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Lending Club Discussion => Investors - LC => Topic started by: Fred93 on November 15, 2016, 02:49:30 PM

Title: LC prepayments rising
Post by: Fred93 on November 15, 2016, 02:49:30 PM
In the past I haven't thought about prepayments much.  They happen.  We put up with them.  In recent months tho, something is changing.  Prepayments are increasing.  (For the record, worrying about this was Rob L's idea.)

The chart below shows prepayments in the first few months of a loan.  Each curve shows how prepayment by certain "age" of the loans varies with vintage.  The curves are cumulative.  The red "month 1" curve shows the fraction of loans that have prepaid by the end of month 1, so it includes the month 0 prepays.  The horizontal axis shows the quarter in which the loan was issued, more or less (1).

Look at the right side of the chart.  You can see that in the past nobody ever prepaid during the first month (month 0), but recently 1.5% of borrowers are doing just that.  Furthermore, that rate is still climbing.  Interestingly, the increase is all in month 0, which is the month that in the past never had any prepays.

(https://forum.lendacademy.com/proxy.php?request=http%3A%2F%2Ffred93.com%2Ffbi%2FLC-prepayments-2016-11-15.png&hash=3fcda009464333614b0e9cb33791a3a7)

I wonder what is going on here.  Why do people prepay before the first payment is due?  And whatever the reason is, why is it happening now and not in prior years?  I have a theory. 

My idea is that this is a sign of competition among online lenders.  There are now a lot of different online lenders.  Suppose you pick one and borrow, but during your investigation you discover all these other guys, and you check the interest rate they offer.  Seems likely that quite often you would find another guy who offers you a lower rate.  At that point a logical person might borrow from the 2nd guy and pay off the 1st guy. 

If I'm right, then the proliferation of online lending is generating competition whose impact we can see.  I'm thinking that this is an explicit example of pressure on LC to keep rates low.  We lenders tend to ascribe the "bad" rate reductions during the past 2 years to LC & Prosper's lust for growth.  Growing competition was likely part of the picture.

There have been a few articles recently about "stacking" by online borrowers.  The credit bureaus have noticed more folks borrowing from more than one online lender in rapid succession.  The thrust of these articles is always that this is a sign of fraud.  Maybe it is.  However, credit bureaus, who want to sell new services, seed such articles with the intent to frighten their customers, so we should stay skeptical.  Some of these stackers are apparently just repaying their loans with cheaper ones.


(1) footnote: I've recently learned that when LC provides data by "vintage", that they assign the vintages by the date of the first payment, not the date of origination.  I learned this only by processing the payment history file.  In fact, this probably occurs because some fellow at LC is generating the prepayment data from the payment history file.  The payment history file only contains information about payments, not origination.  Because LC allows borrowers to set the payment day, and then censors the payment day from the payment history file, there is no way to reconstruct the issue date.  All of which is to say that while we think of the vintage quarters (like "15Q4") as being the quarter of loan origination, actually there can be up to 1 month of slop.  This may only matter to data nerds who expect consistency between data from multiple files provided by the same company, but don't find it.  For example, if you add up the number of loans in a given quarter from the loan history files, they don't match the number of loans in a quarter from the payment history file, because of this slop.  Personally, I prefer consistency.  Its something you can test for to help ensure that your software isn't fouling up.  Of course when the guy upstream from you is completely undisciplined and issues massive data files that are inconsistent by design, then this doesn't work. :-\
Title: Re: LC prepayments rising
Post by: RT45 on November 15, 2016, 04:00:16 PM
Two other things I've seen:

1) Person applies for a loan, they realize they can optimize their rate by obtaining a loan with a different purpose, lower amount etc. and applies for a more optimized loan.

2) Spouse 1 applies for a loan, realizes there are more efficient ways to borrow be it credit score, or the reasons listed above and applies for a loan under Spouse 2.

LendingClub is definitely cannibalizing their own business by trying to refinance borrowers very early on causing many widespread pre-payments, but that is a separate issue and likely wouldn't be related to a prepayment on the 1st payment.
Title: Re: LC prepayments rising
Post by: Rob L on November 15, 2016, 04:02:58 PM
Yeah, I posted this about a month ago and it seemed not to generate any interest. Now I see you were interested!
I was only addressing MOB 0 (your blue line). You covered the first 4 (MOB 0 through MOB 3).

As for the reason for the change your theories may be correct or maybe not.

<edit>
Doesn't the borrower have to give LC a significant amount of money up front in origination fees (withheld from $ placed into their account)?
How can they just give that money away and come out ahead with another lender?
That implies the second loan they get is enough to pay off entire principal, not just the amount they received from LC.
Then the APR from the second lender must be low enough to pay all that and the borrower wind up with a lower monthly payment.
Nah; I wouldn't be surprised there's some scam here and it's growing. Just not devious enough to figure it out yet.
<end edit>

REGARDLESS THIS IS A MAJOR BEHAVIORAL CHANGE!!

If it isn't unusual that makes it all the stranger to me.
Can you put an approximate percentage on it without taking too much effort? TIA

LC publishes prepayment data on their web site by vintage, by month of prepayment.

