Online lenders have turned these fees into a cash cow fintech startup loan
Fees paid by consumers for loans are proving a lucrative source of revenue for Lending Club and other online lenders.
Lending Club charges up to 6% fitting fees based on its “proprietary model ranking,” according to the company’s website. Borrowers with the highest ratings in the model pay the lowest fees and borrowers with the lowest ratings pay the most. Lending Club also uses its grading system to determine loan interest rates; borrowers with the best ratings pay as little as 1%, according to its website.
Most Lending Club fees lean towards the high end of the scale, said Bob Ramsey, senior vice president of equity research at FBR Capital. Lending Club charges an average of 4.47% per creation, he said.
Fees are “the only way to make money,” Ramsey said. “In 2015, it was $373 [million] or 87% of its total income. »
A Lending Club representative declined to comment, citing the company’s quiet period ahead of next week’s earnings report.
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Origination fees charged by online lenders vary from company to company, and a source said Washington regulators, including the Consumer Financial Protection Bureau, have requested information on fees. The source spoke on condition of anonymity as the CFPB is in the early stages of assessing non-banking regulation.
A CFPB spokeswoman said the office meets regularly with a range of industry and advocacy groups. The spokeswoman declined to comment further.
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Online lender Prosper charges 1-5% for loans. But the company charges an average of more than 4% in the form of “closing costs” per transaction, Ramsey said, citing documents filed by Prosper.
Prosper is not a publicly traded lender, but provides reports to the Securities and Exchange Commission. Similar to Lending Club, the company has a “Prosper Ratings” system to determine what to charge borrowers. Prosper declined to comment for this report.
Commercial lender On Deck Capital’s website says it charges a 2.5% origination fee and offers consumers a rebate if they refinance their loans with the company. The company declined to comment. Lenders SoFi and Avant said they had no origination fees. Avant and SoFi declined to comment.
Student lender and refinance company CommonBond charge a 2% origination fee for student loans, but nothing for the refinance products it offers. CommonBond CEO David Klein said it’s often less than the set-up fees the government charges students.
“At CommonBond, we always talk about APR – it’s the fairest thing to do and the most transparent thing for the consumer, who is sometimes trying to compare their options,” Klein said. “[It’s] It is important for any business to show the full cost of financing, i.e. the interest rate plus origination fees. And that’s what the APR does – it reflects the full cost of funding.”
Read moreBanks’ fintech battle with apps intensifies
In March, the CFPB began soliciting feedback from consumers regarding lenders in the online marketplace. The fintech industry has recently, in part because banking proponents have sought to highlight the disparity in how big banks are regulated compared to start-ups. In addition, proponents of tougher regulations on disruptors in the financial services industry say there is a gap between the security requirements imposed on start-ups and those faced by banks and other companies in the sector.
According to a 2015 report by the National Consumer Law Center, many US states cap the fees that can be charged to consumers, either by a percentage or a dollar amount. The report says fees for installment loans can “significantly” increase the total annual percentage rate paid by consumers who may sometimes not notice them.
“The most effective approach to loan fees is to prohibit them and require the full cost of the loan to be included in the interest rate,” the report said.