of ours, any secured or priority rights of such other creditors may cause the proceeds to be distributed to such other creditors before, or ratably with, any distribution made to you on your Note.

In a bankruptcy or similar proceeding of us, there may be uncertainty regarding the rights of a holder of a Note, if any, to payment from funds in the clearing account. If a borrower has paid us on a Loan corresponding to a Note before a bankruptcy or similar proceeding of us is commenced, and those funds are held in the clearing account and have not been used by us to make payments on the Note as of the date the bankruptcy or similar proceeding is commenced, there can be no assurance that we will or will be able to use such funds to make payments on the Note. Other creditors of ours may be deemed to have, or actually have, rights to such funds that are equal to or greater than the rights of the holder of the Note.

In a bankruptcy or similar proceeding of us, there may be uncertainty regarding the rights of a holder of a Note, if any, to access funds in the ITF Account. If a borrower has paid us on a Loan corresponding to a Note before a bankruptcy or similar proceeding of us is commenced, and those funds have been used by us to make payments on the Note prior to the date the bankruptcy or similar proceeding is commenced, but the payments on the Note continue to be held by us in an ITF Account, there can be no assurance that the holder of the Note will have immediate access to the funds constituting the payment or that the funds constituting the payment will ultimately be released to the holder of the Note. While the Trust Agreement states that funds in the ITF Account are trust property and are not intended to be property of ours or subject to claims of our creditors generally, there can be no assurance that, if the matter were to be litigated, such litigation would not delay or prevent the holder of a Note from accessing the portion of those funds in which the holder has an interest.

In a bankruptcy or similar proceeding of us, there may be uncertainty regarding the rights of a holder of a Note, if any, to the return of the purchase price of a Note if the corresponding Loan has not been funded. If the purchase price of a Note is paid to us and a bankruptcy or similar proceeding of us is commenced, the holder of the Note may not be able to obtain a return of the funds constituting the purchase price, even if the Loan corresponding to the Note has not been funded as of the date that the bankruptcy or similar proceeding is commenced and even if the funds are held by us in the ITF Account.

In a bankruptcy or similar proceeding of us, the holder of a Note may be delayed or prevented from enforcing our repurchase obligations in cases of confirmed identity fraud. In a bankruptcy or similar proceeding of us, any right of a holder of Note to require us to repurchase the Note as a result of a confirmed identity fraud incident may not be specifically enforced, and such holder’s claim for such repurchase may be treated less favorably than a general unsecured obligation of ours as described and subject to the limitations in this “Risks Related to LC and the LC Platform – If we were to become subject to a bankruptcy or similar proceeding” section.

In a bankruptcy or similar proceeding of us, the implementation of back-up servicing arrangements may be delayed or prevented. In a bankruptcy or similar proceeding of us, our ability to transfer servicing obligations to our back-up servicer may be limited and subject to the approval of the bankruptcy court or other presiding authority. The bankruptcy process may delay or prevent the implementation of back-up servicing, which may impair the collection of Loan payments to the detriment of the Notes.

If the security of our members’ confidential information stored in our systems is breached or otherwise subjected to unauthorized access, your confidential information may be stolen, our reputation may be harmed, and we may be exposed to liability.

Our platform stores our borrowers’ and investors’ bank information and other personally-identifiable sensitive data. Any accidental or willful security breaches or other unauthorized access could cause your confidential information to be stolen and used for criminal purposes. Security breaches or unauthorized access to confidential information could also expose us to liability related to the loss of the information, time-consuming and expensive litigation and negative publicity. If security measures are breached because of third-party action, employee error, malfeasance or otherwise, or if design flaws in our software are exposed and exploited, and, as a result, a third party or disaffected employee obtains unauthorized access to any of our members’ data, our relationships with our members will be severely damaged, and we could incur significant liability.

 

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Because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until they are launched against a target, we and our third-party hosting facilities may be unable to anticipate these techniques or to implement adequate preventative measures. In addition, many states have enacted laws requiring companies to notify individuals of data security breaches involving their personal data. These mandatory disclosures regarding a security breach are costly to implement and often lead to widespread negative publicity, which may cause our members to lose confidence in the effectiveness of our data security measures. Any security breach, whether actual or perceived, would harm our reputation, and we could lose members.

Our ability to service Loans or maintain accurate accounts may be adversely affected by computer viruses, physical or electronic break-ins and similar disruptions.

The highly automated nature of our platform may make it an attractive target and potentially vulnerable to computer viruses, physical or electronic break-ins and similar disruptions. If a “hacker” were able to infiltrate our platform, you would be subject to an increased risk of fraud or identity theft, and may experience losses on, or delays in the recoupment of amounts owed on, a fraudulently induced purchase of a Note or Certificates. Additionally, if a hacker were able to access our secure files, he or she might be able to gain access to your personal information. While we have taken steps to prevent such activity from affecting our platform, if we are unable to prevent such activity, the value in the Notes and our ability to fulfill our servicing obligations and to maintain our platform would be adversely affected.

Any significant disruption in service on our website or in our computer systems, including events beyond our control, could prevent us from processing or posting payments on the loans or the Notes, reduce the attractiveness of our platform and result in a loss of members.

If a catastrophic event resulted in a platform outage and physical data loss, our ability to perform our servicing obligations would be materially and adversely affected. The satisfactory performance, reliability and availability of our technology and our underlying network infrastructure are critical to our operations, level of customer service, reputation and ability to attract new borrowers and investors and retain existing members. Our system hardware is hosted in a hosting facility located in Las Vegas, Nevada, owned and operated by SwitchNet. We also maintain a real time backup system located in Santa Clara, CA owned and operated by SAVVIS. SwitchNet does not guarantee that our members’ access to our website will be uninterrupted, error-free or secure. Our operations depend on SwitchNet’s ability to protect their and our systems in their facilities against damage or interruption from natural disasters, power or telecommunications failures, air quality, temperature, humidity and other environmental concerns, computer viruses or other attempts to harm our systems, criminal acts and similar events. If our arrangement with SwitchNet is terminated, or there is a lapse of service or damage to SwitchNet facilities, we could experience interruptions in our service as well as delays and additional expense in arranging new facilities.

Any interruptions or delays in our service, whether as a result of SwitchNet other third-party error, our own error, natural disasters or security breaches, whether accidental or willful, could harm our relationships with our members and our reputation. Additionally, in the event of damage or interruption, our insurance policies may not adequately compensate us for any losses that we may incur. Our disaster recovery plan has not been tested under actual disaster conditions, and we may not have sufficient capacity to recover all data and services in the event of an outage at a SwitchNet facility. These factors could prevent us from processing or posting payments on the Loans or the Notes, damage our brand and reputation, divert our employees’ attention, reduce our revenue, subject us to liability and cause members to abandon our platform, any of which could adversely affect our business, financial condition and results of operations.

Competition for our employees is intense, and we may not be able to attract and retain the highly skilled employees whom we need to support our business.

Competition for highly skilled technical and financial personnel is extremely intense. We may not be able to hire and retain these personnel at compensation levels consistent with our existing compensation and salary structure. Many of the companies with which we compete for experienced employees have greater resources than we have and may be able to offer more attractive terms of employment.

In addition, we invest significant time and expense in training our employees, which increases their value to competitors who may seek to recruit them. If we fail to retain our employees, we could incur significant expenses in hiring and training their replacements and the quality of our services and our ability to serve our members could diminish, resulting in a material adverse effect on our business.

Our growth could strain our personnel resources and infrastructure, and if we are unable to implement appropriate controls and procedures to manage our growth, we may not be able to successfully implement our business plan.

Our growth in headcount and operations since our inception has placed, and will continue to place, to the extent that we are able to sustain such growth, a significant strain on our management and our administrative, operational and financial reporting infrastructure.

 

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Our success will depend in part on the ability of our senior management to manage the growth we achieve effectively. To do so, we must continue to hire, train and manage new employees as needed. If our new hires perform poorly, or if we are unsuccessful in hiring, training, managing and integrating these new employees, or if we are not successful in retaining our existing employees, our business may be harmed. To manage the expected growth of our operations and personnel, we will need to continue to improve our operational and financial controls and update our reporting procedures and systems. The addition of new employees and the system development that we anticipate will be necessary to manage our growth will increase our cost base, which will make it more difficult for us to offset any future revenue shortfalls by reducing expenses in the short term. If we fail to successfully manage our growth, we will be unable to execute our business plan.

We may evaluate, and potentially consummate, acquisitions, which could require significant management attention, disrupt our business, and adversely affect our financial results.

As part of our business strategy, we may, from time to time, evaluate and consider potential strategic transactions, combinations, acquisitions or alliances, to enhance our existing businesses or develop new products and services. At any given time we may be engaged in discussions or negotiations with respect to one or more of these types of transactions, and any of these transactions could be material to our financial condition and results of operations if consummated. If we are able to identify an appropriate business opportunity, we may not be able to successfully consummate the transaction, and even if we do consummate such a transaction, we may be unable to obtain the benefits or avoid the difficulties and risks of such transaction.

Any future acquisition will involve risks commonly encountered in business relationships, including:

 

    the difficulties in assimilating and integrating the operations, personnel, systems, technologies, products and services of the acquired business;

 

    the technologies, products or businesses that we acquire may not achieve expected levels of revenue, profitability, benefits or productivity;

 

    the difficulties in retaining, training, motivating and integrating key personnel;

 

    the diversion of management’s time and resources away from our normal daily operations;

 

    the difficulties in successfully incorporating licensed or acquired technology and rights into product and service offerings;

 

    the difficulties in maintaining uniform standards, controls, procedures and policies within the combined organizations;

 

    the difficulties in retaining relationships with customers, employees and suppliers of the acquired business;

 

    the risks of entering markets in which we have no or limited direct prior experience;

 

    regulatory risks, including remaining in good standing with existing regulatory bodies, receiving any necessary pre-closing or post-closing approvals, as well as being subject to new regulators with oversight over an acquired business;

 

    potential disruptions to our ongoing businesses; and

 

    unexpected costs and unknown risks and liabilities associated with the acquisition.