Yes they sure do. Thanks for the tip.
For all vintages from 08Q1 through 14Q3 (over 6 years!) loans fully paid with months on books (MOB=0) was 0%, nada, zip, cypher, ....
I don't mean there were zero occurrences, just 0% of originations per LC's numbers.
An then:

36 month term:
14Q4      15Q1      15Q2      15Q3     15Q4      16Q1     16Q2
0.29%    0.47%    0.64%    0.70%    0.70%    0.97%   1.51%

60 month term:
14Q4      15Q1      15Q2      15Q3     15Q4      16Q1     16Q2
0.25%    0.48%    0.61%    0.81%    0.75%    0.93%   1.38%

Now roughly 3 loans in every 200 are fully paid before the first payment comes due. Makes no sense to me.
Somebody want to try and explain this (or show me where I messed up the data)?

It isn't that unusual (maybe the 2 weeks is, most wait at least 4).
At least LendingClub changed the rules a while back so you don't actually lose money on these.

Yep. Thank goodness for that!
Title: Re: LC prepayments rising
Post by: Fred93 on November 15, 2016, 04:22:52 PM
Yeah, I posted this about a month ago and it seemed not to generate any interest. Now I see you were interested!

If you keep beating us over the head with it, eventually it gets thru.
Title: Re: LC prepayments rising
Post by: Rob L on November 15, 2016, 04:35:44 PM
LOL  ;D (and you did tell me where to look for the data I posted).

PS: I added some stuff to the initial reply.
Title: Re: LC prepayments rising
Post by: yojoakak on November 15, 2016, 05:02:48 PM
Doesn't the borrower have to give LC a significant amount of money up front in origination fees (withheld from $ placed into their account)?
How can they just give that money away and come out ahead with another lender?
That implies the second loan they get is enough to pay off entire principal, not just the amount they received from LC.
Then the APR from the second lender must be low enough to pay all that and the borrower wind up with a lower monthly payment.
Nah; I wouldn't be surprised there's some scam here and it's growing. Just not devious enough to figure it out yet.

Origniation fees  are 1% to 5% on A loans, and 5% to 6% on B-G loans. The rate on a new loan would have to be pretty low to make it worthwhile.

https://www.lendingclub.com/public/borrower-rates-and-fees.action
Title: Re: LC prepayments rising
Post by: Fred93 on November 15, 2016, 06:34:00 PM
Doesn't the borrower have to give LC a significant amount of money up front in origination fees (withheld from $ placed into their account)?  How can they just give that money away and come out ahead with another lender?

It is a mystery.  My best guess is that many borrowers don't do the math right. 

Just comparing interest rate or APR won't do it.  If you compare monthly payment, you can get the right answer, but only if you know to oversize the 2nd loan so you can pay back the full amount borrowed from the 1st guy, not just the amount he deposited in your bank account (which has the origination fee subtracted from it).

Suppose you need $10,000 for the new boat, summercamp, or to fix the ex-wife's car.

Because there's a 5% origination fee, you have to borrow $10,527.  At 15%, with 36 payments, you'll pay $364.92/month.

If you get a replacement loan within a few days (so we don't count interest on the 1st loan), you'll need to borrow $11,081 to pay back the 1st lender including the origination fee, ie the full $10,527 and to cover the origination fee of the 2nd lender, about $554 to net you the $10,000 you need.

To get the payment on that 2nd loan down below the payment on the 1st loan, interest rate on the 2nd loan would need to be below 11.40%  From 15.0% to 11.4% is a big drop, and that's just to get to parity!  The second loan has to be even lower to motivate the borrower.  Is it possible that differences between rates offered by different online lenders vary this much?  Kinda shocking, but I'm thinkin' maybe they do!

Another problem with the logical borrower replacement loan theory is that if this theory is right, I would expect to see some bump up in month 1 as well, and maybe month 2, but we don't see that.  The effect is all in month 0. 

Another possibility is that there are some magic words which will make LC refund the origination fee on a very quickly repaid loan.  Sorta like an annulment.  Don't know what this might be, but there are all manner of curious consumer protection laws.

Another possibility is that these are not repaid loans at all, but some new quirk in the data.  There are lots of quirks in LC's data, so a new quirk would not be lonely.  Perhaps there are some circumstances where LC changes its mind and jerks back the money real quick?  Just to be clear, I've never heard of such a thing, but they don't tell us every time they change policy.

Edited to add: I just now sent a query to LC asking them about this possibility explicitly.


Quote
REGARDLESS THIS IS A MAJOR BEHAVIORAL CHANGE!!

Yea.  The thing that gets me is the big quarter/quarter change.  Will it jump again in Q3?

Darn good thing we beat them up awhile back and got the policy where they waive the service fees on quickly repaid loans.
Title: Re: LC prepayments rising
Post by: Rob L on November 15, 2016, 07:07:36 PM
Another possibility is that there are some magic words which will make LC refund the origination fee on a very quickly repaid loan.  Sorta like an annulment.  Don't know what this might be, but there are all manner of curious consumer protection laws.

