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Lending Club Discussion => Investors - LC => Topic started by: statslender on February 16, 2016, 09:46:47 PM

Title: How does Default status work?
Post by: statslender on February 16, 2016, 09:46:47 PM
I'm trying to figure out Lending Club basics, so I downloaded the LoanStats3c data (2013-2014 originations) from https://www.lendingclub.com/info/download-data.action

According to http://kb.lendingclub.com/investor/articles/Investor/What-do-the-different-Note-statuses-mean, defaulted loans haven't paid in 121 days. But I'm seeing 7 loans in Default with last payment in December 2015.

What gives? Are these notes truly in Default?

Apologies if this was answered somewhere else - I'm new.
Title: Re: How does Default status work?
Post by: skierx on February 16, 2016, 10:23:12 PM
I am also interested to learn how LC handles these loans. I currently have two notes that are in default one has one payment received and the other has no payments received, both loans were for significant sums of money. Has anyone else experienced a default where there were little or no payments received? How does LC deal with these seemingly fraudulent borrowers?
Title: Re: How does Default status work?
Post by: Fred93 on February 16, 2016, 10:44:38 PM
defaulted loans haven't paid in 121 days. But I'm seeing 7 loans in Default with last payment in December 2015.

What you said above isn't quite right.  A loan is supposed to default when it has been in arrears for 4 months.  (I believe that's the most precise way to say it.)  Doesn't matter when the "last payment" was.  Last payment could be yesterday.  If the payment didn't bring the note current, then it won't stop default.  It is very common to have a loan where the borrower gets behind, then makes some partial or even whole payments without getting caught up and then defaults.

Just FYI tho, LC isn't always 100% consistent, and that's just the way it is.  There are occasional funny cases in the database.
Title: Re: How does Default status work?
Post by: Fred93 on February 16, 2016, 10:48:37 PM
I currently have two notes that are in default one has one payment received and the other has no payments received, both loans were for significant sums of money. Has anyone else experienced a default where there were little or no payments received?

Sure.  Anyone who has invested in a few hundred loans has had some.

Quote
How does LC deal with these seemingly fraudulent borrowers?

I don't know of anywhere they have told us what they do.  I hope they investigate some of them, but we just have no information.
Title: Re: How does Default status work?
Post by: statslender on February 16, 2016, 10:59:12 PM
Thank you - makes perfect sense now.
Title: Re: How does Default status work?
Post by: lascott on February 17, 2016, 12:32:24 AM
I don't know of anywhere they have told us what they do.  I hope they investigate some of them, but we just have no information.
By chance I read this old article today where these "straight rollers" were mentioned.

http://www.lendacademy.com/the-collection-practices-at-lending-club/
Title: Re: How does Default status work?
Post by: skierx on February 17, 2016, 12:56:47 AM
I don't know of anywhere they have told us what they do.  I hope they investigate some of them, but we just have no information.
By chance I read this old article today where these "straight rollers" were mentioned.

http://www.lendacademy.com/the-collection-practices-at-lending-club/

The situation described in that article is exactly what happened with my note, the borrower took out a loan for $35,000 and never made a payment. After checking my account today LC has already moved the loan from default to charged off, there is nothing in the collections log that would indicate they took any legal action. It seems that LC's collections efforts in regard to this loan were seriously lacking, its quite disappointing.
Title: Re: How does Default status work?
Post by: Fred on February 17, 2016, 03:21:32 AM
It seems that LC's collections efforts in regard to this loan were seriously lacking, its quite disappointing.

The collections process in general is highly regulated.

Last time I checked, LC employs a 2-pronged approach:
- internal collection team
- third-party debt collection agencies

See also http://kb.lendingclub.com/investor/articles/Investor/What-tools-does-Lending-Club-have-to-deal-with-delinquent-borrowers/

As a lender, the following is enough: Lending Club reports delinquent borrowers to credit bureaus every month.

Also, I can always sell late notes on Folio, so I am not stuck holding the bag of bad notes.
Title: Re: How does Default status work?
Post by: rawraw on February 17, 2016, 05:58:39 AM
I don't know of anywhere they have told us what they do.  I hope they investigate some of them, but we just have no information.
By chance I read this old article today where these "straight rollers" were mentioned.

http://www.lendacademy.com/the-collection-practices-at-lending-club/

The situation described in that article is exactly what happened with my note, the borrower took out a loan for $35,000 and never made a payment. After checking my account today LC has already moved the loan from default to charged off, there is nothing in the collections log that would indicate they took any legal action. It seems that LC's collections efforts in regard to this loan were seriously lacking, its quite disappointing.
IIRC LC makes the investor whole in cases of fraud.
Title: Re: How does Default status work?
Post by: Fred93 on February 17, 2016, 06:04:55 AM
IIRC LC makes the investor whole in cases of fraud.

We don't have the information necessary to validate this or disprove it, therefore I refuse to consider it a "fact".

We don't even know what fraction of the time LC knows that fraud has occurred, and we don't know what fraction of those times they "make the investor whole".
Title: Re: How does Default status work?
Post by: yojoakak on February 17, 2016, 10:55:05 AM
What gives? Are these notes truly in Default?

Nobody knows!

See also: http://www.lendacademy.com/forum/index.php?topic=1797.0
Title: Re: How does Default status work?
Post by: rj2 on February 18, 2016, 03:31:42 PM
"As a lender, the following is enough: Lending Club reports delinquent borrowers to credit bureaus every month."

