In an in-depth article on Lending Club, Bloomberg reporters highlight two of the major benefits of transparency.

Lending Club is in the peer-to-peer lending business.  This business exists to bring transparency to the lending process.  While retaining the borrower’s anonymity, it provides 100+ fields of information about the borrower to prospective lenders so they can evaluate the creditworthiness of the borrower and compare it to the borrower’s rating from Lending Club’s credit algorithm.  As a result of this evaluation, prospective lenders can decide if they want to lend the money and if the return being offered adequately compensates them for the risk of making the loan.

So far, so good.

Now we get to the first benefit of transparency:  where there is money to be made, people will use the disclosed information.  The article discusses one such individual who hoped to create an independent service to rate the credit quality of the loans.

Compare and contrast this to the opaque Too Big to Fail banks.  Do they make their lending data available? No.  As a result, nothing is known about the actual quality of the loans on these banks’ balance sheets.

Second benefit of transparency:  where there is bad behavior, people examining the disclosed information will spot it.  A significant portion of the article is devoted to how the individual trying to create the rating service discovered management was gaming its reported lending volumes.  Since the company did it while it was publicly traded, this likely broke the law.  The company appears to agree as it ousted its founder and CEO.

Third benefit of transparency:  investors exert market discipline to fix problems.  With the revelation the company had been misleading in at least some of its disclosures, investors responded by exerting market discipline to fix the problem.  Market discipline takes the form of both requiring a higher return and reducing the company’s access to funding.  Based on the new CEO’s comments, it is clear he got the message as investors exerting market discipline reduced the volume of loans the company could originate.