One thing that is very common is for the consumer to have the option to reject the whole deal within a "cooling off period". We've all been there.
For purchases made within the rules of the FTC that is 3 days. Who knows what the CFPB cooling off period for mpl loans is? Is it possible that "poachers" could discover LC loans via credit bureau data (external or external), contact borrowers offering lower monthly payments and lower APR, and convince 1-2% of them to force LC (us) to unwind the loan no fee no charges? How would LC record such a thing if not a loan that was paid off in MOB 0?
Title: Re: LC prepayments rising
Post by: Fred93 on November 15, 2016, 08:51:59 PM
One thing that is very common is for the consumer to have the option to reject the whole deal within a "cooling off period". We've all been there.  For purchases made within the rules of the FTC that is 3 days. Who knows what the CFPB cooling off period for mpl loans is?

I can't find any such federal thing for consumer loans.  Several states have some rules for payday loans, but I don't think these loans qualify, tho I'm not sure, and I'm not gonna go digest all the state rules!

Quote
s it possible that "poachers" could discover LC loans via credit bureau data (external or external), contact borrowers offering lower monthly payments and lower APR, and convince 1-2% of them to force LC (us) to unwind the loan no fee no charges? How would LC record such a thing if not a loan that was paid off in MOB 0?

I believe poaching is possible, as the credit bureaus are in the business of selling data any way they can.  However, I'm guessing that a poacher would have to approach a large number of borrowers to win 1 borrower, so there would be widespread activity, and we would have heard about it from borrowers.  Also, this poacher would have to offer a much lower interest rate... See earlier numbers.

Also, how would another lender "force" LC to unwind the loan giving back the origination fee?  That's where LC makes most of their bread.  There would have to be some legal hook. 

I'm not sayin' its not happening.  These obstacles make me skeptical.

Finally, wouldn't some of the poachers end up affecting month 1? 
Title: Re: LC prepayments rising
Post by: rawraw on November 16, 2016, 01:55:13 AM
Isn't the simplest explanation that LC is being more aggressive in cannibalizing loans to restore volume?
Title: Re: LC prepayments rising
Post by: Fred93 on November 16, 2016, 03:21:55 AM
Isn't the simplest explanation that LC is being more aggressive in cannibalizing loans to restore volume?

In Month 0?  Really?  Unlikely that FICO would have improved in just a few days.  Do you think they would spontaneously drop interest rate by enough to make this work without a FICO bump?  I'm not saying its impossible, simply that this explanation has difficulties to overcome just like all the rest.

How would they do that?  With email like...
Quote
Dear Mr Borrower,
  Thank you for borrowing from us.  We've decided that you're such a swell fellow that we would like to lend to you at 11.2% instead of the 15% we lent to you a few days ago.  This would reduce your monthly payment from $365 to $359.  Unfortunately, regulations prevent us from changing the interest rate on last week's loan.  However, if you just click on this link, we would be pleased to offer you a new loan which you can use to pay off the first loan, and benefit from reduced payments.  Because we like you so much, we'll send you this nice toaster when the new loan issues.
Thanks so much,
Revolving Door Club

If they had been sending email like that for the last year, wouldn't some borrower have posted a copy here by now?

Some folks have offered the suggestion that people borrow from company A, then pay down credit cards to get the FICO bump that results, then take out a 2nd loan from a different lender at a lower rate.  That's believable, because the FICO bump is real.  If you've looked at those FICO trend charts for lots of LC loans, you see them during the 3-4 months or so after the beginning of the loan.  Inevitably, FICO goes down again after a few months as I suppose the borrower runs up his credit cards again.  This scenario can't explain month 0 prepays tho, 'cause its just too fast.

There was a discussion about this organic cannibalization possibility on here somewhere awhile back.  We talked about the possibility that one could use LC data to find pairs of loans from LC to the same person.  I seem to remember we even discussed possible pairs of loans.  Hmm.  Guess I need to go back and think more about this!  Thanks for reminding me.

Title: Re: LC prepayments rising
Post by: rawraw on November 16, 2016, 03:28:15 AM
Whenever Core discovered that LC was sending mailings to existing customers, it wasn't from this site but some review site.

LC doesn't disclose (to my knowledge) their underwriting like they used to. But they could be changing the rate based on something else besides FICO.  Competition just doesn't strike me as a good explanation for month 0, but I could be off. Just speculation on my end

Sent from my SAMSUNG-SM-G935A using Tapatalk

Title: Re: LC prepayments rising
Post by: Zach on November 16, 2016, 07:31:43 AM
While the rate would have to be somewhat lower, several balance sheet lenders (banks and others), like Discover, offer competitive loan products that don't charge an origination fee.

That makes the switching cost less if there is a slight rate improvement.
Title: Re: LC prepayments rising
Post by: anabio on November 16, 2016, 07:56:46 AM
I'm not sure if it could explain why there is a recent spike in prepayments but one reason why a loan is prepaid real early might be that the borrower became "super conscious" of the monthly payment.

What does the auto salesman talk about concerning the cost of buying a car? The monthly payment of course. "What if I can get that monthly payment down to ???". People don't seem to care about the loan amount as much as the monthly payment.

What if borrowers realized they could lower their  monthly  payment dramatically by going for a 5 year loan instead of a 3 year loan?

