Lend Academy Network Forum

Lending Club Discussion => Investors - LC => Topic started by: SeanMCA on July 10, 2015, 12:09:22 AM

Title: Grace Period Track Record
Post by: SeanMCA on July 10, 2015, 12:09:22 AM
Is there an easy way to sort all your notes to see which ones have entered into the Grace Period at some point? The amount of notes I have in the Grace Period category at any given moment is appalling. I rarely if ever see my A or B notes in there. It's always C and worse. As of a few weeks ago, I began only buying A and B notes and don't plan to change that any time soon.

I don't mind lending to people with damaged credit but I don't want to lend to people who are so broke that their bank account is empty just a few months in to a long term loan. Considering how many people have overdraft protection, a bounced ACH means that some of these borrowers are so broke that they've already capped out the maximum negative amount the bank will possibly let them hit.

The biggest irony is that in tech-based business lending, the single most important factor during analysis is the applicant's cash flow history. They use api tools to log into the borrower bank accounts and analyze the deposit history and daily ending average balance. If the person is broke, they don't get funded, no matter how good the credit and all the other "thousand data points" look.

In tech-based consumer lending, nobody seems to care whether or not the borrower is already broke. The lenders don't ask and nobody talks about it. Instead we rely on silly assumptions based on incomplete information. Why are we relying on outdated formulas when the technology to find out if a borrower has any money already exists? Why are we making presumptions about what someone could afford when we can just easily find out? This can easily be scaled. The first thing business lender Kabbage does when an applicant applies is log into their online banking through an API and download every transaction and balance for the last 90 days. And if they're not broke, then they ask what the borrower's name is. I'm not kidding. They log into your bank account before they even ask what your first and last name is. Because if you're broke, the rest doesn't matter...

Consumer lenders
Does the borrower have great credit? Yes
Is the borrower dead broke with -$10,000 in the bank and about to blow up and file bankruptcy? Meh, who cares
Approved!

We laugh at these pseudo calculations in business lending. Lend to people with money, decline people who are broke.
Title: Re: Grace Period Track Record
Post by: lascott on July 10, 2015, 10:20:29 AM
That was a very interesting read. Thanks.

I've only been lending for 1.4 years and am still investing a fair amount each month so it seems most of notes in grace are brand new and I assumed it was something to do with the automatic bank payment not being correct right at the beginning. I'm about out of my discretionary Lending Club investment money so I will see how graces and lates work by the end of the year.

I think the altruistic view is these consumers are paying so much in variable interest rates that we are hoping a fixed interest rate and payment will let them get ahead / back-on-their-feet.

I definitely have gotten more conservative since I started.  See my ABCs vs DEFGs.
1.4 yr old -- Taxable account
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2 mo old -- Roth account
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Title: Re: Grace Period Track Record
Post by: lascott on July 10, 2015, 10:32:08 AM
<snip>
The first thing business lender Kabbage does when an applicant applies is log into their online banking through an API and download every transaction and balance for the last 90 days. And if they're not broke, then they ask what the borrower's name is. I'm not kidding. They log into your bank account before they even ask what your first and last name is. Because if you're broke, the rest doesn't matter...
Would that work in consumer lending if only, say, Lending Club did that. Wouldn't many/most borrowers just go to Prosper, Avant [Credit], LendingTree, Lightstream, Wells Fargo, etc ?!?
Title: Re: Grace Period Track Record
Post by: thezfunk on July 10, 2015, 03:11:03 PM
Yeah, exactly.  I am guessing that consumer lending doesn't attempt that because of the competition.  Nobody would subject themselves to that when there are opportunities everywhere to not have to do that.  Business lending is much tougher and businesses are used to subjecting themselves to those types of requirements.

