LendingClub's Focus on Volume Growth Was Misplaced

Colin Plunkett: We still believe LendingClub has its work cut out for itself in winning back investors to fund its loans. Our belief is that LendingClub valued growth over sustainable growth which resulted in the company spending less on compliance and employee training than it really should have. This lack of internal investment helped boost short-term results and impress investors but really harmed LendingClub in the long term. We believe the model is still unproven and suspect better-funded peers like Goldman Sach's Mosaic will eat into LendingClub's returns.

As a result of the company placing so much emphasis on volume growth, we also aren't convinced that LendingClub has proven itself to be a quality underwriter. Currently, the company's loans have a charge off rates exceeding 7.5%, yet only have interests rates of 14%. In comparison, credit cards have lower charge-offs, but higher rates which is why we think LendingClub's loans will continue to be challenged.

As a result of recent hires from fund companies, we do believe the company is going to make a concentrated effort to target ETFs as an additional source of funding. A new source of funding could really re-accelerate their growth. However, we are skeptical whether peer loans are suitable for exchange-traded investment vehicles. And any gains here we expect to be short lived.