Someone showed a chart of 3 year loan prepayments...what does the chart of 5 year prepayments look like?

Of course...this still would not explain month 0 prepayments. I doubt the borrower would be able to get that 5 or more year loan that soon after closing on their LC loan.
Title: Re: LC prepayments rising
Post by: Fred93 on November 16, 2016, 08:25:09 AM
While the rate would have to be somewhat lower, several balance sheet lenders (banks and others), like Discover, offer competitive loan products that don't charge an origination fee.

Excellent point.  Goldman's Marcus.com too.

Quote
That makes the switching cost less if there is a slight rate improvement.

Yep, and this is a revolting development.  A borrower can get a loan from you to refinance his boat or credit card while sitting on the couch in his PJs, but he can also get a loan from one of these other guys to refinance the loan he got from you while sitting on same couch.

Origination fees were some defense, except that I envision competitive pressure forcing LC & Prosper to drop origination fees at some point.  They make most of their money off origination fees, so they would have to substantially raise servicing fees to compensate.  Unfortunately, with no origination fee, you may get more borrower customers, but I think they are much more slippery.

Live by the speed of the internet -- die by the speed of the internet.

In the cellular telephone biz the operators report a statistic they call "churn" and churn is widely tracked by stock analysts.  Its the fraction of customers who leave every month.  In a no-origination-fee world, borrowers would need to be sticky to produce revenue, so stock investors would all be following churn.
Title: Re: LC prepayments rising
Post by: Fred93 on November 16, 2016, 08:31:31 AM
What if borrowers realized they could lower their  monthly  payment dramatically by going for a 5 year loan instead of a 3 year loan?

Someone showed a chart of 3 year loan prepayments...what does the chart of 5 year prepayments look like?

I just checked the data.  The numbers for 60 month loan prepayments (for the first few months) are almost identical.  I'm not gonna bother to plot them, because the curves will sit right on top of the 36 month curves.
Title: Re: LC prepayments rising
Post by: Fred93 on November 16, 2016, 03:29:56 PM
Got a partial answer from LC.  They say
Quote
Prior to 2014, our system was not set up to report payments in Month 0, hence no reporting of prepayments during that time frame.

My contact still looking for an answer to characterize how month0 prepays seem to be increasing after that.
Title: Re: LC prepayments rising
Post by: rawraw on November 16, 2016, 06:43:00 PM
Got a partial answer from LC.  They say
Quote
Prior to 2014, our system was not set up to report payments in Month 0, hence no reporting of prepayments during that time frame.

My contact still looking for an answer to characterize how month0 prepays seem to be increasing after that.
Very interesting! I was wondering if it was a quirk in the data
Title: Re: LC prepayments rising
Post by: Fred on November 17, 2016, 12:50:47 AM
Very interesting! I was wondering if it was a quirk in the data

No quirk in the data.

If I have to guess, the LC "risk officers" were probably (unconsciously) bringing their prepayment mindset from the mortgage world (PSA Model), where it is assumed that prepayment at month 0 is 0 -- https://en.wikipedia.org/wiki/PSA_prepayment_model.
Title: Re: LC prepayments rising
Post by: nonattender on November 17, 2016, 04:05:35 AM
I could swear we discussed this - and that I wrote about this phenom extensively - last month...  DFS/STI/GS all now "actively poaching"...
Title: Re: LC prepayments rising
Post by: SLCPaladin on November 17, 2016, 01:51:54 PM
I wonder if something else might be going on as well, like some people who go out looking for a 3 or 5 year loan are really just looking for a bridge loan. They may have assets that are tied up or just have some cash flow issues and need extremely short-term financing. Even though a 5% origination fee is steep, maybe it's the only option, or maybe other options are simply more painful from a financial standpoint.

I also agree with Anabio about the monthly payment vs. interest rate. In my experience, people are much more concerned about the amount they pay each month as opposed to the total amount they pay or the interest rate.

So maybe a quick refinance with a competitor that results in a lower monthly payment, even if it is more costly overall, might tip the scales in favor of a month 0 repayment and refi with an LC competitor.
Title: Re: LC prepayments rising
Post by: RT45 on November 18, 2016, 07:36:35 PM
Good read on prepayments and fraud from WSJ.

http://www.wsj.com/articles/borrower-or-fraudster-online-lenders-scramble-to-tell-the-difference-1477580637

Pro Tip: If you don't have a paid subscription, Google the headline and click through from Google and it will unlock the paywall.
Title: Re: LC prepayments rising
Post by: Fred93 on November 20, 2016, 02:12:15 AM
I think the WSJ article is a bad article.  It is just an echo of some recent Transunion propaganda piece intended to push a new Transunion service.

It talks about stacking, and gives some statistics on how stacking has increased, but note that the article fails to make a connection between stacking and loan quality, fails to make a connection between stacking and delinquency, fails to make a connection between stacking and fraud.  Fails to make a connection between stacking and anything actually.

Lots of insinuation, but no data.

The only "news" in the article is that TU is pitching some new service.
Title: Re: LC prepayments rising
Post by: Fred93 on December 01, 2016, 07:17:12 AM
Update.  LC has published the November prepayments file, so I updated my chart.  This gives us the first prepayment numbers for vintage 2016Q3.  Bottom line is that month 0 prepayments continue to increase.