I remember the Prosper CEO talking about how their volume went up by a huge amount by just streamlining the application process on their website.  We can't have anything getting in the way of people getting your money.  Another point that I see brought up over and over again is if the originators had an incentive to not have these notes default, then we would start seeing some common sense changes.  Right now they don't care you lose your money.  The only reason they have to care right now is if people stopped investing and they had problems getting sucke...er...investors to give up their money.  The platforms in this country make money on originations not whether or not you get paid back.
Title: Re: Grace Period Track Record
Post by: SeanMCA on July 10, 2015, 11:37:10 PM
Yeah, exactly.  I am guessing that consumer lending doesn't attempt that because of the competition.  Nobody would subject themselves to that when there are opportunities everywhere to not have to do that.  Business lending is much tougher and businesses are used to subjecting themselves to those types of requirements.

With tools like Yodlee, there is not really much work involved to have the lender access your bank account. Basically you enter in your routing number and that brings up the login/pw and any security questions screen for that bank. You enter that stuff in and boom, instantly done. Yodlee securely accesses the data from the bank and downloads it to the lender where a basic script or algorithm can analyze the last 90 days and issue an immediate decline or next set of questions like your first and last name.

The lender never captures your bank credentials, just the data from the last 90 days. In business lending the old adage used to be that "small business owners would never want to spend time filling out 3 extra fields or enter in their bank username and password to apply for a loan because it wouldn't feel safe," but lo and behold, once the technology was there, business owners didn't flinch.

The only real reason to not reveal your daily ending bank balance and transaction history to a lender is because you don't want them to see what's really going on. As long as the lender relies on presumptions, they'll never be able to detect if you're broke.

And as long as we don't care if the borrowers are broke, then we will really never know the portfolio's risk or how to predict a looming crisis.
Title: Re: Grace Period Track Record
Post by: SeanMCA on July 10, 2015, 11:40:10 PM
I remember the Prosper CEO talking about how their volume went up by a huge amount by just streamlining the application process on their website.  We can't have anything getting in the way of people getting your money. 

Sounds exactly what a payday lender would say...

And considering they don't know or care if the borrowers are broke but they make the loan anyway, then they have the same attitude as a payday lender.

As long as the math works in our favor for the time being, who cares right? We're all in the payday lending business.
Title: Re: Grace Period Track Record
Post by: bobeubanks on July 11, 2015, 12:07:40 AM
And considering they don't know or care if the borrowers are broke but they make the loan anyway, then they have the same attitude as a payday lender.

Actually a payday loan lender has more motivation than LC to check to see if the loan will be repaid.
Title: Re: Grace Period Track Record
Post by: thezfunk on July 11, 2015, 01:04:43 AM
Don't get me wrong Sean, I don't disagree with you.  Unfortunately, LC and Prosper have no incentive right now to verify accounts as you describe.  We, as lenders, would love that but the originators have no incentive. 

What I don't get are the people borrowing some of my money at ~30% interest.  It is never a ton of money.  I never see a $20k or $30k loan at ~30%.  It is always only a few thousand.  I know what the borrowing is thinking...hey, I can make that monthly payment and the interest rate is secondary or of little concern to them.  In my experience, that is how poor people think.  Those type of people will never get out of situations where they feel they need to borrow at ~30% because they don't know any better.  It is ignorance and somehow those people need a better financial education.  You couldn't get me to borrow money at ~30% no matter what the circumstances were.  I know it is a rip off and I would never do it.  Maybe they do know and they just plan on running off with my $25.  In that case, the interest rate is totally irrelevant. 
Title: Re: Grace Period Track Record
Post by: SeanMCA on July 11, 2015, 11:44:43 AM
As of a few months ago, I stopped buying notes of anyone making less than $85,000 a year. You can make that amount or much more and still be broke, but at least it reduces the odds that the borrower will be poor.

