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How Lending Club’s Biggest Fanboy Uncovered Shady Loans

Lending Club CEO Renaud Laplanche on the floor of the New York Stock Exchange on Dec. 11, 2014.

“You ready to see some crazy shit?”

Bryan Sims and I were sitting in the dining room of his modest home in Portland, Ore., in front of a laptop and a flatscreen monitor. A bulky home-built computer sat on the floor, with a handwritten warning taped on the side: “DO NOT TURN OFF. POST-APOCALYPTICAL FINANCIAL CRISIS WILL ENSUE.”

The sign was a joke, but with a hint of truth. It was early June, and for months, Sims’s computer had been churning through a database of loans made by Lending Club. The San Francisco-based marketplace lender is either the most important company in the booming financial technology sector or, if its many critics are to be believed, a Silicon Valley-tinged credit crisis waiting to happen.

Lending Club is a kind of EBay for loans. The company, which has made more than 1.6 million loans to date, worth about $20 billion, matches users who need money with investors willing to lend. The concept relies on both an innovative financial structure and an unprecedented level of transparency. Loans of up to $40,000 at a time are divided into $25 securities that anybody can buy, and Lending Club publishes detailed information about the loans in daily filings with the U.S. Securities and Exchange Commission. It maintains publicly available spreadsheets that have more than 100 fields of information about prospective, though anonymous, borrowers. “Want to slice and dice the data?” the company’s website asks. “Help yourself.”

It was this information bonanza that first attracted Sims, an entrepreneur who’d previously started a personal finance magazine aimed at young people, which at one point had annual revenue of $3.9 million. In 2013, at age 30, he set out to build a better, more equitable way to assign credit scores to millennials who, in the wake of the recent financial crisis, had never taken out a loan before. All Sims needed to get started was a trove of data from a financial institution.

He started calling banks and credit unions, but none of them would let him anywhere near their data. Over the course of two years, he burned through most of his cash and found himself in a deep depression. “Honestly, it was at the point where routine tasks were hard,” he said. One source of solace was the Lending Club website, where he began to dabble as an investor, eventually rolling all the money in his retirement fund into Lending Club loans. In some ways, Lending Club had done what he’d set out to do: It remade personal loans for the post-2008 age. “I was in love,” he said. “It seemed like a great model to get people out of debt in an efficient way without the megabanking conglomerates.”

When Lending Club went public in late 2014, Sims scraped together about $1,000 to buy stock. “It sounds dumb now,” he said, “but it felt like a chance to participate in history.” He was so taken by Lending Club that he began listening to the company’s earnings calls. “Like a weirdo,” he said. It was on one of these calls, in 2015, that he heard Chief Executive Officer Renaud Laplanche say that 14 percent of Lending Club’s borrowers, or more than 100,000 people, “returned for a second loan.” That struck Sims as curious. He knew that for all the information the company made public about its borrowers—incomes, employment histories, their reasons for borrowing—one thing it didn’t list was repeat customers.

Sims decided to take a look at the hundreds of loans he’d invested in, arranging them in a spreadsheet that displayed their amounts, interest rates, and information about borrowers’ salaries, employers, locations, incomes, and credit ratings (FICO scores, specifically). Two loans caught his eye. Both had been issued to individuals with the same employer in the same small town. So far, so coincidental. But looking deeper, Sims found that the salaries were nearly identical. Both borrowers had opened their first line of credit in the same month. This, Sims realized, is the same dude. It wasn’t a borrower who’d paid off one loan and happily returned for a second. It was one person with two active loans, and Lending Club was treating them as completely unrelated, charging wildly different interest rates. The borrower was paying about 15 percent interest on one loan of about $15,000; on the other, he was paying 9 percent on twice the principal. That meant the investors who held only the second loan were leaving money on the table. And Lending Club didn’t seem to be doing anything to help them.

Sims saw a business opportunity: a research service that would independently rate Lending Club loans the way Morningstar rates mutual funds. Sims asked a data scientist, Allen Grimm, to help design an algorithm to identify loans that seemed to have been taken out by the same person and yet were assigned different rates. They called it the Financial Genome Project.

The algorithm was still mining the Lending Club database when, on May 6, 2016, Laplanche was forced to resign amid alleged ethical breaches on his watch that involved misdated loans and conflicts of interest. Lending Club is facing shareholder lawsuits and investigations by the Department of Justice and the SEC. (The company says it’s cooperating with investigators.) Lending Club has lost 80 percent of its market value since its high point, shortly after its initial public offering in late 2014, when it was briefly worth more than $10 billion. Sims invited me to his home not long after Laplanche’s ouster to show what the Financial Genome Project had discovered. He wanted me to know that things were worse at Lending Club than anybody realized. You just had to know where to look.

On his laptop, Simms pulled up a spreadsheet showing 32 loans totaling $722,800. The loans ranged from $20,000 to $24,000 and were taken out over the course of eight days in late December 2009. Sims said he believed the loans, ostensibly from 32 different individuals, were taken out by just four borrowers. Each of the four, he said, took out one loan per day, making slight changes to their annual incomes and addresses. One borrower used addresses in Los Gatos, Calif., San Jose, San Francisco, and Atlanta, offering a variety of reasons for the loan requests, including debt consolidation, remodeling, and a wedding. Another, who used addresses in Boston and a nearby suburb, New York, and Denver, claimed the loans would be used for down payments on two houses, a home improvement project, debt restructuring, and the purchase of three vehicles. All but three of the 32 loans had been paid back within 90 days.

Sims looked at me with a raised eyebrow. These four people, it appeared, systematically borrowed almost a million dollars just before the end of the year and had gone to some length to obscure their activity. It was pretty unusual borrowing, to say the least—as if four people each took out eight mortgages of similar amounts over the course of Christmas break. “It’s crazy to me that nobody else has come across this,” he said.

Sims had two theories why four...