(https://forum.lendacademy.com/proxy.php?request=http%3A%2F%2Ffred93.com%2Ffbi%2FLC-prepayments-2016-12-01.png&hash=316be020fb99b3c7f121a8e542c0a911)

Notes:
1. After I gave a copy of the prior version of this chart to LC, and asked for an explanation of the increase in month 0 prepayments, I got two responses.  The first was that prior to 2014, their software was not set up to record payoffs in month 0.  This historical quirk explains the long string of zeros in the old month 0 data.  Their second comment was that the events of May 2016 caused a slowdown in lender activity, so in the days following that event, there were loans where the borrower was approved, but not funded quickly.  As a result, a significant number of borrowers found money elsewhere, then cancelled the LC loan, and that these were recorded as payoffs in month 0.  The timing of these events was not made explicit.  For example, I don't know if the borrower actually got the money and told LC to take it back, or if the loan was cancelled before the money transferred to the borrower.  I didn't inquire further.  I noted that could explain some of the jump in 2016Q2, but not Q1 or Q3, nor the obvious trend.  I don't believe the right people at LC took this inquiry seriously.  The overall question of why this is happening remains unanswered.

2. After my conversation with LC I realized that there were hints there that I (we?) don't understand the precise definition of a prepayment in month 0.  Perhaps that can be discussed further at some later time.

3. Careful observers may note that these curves don't look exactly like the curves I plotted from the Oct 2016 prepayment file.  Every data point has moved slightly.  This indicates a bug in LC's software.  There is no other explanation.  The prepayments during month 1 of loans issued in 2014, 2013, etc (for example) are a historical fact, and cannot change during 2016, so those old numbers should be constant from one prepayments file to the next, and yet, they have changed between the Oct2016 and Nov2016 prepayments files.  You can see, for example, that 2014Q4 now shows a dip which is not present in last month's chart.  I presume this bug is due to some quirk in the data which is not properly handled by LC's software.  I'm just making a visual representation of the data LC has published.  The changes induced by this bug appear to be small from month to month, so its not a big deal unless perhaps it is a clue to some larger problem.
Title: Re: LC prepayments rising
Post by: rawraw on December 01, 2016, 04:52:52 PM
Fred93 is the only person I've ever seen footnoting forum posts.  Hilarious and strangely effective at keeping TLDR reaction at bay
Title: Re: LC prepayments rising
Post by: yielder on December 01, 2016, 05:33:59 PM
Hello Everyone -

  Could month 0 prepayments be on the rise due to LC's securitization process?  The lender just buys your loan & moves it to their own portfolio? 

  Big lenders have a lot of clout & with the retail investors gone poof, LC needs lenders. 

  So they get special favors.  Like maybe taking out your loans.

  That would not be great news for investors, right?  Because the loans that are higher quality are taken out meanwhile we keep the lower quality ones.

Hmm...  What do you all think?
Title: Re: LC prepayments rising
Post by: Rob L on December 01, 2016, 07:01:57 PM
Fred93 is the only person I've ever seen footnoting forum posts.  Hilarious and strangely effective at keeping TLDR reaction at bay
Sorry for being slow on the uptake; what's a TLDR? Probably me LOL.  :)
Title: Re: LC prepayments rising
Post by: rawraw on December 01, 2016, 07:04:03 PM
Fred93 is the only person I've ever seen footnoting forum posts.  Hilarious and strangely effective at keeping TLDR reaction at bay
Sorry for being slow on the uptake; what's a TLDR? Probably me LOL.  :)
Internet slang meaning too long didn't read. Often written tl;Dr. People write it when the post is too long or posters will use it to indicate a summary of their long post

Tl;Dr  millennial slang

Sent from my SAMSUNG-SM-G935A using Tapatalk

Title: Re: LC prepayments rising
Post by: we2ding on December 03, 2016, 11:01:08 AM
I have had 3/108 repaid fully and I just joined in Oct.
Title: Re: LC prepayments rising
Post by: SeanMCA on December 03, 2016, 02:29:12 PM
I've had 928 notes pay off early and my account isn't even old enough to have had my first 3-year note reach maturity.
Title: Re: LC prepayments rising
Post by: SeanMCA on February 19, 2017, 05:20:04 PM
Are borrowers using a second loan from Lending Club to pay off their first Lending Club loan? The answer is yes


Title: Re: LC prepayments rising
Post by: SeanMCA on February 19, 2017, 05:25:22 PM
These are just a sample of the reviews posted on Lending Club's own website.

Lending Club gives second loan to borrower. Borrower uses it to pay off their first loan. Lending Club charges 1% penalty to retail investors on outstanding principal for early prepayment even though the source of the prepayment funds came from Lending Club.

Lending Club gets another origination fee on the 2nd loan. If they dangle lower interest rates or a lower monthly payment, well then some borrowers are inevitably going to use the second loan to pay off the first one.