I don't want to lend to people whose bank balance is always zero or just enough to make the payment and it's not just for moral reasons, it's because as soon as there's a blip in the economy, these accounts will be the first to fall. As helpful as all the ratios and statistics that Lending Club provides are, I really think it's kind of reckless that we don't know how much money these people actually have in the bank when the loan is issued.
Title: Re: Grace Period Track Record
Post by: lascott on July 11, 2015, 01:07:43 PM
As of a few months ago, I stopped buying notes of anyone making less than $85,000 a year. You can make that amount or much more and still be broke, but at least it reduces the odds that the borrower will be poor.
An isolated analysis gives that impression but there are certainly other factors.  No matter what you strategies it has to be sustainable (nbr of notes available) to keep your cash invested.

Source: https://www.lendingharbor.com/hist_analysis/
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Title: Re: Grace Period Track Record
Post by: rawraw on July 11, 2015, 04:48:45 PM
You try getting a prime borrower to jump through hoops to get a loan.  You'll start seeing a much much lower pull through rate.  There used to be a service that people would post in the questions that the borrowers could link their debts, to confirm their debt repayment loan was paying off debts at a lower rate and payment level.  But that was back when you had leverage because loans didn't always fund so the borrowers were more likely to jump through your hoop.

Now doing this for D/E/F/G borrowers may be a good idea.  But terrible idea for a blanket use of all LC borrowers.  But I have a feeling if you ask to crawl someone's bank account, they'll just go elsewhere.  Seems that'd only work on subprime borrowers who have limited bargaining power

I'm assuming you may be new to lending.  Making a loan based on deposit balances is rarely a good idea.  Deposits magically disappear when you need them most.  Only deposits that are any protection are CD's with a hold against them.  Just beacuse someone has had money for 90 days doesn't mean they'll have any moving forward

On a related note, I've heard from colleagues I trust that high income borrowers performed worse on their consumer credit (like auto loans) than subprime in the prior crisis (ignoring thsoe who were making liar loans and stuff), in terms of returns to the lender.  This lender was one of the biggest banks in the country.  High income people have high income expenses and it doesn't take long after losing a job for it to bring down their "large" bank accounts
Title: Re: Grace Period Track Record
Post by: kya on July 12, 2015, 02:06:49 PM
the "flaw" in p2p lending to me was that lc prosper etc. dont have the incentive to collect like a normal un-secured creditor would..... the collection effort is very poor and spotty. It looks to me like collectors almost breathe a sigh of relief when the customer doesnt answer the phone. When they do by chance get a customer on the phone many times nothing is resolved. It seems like accounts just for the most part work there way through the various stages of delinq and then are charged off with nothing more than a "oh well".......i worked in collections through out my 30 years in consumer lending and have never seen anything like the lack of effort to collect accounts. I will continue to buy notes on lc and prosper but will never get carried away with the amount invested ie ( hobby $)
Title: Re: Grace Period Track Record
Post by: thezfunk on July 12, 2015, 02:36:11 PM
the "flaw" in p2p lending to me was that lc prosper etc. dont have the incentive to collect like a normal un-secured creditor would..... the collection effort is very poor and spotty. It looks to me like collectors almost breathe a sigh of relief when the customer doesnt answer the phone. When they do by chance get a customer on the phone many times nothing is resolved. It seems like accounts just for the most part work there way through the various stages of delinq and then are charged off with nothing more than a "oh well".......i worked in collections through out my 30 years in consumer lending and have never seen anything like the lack of effort to collect accounts. I will continue to buy notes on lc and prosper but will never get carried away with the amount invested ie ( hobby $)