Why is that enough? It takes what, seven years for bad debt to roll off a credit report? So if a fraudulent borrower hits up both LC and Prosper for, say, $70k, then just doesn't pay, they have effectively added $10k/yr to their income. Tax free.

Then they can do it again in seven years.

Doesn't seem like reporting is enough unless there is additional legal action being taken people will eventually come to see LC as a giant online ATM.
Title: Re: How does Default status work?
Post by: Fred on February 19, 2016, 03:02:23 AM
"As a lender, the following is enough: Lending Club reports delinquent borrowers to credit bureaus every month."

Why is that enough? It takes what, seven years for bad debt to roll off a credit report? So if a fraudulent borrower hits up both LC and Prosper for, say, $70k, then just doesn't pay, they have effectively added $10k/yr to their income. Tax free.

Then they can do it again in seven years.

Doesn't seem like reporting is enough unless there is additional legal action being taken people will eventually come to see LC as a giant online ATM.

You've been burned, bro? ;-)

I have 12,000 notes in my portfolio currently -- almost 20,000 if you include the matured/charged-off ones.  When a bad borrower tricked LC and me into lending to him, I just lick my wounds and move on.

Title: Re: How does Default status work?
Post by: Fred93 on February 19, 2016, 04:48:16 AM
Why is that enough? ... Then they can do it again in seven years. ... Doesn't seem like reporting is enough unless there is additional legal action being taken

Sadly, legal action is very expensive and uncertain.  That's just the way it is.  Because of this all banks and other lending companies use it sparingly.

Because of the anonymity, it is very difficult to track what LC is doing exactly.  You can scan the various court web sites for cases involving Lending Club.  Back in the early days of Prosper, when borrowers often put enough info in their listing descriptions to identify themselves, I used to scan the court web sites and find specific cases, and lenders used to follow them and discuss progress.  What I learned thru this is just what I said above.

From an emotional point-of-view I agree with you.  People who cheat us ought to be slammed.  One of my early Prosper loans was to a guy who was a former state senator from an eastern state.  A grade loan.  He stopped paying after just a few payments.  He continued to be quite a public figure, having opened a gay bar that got a lot of news.  I was astonished and angry.  My anger did nothing useful.  Nothing I could do.  In those early days, Prosper hadn't yet learned how to manage nonpayers.  Both P & LC are much more sophisticated now.  I have learned to back off and let them manage. 

From a more logical perspective, what matters to an investor is that the lending company do enough to keep fraud under control and produce good numbers.  That's what all lending companies try to do.

So you can look at results, and decide whether you want to buy Bank of America stock, Wells Fargo stock, etc, or buy notes thru Lending Club or Prosper.

The various lending laws pretty much prohibit you from getting involved personally, so you need to step back and the guys who can make these decisions do so.
Title: Re: How does Default status work?
Post by: Fred93 on February 19, 2016, 04:51:30 AM
I have 12,000 notes in my portfolio currently

Fred has WAY too many loans in his portfolio.  I have a much more reasonable 4,146 active loans.
Title: Re: How does Default status work?
Post by: lascott on February 19, 2016, 10:49:02 AM
I have 12,000 notes in my portfolio currently
Fred has WAY too many loans in his portfolio.  I have a much more reasonable 4,146 active loans.
Some would say you have "WAY" too many loans in your portfolio as well.  I think it partially depends on how big ($) your account is and if you can keep your "Available cash" at a reasonable level based on your $/Note investment.

Related to this thread ... the theory goes, a person with 10000 $25 notes will have 2 defaults statistically compared to a person with 5000 $50 notes having 1 default (ie. same account value and same $50 worth of defaults).  Feels better to only lose $25 at a time to these "straight rollers" tho <grin>.

Bryce M and others have talked about CI in the past to show how it changes.

(https://forum.lendacademy.com/proxy.php?request=http%3A%2F%2Fi.imgur.com%2FaXTujTU.png&hash=d90192412f51ef44422be908fb9435fd)
Title: Re: How does Default status work?
Post by: rj2 on February 19, 2016, 11:02:41 AM
Why is that enough? ... Then they can do it again in seven years. ... Doesn't seem like reporting is enough unless there is additional legal action being taken

Sadly, legal action is very expensive and uncertain.  That's just the way it is.  Because of this all banks and other lending companies use it sparingly.

Because of the anonymity, it is very difficult to track what LC is doing exactly.  You can scan the various court web sites for cases involving Lending Club.  Back in the early days of Prosper, when borrowers often put enough info in their listing descriptions to identify themselves, I used to scan the court web sites and find specific cases, and lenders used to follow them and discuss progress.  What I learned thru this is just what I said above.

From an emotional point-of-view I agree with you.  People who cheat us ought to be slammed.  One of my early Prosper loans was to a guy who was a former state senator from an eastern state.  A grade loan.  He stopped paying after just a few payments.  He continued to be quite a public figure, having opened a gay bar that got a lot of news.  I was astonished and angry.  My anger did nothing useful.  Nothing I could do.  In those early days, Prosper hadn't yet learned how to manage nonpayers.  Both P & LC are much more sophisticated now.  I have learned to back off and let them manage. 

From a more logical perspective, what matters to an investor is that the lending company do enough to keep fraud under control and produce good numbers.  That's what all lending companies try to do.

So you can look at results, and decide whether you want to buy Bank of America stock, Wells Fargo stock, etc, or buy notes thru Lending Club or Prosper.

The various lending laws pretty much prohibit you from getting involved personally, so you need to step back and the guys who can make these decisions do so.

What is LC's incentive?