Question is, why should retail investors get hit with a penalty for this? At best retail investors become collateral damage.... at worst... well...
Title: Re: LC prepayments rising
Post by: Rob L on February 19, 2017, 05:40:04 PM
Smoking gun.
Title: Re: LC prepayments rising
Post by: SeanMCA on February 19, 2017, 05:59:45 PM
Does Lending Club know that some borrowers are using their second loan to pay off their first? The answer is Yes

How can they not tell the retail investor this but still charge them a fee for an "early prepayment" that they were the cause of?

Title: Re: LC prepayments rising
Post by: SeanMCA on February 19, 2017, 06:20:20 PM
I mean these reviews are right on Lending Club's website...

I've attached 16 already that are pretty clear...
Title: Re: LC prepayments rising
Post by: Fred93 on February 19, 2017, 07:54:45 PM
On the other hand...

In a period of falling interest rates, one has to expect refinancing. 

If LC doesn't do it, then somebody else will, eh?

I do get your basic point, which I believe is that LC's motivations and ours are not well aligned on this issue.
Title: Re: LC prepayments rising
Post by: Rob L on February 20, 2017, 10:14:40 AM
About a month ago I began investing in B grade only loans and created a new portfolio for them. Since that time I've purchased 259 notes. They break down as follows:

In Funding              1
In Review               5
Issuing                  15
Issued                 231
Current                   5
Fully Paid              2

So, no payments have yet come due for any of the first 4 categories (252) of the 259 loans yet I've already had two paid off early and in full.
One was issued on 1/31/2017 and fully paid only 8 days later on 2/7/2016 (loan id 97202338).
The other was issued on 1/26/2017 and fully paid only 26 days later on 2/17 (loan id 96737405).
Makes no sense!
Title: Re: LC prepayments rising
Post by: newstreet on February 20, 2017, 10:56:13 AM
I mean these reviews are right on Lending Club's website...

I've attached 16 already that are pretty clear...

As I said, this has been obvious.

1.  LC is scrambling for volume.
2.  Retail Investors shouldn't invest if they don't like the fees.
3.  The likelihood that large banks pay these fees is nil.
4.  LC has lost half their senior mgt team in the past year
5.  The auto loan product is ill conceived given the credit cycle
6.  The stock compensation for "executives" is approaching absurd levels
7.  The business lending initiative has failed
8.  The patient solution business have been cut 70% (they still need to writedown the goodwill associated with this acquistion by around 50%)

Crazy



Title: Re: LC prepayments rising
Post by: Fred93 on February 20, 2017, 05:45:26 PM
About a month ago I began investing in B grade only loans and created a new portfolio for them.
...
Issued                 231
Fully Paid              2
...
Makes no sense!

It is however consistent with data the LC has published on prepayments.  LC publishes a spreadsheet of prepayment statistics broken down by vintage (and if you manipulate the pivot table, you can see it by grade as well).  It says that for recent vintages, about 1.4% of loans prepay in month 0.

1.4% of 231 = 3.2 which is similar to the 2 you see in your portfolio.   

I should say at this point that I have tried to figure out what it all means... and I have to say that it is unclear at this point.  If you look at past vintages where prepayments were a lot higher than normal in early months (back in 2009 for example) this did NOT result in a higher total cumulative prepayment.  In other words, people prepaid earlier than expected, but did not prepay overall more than in other vintages.  Given this history, I am shy about simply extrapolating the current vintage and concluding that total prepayments will be huge.

I've updated my prepayments chart.  This is data published by LC.  Chart by me.   I've updated with the Feb 2017 data file. 
(https://forum.lendacademy.com/proxy.php?request=http%3A%2F%2Ffred93.com%2Ffbi%2FLC-prepayments-2017-02-20.png&hash=ab168086efc940f5aa5ea68169082225)
Note: LC has explained that prior to 2014, their software did not categorize prepayments in month 0.  I don't know exactly what they did with them prior to 2014, but they didn't show up as prepayments in the big payments file, and therefore don't show up in this data.
Title: Re: LC prepayments rising
Post by: apc3161 on February 20, 2017, 06:27:53 PM
I just asked LC in an email if they could tell me what percentage of pre-payed loans are due to LC's own refinancing. They couldn't/wouldn't provide this info:

"All the information we display public ally is located on our Statistics page and we currently do not have the data for how many of the pre paid loans are from refinancing. Thank you for your understanding."
Title: Re: LC prepayments rising
Post by: newstreet on February 20, 2017, 07:21:36 PM
I just asked LC in an email if they could tell me what percentage of pre-payed loans are due to LC's own refinancing. They couldn't/wouldn't provide this info:

"All the information we display public ally is located on our Statistics page and we currently do not have the data for how many of the pre paid loans are from refinancing. Thank you for your understanding."

Of course they have the data, but why would disclose it to the retail guy they are trying to screw.Bigger picture........place your bets on the percent of orignations in Q4 that were refis....I say 35%. 

Funny..... the CEO and CFO stated that they stopped using "Incentives" in Q4.  They were referring to incentives to Institutions. No mentions of "incentives"  that they flooded current borrowers with (ie. lower rates, longer terns)...tricks are for kids...lol
Title: Re: LC prepayments rising
Post by: jheizer on February 21, 2017, 12:52:18 AM
I've been poking around with this tonight and I wouldn't be surprised now if LC said that at least 5% of the loans are a second loan and/or refi.  The number of what I am assuming are matches is huge.  It could be way more as I've just roughly matching data that is exactly the same.  So if they got for example a $1k raise I'd miss them.  There are even a decent number of people I'd assume have had 3 loans, but only 2 active at a time on the few I looked at in more detail.