I agree and if they were maybe forced to have some skin in the game, things would change quick.  How about refunding any note that goes delinquent?  Maybe forcing LC and Prosper to fund a fraction of every loan?  People want to cry about regulations but it is situations like this where people begin to realize 'free' and 'unfettered' are not always the best for everyone.  Until this industry is really tested in a bad economic downturn, its viability and sustainability are complete unknowns.  We are kind of like wildcatters out poking holes in the ground and praying we find oil.
Title: Re: Grace Period Track Record
Post by: rawraw on July 12, 2015, 03:20:45 PM
Collecting on an unsecured debt isn't normally cost effective.  There is almost always more senior claims against the assets and you have no leverage (i.e. take back their car, or home, or whatever other asset other loans have).  Collection efforts may be lax, but I am doubtful it is very material.  But maybe my suspicion is wrong -- if its material, it leaves room for another platform to do it differently.
Title: Re: Grace Period Track Record
Post by: Rob L on July 12, 2015, 09:20:20 PM
If collection efforts are lax and the "market" knows it then the loans will sell for more to collection agencies.
It may be more cost effective to sell the loans to collection agencies (so long as there are enough of them to make the bidding efficient), than to spend more of your own resources doing it.
When a collection agency buys the loan they have skin in the game, and they bring resources and expertise that P2P lenders may not have and are costly to duplicate.
I have no experience in collections, but this seems to make sense.
Title: Re: Grace Period Track Record
Post by: Lovinglifestyle on July 12, 2015, 09:36:15 PM
The last time one of my sale-eligible notes changed from late to current was July 7 and that is the only one on a long list to go positive. 
Seems odd to me.  Last month a fourth of the lates for sale went current. There must be quite a few costly to me/profitable to them collection fees to be had in the bunch.
It does make sense to raise the price the way you say, Rob.
Title: Re: Grace Period Track Record
Post by: SeanMCA on July 14, 2015, 12:21:15 AM
I'm assuming you may be new to lending.  Making a loan based on deposit balances is rarely a good idea.  Deposits magically disappear when you need them most.  Only deposits that are any protection are CD's with a hold against them.  Just because someone has had money for 90 days doesn't mean they'll have any moving forward

I've worked on the B2B side of finance for a long time but am still new to the consumer side. It's not about "making a loan based on deposits" so much as it is knowing whether or not a borrower is dead broke or unable at the time the loan is issued to afford the expected payments. Instead we're looking at formulas and ratios based on other factors to make predictions about whether or not the borrower can afford the payments when we could easily check to see what actually is.

In B2B finance, checking to see whether or not the applicant can afford the payments (even if that cashflow magically disappears as you say) is of paramount importance. The last few months of banking history plays a big role in that assessment. Basically, if out of 1,000 data points they had to choose one to base all decisions off of, the banking transaction history would likely be the clear winner.

I'm not talking about traditional banks and collateralized loans for sophisticated big businesses either. I'm talking the mirror image of Lending Club but in business lending. This is how lenders like OnDeck work, a company who will make quick loans over the internet for as little as $5,000. All the tech-based business lenders say bank data is king but you guys are saying it's too much work for consumers to type in 3 fields on a website and that things basically work different 'round these parts and that it's not important.

I ask how can this be? How can bank data be king for a sole proprietorship applying at OnDeck but irrelevant for a sole proprietor applying for a personal loan on Lending Club?

But I have a feeling if you ask to crawl someone's bank account, they'll just go elsewhere

In B2B finance, anyone unwilling to share their banking history is assumed to be fraud or broke. Going elsewhere is exactly what we want to have happen.

I realize that ignoring someone's banking history is all business as usual in consumer lending, but for the last nine years that I've worked on the B2B side, banking has been all that's mattered.

I'm having trouble reconciling the discrepancy when we are very often lending the same amount to the same people...
Title: Re: Grace Period Track Record
Post by: AnilG on July 14, 2015, 12:57:23 AM
Not verifying bank account transactions may have to do with consumer protection or consumer lending laws. Recently, I financed a new car through Chase Bank. The bank also didn't check the bank account history or verified income. There seems to be lot of trust on FICO Score and Credit Report when it comes to consumer lending.
Title: Re: Grace Period Track Record
Post by: Fred93 on July 14, 2015, 01:16:42 AM
There is information about a bank account beyond just how much money is in the account at this instant.