We cannot assure you that we will make any acquisitions or that any future acquisitions will be successful, will assist us in the accomplishment of our or our business strategy, or will generate sufficient revenues to offset the associated costs and other adverse effects or will otherwise result in receiving the intended benefits of the acquisition. In addition, we cannot assure you that any future acquisition of new businesses or technology will lead to the successful development of new or enhanced products and services, or that any new or enhanced products and services, if developed, will achieve market acceptance or prove to be profitable.

We may issue debt securities, or otherwise incur substantial debt, to complete an acquisition, which may adversely affect our leverage and financial condition and thus negatively impact our operations.

Although we have no current commitments to issue any securities, or to otherwise incur outstanding debt, we may incur substantial debt to complete an acquisition. The incurrence of debt could have a variety of negative effects, including:

 

    default and foreclosure on our assets if our operating revenues after an acquisition are insufficient to repay debt obligations;

 

    acceleration of obligations to repay the indebtedness even if we make all principal and interest payments when due if we breach any covenants that require the maintenance of certain financial ratios or reserves without a waiver or renegotiation of that covenant;

 

    our inability to obtain necessary additional financing if the debt security contains covenants restricting our ability to obtain such financing while the debt security is outstanding;

 

    diverting a substantial portion of cash flow to pay principal and interest on such debt, which would reduce the funds available for expenses, capital expenditures, acquisitions and other general corporate purposes; and

 

    creating potential limitations on our flexibility in planning for and reacting to changes in our business and in the industry in which we operate;

any of which could adversely affect our operations or financial condition.

 

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If we fail to retain our key personnel, we may not be able to achieve our anticipated level of growth and our business could suffer.

Our future depends, in part, on our ability to attract and retain key personnel. Our future also depends on the continued contributions of our executive officers and other key personnel, each of whom would be difficult to replace. In particular, our Founder/Chief Executive Officer is critical to the management of our business and operations and the development of our strategic direction. The loss of the services of Mr. Laplanche or other executive officers or key personnel and the process to replace any of our key personnel would involve significant time and expense and may significantly delay or prevent the achievement of our business objectives.

It may be difficult and costly to protect our intellectual property rights, and we may not be able to ensure their protection.

Our ability to maintain our platform and arrange Loans depends, in part, upon our proprietary technology. We may be unable to protect our proprietary technology effectively, however, which would allow competitors to duplicate our products and adversely affect our ability to compete with them. A third party may attempt to reverse engineer or otherwise obtain and use our proprietary technology without our consent. In addition, our platform may infringe upon claims of third-party patents, and we may face intellectual property challenges from such other parties. We may not be successful in defending against any such challenges or in obtaining licenses to avoid or resolve any intellectual property disputes. Furthermore, our technology may become obsolete, and there is no guarantee that we will be able to successfully develop, obtain or use new technologies to adapt our platform to compete with other person-to-person lending platforms as they develop. If we cannot protect our proprietary technology from intellectual property challenges, or if the platform becomes obsolete, our ability to maintain the platform, arrange Loans or perform our servicing obligations on the Loans could be adversely affected.

Purchasers of Notes will have no control over us and will not be able to influence our corporate matters.

The Notes offered through our platform grant no equity interest in LC to the purchaser nor grant the purchaser the ability to vote on or influence our corporate decisions. As a result, our stockholders will continue to exercise 100% voting control over all our corporate matters, including the election of directors and approval of significant corporate transactions, such as a merger or other sale of our company or its assets.

Neither the Notes nor the related indenture restrict our ability to incur additional indebtedness. Any additional debt we incur may increase our risk of bankruptcy, which could impair your ability to receive the principal and interest payments you expect to receive on your Notes.

If we incur additional debt after the Notes are issued, it may adversely affect our creditworthiness generally, and could result in the financial distress, insolvency, or bankruptcy of LC. As discussed above, the financial distress, insolvency or bankruptcy of LC could impair your ability to receive the principal and interest payments you expect to receive on your Notes.

RISKS RELATING TO THE NOTES, AND THE CORRESPONDING LOANS ON WHICH THE NOTES ARE DEPENDENT

You may lose some or all of your initial purchase price for the Notes because the Notes are highly risky and speculative. Only investors who can bear the loss of their entire purchase price should purchase.

Notes are highly risky and speculative because payments on Notes depend entirely on payments to us of unsecured obligations of individual borrowers and contemporaneous payments on the Notes, which are special, limited obligations of LC. Notes are suitable purchases only for investors of adequate financial means. If you cannot afford to lose all of the money you plan to invest in Notes, you should not purchase Notes.

Payments on each Note depend entirely on the payments, if any, we receive on the corresponding Loan related to that Note. If a borrower fails to make any payments on the corresponding Loan related to your Note, you will not receive any payments on your Note.

We will make payments pro rata on a series of Notes, net of our service charge, only if we receive the borrower’s payments on the corresponding Loan and such payments clear and therefore become available for distribution to investors. We will not pay to investors any unsuccessful payment fees, check processing fees, collection fees we or our third-party collection agency charge. If we do not receive payments on the corresponding Loan related to your Note, you will not be entitled to any payments under the terms of the Notes, and you will not receive any payments. The failure of a borrower to repay a Loan is not an event of default under the terms of the Notes.

 

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The Notes are special, limited obligations of ours only, and the Notes are not secured by any collateral or guaranteed or insured by any third party.

The Notes will not represent an obligation of borrowers or any other party except by us, and are special, limited obligations of ours. The Notes are not secured by any collateral and are not guaranteed or insured by any governmental agency or instrumentality or any third party.

Loans are unsecured obligations and as such are not backed by any collateral or guaranteed nor are they insured by any third party, and you must rely on us and our designated third-party collection agency to pursue collection against any borrower.

Loans are unsecured obligations of borrowers. They are not secured by any collateral, not guaranteed or insured by any third party and not backed by any governmental authority in any way. We and our designated third-party collection agency will, therefore, be limited in our ability to collect Loans.

Moreover, unsecured Loans are obligations of borrowers to us as assignee of the Loan’s promissory note from WebBank, or obligations of borrowers to the Trust as assignee of the Loan’s promissory note from us. Loans are not obligations to holders of Notes. Holders of Notes will have no recourse against borrowers and no ability to pursue borrowers to collect payments under Loans. Holders of Notes may look only to us and the Trust, respectively, for payment of the Notes, and our obligation to pay the Notes is limited as described in this document. Furthermore, if a borrower fails to make any payments on the Loan corresponding to a Note, the holder of that Note will not receive any payments on that Note. The holder of that Note will not be able to obtain the identity of the borrower in order to contact the borrower about the defaulted Loan.

If payments on the corresponding Loan become overdue, it is likely you will not receive the full principal and interest payments that you expect due to collection fees and other costs, and you may not recover any of your original purchase price.

If the borrower fails to make a required payment on a Loan within 30 days of the due date, we will pursue reasonable collection efforts in respect of the Loan. We may handle collection efforts in respect of a delinquent Loan ourselves, or we may refer a delinquent Loan to a collection agency on the 31st day of its delinquency. These efforts will be considered reasonable collection efforts. If we refer a Loan to a collection agency, we will have no other obligation to attempt to collect on that delinquent Loan.

If payment amounts on a delinquent Loan are received from a borrower more than 30 days after their due date, then we, or, if we have referred the delinquent Loan to an outside collection agency, that collection agency, will retain a percentage of any funds recovered from such borrower as a service fee before any principal or interest becomes payable to you from recovered amounts in respect of Notes related to the corresponding Loan.

We or the collection agency may be unable to recover some or all of the unpaid balance of a non-performing Loan. You must rely on the collection efforts from us and the designated collection agency, and you are not permitted to attempt to collect payments on the Loan in any manner.

Borrowers may not view or treat their obligations to us as having the same significance as loans from traditional lending sources, such as bank loans and borrower Loans may have a higher risk of default than loans of borrowers with similar credit scores to other lenders.

The investment return on the Notes depends on borrowers fulfilling their payment obligations in a timely and complete manner under the corresponding Loan. Borrowers may not view our lending obligations facilitated through our platform as having the same significance as other credit obligations arising under more traditional circumstances, such as loans from banks or other commercial financial institutions. If a borrower neglects his or her payment obligations on a Loan upon which payment of the corresponding Note is dependent or chooses not to repay his or her borrower Loan entirely, you may not be able to recover any portion of your investment in a Note.

Our Public Credit Policy loan grading algorithm is based upon historical credit performance of certain populations and as a result the actual performance of a Loan may not be consistent within or across loan grades and may result in an unanticipated loss of capital.

Our proprietary pricing algorithm for Public Policy Loans is based primarily upon the historical loan performance of actual borrowers that met the requirements of the algorithm, the assumed performance of applicants that would have been approved under the current algorithm but were declined by prior methodologies, and the exclusion of borrowers that were approved under prior methodologies but would have been declined under the new algorithm, in addition to other factors and assumptions. Because the algorithm is based upon these assumed performances and the assumptions of management which may change over time as the available data grows and our analysis continues to develop, the actual performance of a graded loan may differ materially versus previously issued, similarly graded loans or other grades and this may result in a greater loss of your investment capital than anticipated.

 

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Credit Information that we receive about a borrower may be inaccurate or may not accurately reflect the borrower’s creditworthiness, which may cause you to lose part or all of the purchase price you pay for a Note.

We obtain borrower credit information from consumer reporting agencies, such as TransUnion, Experian or Equifax, and assign one of 35 loan grades to Public Policy Loan requests, from A1 through G5, based on the reported credit score, other information reported by the consumer reporting agencies and the requested loan amount. A credit score or loan grade assigned to a borrower may not reflect that borrower’s actual creditworthiness because the credit score may be based on outdated, incomplete or inaccurate consumer reporting data, and we do not verify the information obtained from the borrower’s credit report. Additionally, there is a risk that, following the date of the credit report that we obtain and review, a borrower may have:

 

    become delinquent in the payment of an outstanding obligation;

 

    default on a pre-existing debt obligation;

 

    take on additional debt; or

 

    sustain other adverse financial events.

Moreover, investors do not, and will not, have access to consolidated financial statements of borrowers, or to other detailed financial information about borrowers.