The last financial crisis happened because the people originating mortgages had no skin in the game. They offloaded crap through securitization and didn't give a damn whether anybody actually paid.

LC loses nothing when a loan goes bad, and therefore has precious little incentive to take harsh legal action to make an example out of fraudsters.

Legal action is a deterrent. Of course it is expensive, but if you don't do it in at least a few cases the fraudsters will assume that they are safe and you never will.

What motivates LC to take this action and how can we as investors see for ourselves that they do this in an appropriate fashion?

I don't need to know that my loan in particular was prosecuted, but can you show data that LC is just as aggressive in court as lenders whose own money is at stake?
Title: Re: How does Default status work?
Post by: DaveSch on February 19, 2016, 04:35:58 PM
If the loan investors were paid first, and the Lending Club (and Prosper) received their origination fee and payment fees at the end, I'll bet that more care would be taken in issuing the loans.

Now, LC & P only have incentive to offer as many loans as they can. The incentive for successful completion of the loans? Not so much.

Disclosure: My Prosper loans are nearly done, and LC in another year or so.

Dave
Title: Re: How does Default status work?
Post by: Fred93 on February 19, 2016, 04:59:04 PM
Now, LC & P only have incentive to offer as many loans as they can. The incentive for successful completion of the loans? Not so much.

That's not right.  IF LC were to issue a bunch of crap loans and drive investor's returns negative, it would greatly harm their brand.  There would no longer be all the institutional money and retail investor money beating down their door.  They would stop growing and start shrinking.  I will grant you that this maintenance of brand is a longer term objective.  Money made this quarter thru loan origination fees is immediate.

In the end you have to have faith in management's understanding and intentions and skill to maintain the brand.  This is a bit easier with LC than with P IMHO as LC simply has classier management folk.
Title: Re: How does Default status work?
Post by: nonattender on February 19, 2016, 06:59:08 PM
The real "sue" that you "sue 'em all" guys should think about is Single Unit Economics;  I don't want to sacrifice return to "feel better" or
"make a point".  The best way to feel better and make a point is to continue refining credit/risk models, weed on front end - and bank $.

I apologize if that sounds blunt, but some of you sound a little "emotional" about what LC should do as my fiduciary agent for my funds.
Their job is to make me money; their job is not to tax me to do something inoptimal with my money in order to appease emotional guys.

Fred93 has this one right and put it a lot more softly than I did, if you don't understand the nuances of the economics of debt collection.
Title: Re: How does Default status work?
Post by: Rob L on February 19, 2016, 07:20:37 PM
The real "sue" that you "sue 'em all" guys should think about is Single Unit Economics;

Doesn't seem the consensus is to "sue em all", just the "straight rollers". Personally I think that would be money well spent.
Maybe that's LC's policy. We really don't / can't know but the CEO commented in his interview that these folks are taken seriously.
Guess that's where faith in the brand comes in.

Title: Re: How does Default status work?
Post by: rawraw on February 19, 2016, 07:22:07 PM
Why is that enough? ... Then they can do it again in seven years. ... Doesn't seem like reporting is enough unless there is additional legal action being taken

Sadly, legal action is very expensive and uncertain.  That's just the way it is.  Because of this all banks and other lending companies use it sparingly.

Because of the anonymity, it is very difficult to track what LC is doing exactly.  You can scan the various court web sites for cases involving Lending Club.  Back in the early days of Prosper, when borrowers often put enough info in their listing descriptions to identify themselves, I used to scan the court web sites and find specific cases, and lenders used to follow them and discuss progress.  What I learned thru this is just what I said above.

From an emotional point-of-view I agree with you.  People who cheat us ought to be slammed.  One of my early Prosper loans was to a guy who was a former state senator from an eastern state.  A grade loan.  He stopped paying after just a few payments.  He continued to be quite a public figure, having opened a gay bar that got a lot of news.  I was astonished and angry.  My anger did nothing useful.  Nothing I could do.  In those early days, Prosper hadn't yet learned how to manage nonpayers.  Both P & LC are much more sophisticated now.  I have learned to back off and let them manage. 

From a more logical perspective, what matters to an investor is that the lending company do enough to keep fraud under control and produce good numbers.  That's what all lending companies try to do.

So you can look at results, and decide whether you want to buy Bank of America stock, Wells Fargo stock, etc, or buy notes thru Lending Club or Prosper.

The various lending laws pretty much prohibit you from getting involved personally, so you need to step back and the guys who can make these decisions do so.

What is LC's incentive?

The last financial crisis happened because the people originating mortgages had no skin in the game. They offloaded crap through securitization and didn't give a damn whether anybody actually paid.

LC loses nothing when a loan goes bad, and therefore has precious little incentive to take harsh legal action to make an example out of fraudsters.

Legal action is a deterrent. Of course it is expensive, but if you don't do it in at least a few cases the fraudsters will assume that they are safe and you never will.

What motivates LC to take this action and how can we as investors see for ourselves that they do this in an appropriate fashion?

I don't need to know that my loan in particular was prosecuted, but can you show data that LC is just as aggressive in court as lenders whose own money is at stake?
Yes that's the correct way to think about it.  But also remember, not all mortgage brokers engaged in this practice.  Management is a crucial part of a company and what they end up doing.  Just look at LC and Prosper at 2008

You guys can sue all you want, but only if you pay higher servicing fees to LC to do it.  Everyone wants to complain, but I doubt you'd want to pay
Title: Re: How does Default status work?
Post by: rj2 on February 19, 2016, 09:29:56 PM
The real "sue" that you "sue 'em all" guys should think about is Single Unit Economics;  I don't want to sacrifice return to "feel better" or
"make a point".  The best way to feel better and make a point is to continue refining credit/risk models, weed on front end - and bank $.