Account age for example ... It would be nice to know if they account had been created only recently, and never had any money to speak of in it.  Such an account is probably created just for the P2P loan.  Automated withdrawals from such an account may easily retrieve nothing.  At the other extreme, an account that had existed for years, and which has regular direct deposits into  it, in amounts consistent with stated income, would give some comfort.

I've learned that in underwriting, my intuition isn't excellent.  Better to look at historical data to build a case for using some metric when making new loans.  Where would we get the historical data re bank account metrics?  Might need to gather the info for a year or two just to build the database from which to learn how to use the data!

AnilG raises an interesting question re how this sort of thing intersects with consumer protection/lending/credit laws.   I have no idea.
Title: Grace Period Track Record
Post by: rawraw on July 14, 2015, 06:34:23 AM
Besides consumer protection laws, the credit quality of ondeck borrowers is nothing like most Lendingclub borrowers.  Business lending and consumer lending are extremely different. Consumer lending is about managing a pool of homogeneous credit and less about the underwriting of any particular credit
Title: Re: Grace Period Track Record
Post by: lascott on July 14, 2015, 09:44:52 AM
<snip>
All the tech-based business lenders say bank data is king but you guys are saying it's too much work for consumers to type in 3 fields on a website and that things basically work different 'round these parts and that it's not important.
<snip>
I don't recall people telling you it is "too much work" for a borrower to fill in their bank account information.  We questions if borrowers would just go to another place to get the loan. What if LendingClub started to require access to crawl peoples bank accounts.  How many days later would Propser, LendingTree, etc have adds or public statements saying that they don't require that and encourage borrowers to go to them.

You imply that you want those borrowers to go to the competitors because you think all of those would be the fraudulent ones.  I think most even very high quality borrowers would not want LendingClub or whoever crawling up their bank accounts.  Especially because the standard for consumer credit is FICO and employment/retirement_income (ie. ability to pay loan back)

Would that work in consumer lending if only, say, Lending Club did that. Wouldn't many/most borrowers just go to Prosper, Avant [Credit], LendingTree, Lightstream, Wells Fargo, etc ?!?
Title: Re: Grace Period Track Record
Post by: rawraw on July 14, 2015, 08:37:30 PM
Now that I know he has business lending background, I understand where his points of view are coming from.  It's just different when dealing with consumers vs a business.  For one, businesses have much harder time getting loans (and as a result, bank has more leverage).
Title: Re: Grace Period Track Record
Post by: SeanMCA on July 15, 2015, 12:26:17 AM
Thanks to everyone that has shared their thoughts.

Coming from B2B where the modern adage has basically been FICO and credit reports are worthless, and then coming here where FICO and credit report data are believed to very important, I have just struggled to figure out why there is such a difference between business and consumer.

I had not considered that there might be consumer protection laws that prevent a creditor from using that information. I will have to look into that. I understand the competitive advantage aspect that lenders are up against. If Lending Club required bank data to be crawled but Avant and Prosper didn't, they would use that as a marketing tool to steal borrowers from Lending Club.

I guess why it's a moot point and this feeds into what some of you have said, is that collections is not the highest priority on the Lending Club checklist, growth is. Their system works good enough in the current economic environment, so why do anything drastic like require banking data and potentially stymie growth?

I am not a shareholder in the company so I don't care that much about growth, so long as there are enough notes for me to acquire. I care about the performance of my loans to Lending Club, not how many loans they can make. But shareholders like growth, especially with new age tech companies. I guess we have an old fashioned bondholder/shareholder conflict.

I want my investment to be as risk-free as possible and shareholders want to do new and crazy things to fund more loans and acquire more market share.
Title: Re: Grace Period Track Record
Post by: SeanMCA on July 15, 2015, 01:03:04 AM
Well, I just talked to my friend who is an underwriter for a credit card issuer. He manages a department that approves consumers for credit cards. They regularly ask for bank statements from applicants to prove income and it is required for any line of 25k and over. That combined with proof of address he says is necessary for them to stay compliant with the Bank Secrecy Act.