Information supplied by borrowers may be inaccurate or intentionally false and should generally not be relied upon.

Borrowers supply a variety of information that is included in the borrower loan listings on our website and in the posting reports and sales reports we file with the SEC. Other than as described below, we do not verify this information, and it may be inaccurate or incomplete. For example, we do not verify a borrower’s stated tenure, job title, home ownership status or intention for the use of loan proceeds, and the information borrower’s supply may be inaccurate or intentionally false. Unless we have specifically indicated otherwise in a loan listing, we do not verify a borrower’s stated income. For example, we do not verify borrower paystubs, IRS Forms W-2, federal or state income tax returns, bank and savings account balances, retirement account balances, letters from employers, home ownership or rental records, car ownership records or any records related to past bankruptcy and legal proceedings. In the limited cases in which we have selected borrowers for income or employment verification, for the year ended December 31, 2013, approximately 58.6% of requested borrowers provided us with satisfactory responses to verify their income or employment; approximately 9.6% of requested borrowers withdrew their applications for Loans, and approximately 30.5% of requested borrowers either failed to respond to our request in full or provided information that failed to verify their stated information, and we therefore removed those borrowers’ Loan postings. The identity of borrowers is not revealed to investors, and investors also have no ability to obtain or verify borrower information either before or after they purchase a Note. Potential investors may only communicate with borrowers through our website postings, and then only on an anonymous basis. While we may monitor website posting for appropriate content, we do not verify any information in the postings nor do we respond to requests from investor or borrowers in any posting and any response to the contrary should not be seen as accurate.

If you rely on false, misleading or unverified information supplied by borrowers in deciding to purchase Notes, you may lose part or the entire purchase price you pay for a Note. Loan posting and borrower information available on our website will be statements made in connection with the purchase and sale of securities, and therefore subject to Rule 10b-5 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Loan posting and borrower information filed in prospectus supplements will be subject to the liability provisions of the Securities Act. However, in each event, we are only providing information that was submitted to us by the borrower. In this document, we advise potential investors as to the limitations on the reliability of this information, and an investor’s recourse in the event this information is false will be extremely limited. Consequently, investors should rely on loan grade, which we determine based on third-party credit report information, and the size of the loan request, and should not rely on unverified information provided by borrowers.

You should not assume that a Note is appropriate for you as an investment vehicle just because it corresponds to a Loan listed on our platform or is included in a portfolio built based upon your investment criteria through any of the portfolio tools.

While we take precautions to prevent borrower identity fraud, it is possible that identity fraud may still occur and adversely affect your ability to receive the principal and interest payments that you expect to receive on Notes.

We use identity checks with a third-party provider to verify each borrower’s identity and credit history. Notwithstanding our efforts, there is a risk that identity fraud may occur without our detecting it, and a Loan obtained by identity fraud may simply default. While we will repurchase Notes in limited identity fraud circumstances involving the corresponding Loan, we are not otherwise obligated to repurchase a Note from you for any other reason. From October 2008, when we commenced the issuance of Notes, through December 31, 2013, we had repurchased Notes for a total of $0.5 million relating to fifty one corresponding Loans in which identity fraud occurred. If we repurchase a Note based on identity fraud involving the corresponding Loan, you will only receive an amount equal to the outstanding principal balance of the Note.

 

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We have the exclusive right to investigate claims of identity theft and determine, in our sole discretion, whether verifiable identity theft has occurred. As we are the sole entity with the ability to investigate and determine verifiable identity theft, which triggers our repurchase obligation, a conflict of interest exists as the denial of a claim under our identity theft guarantee would save us from the repurchase obligation.

Our performance data about borrower performance on our Public Policy Loans is just over six years old. Default and charge-off rates on Loans may increase.

Due to our limited operational and origination history, we have limited historical performance data regarding borrower performance on Public Policy Loans, and we do not yet know what the long-term loss experience may be. As of December 31, 2013, for all Loans, our default and charged-off rate was 3.29% of the principal balance of loans. These default and charge-off rates may increase in the future. In addition, as we do not have significant experience in the performance of five-year Public Policy Loans, the future default rates on these loan types is uncertain and may exceed our current expectations. As actual loss experience increases on our platform, we may change how loan interest rates are set, and investors who have purchased Notes prior to any such changes will not benefit from these changes.

Default rates on loans may increase as a result of economic conditions beyond our control and beyond the control of borrowers.

Loan default rates may be significantly affected by economic downturns or general economic conditions beyond our control and beyond the control of individual borrowers. In particular, default rates on Public Policy Loans on which the Notes are dependent may increase due to factors such as prevailing interest rates, the rate of unemployment, the level of consumer confidence, residential real estate values, the value of the U.S. dollar, energy prices, changes in consumer spending, the number of personal bankruptcies, disruptions in the credit markets and other factors. The significant downturn in the United States economy that occurred in the past several years caused default rates on consumer loans to increase, and a similar downturn in the future will likely result in increased default rates.

If you decide to invest through the platform and concentrate your investment in a single Note (or a small number of Notes), your entire return will be highly dependent on the performance of a single loan.

Loans facilitated through our platform have a wide range of credit grades, and we expect that some borrowers at all credit grades will default on their loan. If you decide to invest through the platform and concentrate your investment in a single Note (or a small number of Notes) your entire return will depend on the performance of that single Loan (or that concentrated small number of Notes). For example, if you plan to purchase $100 of Notes, and choose to invest the entire $100 in a single Note instead of in four $25 Notes corresponding to the loan of four different borrowers, you would lose your entire $100 investment if that single borrower defaulted. Failing to diversify your investment increases the risk of losing your entire investment due to a single borrower’s default, or a small number of borrower defaults. Diversification, however, will not eliminate the risk that you may lose some, or all, of the expected principal and interest payments on the Notes.

The Public Policy Loan on which the Notes are dependent do not restrict borrowers from incurring additional unsecured or secured debt, nor do they impose any financial restrictions on borrowers during the term of the Public Policy Loan, which may increase the likelihood that a borrower may default on their loan.

All Public Policy Loans are credit obligations of individual borrowers. If a borrower incurs additional debt after obtaining a Loan through our platform, that additional debt may adversely affect the borrower’s creditworthiness generally, and could result in the financial distress, insolvency, or bankruptcy of the borrower. This circumstance could ultimately impair the ability of that borrower to make payments on the borrower’s loan and your ability to receive the principal and interest payments that you expect to receive on Notes dependent on those Public Policy Loans. To the extent that the borrower has or incurs other indebtedness and cannot pay all of its indebtedness, the borrower may choose to make payments to other creditors, rather than to us.

As to these Public Policy Loans, to the extent borrowers incur other indebtedness that is secured, such as mortgage, home equity or auto loans, the ability of the secured creditors to exercise remedies against the assets of the borrower may impair the borrower’s ability to repay the loan on which your Note is dependent for payment, or it may impair our ability to collect on the Loan if it goes unpaid. Since the Public Policy Loans are unsecured, borrowers may choose to repay obligations under other indebtedness before repaying loans facilitated through our platform because the borrowers have no collateral at risk. An investor will not be made aware of any additional debt incurred by a borrower, or whether such debt is secured.

Loans do not contain any cross-default or similar provisions. If borrowers default on their debt obligations other than the Loan, the ability to collect on Loans on which the Notes are dependent may be substantially impaired.

Loan documents do not contain cross-default provisions. A cross-default provision makes a default under certain debt of a borrower an automatic default on other debt of that borrower. The effect of this can be to allow other creditors to move more quickly to claim any assets of the borrower. Because the Loans do not contain cross-default provisions, a Loan will not be placed automatically in default upon that borrower’s default on any of the borrower’s other debt obligations, unless there are relevant independent grounds for a default on the loan.

 

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In addition, the Loan will not be referred to a third-party collection agency for collection because of a borrower’s default on debt obligations other than the Loan. If a borrower defaults on debt obligations owed to a third party and continues to satisfy payment obligations under the Loan, the third party may seize the borrower’s assets or pursue other legal action against the borrower before the borrower defaults on the Loan. Payments on Notes may be substantially reduced if the borrower subsequently defaults on the loan and you may be unable to recoup any or all of your expected principal and interest payments on those Notes.

Borrowers may seek the protection of debtor relief under federal bankruptcy or state insolvency laws, which may result in the nonpayment of the Notes.

Borrowers may seek protection under federal bankruptcy law or similar laws. If a borrower files for bankruptcy (or becomes the subject of an involuntary petition), a stay will go into effect that will automatically put any pending collection actions, on hold and prevent further collection action absent bankruptcy court approval. If we receive notice that a borrower has filed for protection under the federal bankruptcy laws, or has become the subject of an involuntary bankruptcy petition, we will put the borrower’s loan account into “bankruptcy status.” When we put a Loan into bankruptcy status, we terminate automatic monthly Automated Clearing House (“ACH”) debits and do not undertake collection activity without bankruptcy court approval. Whether any payment will ultimately be made or received on a Loan after a bankruptcy status is declared, depends on the borrower’s particular financial situation and the determination of the court. It is possible that the borrower’s liability on the Loan will be discharged in bankruptcy. In most cases involving the bankruptcy of a borrower with an unsecured Loan, unsecured creditors, including us and the Trust as holders of the Loan, will receive only a fraction of any amount outstanding on their Loan, if anything.

Federal law entitles borrowers who enter active military service to an interest rate cap and certain other rights that may inhibit the ability to collect on loans and reduce the amount of interest paid on the corresponding Notes.

Federal law provides borrowers on active military service with rights that may reduce the return on your investment, as well as delay or impair our ability to collect on a borrower Loan corresponding to your Note. The Service members Civil Relief Act (“SCRA”) requires that the interest rate on preexisting debts, such as Loans, be set at no more than 6% while the qualified service member or reservist is on active duty. A holder of a Note that is dependent on such a Loan will not receive the difference between 6% and the original stated interest rate for the Loan during any such period.

This law also permits courts to stay proceedings and execution of judgments against service members and reservists on active duty, which may delay recovery on any Loan in default, and, accordingly, payments on Notes that are dependent on these Loans. If there are any amounts under such a Loan still due and owing to us after the final maturity of the Notes that correspond to the Loan, we will have no further obligation to make payments on the Notes, even if we later receive payments after the final maturity of the Notes. We do not take military service into account in assigning loan grades to borrower loan requests. In addition, as part of the borrower registration process, we do not request our borrowers to confirm if they are a qualified service member or reservists within the meaning of the SCRA.