I apologize if that sounds blunt, but some of you sound a little "emotional" about what LC should do as my fiduciary agent for my funds.
Their job is to make me money; their job is not to tax me to do something inoptimal with my money in order to appease emotional guys.

Fred93 has this one right and put it a lot more softly than I did, if you don't understand the nuances of the economics of debt collection.

There is merit in what you say, on the flip side we don't know if lending club EVER sues. If they never do then they become a target and fraud spikes up.

Lenders who fund with their own money seek that rational balance of suing in just enough cases that it deters fraud.

My question ultimately is whether lending club goes after fraud as aggressively as other lenders who have their own money on the line would. A bank lending from its own book doesn't sue in every case either, but it will in some.

Title: Re: How does Default status work?
Post by: Fred93 on February 19, 2016, 10:55:14 PM
I logged into pacer.gov tonite and searched for all cases where "Lending Club" was a party.  78 cases appeared.  So apparently they do get involved!  I'll leave it to someone else to analyze.  Note that pacer doesn't cover all courts.

Here's the search results...
http://fred93.com/fbi/lendingclub_uspci.csv

If Excel doesn't fire up when you click on that link, try right clicking and doing a save as to create a local copy, then click on that.

On the other hand, I went to the San Francisco Superior Court web site and did the same search, and only found one case from 2010.  Somebody needs to do more searching and categorize the results.
Title: Re: How does Default status work?
Post by: rj2 on February 20, 2016, 02:45:59 AM

Those look like bankruptcies. I would assume that the bankrupt themselves filed documents making LC a party to the bankruptcy.

What I'm interested is some information about how aggressively LC pursues legal action as opposed to banks that lend from their own book. My guess is that LC doesn't--that it works far less hard to deter fraud and collect than other lenders do. That's because LC has far less incentive to do so. They make their money originating loans, and other than in some marketing/PR sense, don't really care a whole lot whether those loans get paid. As in, they pursue it to the level that would avoid bad press and scare off investors, but not to the level that they would if it was their own money.

But we don't know. Until LC provides some tracking data, we can't compare that. This is something LC should put in its filings somewhere.
Title: Re: How does Default status work?
Post by: Rob L on February 20, 2016, 10:08:42 AM
Just a thought but the decision to sue may never be one in which LC is directly involved.

It may be entirely at the discretion of their third party collectors. Someone who knows more please help out here, but I think there are two categories of collectors. One category is contracted by LC, while LC still owns the loan, to act in LC's behalf. These loans are in "default" and, depending on success or lack of it, payments may be received and the loan may exit default. The other category LC sells the loan to the third party for a negotiated price (typically very little), the loan is charged off by LC and LC has nothing more to do with it.
Title: Re: How does Default status work?
Post by: rickhuizinga on February 20, 2016, 12:13:20 PM


What I'm interested is some information about how aggressively LC pursues legal action as opposed to banks that lend from their own book. My guess is that LC doesn't--that it works far less hard to deter fraud and collect than other lenders do. That's because LC has far less incentive to do so. They make their money originating loans, and other than in some marketing/PR sense, don't really care a whole lot whether those loans get paid. As in, they pursue it to the level that would avoid bad press and scare off investors, but not to the level that they would if it was their own money.

This is why I would like to see LC invest it's origination fee back into the note. It would align their interests with their investors, and they would have skin in the game. Right now, they are very much like brokers from the subprime mortgage bubble era, just pushing new crap loans as fast as they can to collect their origination fees.
Title: Re: How does Default status work?
Post by: nonattender on February 20, 2016, 01:06:48 PM
This is why I would like to see LC invest it's origination fee back into the note. It would align their interests with their investors, and they would have skin in the game. Right now, they are very much like brokers from the subprime mortgage bubble era, just pushing new crap loans as fast as they can to collect their origination fees.

Please present data or other evidence supporting your assertion that the loans are "crap".  We get a visit from a self-appointed internet
financial regulator / guy-who-just-saw-"The Big Short"-at-the-theater-and-is-now-a-credit-risk-analyst like once a week, so, data please.
Title: Re: How does Default status work?
Post by: Fred on February 20, 2016, 10:05:29 PM
This is why I would like to see LC invest it's origination fee back into the note. It would align their interests with their investors, and they would have skin in the game.

Not sure this makes sense.  It's like asking Amazon to purchase the products on its site; or asking Costco to buy the HDTVs  it's selling.

That's not how it works; that's not how any of this works.
Title: Re: How does Default status work?
Post by: Fred on February 20, 2016, 10:36:14 PM
I have 12,000 notes in my portfolio currently

Fred has WAY too many loans in his portfolio.  I have a much more reasonable 4,146 active loans.

Ha ha ha ....  This number does not include my "fleeting" notes, which I purchased from Folio and sold a few days afterwards.
Title: Re: How does Default status work?
Post by: rickhuizinga on February 20, 2016, 11:11:40 PM
This is why I would like to see LC invest it's origination fee back into the note. It would align their interests with their investors, and they would have skin in the game.

Not sure this makes sense.  It's like asking Amazon to purchase the products on its site; or asking Costco to buy the HDTVs  it's selling.

That's not how it works; that's not how any of this works.

Are you saying that LC never invests or funds (or is incapable of investing or funding) any portion of the loans issued through it's site with its own funds? It was my understanding that they did this at times.
Title: Re: How does Default status work?
Post by: Fred on February 21, 2016, 01:00:16 AM
Are you saying that LC never invests or funds (or is incapable of investing or funding) any portion of the loans issued through it's site with its own funds? It was my understanding that they did this at times.

