The Secondary Market on Lending Club: How It Works

Lending Club’s secondary market enables investors to trade notes from their Lending Club account. In this post we will go over Lending Club’s secondary market: how it works, important considerations, and the timeframes of most transactions.


The reason Lending Club uses FolioFN for secondary market trading

Lending Club does not have a brokerage license so they use Folio Investing (also referred to as FolioFN or simply, Folio) to allow trading of existing notes. FolioFN is a registered broker-dealer member of FINRA/SIPC.

To enable secondary market trading, investors will need to sign up and be approved for a FolioFN brokerage account through the Lending Club website. The application process can take up to four business days. Investors interested in automating secondary market trading will need to accept the secondary market API agreement, access to which is available from the LendingRobot dashboard.


Lending Club Fees & FolioFN Fees

FolioFN charges a 1% haircut of the dollar amount sold to the seller. Lending Club remains responsible for loan servicing, for which they charge 1% of the monthly payment.


Purchasing

Note prices on the secondary market can vary in relation to their remaining principal balance. Notes can be purchased at a discount as low as 1% of the principal + interest owed, to as high as 70%. In no case can a note be priced so that the purchaser will be assured to lose money in the best-case scenario, although care must be given to purchasing notes with missed payments.

A purchase may be canceled due to the following reasons:

  • A borrower’s payment is processing
  • The note’s status changes
  • The borrower files for bankruptcy
  • Multiple orders for the same note are submitted at the same time

Selling

A note auction can have up to a 7 day duration. Notes may be re-listed if the note is not sold.

Similar to the events leading to the cancelation of a sale, some notes may not be listed for sale for the following reasons:

  • A borrower’s payment is processing
  • The note’s status changes
  • The borrower files for bankruptcy
  • The note is listed with a negative Yield to Maturity (YTM)

Additional Information

Note trades cannot be manually canceled. IRA accounts can participate in the secondary market just like non-IRA accounts, and similarly to other securities, any losses due to note trading in a taxable account may be able to be written off.

Most trades settle one business day after the buyer submits the order to buy the note. When trades do settle you should receive an email from FolioFN notifying you that the trade has settled. You can find your settled trades in your FolioFN account in your “My Account” page under “Sold this month” or “Purchased this month.”

A borrower may prepay their loans at any time. The servicing fee charged by Lending Club will not exceed 1% of the contractual payment for those first 12 months of a loans issuance. If prepayment from the borrower occurs after 12 months the investor will be charged the 1% servicing fee on interest and prepaid principal.

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