Spot checking a few, it seems a lost of them are falling behind and need a second, riskier, larger loan.  Some times they paid off the first one, some times they both went to charged off.  I didn't seem to come across too many where it seemed like they refied to a lower rate.  But I only looked at the details of 2 dozen or so cases so it could just be the luck of the draw.  I'd have to write some code to get a better idea.


Example of someone who has had 3 loans and slowly going down hill. 31216399   65007223   91594336  Vacations are important...
Title: Re: LC prepayments rising
Post by: jheizer on February 23, 2017, 11:52:39 PM
I decided to look at this again tonight.

1,321,818 - Number of Loans in the historical files
8,341 - People I believe have taken out 2 or more loans.  I tightened up my matching from the above post as I think 5% was just too many.

The following are the number of people that have taken out at least 2 loans and the first one is in "Fully Paid" status and the second one:
1,512 - ... is ONE letter grade better or more.
1,286 - ... is ONE letter grade better or more and the second loan was started within 550 days of the first loan.
466 - ... is TWO letter grade better or more and the second loan was started within 550 days of the first loan.
And the ones that are probably the worst for us:
512- ... is ONE letter grade better or more and the second loan was started after 350 days and before 550 days of the first loan.

Things to note:
Grade difference in this case is defined as a change in a whole grade only looking at the letter and not the sub grade number.
I did not check the ending date of the first loan vs the starting date of the second one to check over overlaps.
This is all assuming the first 8,341 people I identified was correct.  I'm not sure if that is a reasonable number or not.


So my guess would be they are not offering up as many refinances as we first thought.  Or I am being too strict on matching people.

A bit of side information.  The status of the 16k loans that make up the duplicates:
Code: [Select]
Count Loan Status
848 Charged Off
8458 Current
16 Default
7 Does not meet the credit policy. Status:Charged Off
22 Does not meet the credit policy. Status:Fully Paid
7024 Fully Paid
111 In Grace Period
71 Issued
42 Late (16-30 days)
212 Late (31-120 days)

Title: Re: LC prepayments rising
Post by: Fred93 on February 24, 2017, 12:21:16 AM
1,321,818 - Number of Loans in the historical files

1,286 ... number of people that have taken out at least 2 loans and the first one is in "Fully Paid" status and the second one ... is ONE letter grade better or more and the second loan was started within 550 days of the first loan.

So that's one out of a thousand, ie 0.1% ?  !!!

If that's anywhere close to right I would say it knocks down the refinancing conspiracy theorists pretty good.

Devil is in these categorizations.  In other words, not only do you need to get the matching algorithm right, but then you need to figure out what the heck to measure.  I'm sure some will argue with the one grade, or the 550 days, or ...

For example: The numbers above are for all time, but if refinancing is a more recent phenomena, perhaps we should limit both the numerator and denominator to loans issued in some recent time period, perhaps the last year?

Still it looks like your result is going to show that the refinancings are a small fraction of total.
Title: Re: LC prepayments rising
Post by: Rob L on February 24, 2017, 09:13:30 AM
I decided to look at this again tonight.

1,321,818 - Number of Loans in the historical files
8,341 - People I believe have taken out 2 or more loans.  I tightened up my matching from the above post as I think 5% was just too many.

The following are the number of people that have taken out at least 2 loans and the first one is in "Fully Paid" status and the second one:
1,512 - ... is ONE letter grade better or more.
1,286 - ... is ONE letter grade better or more and the second loan was started within 550 days of the first loan.
466 - ... is TWO letter grade better or more and the second loan was started within 550 days of the first loan.
And the ones that are probably the worst for us:
512- ... is ONE letter grade better or more and the second loan was started after 350 days and before 550 days of the first loan.

Things to note:
Grade difference in this case is defined as a change in a whole grade only looking at the letter and not the sub grade number.
I did not check the ending date of the first loan vs the starting date of the second one to check over overlaps.
This is all assuming the first 8,341 people I identified was correct.  I'm not sure if that is a reasonable number or not.


So my guess would be they are not offering up as many refinances as we first thought.  Or I am being too strict on matching people.

A bit of side information.  The status of the 16k loans that make up the duplicates:
Code: [Select]
Count Loan Status
848 Charged Off
8458 Current
16 Default
7 Does not meet the credit policy. Status:Charged Off
22 Does not meet the credit policy. Status:Fully Paid
7024 Fully Paid
111 In Grace Period
71 Issued
42 Late (16-30 days)
212 Late (31-120 days)

Very nice work. What a remarkably small number. Guess I must have had the unfortunate and astoundingly improbable coincidence of having half them in my portfolio alone.  :)
Title: Re: LC prepayments rising
Post by: jheizer on February 24, 2017, 09:18:03 AM
Yup, pretty small odds, like you said if things were done right.  Last night I tightened up the person matching from I'm pretty sure they are the same to they absolutely have to be.  For it to be in error now you'd basically have to be working the same fixed rate (factory like job) in the same place with the same title and have the same starting credit date.  I decided I'd rather guess up from here than have a starting possibly inflated number.  So even if I am off by a factor of 10, that is still only 1% for your picked case.