They certainly can, but why?

There are other (better?) ways for LC to deploy their cash: technology, operations, marketing, etc.
Title: Re: How does Default status work?
Post by: rj2 on February 22, 2016, 10:42:49 AM
This is why I would like to see LC invest it's origination fee back into the note. It would align their interests with their investors, and they would have skin in the game.

Not sure this makes sense.  It's like asking Amazon to purchase the products on its site; or asking Costco to buy the HDTVs  it's selling.

That's not how it works; that's not how any of this works.

Amazon and Costco will take back the HDTV if you are unhappy with it, for a full refund. Your analogy is not valid at all. Brokering loans is nothing like selling televisions.

We rely on LC to originate good loans and to ensure they are paid. It is totally valid to ask that they have a financial incentive to do so.
Title: Re: How does Default status work?
Post by: nonattender on February 22, 2016, 11:08:29 AM
This is why I would like to see LC invest it's origination fee back into the note. It would align their interests with their investors, and they would have skin in the game.

Not sure this makes sense.  It's like asking Amazon to purchase the products on its site; or asking Costco to buy the HDTVs  it's selling.

That's not how it works; that's not how any of this works.

Amazon and Costco will take back the HDTV if you are unhappy with it, for a full refund. Your analogy is not valid at all. Brokering loans is nothing like selling televisions.

We rely on LC to originate good loans and to ensure they are paid. It is totally valid to ask that they have a financial incentive to do so.

They have reputational risk and servicing fees (these are not de minimis, in aggregate), both hinging upon how they underwrite.
They have, in aggregate, about nine years of fully transparent data showing that they underwrite well.  What else do you want?

The implication that marketplace lenders are somehow bad actors based upon the design of their business models is tiresome...
Title: Re: How does Default status work?
Post by: rickhuizinga on February 22, 2016, 12:05:56 PM


This is why I would like to see LC invest it's origination fee back into the note. It would align their interests with their investors, and they would have skin in the game.
What else do you want?
I want LC to place a bet on the same side of the table they are asking investors to place their money. The concept of an investor wanting to see "insider ownership" prior to putting their money at stake is not new.


Sent from my Nexus 5X using Tapatalk

Title: Re: How does Default status work?
Post by: nonattender on February 22, 2016, 12:16:19 PM


This is why I would like to see LC invest it's origination fee back into the note. It would align their interests with their investors, and they would have skin in the game.
What else do you want?
I want LC to place a bet on the same side of the table they are asking investors to place their money. The concept of an investor wanting to see "insider ownership" prior to putting their money at stake is not new.

That would introduce a world of perverse incentives that I don't think you've yet thought about.  I am very happy with the marketplace
models not taking on any credit risk, having strong balance sheets, and not having any reason to want to participate in secondary mkt.

I really don't mean to sound jaded, but this is a conversation that many of us have had multiple times since 2006.  The model dynamics
presently in place really are the best possible dynamics for note investors of all sizes and keep the platforms (and our notes) very safe.

Making a seemingly small and well-intentioned change to the balance of the marketplace dynamics would introduce combinatoric risks...
Title: Re: How does Default status work?
Post by: rickhuizinga on February 22, 2016, 12:46:37 PM


This is why I would like to see LC invest it's origination fee back into the note. It would align their interests with their investors, and they would have skin in the game.
What else do you want?
I want LC to place a bet on the same side of the table they are asking investors to place their money. The concept of an investor wanting to see "insider ownership" prior to putting their money at stake is not new.

That would introduce a world of perverse incentives that I don't think you've yet thought about.  I am very happy with the marketplace
models not taking on any credit risk, having strong balance sheets, and not having any reason to want to participate in secondary mkt.

I really don't mean to sound jaded, but this is a conversation that many of us have had multiple times since 2006.  The model dynamics
presently in place really are the best possible dynamics for note investors of all sizes and keep the platforms (and our notes) very safe.

Making a seemingly small and well-intentioned change to the balance of the marketplace dynamics would introduce combinatoric risks...
So in a scenario where LC would invest an amount equivalent to their origination fee into every loan, how would that adversely affect the marketplace?

In this scenario, LC would not have a perverse incentive to alter the credit models in their favor, with respect to other investors, because they are investing equally in all classes of loans.

As far as I can tell, this would mainly have the effect of being a revenue deferment program for LC while providing a stronger financial incentive for originating good loans.
Title: Re: How does Default status work?
Post by: nonattender on February 22, 2016, 01:34:57 PM
I will leave it to others if they wish to go down that rabbit hole with you.  For my part, I reject your initial premise (as does the data from
the last 10 years or so) that LC has anything but positive incentive to iterate its credit models appropriately, as is.  Don't 'fix' what works.

And, with that, for the moment, I've got to get back to work... ;)
Title: Re: How does Default status work?
Post by: AnilG on February 22, 2016, 02:12:19 PM
If LC invests origination fee in loans, what will be the source of money needed for company operations, engineering, marketing, and sales? Majority of LC revenues are from origination fees and most of these revenues are being used for LC expenses.

May be they should charge lenders like you, who want LC to invest in their own loans, 5% additional fees on top of 1% service fees and then turn around and lend collected 5% additional fees in to their own loans to make you happy.

