LC would take a hit on a change from origination fees to higher APR.
IIRC most loans are paid off early. If LC were to eliminate origination fees and charge a higher monthly service fee then prepayments would hurt them. Rather than a fixed upfront fee LC would receive an indeterminate number of monthly payments. Fewer payments less fee. Prepayments already hurt investors as they are charged a service fee by LC on the final payment for the privilege of simply getting their money (principal) back. To mitigate the investor loss LC does not charge the full 1% on prepayments made within the first 12 months. Very nice they made that change. After 12 months though LC gets a tidy windfall for prepayments as they charge the investor a service fee for returning the remaining principal without actually having to service the remainder of the loan.
There's also the unsubstantiated "conspiracy theory" that LC re solicits its current borrowers that have made a year or more of prompt payments with an offer to refinance their current loan at a much lower interest rate. Marketingwise they are the perfect target. LC gets a new origination fee and the servicing windfall from the original loan described above. Only the current investor(s) get hurt. If true, a switch to higher APR would end this game.
Finally there's cash flow. Those nice up front fees would be spread over the life of the loan. Not a good thing.
Of course LC could up the APR enough to cover all this (they'd have to predict future prepayment rates to do so).
Whether or not the new APR would be competitive is an open question.
IIRC most loans are paid off early. If LC were to eliminate origination fees and charge a higher monthly service fee then prepayments would hurt them. Rather than a fixed upfront fee LC would receive an indeterminate number of monthly payments. Fewer payments less fee. Prepayments already hurt investors as they are charged a service fee by LC on the final payment for the privilege of simply getting their money (principal) back. To mitigate the investor loss LC does not charge the full 1% on prepayments made within the first 12 months. Very nice they made that change. After 12 months though LC gets a tidy windfall for prepayments as they charge the investor a service fee for returning the remaining principal without actually having to service the remainder of the loan.
There's also the unsubstantiated "conspiracy theory" that LC re solicits its current borrowers that have made a year or more of prompt payments with an offer to refinance their current loan at a much lower interest rate. Marketingwise they are the perfect target. LC gets a new origination fee and the servicing windfall from the original loan described above. Only the current investor(s) get hurt. If true, a switch to higher APR would end this game.
Finally there's cash flow. Those nice up front fees would be spread over the life of the loan. Not a good thing.
Of course LC could up the APR enough to cover all this (they'd have to predict future prepayment rates to do so).
Whether or not the new APR would be competitive is an open question.