The death of a borrower may substantially impair your ability to recoup the full purchase price of Notes that are dependent on the loan to that borrower or to receive the interest payments that you expect to receive on the Notes.

If a borrower dies with a loan outstanding, we will generally seek to work with the executor of the estate of the borrower to obtain repayment of the loan. However, the borrower’s estate may not contain sufficient assets to repay the loan on which your Note is dependent. In addition, if a borrower dies near the end of the term of an unsecured loan, it is unlikely that any further payments will be made on the Notes corresponding to such loan, because the time required for the probate of the estate may extend beyond the initial maturity date and the final maturity date of the Notes.

The LC platform allows a borrower to prepay a Loan at any time without penalty. Loan prepayments will extinguish or limit your ability to receive additional interest payments on your investment.

Loan prepayments occur when a borrower decides to pay some or all of the principal amount on a Loan earlier than originally scheduled. A borrower may decide to prepay all or a portion of the remaining principal amount at any time without penalty. In the event of a prepayment of the entire remaining unpaid principal amount of a loan on which the Notes are dependent, you will receive your share of such prepayment, net of our 1.00% service fee applicable to Notes, but further interest will not accrue after the date on which the payment is made. If a borrower prepays a portion of the remaining unpaid principal balance on a loan on which the Notes are dependent, we will reduce the outstanding principal amount and interest will cease to accrue on the prepaid portion.

The combination of the reduced principal amount and the unchanged monthly payment cause the effective term of the loan to decline. If a borrower prepays a loan in full or in part, you will not receive all of the interest payments that you originally expected to receive

 

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on Notes that are dependent on that loan, and you may not be able to find a similar rate of return on another investment at the time at which the loan is prepaid. Prepayments of loans passed onto Note holders are subject to our 1.00% service charge, even if the prepayment occurs immediately after issuance of your Note. The return on the Note may actually be negative if prepayment occurs within the first few months after issuance.

Prevailing interest rates may change during the term of the Loan on which your Note is dependent. If interest rates increase, you may receive less value from your purchase of the Note in comparison to other investment opportunities. If interest rates decrease, Borrowers may prepay their loan due to changes in interest rates, and you may not be able to redeploy the amounts you receive from prepayments in a way that offers you the return you expected to receive from the Notes.

The loan on which the Notes are dependent have a term of three or five years and bear fixed, not floating, rates of interest. If prevailing interest rates increase, the interest rates on Notes you purchased might be less than the current rate of return you could earn if you invested your purchase price in other investments. While you may still receive a return on your purchase price for the Notes through the receipt of amounts equal to the interest portion of a borrower’s payments on the loan, if prevailing interest rates exceed the rate of interest payable on the loan, the payments you receive during the term of the Note may not reflect the full opportunity cost to you when you take into account factors such as the time value of money.

Alternatively, if prevailing interest rates on consumer loans decrease, borrowers may choose to prepay their loans without penalty with money they borrow from other sources or other resources, and you may not receive the interest payments on Notes dependent on those loans that you expect to receive or be able to find an alternative use of your money to realize a similar rate of return at the time at which the Note is prepaid.

Investor funds in an investor account are held in a pooled deposit account that does not earn interest.

Your investor account that enables you to purchase Notes represents an interest in a pooled demand deposit account maintained by us “in trust for” investors that does not earn interest. Similarly your investor account that enables you to purchase Notes represents either a discrete or pooled demand deposit account maintained by an independent custodian “as custodian for” investors that does not earn interest. Investor funds committed to purchase Notes represent binding commitments, and such committed funds may not be withdrawn from investor accounts (unless and until corresponding Loans included in the order are not funded, in which case the corresponding funds become available to the investor again). Funds committed to purchase Notes will not earn interest in the ITF Account or custodial accounts, respectively, and interest will not begin to accrue on a Note until the corresponding Loan has closed and the Note is issued.

The pooled investor account has “pass through” deposit insurance through the FDIC, but only up to FDIC limits.

Investor funds in the ITF Account at a federal banking institution. Under our agreement with the bank, investors depositing funds in the ITF Account benefit from FDIC insurance to the maximum amount, on a “pass-through” basis. Investors holding funds in the ITF Account will not have FDIC coverage for amounts in excess of the FDIC maximum, which is currently $250,000 and is measured across all accounts in a particular institution. In addition, in the unlikely event that FDIC coverage were not available on a pass-through basis, investors would have no significant FDIC insurance coverage on their deposits.

The Notes will not be listed on any securities exchange, will not be transferable except for Notes transferable through the Note Trading Platform by FOLIOfn, and must be held only by LC investors. You should be prepared to hold the Notes you purchase until they mature.

The Notes will not be listed on any securities exchange. All Notes must be held by LC investors. The Notes will not be transferable except through the Note Trading Platform by FOLIOfn Investments, Inc. (“FOLIOfn”), a registered broker-dealer and the trading platform is not available to residents of all states. There can be no assurance that an active market for Notes will develop on the trading platform, that there will be a buyer for any particular Notes listed for resale on the trading platform or that the trading platform will continue to operate. Therefore, investors must be prepared to hold their Notes to maturity.

The U.S. federal income tax consequences of an investment in the Notes are uncertain.

There are no statutory provisions, regulations, published rulings, or judicial decisions that directly address the characterization of the Notes, or instruments similar to the Notes, for U.S. federal income tax purposes. However, although the matter is not free from doubt,

 

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we intend to treat the Notes as our indebtedness for U.S. federal income tax purposes. As a result of such treatment, the Notes will have original issue discount, or OID, for U.S. federal income tax purposes because payments on the Notes are dependent on payments on the corresponding Loan. Further, a holder of a Note, other than a holder that is holding the Note in a tax deferred account such as an IRA, will be required to include the OID in income as ordinary interest income for U.S. federal income tax purposes as it accrues (which may be in advance of interest being paid on the Note), regardless of such holder’s regular method of accounting. This characterization is not binding on the IRS, and the IRS may take contrary positions.

Any differing treatment of the Notes for U.S. federal income tax purposes could significantly affect the amount, timing and character of income, gain or loss in respect of an investment in the Notes. Accordingly, all prospective purchasers of the Notes are advised to consult their own tax advisors regarding the U.S. federal, state, local and non-U.S. tax consequences of the purchase and ownership of Notes (including any possible differing treatments of the Notes).

RISKS RELATING TO COMPLIANCE AND REGULATION

Our platform is a novel approach to borrowing that may fail to comply with borrower protection laws such as state usury laws, other interest rate limitations or federal and state consumer protection laws such as the Truth in Lending Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act and the Fair Debt Collection Practices Act and their state counterparts. Borrowers may make counterclaims regarding the enforceability of their obligations after collection actions have commenced, or otherwise seek damages under these laws. Compliance with such regimes is also costly and burdensome.

Our novel platform must comply with regulatory regimes applicable to all consumer credit transactions. The novelty of our platform means compliance with various aspects of such laws is untested, as applied to us. Certain state laws generally regulate interest rates and other charges and require certain disclosures. In addition, other state laws, public policy and general principles of equity relating to the protection of consumers, unfair and deceptive practices and debt collection practices may apply to the origination, servicing and collection of the loans. Our platform is also subject to other federal and state laws, such as:

 

    state and federal securities laws, which require that any non-exempt offers and sales of the Securities be registered;

 

    the Federal Truth-in-Lending Act and Regulation Z promulgated thereunder, and similar state laws, which require certain disclosures to borrowers regarding the terms of their Loans;

 

    the Federal Equal Credit Opportunity Act and Regulation B promulgated thereunder, which prohibit discrimination on the basis of age, race, color, sex, religion, marital status, national origin, receipt of public assistance or the exercise of any right under the Consumer Credit Protection Act, in the extension of credit;

 

    the Federal Fair Credit Reporting Act, which regulates the use and reporting of information related to each borrower’s credit history; and

 

    the Federal Fair Debt Collection Practices Act and similar state debt collection laws, which regulate debt collection practices by “debt collectors” and prohibit debt collectors from engaging in certain practices in collecting, and attempting to collect, outstanding consumer loans.

We may not always have been, and may not always be, in compliance with these laws. Compliance with these requirements is also costly, time-consuming and limits our operational flexibility.

Failure to comply with these laws and regulatory requirements applicable to our business may, among other things, limit our, or a collection agency’s, ability to collect all or part of the principal amount of or interest on the Loans on which the Notes are dependent for payment. In addition, our non-compliance could subject us to damages, revocation of required licenses or other authorities, class action lawsuits, administrative enforcement actions, rescission rights held by investors in securities offerings, and civil and criminal liability, which may harm our business and ability to maintain our platform and may result in borrowers rescinding their Loans.

Where applicable, we seek to comply with state small loan, loan broker, servicing and similar statutes. Currently, we do not provide services to borrowers in Idaho, Iowa, Maine, Nebraska and North Dakota. In all other U.S. jurisdictions with licensing or other requirements we believe may be applicable to making loans, we have obtained any necessary licenses or comply with the relevant requirements. Nevertheless, if we are found to not comply with applicable laws, we could lose one or more of our licenses or authorizations or face other sanctions or be required to obtain a license in such jurisdiction, which may have an adverse effect on our ability to continue to facilitate the origination of Loans through our platform, perform our servicing obligations or make our platform available to borrowers in particular states, which may impair your ability to receive the payments of principal and interest on the Notes that you expect to receive.

 

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If our platform was found to violate a state’s usury laws, your investment may lose substantial value and you may lose all of the interest due on your Note.