So in a scenario where LC would invest an amount equivalent to their origination fee into every loan, how would that adversely affect the marketplace?
Title: Re: How does Default status work?
Post by: rickhuizinga on February 22, 2016, 02:27:21 PM
If LC invests origination fee in loans, what will be the source of money needed for company operations, engineering, marketing, and sales? Majority of LC revenues are from origination fees and most of these revenues are being used for LC expenses.

May be they should charge lenders like you, who want LC to invest in their own loans, 5% additional fees on top of 1% service fees and then turn around and lend collected 5% additional fees in to their own loans to make you happy.

So in a scenario where LC would invest an amount equivalent to their origination fee into every loan, how would that adversely affect the marketplace?
The money wouldn't simply disappear.

If they invested an amount equivalent to the origination fee in loans, the origination fee would be returned to LC at the same rate that the loans are paid off (assuming the loans do get paid off).  They would essentially be deferring the revenue generated from origination fees from the time of origination to the payoff schedule of each loan.
Title: Re: How does Default status work?
Post by: yojoakak on February 22, 2016, 03:58:21 PM
I would prefer if LC took a percentage of it's origination fee every month, instead of upfront all at once. (Equivalent to no origination fee and a bigger service fee.)

The current situation is equivalent to Lenders paying LC's Origination Fee in return for the Borrower paying back more in principal than they actually receive. Because this is in fact exactly what happens.
Title: Re: How does Default status work?
Post by: dompazz on February 22, 2016, 04:38:18 PM
I would prefer if LC took a percentage of it's origination fee every month, instead of upfront all at once. (Equivalent to no origination fee and a bigger service fee.)

The current situation is equivalent to Lenders paying LC's Origination Fee in return for the Borrower paying back more in principal than they actually receive. Because this is in fact exactly what happens.

They do, most people just don't realize it.  When they take their 1%, it comes out of interest and principal.  That principal part is, in effect, a delayed, lender paid, origination fee.
Title: Re: How does Default status work?
Post by: yojoakak on February 22, 2016, 09:25:31 PM
I would prefer if LC took a percentage of it's origination fee every month, instead of upfront all at once. (Equivalent to no origination fee and a bigger service fee.)

The current situation is equivalent to Lenders paying LC's Origination Fee in return for the Borrower paying back more in principal than they actually receive. Because this is in fact exactly what happens.

They do, most people just don't realize it.  When they take their 1%, it comes out of interest and principal.  That principal part is, in effect, a delayed, lender paid, origination fee.

LC makes 4 times a much on the Origination Fee. Immediately. And they don't give it back even if the loan defaults.

Are you not aware of this?
Title: Re: How does Default status work?
Post by: rj2 on February 22, 2016, 09:58:44 PM
I will leave it to others if they wish to go down that rabbit hole with you.  For my part, I reject your initial premise (as does the data from
the last 10 years or so) that LC has anything but positive incentive to iterate its credit models appropriately, as is.  Don't 'fix' what works.

And, with that, for the moment, I've got to get back to work... ;)

Have we learned NOTHING from the meltdown of Countrywide Financial?
Title: Re: How does Default status work?
Post by: AnilG on February 23, 2016, 12:14:12 AM
Based on latest quarterly earnings[1], revenue to origination ratio is 5.21%. Lending Club is making 5.21% (top line) on every dollar of origination while lenders on LC platform on average are making 7.84% (bottom line) [2].

It is already a bad business deal for Lending Club to make less in top line than the lenders on the platform (higher portion of economic profit going to lenders). Basically, Lending Club is borrowing funds from lenders at 7.84% to lend when it could easily borrow the same amount as debt at much lower interest rate. Recently, I was looking at a junk level corporate debt of a company, it's borrowing cost 3.8%. It makes no sense for Lending Club to be borrowing funds at 7.84% from lenders, when it could get same funds from a corporate debt at much lower rate. Or Lending Club could become a bank like Ally Bank which pays depositors 1% and lends majority of these funds at much higher rates to auto loans and keep all the profits for itself.

So, count your blessings that you are already getting extra returns. Sooner than later, this gravy train will need to stop for Lending Club to be a viable, standalone and scalable business and shareholders are going to demand that. Either Lending Club will have to become pure balance sheet lender or offer lenders a fixed return (or variable return within a fixed range) like some UK p2p platforms. In my estimates, if Lending Club becomes pure balance sheet lender, it can raise its top line from 5.21% to almost 10% with a combination of origination fees and interest received from loans.

[1] Lending Club Reports Fourth Quarter and Full Year 2015 Results and Announces $150 Million Share Buyback https://finance.yahoo.com/news/lending-club-reports-fourth-quarter-123000094.html

[2] Edited Transcript of LC earnings conference call or presentation 11-Feb-16 1:30pm GMT https://finance.yahoo.com/news/edited-transcript-lc-earnings-conference-210404329.html



LC makes 4 times a much on the Origination Fee. Immediately. And they don't give it back even if the loan defaults.

Are you not aware of this?
Title: Re: How does Default status work?
Post by: Fred on February 23, 2016, 01:36:14 AM
I would prefer if LC took a percentage of it's origination fee every month, instead of upfront all at once. (Equivalent to no origination fee and a bigger service fee.)

This would put LC to death quickly.  I don't want that to happen.  ;-)

BTW, LC's 2015 10-K has just been published today.   It shows 2015 Transaction Fees (aka Origination Fees) of 373M, while Servicing Fees only 32M.

http://www.sec.gov/Archives/edgar/data/1409970/000140997016001762/a201510-k.htm
Title: How does Default status work?
Post by: Ran on February 23, 2016, 09:26:39 AM

LC should never invest their own capital on the loans they originated. And I believe LC will not. Doing this will effectively skyrocket LC bankruptcy chances and investors will simply pull out in such a case. No one will trust a platform that may just blow up when it's own investment goes bad and capital is depleted in any given year. Investing it's own capital on risky loans is a much more risky business compared to charge a fixed fee for loan origination.

