That issue, at least based on what I have learned during a dozen interviews with Lending Club managers and analysts, boils down to the difference between the reported value of an investor's return early in the life of the loan against the actual return at the end of the loan. Laplanche, Sanborn and VP of Platform Performance Matthew Wierman each confirmed that, at its core, this difference is due to the timing of money investors lose when borrowers stop paying back their loans and enter default. "The reason why you see a higher rate of return earlier in the life of a loan is because the full effects of the defaults in those loans has not yet occurred," Laplanche said. In fact, if you are patient enough to dig deep into the Lending Club website -- it took me six clicks from the homepage, and you have to know exactly what you are looking for -- you will find something called the Cumulative Loan Charge-Off Curve, which defines how these defaults work. Most start in Month 4 and level out at near Month 25 on a usual 36-month loan. Laplanche responded that his company both places the projected return for 80% of the loans on its homepage and then clearly spells out the exact effect of default for each specific investment when the loan is originated. "It would make no sense for us to irresponsibly increase originations," Laplanche told me when I pressed him on whether Lending Club was being clear enough in how it discloses defaults for the average investor. "That would be the worst thing we could do."
That may be so. But what Laplanche -- and investors -- are up against in estimating the default risk properly becomes obvious when I downloaded the publicly available live investing data for tens of thousands of loans underwritten, priced, originated and serviced since 2007.