Whether this new approach is accepted by other marketplace lenders who collaborate with banks to originate loans will be something to keep an eye on going forward.
Lending Club filed its revised Loan Receivables and Sale Agreement and Marketing Agreement with WebBank as part of its 8-K filing on March 2. These agreements included new information regarding the structure of the revised relationship between Lending Club and WebBank and reflect the steps they have taken steps to mitigate the effects of Madden v. Midland.
Our recent Client Alert reported on the changes in their relationship based on Lending Club’s February 26 press release. However, the redacted public filing of these two agreement clarifies, to a certain extent, the specifics of the revised relationship between Lending Club and WebBank.
Our previous Client Alerts explain in detail the purpose of the bank origination model and the effect of the Second Circuit’s Madden v. Midland decision on marketplace lenders. If you would like to read those articles, they can be viewed here and here.
The new agreements reflect that WebBank, as part of its ongoing relationship with Lending Club, has agreed to retain a contractual relationship with the borrowers of loans it originates in the form of something designated as the “Borrower Account.” The Borrower Account is the relationship between an applicant and WebBank, pursuant to which the borrower may, from time to time, apply for a loan.
The Borrower Account remains in place after any loan is made so it reflects an ongoing relationship with a borrower. Lending Club retains the right to purchase all of the Borrower Accounts for consideration at the end of the term of the agreement in 2020. The exact amount of any consideration to be paid was redacted.
In addition to the Borrower Account, WebBank also retains an economic interest in the loans it originates through a mechanism called a “loan trailing fee.” A loan trailing fee is a fee paid by Lending Club as part of the cost of purchasing each loan or receivable sold to it by WebBank. The loan trailing fee is paid on a monthly basis as the loan is paid back. If a borrower does not pay back the loan, WebBank will not receive the loan trailing fee from Lending Club. This arrangement reflects the fact that WebBank has an ongoing economic interest in each loan it originates and sells to Lending Club.
- The increased risk of nonpayment, or WebBank’s continued “skin in the game” as represented by the loan trailing fee, should strengthen Lending Club’s position that WebBank has not sold all facets of the loan to Lending Club. Rather, WebBank retains an economic interest in making sure that the loan continues to perform, thereby helping to mitigate Madden concerns that the loan when sold loses its interest exportation character in the hands of Lending Club.
- Questions remain as to how courts will view the retention of the Borrower Account when determining whether there is enough of an ongoing relationship between WebBank and the borrower to make a substantive difference in both a Maddencontext and a “true lender” analysis. Clearly, Lending Club and WebBank believe there is economic value in that continuing relationship because Lending Club has the right to purchase the Borrower Accounts for an undisclosed amount at the end of the contract.
- Whether this new approach is accepted by other marketplace lenders who collaborate with banks to originate loans will be something to keep an eye on going forward. Although not as attractive as using a participation to reflect the ongoing relationship with a borrower (which presents its own issues), it represents an interesting approach to a difficult problem facing the bank collaboration model used by many marketplace platforms.