Based on latest quarterly earnings[1], revenue to origination ratio is 5.21%. Lending Club is making 5.21% (top line) on every dollar of origination while lenders on LC platform on average are making 7.84% (bottom line) [2].

It is already a bad business deal for Lending Club to make less in top line than the lenders on the platform (higher portion of economic profit going to lenders). Basically, Lending Club is borrowing funds from lenders at 7.84% to lend when it could easily borrow the same amount as debt at much lower interest rate. Recently, I was looking at a junk level corporate debt of a company, it's borrowing cost 3.8%. It makes no sense for Lending Club to be borrowing funds at 7.84% from lenders, when it could get same funds from a corporate debt at much lower rate. Or Lending Club could become a bank like Ally Bank which pays depositors 1% and lends majority of these funds at much higher rates to auto loans and keep all the profits for itself.

So, count your blessings that you are already getting extra returns. Sooner than later, this gravy train will need to stop for Lending Club to be a viable, standalone and scalable business and shareholders are going to demand that. Either Lending Club will have to become pure balance sheet lender or offer lenders a fixed return (or variable return within a fixed range) like some UK p2p platforms. In my estimates, if Lending Club becomes pure balance sheet lender, it can raise its top line from 5.21% to almost 10% with a combination of origination fees and interest received from loans.

[1] Lending Club Reports Fourth Quarter and Full Year 2015 Results and Announces $150 Million Share Buyback https://finance.yahoo.com/news/lending-club-reports-fourth-quarter-123000094.html

[2] Edited Transcript of LC earnings conference call or presentation 11-Feb-16 1:30pm GMT https://finance.yahoo.com/news/edited-transcript-lc-earnings-conference-210404329.html



LC makes 4 times a much on the Origination Fee. Immediately. And they don't give it back even if the loan defaults.

Are you not aware of this?
Title: Re: How does Default status work?
Post by: rj2 on February 23, 2016, 11:07:02 AM
I would prefer if LC took a percentage of it's origination fee every month, instead of upfront all at once. (Equivalent to no origination fee and a bigger service fee.)

This would put LC to death quickly.  I don't want that to happen.  ;-)

BTW, LC's 2015 10-K has just been published today.   It shows 2015 Transaction Fees (aka Origination Fees) of 373M, while Servicing Fees only 32M.

http://www.sec.gov/Archives/edgar/data/1409970/000140997016001762/a201510-k.htm

They can charge a higher servicing fee and no origination fee. That would align them with investors and if they can't stay in business from servicingthe loans that remain current then the point we were making had truly been made!
Title: Re: How does Default status work?
Post by: Fred93 on February 23, 2016, 01:30:44 PM
They can charge a higher servicing fee and no origination fee.

True.  They could.  The big servicing fee would replace the money taken away when you dropped the origination fee.  However, it would have to be a quite substantial increase in the servicing fee, and this would REDUCE RETURN FOR LENDERS.  Somehow I don't think most lenders would think of that as a great thing. 
Title: Re: How does Default status work?
Post by: yojoakak on February 23, 2016, 05:23:46 PM
They can charge a higher servicing fee and no origination fee.

True.  They could.  The big servicing fee would replace the money taken away when you dropped the origination fee.  However, it would have to be a quite substantial increase in the servicing fee, and this would REDUCE RETURN FOR LENDERS.  Somehow I don't think most lenders would think of that as a great thing.

If my math is correct, with 0% Origination Fee and a 4.5% Service Fee both LC and the Lenders come out in pretty much the exact same position on a Fully Paid loan.
Title: Re: How does Default status work?
Post by: Rob L on February 23, 2016, 06:16:47 PM
If my math is correct, with 0% Origination Fee and a 4.5% Service Fee both LC and the Lenders come out in pretty much the exact same position on a Fully Paid loan.

Sure, but that doesn't address the basic dilemma (presuming there is one) i.e. loans not fully paid off. Your point is made.
In that scenario it still doesn't much matter to LC if loans are fully paid or charged off (so long as all loans applications vetted are fully funded).

Bottom line; we depend on LC to underwrite "as if" the loans are their own (give University of Chicago and all those Noble Laureates its props for "as if").
If they don't it will be fatal to LC's long term business as we lenders (small or large) are killed off and exit the playing field.
Title: Re: How does Default status work?
Post by: rawraw on February 23, 2016, 07:37:51 PM
I disagree that LC should earn higher profits than the balance sheet lenders (us) and that their shareholders want them to be a balance sheet lender.  LC doesn't want to be a specialty finance business; they want to be a tech business for several reasons.  But this is all my opinion
Title: Re: How does Default status work?
Post by: Rob L on February 23, 2016, 09:29:24 PM
they want to be a tech business for several reasons.  But this is all my opinion

This is a great opportunity to bring up something I've long thought. LC isn't rocket science and IMHO the barrier to entry is almost zip. We're not talking about Intel, Microsoft, or even Apple. I value your opinion and expertise in this area. It may be what LC wants, but why should LC be considered a tech business?

And meanwhile I wonder where Goldman stands regarding its entry into the space. Any rumors there?
Title: Re: How does Default status work?
Post by: Fred on February 24, 2016, 12:49:12 AM
If my math is correct, with 0% Origination Fee and a 4.5% Service Fee both LC and the Lenders come out in pretty much the exact same position on a Fully Paid loan.

