Back in October, Lending Club hosted a webinar on “Credit & Collections.” Having had a couple of loans go late, and one actually wind up being charged off, I was naturally interested.
While you’re more than welcome to view the webinar itself, it’s about 35 minutes long. Thus, I thought I’d put together an executive summary for you.
The webinar was presented by a couple of Lending Club execs (John Donovan [COO] Jack Cohen [SVP, Legal & Collections]) and they presented a ton of statistics.
Lending Club borrower requirements
For starters, Donovan and Cohen noted that fewer than 9% of loan requests are accepted by Lending Club. They require a minimum FICO score of 660, though the average score of approved borrowers is 713.
They further require a debt-to-income (DTI) ratio of less than 25%, though I think they exclude mortgage payments from this calculation. Beyond this, they require a credit history of at least three years, no current delinquencies, and no bankruptcies in the past seven years.
Finally, they won’t approve a borrower who has has more than ten recent credit inquiries.
How does Lending Club set rates?
Rates are set based on the perceived level of risk. Overall, the average rate paid to investors on Lending Club loans is 13.4%. However, this ignores fees and losses due to borrowers who fail to repay the loan.
Thus, here’s how it breaks down:
Average rate: 13.4%
Servicing fee: 0.7%
Expected losses: 3%
Average return: 9.7%
Late payments, delinquencies, and defaults
Donovan and Cohen then turned their attention to ‘deadbeat borrowers’ (my term, not theirs). The following image depicts the different degrees of lateness on a Lending Club loan.
Of the loans that first enter the grace period (1-15 days late), the majority are due to things like failed ACH transfers. For those that are unaware, Lending Club loans are all set up to auto-debit the borrowers bank account. Thus, if a borrower changes banks and fails to update their banking info, the loan will slip into the grace period.
Two-thirds of all loans that enter the grace period are brought back to current within 15 days. Of those that slip beyond 15 days, they are re-categorized as being “Early Late, ” and about 10% of these will be brought back to “Current” status before going more than 30 days late.
Loans that are 31-120 days late are considered to be “Late, ” though between one-third and one-half of these are successfully brought back to being “Current” status before default. The most common causes of “Late” loans are job loss, reduced salary, unforeseen medical expenses, or family situations such as divorce.
After 120 days, a loan goes into “Default.” Once a loan reaches this stage, there is a 10% chance of the funds being recovered. Turning that around, there’s a 90% chance that you’ll never see your money again once a loan reaches default.
Finally, if Lending Club loses hope of recovery, a loan is re-categorized as “Charged Off.” This isn’t to say that the money is definitely lost. There’s a slight chance of this money being recovered, and if is you’ll get it back. But don’t hold your breath…
One final note is that, in the case of a deceased borrower, Lending Club will pursue a creditor’s claim against the estate (just as any other creditor would do).
Of course, throughout this entire process, Lending Club is working to get borrowers to live up to their obligations. What follows is a graphic that shows the steps that they take at each stage.
What about payment plans?
During the collection process, Lending Club will sometimes place borrowers on a payment plan. In fact, one of my borrowers is on just such a plan. The graphic below illustrates how this works.
In short, the borrower’s payment is temporarily reduced to allow them to get through a rough patch, after which the base payment is increased such that the loan will still be paid off on time. Not an ideal situation from an investor’s perspective, but certainly better than allowing the borrower to default on the loan.
The webinar at http://www.instantpresenter.com/WebConference/RecordingDefault.aspx?c_psrid=EC52D68485 is no longer available. Is there any other place to get it?
@8 – subsidized loans to reinvest in higher risk LC loans? So everyone leverage’s up with some “subsidized” debt from LC (thought they probably break even with their origination fee that they receive upfront) and buys higher risk LC debt (thus increasing LC volume and origination fees, and maybe some servicing fees until the deadbeats default). Nice.
Why not just create a trust, call it a Collateralized Lending Club Obligation (CLCO), fill it with some really stinky loans that no-one reading the details wants to fund, and issue new LC loans to pay for it. Don’t worry, your credit is good and you will pay only 8% while the deadbeats pay 14% (just don’t ask about defaults…but if you are still worried about defaults I have another group of investors that will sell you some Lending Club Default Swaps (LCDS) that will “insure” your losses in the event of a default for just pennies on the dollar (again, just don’t ask about our total notional exposure.
What, your credit isn’t so good and you can only get a rate of 13.9%…mmm… that’s ok, we’ll create another CLCO will lend to you at 13% and “diversify” the risk to another pool of suckers… I mean investors…
Didn’t we just play this game?
Yes, Lending Club lenders need a forum that is independent of LC!
Lending Club’s priorites are on the origination fees for sure. There isn’t much motivation for collections..after all, no forum for lenders to easily air concerns or communicate among themselves. Almost no “social” to this so-called social lending platform. Not to mention zero communication from Lending Club to investors ie no updates on why the loan offerings are dwindling.
Lending Club is hitting a slow period. One of their ideas is to subsidize loans to a select group of investors who state they are reinvesting in LC loans for riskier borrowers. I think this may backfire on Lending Club. I for one would not invest in one of those. Consider the following dialog taken from a currently listed “subsidized” loan:
Q: 304429
Hello. If many of the loans default, will you then default on this loan? What kind of job do you have with the UC systems? Your answers to these questions are greatly appreciated.
Sent at: 2009-12-13T11:05:48 A: Member_589746
I am a research scientist at a national lab managed by UC.
I am taking the credit risk onto myself. I will pay off the loan even if I take a loss due to defaults.
I intend to invest in 400 different notes which should give me good risk exposure and avoid statistical anomalies. I will aim for a 13% return which after defaults should lead to a 9-10% overall return. The only reason this small of a margin is worth the risk is that Lending Club is subsidizing my loan. Its a good idea on their part to shift more funds to the riskier loans so that more get funded and their business expands.
Awesome thanks Nickel!
You’re right. I don’t have the time to listen to it. Your summary was very much appreciated 🙂
I am unwilling to try this risky way of earning interest. I have a low risk tolerance, but it might be good for some people.
John DeFlumeri Jr
The unofficial Prosper forum at http://www.prospers.org also contains a subforum for Lending Club issues.
Thanks for the great post, this type of information seems somewhat hard to come by for LC. I’ve been struggling with the idea of lending there. On one hand it seems that they are a lot more selective about their borrowers, but on the other hand there still seems to be a lot risk.
They make FAR more money on the origination fees than they do on the servicing fees, so it seems that their prime motivation is in originating new loans rather than chasing deadbeats.
And why is there so little in the way of forum activity? I find it odd that LC doesn’t even have a lenders forum on their site, and the only third party forum I could find is very sparse. Prosper has a huge forum community that is very frank about the pros, cons, and issues that lenders have faced.
All Lending Club loans are for 3-year terms.
Nickel, thanks for posting this. It seems like you have quite a few readers who are trying out Lending Club so I’m sure this will benefit many.
So… help me out here… are they all yearly accounts or are there monthly loans too?
I’m not at all familiar with Lending Club, but it seems like it could be the future of banking.
The banking industry has failed in many ways, and this could be a viable alternative. It provides higher return for depositors, and conservative loans for the truly credit worthy. The banks have failed on both accounts.
Ironically, it’s old world banking so it’s nothing new or weird. It merits a close look.