It is also relatively normal to submit bank statements for a home mortgage.

Karrot, a consumer lender affiliated with business lender Kabbage, and direct competitor to Lending Club and Prosper, already requires applicants to have their bank accounts crawled in the manner that I described previously (through an API).

There are no consumer protection laws in play here, at least none that don't allow a lender to require banking data. In the case of my friend working for a credit card issuer, asking for bank statements from consumer applicants is part of BSA compliance...
Title: Re: Grace Period Track Record
Post by: Fred93 on July 15, 2015, 02:24:58 AM
Good info.

I didn't know about karrot before, so I went to their web site to check it out.  You click on "personal loans" and right there on the 1st page they show you that they're gonna ask for bank account info.  They even say "Please choose the account that would show income deposits." which makes their intent pretty clear.

They even have a loan application API.  I would imagine this is for affiliates or partners or whatever they call them to forward loan application info.
Title: Re: Grace Period Track Record
Post by: rawraw on July 15, 2015, 09:08:42 AM
Well, I just talked to my friend who is an underwriter for a credit card issuer. He manages a department that approves consumers for credit cards. They regularly ask for bank statements from applicants to prove income and it is required for any line of 25k and over. That combined with proof of address he says is necessary for them to stay compliant with the Bank Secrecy Act.

Lending Club also verifies income for borrowers.  You just don't get that data.  In the past people have analyzed these verification and noted the % verified increases with the credit risk of the borrower.  Doesn't sound any different than LC's current practices

Also, FICO isn't useful in business for several reasons -- one is that the business is subject to risks that a consumer's income source is normally not subject to, or at least not subject to such a large degree .  In consumer lending, its highly predictive and it is just a cultural change.
Title: Re: Grace Period Track Record
Post by: lascott on July 15, 2015, 09:44:33 AM
Well, I just talked to my friend who is an underwriter for a credit card issuer. He manages a department that approves consumers for credit cards. They regularly ask for bank statements from applicants to prove income and it is required for any line of 25k and over. That combined with proof of address he says is necessary for them to stay compliant with the Bank Secrecy Act.
Lending Club also verifies income for borrowers.  You just don't get that data.  In the past people have analyzed these verification and noted the % verified increases with the credit risk of the borrower.  Doesn't sound any different than LC's current practices <snip>

A friend and I were just recently looking into income verified (also source verified (work where you say you work)).

Sounds like for Lending Club there is a delay to get the income verified and the loan may be fully funded before that so you may not see many "good" loans since they are funded and "gone" before you get to pick them. So notes are often invested in before they get verified (if verified at all since only a modest percent get verified anyway (income/source))

http://blog.lendingclub.com/more-information-about-our-verified-income-filter/

Quote
More Information About Our “Verified Income” Filter

Recently we’ve been hearing from investors who tell us they’re finding it difficult to find income verified loans on our platform. This has led some to wonder whether loan originations have slowed at Lending Club or whether we’ve changed our standards for income verification.

In fact, neither is the case. Loan issuances are at historic highs: in April 2013 $140,118,275 in loans were facilitated through the Lending Club platform, up nearly 10% from March 2013 and our highest monthly loan issuance ever. In addition we haven’t changed our standards for verifying income; we continue to conduct income verification on over 60% of loans.
So why does it seem like there are “fewer” income verified loans on the platform?

This perception is simply due to extremely high investor demand causing loans to receive 100% investor funding before the borrower income verification process is complete. When a loan receives 100% funding, we remove the listing from the platform. Lending Club is still verifying income prior to issuing a loan – however, the loan is just no longer visible on our platform since it’s reached 100% funding from investors.

One thing I did recently was play with MS Access to see where my P2P-Picks fell in this regard.

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