The interest rates that are charged to borrowers and that form the basis of payments to investors on our Notes are based upon the ability of WebBank, the issuer of the loan, to export the interest rates of Utah to provide for uniform rates to all borrowers. Federal law provides WebBank the authority to charge these interest rates. The current rates offered by WebBank though our platform range from approximately 6.78% to 27.99%. Of the forty-four jurisdictions whose residents may obtain loans (including the District of Columbia), only seven states (Arizona, Nevada, New Hampshire, New Mexico, South Carolina, South Dakota and Utah) have no interest rate limitations on consumer loans, while all other jurisdictions have a maximum rate less than the current maximum rate offered by WebBank through our platform. If a borrower were to successfully bring a claim against us for a state usury law violation and the rate on the loan and Note underlying that borrower was greater than that allowed under applicable state law, the value of your investment may decline as you would not receive the total amount of interest you expected from your investment, and in some cases you may not receive any interest or principal. We may also be subject to fines and penalties. Moreover, such a finding could substantially harm our ability to operate our business in the manner currently contemplated.

We rely on our agreement with WebBank to lend to qualified borrowers on a uniform basis throughout the United States. We have also engaged another lender, but have not used that lender in practice. If our relationship with WebBank were to end, we would need to implement that arrangement, which is untested.

Borrower loan requests take the form of an application to WebBank, which currently makes all loans to our borrowers who request loans through our platform, and allows our platform to be available to borrowers on a uniform basis throughout the United States. If our relationship with WebBank were to end, or if WebBank were to cease operations, we would attempt to implement a substantially similar arrangement with another lender that they have engaged. There can be no assurance that this alternate arrangement would be comparable to the WebBank arrangement. Transitioning the origination of loans to another lender is untested and may result in delays in the process of issuing loans or, if our platform becomes inoperable, may prevent loans from being issued, which would effectively prevent us from issuing Notes.

We could also face increased costs and compliance burdens if our agreement with WebBank terminated, which could affect their ability to continue operations, including servicing all loans.

Several lawsuits have sought to re-characterize certain loan marketers and other originators as lenders. If litigation on similar theories were successful against us, Loans facilitated through our platform could be subject to state consumer protection laws in a greater number of states.

Several lawsuits have brought under scrutiny the association between high-interest “payday loan” marketers and out-of-state banks. These lawsuits assert that payday loan marketers use out-of-state lenders in order to evade the consumer protection laws imposed by the states where they do business. Such litigation has sought to re-characterize the loan marketer as the lender for purposes of state consumer protection law restrictions. Similar civil actions have been brought in the context of gift cards. We believe that our activities are distinguishable from the activities involved in these cases.

Additional state consumer protection laws would be applicable to the Loans facilitated through our platform if we were re-characterized as a lender, and the Loans could be voidable or unenforceable. In addition, we could be subject to claims by borrowers, as well as enforcement actions by regulators. Even if we were not required to cease doing business with residents of certain states or to change our business practices to comply with applicable laws and regulations, we could be required to register or obtain licenses or regulatory approvals that could impose a substantial cost on us. To date, no actions have been taken or threatened against us on the theory that we have engaged in unauthorized lending; however, such actions could have a material adverse effect on our business

As internet commerce develops, federal and state governments may draft and propose new laws to regulate internet commerce, which may negatively affect our business.

As internet commerce continues to evolve, increasing regulation by federal and state governments becomes more likely. Our business could be negatively affected by the application of existing laws and regulations or the enactment of new laws applicable to lending. The cost to comply with such laws or regulations could be significant and would increase our operating expenses, and we may be unable to pass along those costs to our borrowers and investors in the form of increased fees. In addition, federal and state governmental or regulatory agencies may decide to impose taxes on services provided over the Internet. These taxes could discourage the use of the Internet as a means of consumer lending, which would adversely affect the viability of our platform.

 

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Our legal compliance burdens and costs have significantly increased as a result of operating as a public company. Our management is required to devote substantial time to compliance matters.

As a public reporting company, we face costly compliance burdens, requiring significant legal, accounting and other expenses. Our management and other personnel devote a substantial amount of time to SEC reporting compliance requirements.

Also, as a result of disclosure of information required of a public company, our business and financial condition will become more visible, which may result in threatened or actual litigation, including by competitors and other third parties.

If we fail to comply with SEC reporting requirements or if we are subject to actual or threatened litigation relating to our public filings, the time and resources necessary to resolve those issues could divert the resources of our management and harm our business and operating results.

If we discover a material weaknesses in our internal control over financial reporting which we are unable to remedy, or otherwise fail to maintain effective internal control over financial reporting, our ability to report our financial results on a timely and accurate basis may be adversely affected.

The Sarbanes-Oxley Act requires, among other things, that we maintain effective internal control over financial reporting and disclosure controls and procedures. In particular, for our fiscal year ending December 31, 2013, we performed system and process evaluation and testing of our internal control over financial reporting to allow management to report on the effectiveness of our internal control over financial reporting, as required by Section 404A of the Sarbanes-Oxley Act. Although through such testing we discovered no material weaknesses in internal control over financial reporting at December 31, 2013, subsequent testing by us or our independent registered public accounting firm, which has not performed such an audit, may reveal deficiencies in our internal control over financial reporting that are deemed to be material weaknesses. To comply with Section 404A, we may incur substantial accounting expense, expend significant management time on compliance-related issues, and hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge. Moreover, if we are not able to comply with the requirements of Section 404A in a timely manner, or if we or our independent registered public accounting firm identify deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, we could be subject to sanctions or investigations by the SEC or other regulatory authorities, which would require additional financial and management resources.

If we are required to register under the Investment Company Act, our ability to conduct our business could be materially adversely affected.

The Investment Company Act of 1940, or the “Investment Company Act,” contains substantive legal requirements that regulate the manner in which “investment companies” are permitted to conduct their business activities. We believe we have conducted, and we intend to continue to conduct, our business in a manner that does not result in our company being characterized as an investment company. If, however, we are deemed to be an investment company under the Investment Company Act, we may be required to institute burdensome compliance requirements and our activities may be restricted, which would materially adversely affect our business, financial condition and results of operations. If we were deemed to be an investment company, we may also attempt to seek exemptive relief from the SEC, which could impose significant costs and delays on our business.

If our registered investment adviser, LC Advisors, LLC, were found to have violated the Investment Company Act, our ability to raise sufficient Investor purchase commitments to meet Borrower demand could be impaired.

Our subsidiary, LC Advisors, LLC, acts as an advisor to certain private funds and accredited investors who make large investors purchase commitments to invest in Trust certificates, representing Loans. Our ability to continue to advise these private funds and accredited Investors depends on the continuing operation of LC Advisors. We believe we have conducted, and we intend to continue to conduct, the business of LC Advisors in substantial compliance with the Investment Company Act. If, however, we are deemed to have breached any of our obligations under the Investment Company Act, the activities of LC Advisors could be restricted, suspended or event terminated. If this were to occur, our ability to raise Investor purchase commitments through these vehicles could be severely curtailed, and we may not be able to sufficiently meet demand for Loans. This could harm our business and make it difficult for both borrowers and investors to meet demand.

If we were required to register as a broker-dealer, our costs could significantly increase or our operations could be impaired.

The Notes, an obligation of LC, are offered directly by us as the issuer of the Notes. We do not operate as a registered broker-dealer, and we do not believe we are obligated to do so. If a regulatory body were to find that our activities require us to register as a broker-dealer, or to sell our Notes only through a registered broker-dealer, our costs of operation could increase significantly and our ability to issue and distribute Notes could be significantly impaired.

We have not reviewed our compliance with foreign laws regarding the participation of non-U.S. residents on our platform.

From time to time, non-U.S. residents purchase Notes directly on our platform. As of December 31, 2013, the percentage of Notes held (based upon dollar amounts) by such persons against all Notes issued since inception was approximately 0.7%. As we have not reviewed the compliance of these sales with applicable foreign law, these sales of Notes could result in fines and penalties payable by us.

Recent Legislative and Regulatory Initiatives Have Imposed Restrictions and Requirements on Financial Institutions That Could Have an Adverse Effect on Our Business.

The financial industry is becoming more highly regulated. Legislation has been introduced recently by both U.S. and foreign governments relating to financial institutions and markets, including alternative asset management funds that would result in increased oversight and taxation. There has been, and may continue to be, a related increase in regulatory investigations of the trading and other investment activities of alternative investment funds. Such investigations may impose additional expenses by us, may require the attention of senior management and may result in fines if any of our funds are deemed to have violated any regulations.

Partly in response to the recent financial crisis, the President signed into law the Dodd-Frank Act. Few provisions of the Dodd-Frank Act were effective immediately, with various provisions becoming effective in stages. Many of the rules required to be implemented by governmental agencies still have not been promulgated or implemented. These rules have or expect to increase regulation of the

 

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financial services industry and impose restrictions on the ability of firms within the industry to conduct business consistent with historical practices. We cannot predict the substance or impact of pending or future legislation or regulation. Compliance with such legislation or regulation may, among other effects, significantly increase our costs, limit our product offerings and operating flexibility, require significant adjustments in our internal business processes, and possibly require us to maintain our regulatory capital at levels above historical practices.

Item 1B. Unresolved Staff Comments

Not applicable.

Item 2. Properties

The information set forth in Part IV under the caption (See Note 13 – Commitments and Contingencies – Commitments – Operating Leases) is incorporated herein by reference.

Item 3. Legal Proceedings

The information set forth in Part IV under the caption (See Note 13 – Commitments and Contingencies – Contingencies – Legal) is incorporated herein by reference.

Item 4. Mine Safety Disclosures

Not applicable.

 

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PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

On October 13, 2008, we commenced a public offering of up to $600 million in principal amount of the Notes pursuant to the Registration Statement (Registration Statement No. 333-151827) that was declared effective by the SEC on October 10, 2008. The offering was a continuous offering. On October 7, 2011, we filed a new Registration Statement registering $1,000 million in principal amount of Notes (Registration Statement No. 333-177230) that was declared effective by the SEC on July 31, 2012. From October 13, 2008 to December 31, 2013, we sold $1.2 billion in total principal amount of Notes at 100% of their principal amount. The Notes were offered only through our website, and there were no underwriters or underwriting discounts. In connection with the offering, we incurred estimated expenses of approximately $7.1 million, none of which were paid by us to our directors, officers or persons owning 10% or more of any class of our equity securities or affiliates. As set forth in the prospectus for the offering, we are using the proceeds of each series of Notes to fund a corresponding Loan at fair value through our platform designated by the investor purchasing such series of Notes. None of the proceeds from the Notes are paid by us to our directors, officers, persons owning 10% or more of any class of our equity securities or affiliates.

