Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes that appear in this Annual Report on Form 10-K (Report). In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and in this Report, particularly in Item 1A – Risk Factors.

Overview

Lending Club is the world’s largest online marketplace connecting borrowers and investors. We believe a technology-powered marketplace is a more efficient mechanism to allocate capital between borrowers and investors than the traditional banking system. Qualified consumers and small business owners borrow through Lending Club to lower the cost of their credit and enjoy a better experience than that provided by traditional banks.

Investors use Lending Club to earn solid risk-adjusted returns from an asset class that has generally been closed to many investors and only available on a limited basis to institutional investors. The capital to invest in the loans enabled through our marketplace comes directly from a wide range of investors, including retail investors, high-net-worth individuals and family offices, banks and finance companies, insurance companies, hedge funds, foundations, pension plans and university endowments, and through a variety of investment channels. While our business model is not dependent on using our balance sheet and assuming credit risk for loans facilitated by our marketplace, we may use a greater amount of our own capital, compared to past experience, to fulfill regulatory or contractual purchase obligations, or support short-term marketplace equilibrium. We may also use our capital to invest in loans associated with the testing or initial launch of new or alternative loan terms, programs or channels to establish a track record of performance prior to facilitating third-party investments in these loans, or to support alternative loan purchase programs.

We generate revenue from transaction fees from our marketplace’s role in accepting and decisioning applications for our bank partners to enable loan originations, servicing fees from investors for matching available loan assets with capital, and management fees from investment funds and other managed accounts.

Generally, the transaction fees we receive from issuing banks in connection with our marketplace’s role in facilitating loan originations range from 1% to 7% of the initial principal amount of the loan as of December 31, 2016 . In addition, for education and patient finance loans, we also collect fees earned from issuing banks and service providers. Servicing fees paid to us vary based on investment channel. Note investors generally pay us a servicing fee equal to 1% of payment amounts received from the borrower. Whole loan purchasers pay a monthly servicing fee of up to 1.3%  per annum, which is generally based on the month-end principal balance of loans serviced. Certificate holders generally do not pay a servicing fee, but pay a monthly management fee of up to 1.5%  per annum of the month-end balance of assets under management.

Since beginning operations in 2007 , our marketplace has facilitated approximately $24.6 billion in loan originations. These loans were facilitated through the following investment channels: (i) the issuance of member payment dependent notes, (ii) the sale of trust certificates, or (iii) the sale of whole loans to qualified investors. Approximately $4.6 billion of our loan originations since inception were invested in through member payment dependent notes, $6.9 billion were invested in through trust certificates and $13.1 billion were invested in through whole loan sales. In 2016 , our marketplace facilitated over $8.7 billion of loan originations, of which approximately $1.3 billion were invested in through member payment dependent notes, $1.4 billion were invested in through trust certificates and $6.0 billion were invested in through whole loan sales. In 2015 , our marketplace facilitated over $8.4 billion of loan originations, of which approximately $1.3 billion were invested in through member payment

dependent notes, $2.6 billion were invested in through trust certificates and $4.5 billion were invested in through whole loan sales. See “ Item 1A – Risk Factors – A decline in economic conditions may adversely affect our customers, which may negatively impact our business and results of operations. ”

In April 2014 , we acquired all of the outstanding limited liability company interests of Springstone. See “ Item 8 – Financial Statements and Supplementary Data – Note 20. Springstone Acquisition ” for more information.

Current Economic and Business Environment

Lending Club monitors a variety of economic, credit and competitive indicators so that borrowers can benefit from meaningful savings compared to alternatives, and investors can continue to find solid risk-adjusted returns compared to other fixed income investments or investment alternatives.

Our approach to risk-management is a data-driven, continuous and proactive process that runs against a constantly shifting set of conditions. Our marketplace has a number of levers at its disposal to adjust to changing market conditions, including the ability to quickly adapt underwriting models and dynamically increase or decrease pricing to provide an appropriate level of loss coverage to investors.

Throughout 2016 and into 2017, we observed trends that suggest a strong U.S. economy which have, unfortunately, been offset by observations of higher delinquencies in populations characterized by high indebtedness, an increased propensity to accumulate debt, and lower credit scores. While these observations were initially limited to pockets of underperformance in the higher risk segments in the first half of 2016, starting in the third quarter of 2016, this trend was observed across all grades, although it is less notable in lower risk grades and more notable in higher risk grades, particularly grades E, F and G.

In response to these observations, we identified additional ways to optimize credit models around specific combinations of risk indicators while maintaining solid investor yields. These changes included implementing changes to tighten credit criteria based on a unique combination of risk factors, such as number of recent installment loans, revolving utilization, and higher risk scores on our proprietary scorecard. The actions taken in April, June and October 2016 eliminated approximately 11% of total loan volume on an annualized basis from specific risk segments that would have otherwise been approved. Additional action taken in January 2017 eliminated approximately 5% of total loan volume on an annualized basis. We have also invested in our multifaceted collections capabilities to further mitigate risk, including adding new recovery strategies, adding a new agency partner and expanding our internal collections team capacity.

During 2016 we made proactive interest rate increases for loans facilitated on our platform (with a weighted-average increase of approximately 118 basis points from November 2015 to October 2016), and we believe the interest rates in our marketplace already reflect the current interest rate environment. In addition to the increased interest rates, the origination fee paid by borrowers was also increased in March and June of 2016 for certain loan grades. These combined rates and fee increases have negatively impacted the volume of loans facilitated through our marketplace and may continue to do so in the future.

In addition, we continue to actively explore ways to diversify our investor base and obtain additional investment capital for the platform loans. For example, on November 7, 2016, we announced a new addition to the Company’s investor capital mix through an arrangement with a subsidiary of the National Bank of Canada, which had approved up to $1.3 billion to be deployed on the Lending Club platform, subject to certain terms and conditions. We plan to continue to drive toward increased investor engagement and diversification on the platform.

Factors That Can Affect Revenue

As a marketplace, we work toward matching supply and demand while also growing originations and correspondingly revenue at a pace commensurate with proper planning, compliance, risk management, user experience, and operational controls that work to optimize the quality of the customer experience, customer satisfaction and long term growth.

The interplay of the volume, timing and quality of loan applications, investment appetite, investor confidence in our data, controls and processes and available investment capital from investors, platform loan processing and originations, and the subsequent performance of loans, which directly impacts our servicing fees, can affect our revenue in any particular period. These drivers collectively result in transaction, servicing or management fees earned by us related to these transactions and their future performance. As these drivers can be affected by a variety of factors, both in and out of our control, revenues may fluctuate from period to period. Factors that can affect these drivers and ultimately revenue and its timing include:

Given these factors, at any point in time we have loan applications in various stages from initial application through issuance. Depending upon the timing and impact of these factors, loans may not be issued by our issuing bank in the same period in which the corresponding application was originally made resulting in a portion of that subsequent period’s revenue being earned from loan applications that were initiated in the immediately prior period. Consistent with our revenue recognition accounting policy under GAAP, we do not recognize the associated transaction fee revenue with a loan until the loan is issued by our issuing banks and the proceeds are delivered to the borrower. Our receipt of a transaction fee is not impacted by who or how a loan is invested in.