Not sure if this makes sense.

In 2015, LC's origination fee was almost 12x servicing fee: 373M vs 32M.   Besides, I don't think LC would agree to spread the upfront origination fee over several years.  It's the bread and butter of LC livelihood.

Hey, just realized that your name read backward is kakaojoy -- you a chocolate aficionado?
Title: Re: How does Default status work?
Post by: yojoakak on February 24, 2016, 11:00:31 AM

This is a great opportunity to bring up something I've long thought. LC isn't rocket science and IMHO the barrier to entry is almost zip.

LendingClub was a money loser until just recently. Apparently they spend a lot of money on advertising and trying to drum up borrowers.


Not sure if this makes sense.

In 2015, LC's origination fee was almost 12x servicing fee: 373M vs 32M.   Besides, I don't think LC would agree to spread the upfront origination fee over several years.  It's the bread and butter of LC livelihood.

That does seem high. Plus the Origination fees are less than 5% on some loans. Maybe it's due to the exponential growth of Originations? http://www.lendingclub.com/public/borrower-rates-and-fees.action



Quote
Hey, just realized that your name read backward is kakaojoy -- you a chocolate aficionado?

Hey, I never noticed that before! Good eye!


Here is a Google Spreadsheet I put together that calculates the borrower, lender, and LC cash flows. Anyone should be able to copy it and play around with the numbers: https://docs.google.com/spreadsheets/d/1BW2n_6m3RIz52Yhw_SZrIhhDWQx1pclgZXfExp0dIys/edit?usp=sharing
Title: Re: How does Default status work?
Post by: rawraw on February 24, 2016, 02:32:23 PM
they want to be a tech business for several reasons.  But this is all my opinion

This is a great opportunity to bring up something I've long thought. LC isn't rocket science and IMHO the barrier to entry is almost zip. We're not talking about Intel, Microsoft, or even Apple. I value your opinion and expertise in this area. It may be what LC wants, but why should LC be considered a tech business?

And meanwhile I wonder where Goldman stands regarding its entry into the space. Any rumors there?
Is Uber a technology firm or a taxi cab company? They don't seem to have huge barriers of entry either outside of network effects.

Along those lines, is LC a lender? Well no, you have to take credit risk for that to occur. It seems for the box they fit in is a technology that matches buyers and sellers, just like Uber matches those driving and those needing transportation.  But is that technology for LC more or the same as a loan broker? I think that's the area for debate

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Title: Re: How does Default status work?
Post by: jheizer on February 24, 2016, 03:06:35 PM
As a software dev I hate thinking of them as a tech company.  API sucks!  :)
Title: Re: How does Default status work?
Post by: AnilG on February 24, 2016, 04:06:22 PM
Uber is somewhat controversial comparison as whether it is taxi company, transportation company or technology company is up for debate. Last year, there was interesting debate about valuation of Uber between valuation gurus including Aswath Damodaran http://aswathdamodaran.blogspot.com. My impression from that debate was in the end the valuation depended on who treated Uber as what.

LC is a lender because they are taking credit risk. While LC may claim member-dependent notes, the lenders are lending to LC and LC is lending those funds to borrowers. There is very tenuous connection, if any, legally between the two. Also, LC doesn't have network effect like Uber or AirBnb. LC has to go out and actively acquire new borrowers unlike Uber and AirBnb where the drivers/hosts and passengers/guests are mostly repeat users.

LC CEO likes to portray LC as Technology company with network effect as getting classified such get you much higher valuations. LC is nothing more than specialty finance company using similar processes and technology as traditional lending company (exclude lender management side).

 
Is Uber a technology firm or a taxi cab company? They don't seem to have huge barriers of entry either outside of network effects.

Along those lines, is LC a lender? Well no, you have to take credit risk for that to occur. It seems for the box they fit in is a technology that matches buyers and sellers, just like Uber matches those driving and those needing transportation.  But is that technology for LC more or the same as a loan broker? I think that's the area for debate

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Title: Re: How does Default status work?
Post by: nonattender on February 24, 2016, 04:17:30 PM
And meanwhile I wonder where Goldman stands regarding its entry into the space. Any rumors there?

I heard that some guy stood up in a meeting a couple of weeks ago and said "Sir, are we really sure that American consumers are going
to want to borrow from Goldman Sachs - especially the millennials?" and then he was promptly beaten to death with ripped off chairlegs.
Title: Re: How does Default status work?
Post by: nonattender on February 24, 2016, 04:28:18 PM
LC CEO likes to portray LC as Technology company with network effect as getting classified such get you much higher valuations. LC is nothing more than specialty finance company using similar processes and technology as traditional lending company (exclude lender management side).

And yet, they somehow manage to spend much, much less - consistently - than their competitors (new and old) on customer acquisition.

Hmm, I dunno.  Think there might be a couple (^2) things to this whole "network effect" idea that the kids are talking about these days.

;)
Title: How does Default status work?
Post by: rawraw on February 24, 2016, 04:38:15 PM
I disagree. It's not credit risk if it's passed through to another entity.  And the Uber example was used on purpose, to illustrate how boxes are hard to define in a lot of these companies.  And I also disagree there is no network effects. In my mind the question is degree and how valuable are they. To assume every relationship is completely independent of another seems strange. Investors want loans and borrowers want to be funded. There are network forces on both of these variables. But who knows their strength or "moat".  I'm more confident on my belief about them not being a lender than on network effects, however

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