We have no publicly traded equity securities. At December 31, 2013, there were 115 holders of record of our common stock. We have not paid cash dividends since our inception, and we do not anticipate paying cash dividends in the foreseeable future.

On June 1, 2012, we issued and sold 2.5 million shares of Series E Convertible Preferred Stock, par value $0.01 per share, for aggregate gross proceeds of $17.5 million pursuant to Section 4(2) of the Securities Act of 1933. In connection with our private placement of Series E convertible preferred stock, we incurred transaction expenses of $0.2 million that were recorded as an offset to the gross proceeds.

From July 2011 through January 2012, we issued and sold 9,007,678 shares of our Series D Convertible Preferred Stock, par value $0.01 per share, for aggregate gross proceeds to LC of approximately $32.0 million. In connection with our private placement of Series D convertible preferred stock, we incurred transaction expenses of approximately $0.1 million that were recorded as an offset to gross proceeds.

 

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Item 6. Selected Financial Data

On December 19, 2012, our Board of Directors approved a change in our fiscal year-end from March 31st to December 31st. The change was effective as of December 31, 2012 and we filed a transition report with the Securities and Exchange Commission, which covered the nine-month period ending December 31, 2013. Our financials were audited for the years presented on an April 1st – March 31st fiscal year. The numbers presented for the calendar years 2009- 2012 are unaudited and shown for comparative purposes.

Annual financial information is presented below (in thousands, except per share data):

 

     Year Ended December 31,  
     2013     2012     2011     2010     2009  
           (unaudited)     (unaudited)     (unaudited)     (unaudited)  

Statement of Operations Data:

          

Origination fees

   $ 85,854      $ 30,592      $ 10,996      $ 4,984      $ 1,307   

Servicing fees and other revenue

     12,121        3,453        1,534        739        65   

Total Non-interest revenue

     97,975        34,045        12,530        5,723        1,372   

Interest income

     187,507        69,521        24,223        10,172        3,106   

Interest expense

     (187,447     (69,158     (23,588     (10,273     (3,069

Fair valuation adjustments, net and Provision for losses on Loans at amortized cost

     (33     (601     (413     (607     (1,587
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Net Revenue

     98,002        33,807        12,752        5,015        (178
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Operating Expenses

     90,694        40,669        25,021        15,822        10,077   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 7,308      $ (6,862   $ (12,269   $ (10,807   $ (10,255
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Per Share Data:

          

Basic net income (loss) per share

   $ 0.01      $ (0.69   $ (1.41   $ (1.26   $ (1.24

Weighted-average shares of common stock used in computing basic net income (loss) net loss per share

     12,889,284        9,996,219        8,686,215        8,550,075        8,273,324   

Diluted net income (loss) per share

   $ 0.01      $ (0.69   $ (1.41   $ (1.26   $ (1.24

Weighted-average shares of common stock used in computing diluted net income (loss) net loss per share

     20,356,744        9,996,219        8,686,215        8,550,075        8,273,324   

Balance Sheet Data:

          

Cash and cash equivalents

   $ 49,299      $ 52,551      $ 24,712      $ 17,265      $ 4,730   

Restricted cash

   $ 12,208      $ 7,484      $ 4,022      $ 862      $ 1,252   

Loans

   $ 1,829,042      $ 781,215      $ 296,100      $ 128,241      $ 48,797   

Total Assets

   $ 1,943,395      $ 850,830      $ 326,797      $ 146,743      $ 55,304   

Notes and Certificates

   $ 1,839,990      $ 785,316      $ 290,768      $ 122,532      $ 39,718   

Total Liabilities

   $ 1,875,301      $ 798,620      $ 294,262      $ 128,221      $ 50,698   

Total Stockholders’ equity

   $ 68,094      $ 52,210      $ 32,535      $ 18,522      $ 4,606   

Other Data:

          

Loan originations

   $ 2,064,626      $ 717,900      $ 257,300      $ 102,200      $ 51,800   

Assets under management

   $ 740,177      $ 286,682      $ 64,254      $ —        $ —     

Whole loans sold, servicing retained (1)

   $ 446,224      $ 9,618      $ —        $ —        $ —     

Revenue yield (2)

     4.7     4.7     4.9     5.6     2.6

Adjusted earnings (loss) before interest, taxes and depreciation and amortization (EBITDA) (3)

   $ 15,242      $ (5,160   $ (11,454   $ (9,317   $ (8,651

EBITDA as % of Net Revenue

     16     -15     -90     -186     -4860

 

(1) Amount of whole loans sold to unrelated third party purchasers
(2) Revenue yield is a non-GAAP return metric. Revenue yield is calculated by dividing total non-interest revenue, which includes origination, servicing, management fees and other revenue as defined in the Results of Operations Section by Loan originations.
(3) Adjusted EBITDA is a non-GAAP financial measure. Adjusted EBITDA is calculated as net income (loss), adjusted to exclude: (provision) benefit for income taxes; net interest income (expense); depreciation and amortization and stock-based compensation and warrant expense.

 

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Quarterly Financial Information:

Quarterly financial information for the years ended December 31, 2013 and 2012 is presented below (in thousands, except per share data):

 

    Three Months Ended  
    December 31,
2013
    September 30,
2013
    June 30,
2013
    March 31,
2013
    December 31,
2012
    September 30,
2012
    June 30,
2012
    March 31,
2012
 
    (unaudited)     (unaudited)     (unaudited)     (unaudited)     (unaudited)     (unaudited)     (unaudited)     (unaudited)  

Statement of Operations Data:

               

Origination fees

  $ 30,625      $ 25,245      $ 16,397      $ 13,587      $ 11,174      $ 8,973      $ 5,866      $ 4,579   

Servicing fees and other revenue

    2,860        2,160        4,445        2,656        1,381        842        691        539   

Total Non-interest revenue

    33,485        27,405        20,842        16,243        12,555        9,815        6,557        5,118   

Interest income

    62,736        51,386        41,021        32,364        24,817        18,490        13,554        12,660   

Interest expense

    (62,720     (51,370     (41,032     (32,325     (24,935     (18,259     (13,448     (12,516

Fair valuation adjustments, net and (Provision) Benefit for losses on Loans at amortized cost

    (4     (6     8        (31     (405     (148     —          (48
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Net Revenue

    33,497        27,415        20,839        16,251        12,032        9,898        6,663        5,214   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Operating Expenses

    30,639        24,787        19,057        16,211        12,862        10,780        9,189        7,838   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before provision for income taxes

    2,858        2,628        1,782        40        (830     (882     (2,526     (2,624

Provision for tax benefit (income taxes)

    —          85        (85     —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 2,858      $ 2,713      $ 1,697      $ 40      $ (830   $ (882   $ (2,526   $ (2,624
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Per Share Data:

               

Basic net income (loss) per share

  $ 0.01      $ —        $ —        $ —        $ (0.08   $ (0.09   $ (0.25   $ (0.29

Weighted-average shares of common stock used in computing basic net income (loss) net loss per share

    13,704,713        13,328,103        12,558,812        11,909,129        10,759,542        10,300,351        9,954,190        8,957,563   

Diluted net income (loss) per share

  $ 0.01      $ —        $ —        $ —        $ (0.08   $ (0.09   $ (0.25   $ (0.29

Weighted-average shares of common stock used in computing diluted net income (loss) net loss per share

    20,831,110        20,000,365        18,849,944        18,874,024        10,759,542        10,300,351        9,954,190        8,957,563   

Balance Sheet Data:

               

Cash and cash equivalents

  $ 49,299      $ 62,186      $ 54,594      $ 51,305      $ 52,551      $ 52,409      $ 47,276      $ 31,244   

Restricted cash

  $ 12,208      $ 8,747      $ 8,410      $ 11,747      $ 7,484      $ 5,726      $ 4,862      $ 4,862   

Loans

  $ 1,829,042      $ 1,516,676      $ 1,237,468      $ 995,983      $ 781,215      $ 603,390      $ 455,126      $ 362,591   

Total Assets

  $ 1,943,395      $ 1,611,648      $ 1,318,560      $ 1,072,724      $ 850,830      $ 669,350      $ 512,571      $ 403,330   

Notes and Certificates

  $ 1,839,990      $ 1,522,975      $ 1,242,668      $ 1,000,059      $ 785,316      $ 605,416      $ 453,110      $ 360,800   

Total Liabilities

  $ 1,875,301      $ 1,549,786      $ 1,262,320      $ 1,019,446      $ 798,620      $ 617,799      $ 460,954      $ 366,993   

Total Stockholders’ equity

  $ 68,094      $ 61,862      $ 56,240      $ 53,278      $ 52,210      $ 51,551      $ 51,617      $ 36,337   

Other Data:

               

Loan originations

  $ 698,373      $ 567,143      $ 446,225      $ 352,885      $ 263,600      $ 207,200      $ 137,400      $ 109,700   

Assets under management

  $ 740,177      $ 653,240      $ 545,062      $ 443,086      $ 286,682      $ 211,300      $ 149,600      $ 104,500   

Whole loans sold, servicing retained (1)

  $ 195,791      $ 131,669      $ 78,698      $ 40,066      $ 9,618      $ —        $ —        $ —     

Revenue yield (2)

    4.8     4.8     4.7     4.6     4.8     4.7     4.8     4.7

Adjusted EBITDA (3)

  $ 6,525      $ 4,936      $ 3,047      $ 734      $ (104   $ (520   $ (2,288   $ (2,248

EBITDA as % of Net Revenue

    19     18     15     5     -1     -5     -34     -43

 

(1) Amount of whole loans sold to unrelated third party purchasers
(2) Revenue yield is a non-GAAP return metric. Revenue yield is calculated by dividing total non-interest revenue, which includes origination, servicing, management fees and other revenue as defined in the Results of Operations Section by Loan originations.
(3) Adjusted EBITDA is a non-GAAP financial measure. Adjusted EBITDA is calculated as net income (loss), adjusted to exclude: (provision) benefit for income taxes; net interest income (expense); depreciation and amortization and stock-based compensation and warrant expense.

 

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The data presented in this section are for our last three audited financials. On December 19, 2012, our Board of Directors approved a change in our fiscal year-end from March 31st to December 31st. The change was effective as of December 31, 2012 and we filed a transition report with the Securities and Exchange Commission (“SEC”), which covered the nine-month period ending December 31, 2012.

Key Operating and Financial Metrics

We regularly review a number of metrics to evaluate our business, measure our performance, identify trends, formulate financial projections and make strategic decisions.

The following table includes key operating and financial data (in thousands, except per share data):

 

     Year Ended      Nine Months Ended     Year Ended  
     December 31,      December 31,     March 31,  
     2013      2012     2012  

Loan originations

   $ 2,064,626       $ 608,200      $ 321,100   

Total Non-Interest Revenue

   $ 97,975       $ 28,927      $ 15,536   

Revenue yield

     4.7%         4.8%        4.8%   

Total Net Revenue

   $ 98,002       $ 28,593      $ 15,797   

Total Operating Expenses

   $ 90,694       $ 32,831      $ 27,741   

Net Income (Loss)

   $ 7,308       $ (4,238   $ (11,944

Adjusted EBITDA

   $ 15,242       $ (2,912   $ (10,894

EBITDA as % of Net Revenue

     16%         -10%        -69%   

Basic net income (loss) per share attributable to common stockholders

   $ 0.01       $ (0.41   $ (1.36

Diluted net income (loss) per share attributable to common stockholders

   $ 0.01       $ (0.41   $ (1.36

Originations

Originations are a key indicator of the growth of our brand and the competitiveness of our products. Originations include all Loans acquired from WebBank whether they were retained or subsequently sold to investors. Growth in originations depends, in part, on our ability to successfully develop and market our products and services to borrowers and investors.

Revenue Yield

Revenue yield is a non-GAAP return metric that takes into account our product pricing and channel mix strategies. Revenue yield is calculated by dividing total non-interest revenue which includes origination, servicing, management fees and other revenue as defined in the Results of Operations Section below by total Loan originations.

Adjusted EBITDA

Adjusted EBITDA is a non-GAAP financial measure that we calculate as net income (loss), adjusted to exclude: provision (benefit) for income taxes; net interest income (expense); depreciation and amortization and stock-based compensation and warrant expense. This non-GAAP information is not necessarily comparable to non-GAAP information of other companies. Non-GAAP information should not be viewed as a substitute for, or superior to, net income (loss) prepared in accordance with GAAP as a measure of our profitability or liquidity. Users of this financial information should consider the types of events and transactions for which adjustments have been made.

Adjusted EBITDA is a key measure used by our management and board of directors to understand and evaluate our core operating performance and trends. We use Adjusted EBITDA because we believe it facilitates operating performance comparisons from period to period by excluding potential differences primarily caused by variations in capital structures, tax positions, the impact of depreciation and amortization expense on our fixed assets and debt discounts and the impact of stock-based compensation expense and warrant expense.

 

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Our use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

 

    Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;

 

    Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

 

    Adjusted EBITDA does not consider the potentially dilutive impact of stock-based compensation and warrant expense;

 

    Adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us; and

 

    Other companies, including companies in our industry, may calculate Adjusted EBITDA differently, which reduces its usefulness as a comparative measure.

In evaluating Adjusted EBITDA, you should be aware that in the future we will incur expenses and earn income similar to the adjustments in this presentation. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by these expenses or any unusual or non-recurring items. When evaluating our performance, you should consider Adjusted EBITDA alongside other financial performance measures, including our net income (loss) and other GAAP results.

Net income (loss) is the most comparable GAAP measure to Adjusted EBITDA. The following table presents a reconciliation of net income (loss) to Adjusted EBITDA for each of the periods indicated (in thousands):

 

     Year Ended     Nine Months Ended     Year Ended  
     December 31,     December 31,     March 31,  
     2013     2012     2012  

Reconciliation of Adjusted EBITDA:

      

Net income (loss)

   $ 7,308      $ (4,238   $ (11,944

Other expense (income), net

     (12     (21     230   

Depreciation and amortization

     1,663        237        160   

Stock-based compensation, net (1)

     6,283        1,110        660   
  

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 15,242      $ (2,912   $ (10,894
  

 

 

   

 

 

   

 

 

 

 

(1) Stock-based compensation expense includes warrant expense and is net of amounts included in internally developed software capitalization which is not included in Net income (loss).

 

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Results of Operations

Overview

The following table summarizes our net income (loss) for the year ended December 31, 2013, the nine months ended December 31, 2012 and the year ended March 31, 2012 (in thousands):

 

     Year Ended      Nine Months Ended               
     December 31,      December 31,               
     2013      2012     $ Change      % Change  

Net Revenue

   $ 98,002       $ 28,593      $ 69,409         243

Operating Expenses

     90,694         32,831        57,863         176
  

 

 

    

 

 

   

 

 

    

Net Income (Loss)

   $ 7,308       $ (4,238   $ 11,546         272
  

 

 

    

 

 

   

 

 

    

 

 

 

 

     Nine Months Ended     Year Ended               
     December 31,     March 31,               
     2012     2012     $ Change      % Change  

Net Revenue

   $ 28,593      $ 15,797      $ 12,796         81

Operating Expenses

     32,831        27,741        5,090         18
  

 

 

   

 

 

   

 

 

    

Net Income (Loss)

   $ (4,238   $ (11,944   $ 7,706         65
  

 

 

   

 

 

   

 

 

    

 

 

 

Net revenues were $98.0 million for the year ended December 31, 2013, a 243% increase over the nine months ended December 31, 2012 primarily due to higher Loan originations. Operating expenses were $90.7 million for the year ended December 31, 2013, a 176% increase over the nine months ended December 31, 2012 primarily due to higher compensation costs as we added more staff to support business growth and higher Loan volume related operational and marketing expenses.

Net revenues were $28.6 million for the nine months ended December 31, 2012, an 81% increase over the year ended March 31, 2012 primarily due to higher Loan originations. Operating expenses were $32.8 million for the nine months ended December 31, 2012, an 18% increase over the year ended March 31, 2012 primarily due to higher compensation costs as we added more staff to support business growth and higher Loan volume related operational and marketing expenses.

Revenues

Our primary sources of revenues consist of fees charged to borrowers and investors for transactions through or related to our platform. During the year ended December 31, 2013, the nine months ended December 31, 2012 and the year ended March 31, 2012 we facilitated and purchased $2,064.6 million, $608.2 million and $321.1 million of Loans, respectively, via our platform.

The following table summarizes our revenue for the year ended December 31, 2013, the nine months ended December 31, 2012 and the year ended March 31, 2012 (in thousands):

 

     Year Ended     Nine Months Ended              
     December 31,     December 31,              
     2013     2012     $ Change     % Change  

Origination fees

   $ 85,854      $ 26,013      $ 59,841        230

Servicing fees

     3,513        1,474        2,039        138

Management fees

     3,083        720        2,363        328

Other revenue

     5,525        720        4,805        667
  

 

 

   

 

 

   

 

 

   

Total Non-Interest Revenue

     97,975        28,927        69,048        239
  

 

 

   

 

 

   

 

 

   

Net Interest Income (Expense) after benefit for loan losses and fair value adjusments

     27        (334     361        108
  

 

 

   

 

 

   

 

 

   

Net Revenue

   $ 98,002      $ 28,593      $ 69,409        243
  

 

 

   

 

 

   

 

 

   

 

 

 
     Nine Months Ended     Year Ended              
     December 31,     March 31,              
     2012     2012     $ Change     % Change  

Origination fees

   $ 26,013      $ 13,701      $ 12,312        90

Servicing fees

     1,474        1,222        252        21

Management fees

     720        206        514        250

Other revenue

     720        407        313        77
  

 

 

   

 

 

   

 

 

   

Total Non-Interest Revenue

     28,927        15,536        13,391        86
  

 

 

   

 

 

   

 

 

   

Net Interest Income (Expense) after benefit/(provision) for loan losses and fair value adjusments

     (334     261        (595     -228
  

 

 

   

 

 

   

 

 

   

Net Revenue

   $ 28,593      $ 15,797      $ 12,796        81
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Origination Fees

This fee is determined by the term and loan grade of the Consumer Loan and as of December 31, 2013 ranged from 1.11% to 5.00% of the issued principal balances. The fee is deducted from the loan proceeds at the time of issuance.

Consumer Loan origination fees received on loans are recognized as a component of non-interest revenue at the time of loan acquisition and were $90.8 million (including $4.9 million in origination fees related to Loan sales to unrelated third party purchasers that is recorded in Other Revenue—see Note 2 – Summary of Significant Accounting Policies – Whole Loan Sales) and $26.0 million for the year ended December 31, 2013 and the nine months ended December 31, 2012, respectively, an increase of 249%. The increase in these fees was primarily due to an increase in Consumer Loan origination volumes from $608.2 million for the nine months ended December 31, 2012 to $2,064.6 million for the year ended December 31, 2013, an increase of 239%. Average Consumer Loan origination fees were 4.4% and 4.3% of the principal amount of loan for the year ended December 31, 2013 and nine months ended December 31, 2012, respectively. The increase in the average Consumer Loan origination fee was primarily due to a higher percentage of both 60 month Consumer Loans and C-G grade Consumer Loans being originated that have higher origination fees.

Consumer Loan origination fees were $26.0 million and $13.7 million for the nine months ended December 31, 2012 and year ended March 31, 2012 respectively, an increase of 90%. The increase in these fees was primarily due to an increase in Consumer Loan origination volumes from $321.1 million for the year ended March 31, 2012 to $608.2 million for the nine months ended December 31, 2012, an increase of 90%. Average Consumer Loan origination fees were 4.3% of the principal amount of Consumer Loans originated for the nine months ended December 31, 2012 and year ended March 31, 2012.

Servicing Fees

We charge investors ongoing service fees for Notes and certain Certificates. The servicing fee compensates us for the costs we incur in servicing the related Loan, including managing payments from borrowers, payments to the Investors and maintaining investors’ account portfolios. These service fees are charged based upon borrower Loan payment amounts received by us on behalf of a Note or Certificate holder.

Servicing fees earned from Note and certain Certificate holders that relate to cash flows received on related Loans were $3.5 million and $1.5 million for the year ended December 31, 2013 and the nine months ended December 31, 2012, respectively, an increase of 138%. The increase in servicing fees was primarily due to increased balances of Notes and certain Certificates outstanding during the year ended December 31, 2013 versus during the nine months ended December 31, 2012.

Servicing fees earned from Note and certain Certificate holders were $1.5 million and $1.2 million for the nine months ended December 31, 2012 and year ended March 31, 2012, respectively, an increase of 21%. The increase in servicing fees was primarily due to increased balances of Notes and certain Certificates outstanding during the year ended December 31, 2012 versus during the year ended March 31, 2012.

Management Fees and Assets Under Management

LCA charges most Certificate holders a management fee based on their capital account balances in lieu of charging a servicing fee. LCA earned management fees totaling $3.1 million and $0.7 million for the year ended December 31, 2013 and the nine months ended December 31, 2012, respectively, an increase of 328%. The increase in management fees was due primarily to an increase in total assets under management, which were $740.2 million at December 31, 2013 ($639.7 million in the Funds and $100.5 million in SMAs) and $286.7 million at December 31, 2012.

Management fees were $0.7 million and $0.2 million for the nine months ended December 31, 2012 and year ended March 31, 2012, respectively, an increase of 250%. The increase in management fees earned was due primarily to an increase in total assets under management, which were $286.7 million at December 31, 2012 and $103.6 million at March 31, 2012.

As of December 31, 2013, the Funds had approximately $639.7 million in assets with $29.2 million of pending capital contributions from limited partners in escrow, which was contributed to the Funds on the first business day of January 2014. LCA earns a management fee paid by the limited partners of the Funds, paid monthly in arrears, which ranges from 0.70% to 1.25% (annualized) of the month-end balances of partners’ capital accounts. These management fees can be modified or waived for individual limited partners at the discretion of the general partner.

Beginning January 2012, LCA began offering SMAs to individual accredited investors. Investors with SMAs invest in Certificates issued by the Trust. As of December 31, 2013, the SMAs had approximately $100.5 million in assets. LCA earns management fees paid by SMA investors, monthly in arrears, based on cash and Certificate balances in SMAs. These management fees can be modified or waived for individual SMA investors at the discretion of LCA.

 

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Summary of Changes in Assets Under Management

The table below presents our summary of changes in assets under management for LCA, stated at amortized cost except for appreciation which includes fair value adjustments for investments (in millions):

 

Balance at December 31, 2012

   $ 286.7   

Net capital contributions

     410.5   

Appreciation

     43.0   
  

 

 

 

Balance at December 31, 2013

   $ 740.2   
  

 

 

 

Other Revenue

Other revenue consists primarily of gains on sale of whole loans, referral revenue and servicing fees on whole loans sold to unrelated third party purchasers.

Other revenue was $5.5 million and $0.7 million for the year ended December 31, 2013 and the nine months ended December 31, 2012, respectively, an increase of 667%. The increase in other revenue was primarily due to a $3.5 million increase in gain on sale of whole loans to unrelated third party purchasers (see Note 2 – Summary of Significant Accounting Policies – Whole Loan Sales) and a $0.9 million increase in referral revenues. We accounted for the net revenues from whole loan sales through June 30, 2013 as gains on sales of whole loans, which was comprised primarily of the origination fees for such whole loans sold, reduced by certain loan origination expenses and loan servicing net revenues (obligations). Beginning July 1, 2013, we adopted the fair value option for whole loan sales that caused the origination fees for the Loans to be reported as origination fees rather than included in gain on sale of whole loans.

Other revenue was $0.7 million and $0.4 million for the nine months ended December 31, 2012 and the year ended March 31, 2012, respectively, an increase of 77%. The increase in other revenue was primarily due to a $0.3 million increase in gain on sale of whole loans to unrelated third party purchasers.

Net Interest Income

The following table summarizes interest income, interest expense and net interest income for the year ended December 31, 2013, the nine months ended December 31, 2012 and the year ended March 31, 2012 (in thousands):

 

     Year     Nine Months     Year  
     Ended     Ended     Ended  
     December 31,     December 31,     March 31  
     2013     2012     2012  

Interest Income

      

Loans

   $ 187,495      $ 56,829      $ 32,636   

Cash and cash equivalents

     12        32        24   
  

 

 

   

 

 

   

 

 

 

Total Interest Income

     187,507        56,861        32,660   
  

 

 

   

 

 

   

 

 

 

Interest Expense

      

Notes and Certificates

   $ (187,447   $ (56,631   $ (31,777

Loans payable

     —          (11     (253
  

 

 

   

 

 

   

 

 

 

Total Interest Expense

     (187,447     (56,642     (32,030
  

 

 

   

 

 

   

 

 

 

Net Interest Income

   $ 60      $ 219      $ 630   
  

 

 

   

 

 

   

 

 

 

Due to the payment dependent feature of Notes and Certificates for payments on related loans, interest income earned on loans equals the interest expense on the Notes and Certificates associated with such loans. Differences between reported interest income earned on loans and interest expense on Notes and Certificates is due to interest earned on loans in which LC has invested in for which there is no corresponding Note or Certificate.

We had net interest income of $0.06 million and $0.22 million for the year ended December 31, 2013 and the nine months ended December 31, 2012, respectively. The decrease in net interest income was primarily due to the reduction in loans financed by us.

 

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We had net interest income of $0.22 million and $0.63 million for the nine months ended December 31, 2012 and year ended March 31, 2012, respectively. The decrease in net interest income was primarily due to the reduction in loans financed by us.

Interest Income on Loans

For the year ended December 31, 2013 and the nine months ended December 31, 2012, interest income from loans was $187.5 million and $56.8 million, respectively. The increase in interest income is primarily due to the increase in the outstanding balances of loans. The average balance of loans outstanding during the year ended December 31, 2013, was $1,262.6 million as compared to an average balance of $551.0 million during the nine months ended December 31, 2012, an increase of 129%. The increase was also due to the fiscal year 2013 including 12 months compared to nine months during the period ended December 31, 2012.

For the nine months ended December 31, 2012 and the fiscal year ended March 31, 2012, interest income from loans at fair value was $56.8 million and $32.6 million, respectively. The increase in interest income in the nine months ended December 31, 2012, compared to the prior fiscal year is primarily due to the increase in the outstanding balances of loans. The average balance of Loans outstanding during the nine months ended December 31, 2012, was $551.0 million as compared to an average balance of $249.3 million during the fiscal year ended March 31, 2012, an increase of 121%. The increase was partially offset by the December 31, 2012 period including nine months versus the March 31, 2012 period including twelve months.

Interest Expense on Notes and Certificates

For the year ended December 31, 2013 and the nine month period ended December 31, 2012, we recorded interest expense for Notes and Certificates of $187.4 million and $56.6 million, respectively. The increase in interest expense was primarily due to the increase in the outstanding balances of Notes and Certificates. The average balance of Notes and Certificates outstanding during the twelve months ended December 31, 2013, was $1,269.8 million as compared to the average balance of $552.5 million during the nine months ended December 31, 2012, an increase of 130%.

For the nine months ended December 31, 2012 and year ended March 31, 2012, we recorded interest expense for Notes and Certificates of $56.6 million and $31.8 million, respectively. The increase in interest expense was primarily due to the increase in the outstanding balances of Notes and Certificates. The average balance of Notes and Certificates outstanding during the nine months ended December 31, 2012, was $552.5 million as compared to the average balance of $247.7 million during the year ended March 31, 2012, an increase of 123%.

Interest Expense on Loans Payable

We did not incur any interest expense for loans payable for the year ended December 31, 2013. All loans payable balances were paid in full as of July 2012. We recorded interest expense for loans payable of $0.01 million and $0.25 million, for the nine months ended December 31, 2012 and the year ended March 31, 2012, respectively.

Fair Value Adjustments on Loans and Notes and Certificates

At December 31, 2013, we estimated the fair value of loans and their related Notes and Certificates using a discounted cash flow valuation methodology. The discounted cash flow valuation methodology uses the historical actual defaults and losses and recoveries on our loans over the past several years to project future losses and net cash flows on loans.

The fair value adjustments for loans were largely offset by the fair value adjustments of the Notes and Certificates at fair value due to the member payment dependent design of the Notes and Certificates, and because the principal balances of the loans are similar to the combined principal balances of the Notes and Certificates. Accordingly, the net fair value adjustment losses for loans and Notes and Certificates were $0.033 million, $0.595 million and $0.001 million for the year ended December 31, 2013, the nine months ended December 31, 2012 and the year ended March 31, 2012, respectively.

 

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Operating Expenses

The following table summarizes our operating expenses for the year ended December 31, 2013, the nine months ended December 31, 2012 and the year ended March 31, 2012 (in thousands):

 

     Year Ended      Nine Months Ended                
     December 31,      December 31,                
     2013      2012      $ Change      % Change  

Sales and marketing

   $ 39,037       $ 14,723       $ 24,314         165

Origination and servicing

     17,217         6,134         11,083         181

General and administrative: Technology

     13,922         3,994         9,928         249

General and administrative: Other

     20,518         7,980         12,538         157
  

 

 

    

 

 

    

 

 

    

Total Operating Expenses

   $ 90,694       $ 32,831       $ 57,863         176
  

 

 

    

 

 

    

 

 

    

 

 

 
     Nine Months Ended      Year Ended                
     December 31,      March 31,                
     2012      2012      $ Change      % Change  

Sales and marketing

   $ 14,723       $ 12,571       $ 2,152         17

Origination and servicing

     6,134         5,099         1,035         20

General and administrative: Technology

     3,994         2,712         1,282         47

General and administrative: Other

     7,980         7,359         621         8
  

 

 

    

 

 

    

 

 

    

Total Operating Expenses

   $ 32,831       $ 27,741       $ 5,090         18
  

 

 

    

 

 

    

 

 

    

 

 

 

Sales and Marketing

Sales and marketing expense consists pri