The reason I included the grade jump was I assumed with the initial fees you'd have to get some kind of decent interest rate boost to make it worth it for a general refi scenario vs just taking out a bigger loan because you need more money now.  But that is assuming people understand the numbers...

550 was a random guess.  Close enough to crossing the 1 year mark that it would be annoying, but far enough out that after that we probably can't blame a LC marketing campaign.


I'll run any scenarios anyone wants.  It only takes me a few seconds to adjust the code and a few minutes for it to run.  I'm sitting here in front of a computer all day anyway.  Just let me know specifics.
Title: Re: LC prepayments rising
Post by: jheizer on February 24, 2017, 09:24:46 AM

Very nice work. What a remarkably small number. Guess I must have had the unfortunate and astoundingly improbable coincidence of having half them in my portfolio alone.  :)

I could be very wrong.  I don't deny it.

Right now I am matching on homeOwnership, annualInc, addrZip, earliestCrLine, empTitle.

In the historical files earliestCrLine is a month so a pretty big range.  If I remove empTitle it jumps from 8341 to 61,658.  Being a free text field it is hard to do solid matching on.  Would people enter exactly the same thing twice?  Assuming the ratios from the previous post stay the same that would mean 11,098 people that is ONE letter grade better or more.  Why I kind of quoted the factor of 10 error rate.



Title: Re: LC prepayments rising
Post by: SeanMCA on February 24, 2017, 09:39:29 AM
1,321,818 - Number of Loans in the historical files

1,286 ... number of people that have taken out at least 2 loans and the first one is in "Fully Paid" status and the second one ... is ONE letter grade better or more and the second loan was started within 550 days of the first loan.

So that's one out of a thousand, ie 0.1% ?  !!!

If that's anywhere close to right I would say it knocks down the refinancing conspiracy theorists pretty good.

Devil is in these categorizations.  In other words, not only do you need to get the matching algorithm right, but then you need to figure out what the heck to measure.  I'm sure some will argue with the one grade, or the 550 days, or ...

For example: The numbers above are for all time, but if refinancing is a more recent phenomena, perhaps we should limit both the numerator and denominator to loans issued in some recent time period, perhaps the last year?

Still it looks like your result is going to show that the refinancings are a small fraction of total.

.1%, no way. 5% is too low, not too high. On the small business lending side of online lending, the percentage of customers who take a 2nd loan from their lender is 50%+. For some companies it's around 80%.
Title: Re: LC prepayments rising
Post by: SeanMCA on February 24, 2017, 09:42:03 AM
Yup, pretty small odds, like you said if things were done right.  Last night I tightened up the person matching from I'm pretty sure they are the same to they absolutely have to be.  For it to be in error now you'd basically have to be working the same fixed rate (factory like job) in the same place with the same title and have the same starting credit date.  I decided I'd rather guess up from here than have a starting possibly inflated number.  So even if I am off by a factor of 10, that is still only 1% for your picked case.

The reason I included the grade jump was I assumed with the initial fees you'd have to get some kind of decent interest rate boost to make it worth it for a general refi scenario vs just taking out a bigger loan because you need more money now.  But that is assuming people understand the numbers...

550 was a random guess.  Close enough to crossing the 1 year mark that it would be annoying, but far enough out that after that we probably can't blame a LC marketing campaign.


I'll run any scenarios anyone wants.  It only takes me a few seconds to adjust the code and a few minutes for it to run.  I'm sitting here in front of a computer all day anyway.  Just let me know specifics.

At a minimum, I would have to guess that at least 20% of Lending Club's borrowers are taking a 2nd loan. I don't care what fields match or don't.

The entire model of online lenders is that once you acquire a borrower, you hold on to them as tight as possible. Lenders don't make money on the first loan because acquisition costs are so high. You make money on the 2nd or 3rd loan where you're not paying to acquire them. The notion that only .1% or 1% or 5% of borrowers are getting a 2nd loan would be an indication that the business has long since failed. You don't make money servicing one loan and then sending the borrower on their merry way.
Title: Re: LC prepayments rising
Post by: jheizer on February 24, 2017, 10:21:02 AM
.1%, no way. 5% is too low, not too high. On the small business lending side of online lending, the percentage of customers who take a 2nd loan from their lender is 50%+. For some companies it's around 80%.

But is that really comparable here?  Companies always need working capital for orders, etc.


At a minimum, I would have to guess that at least 20% of Lending Club's borrowers are taking a 2nd loan. I don't care what fields match or don't.

The entire model of online lenders is that once you acquire a borrower, you hold on to them as tight as possible. Lenders don't make money on the first loan because acquisition costs are so high. You make money on the 2nd or 3rd loan where you're not paying to acquire them. The notion that only .1% or 1% or 5% of borrowers are getting a 2nd loan would be an indication that the business has long since failed. You don't make money servicing one loan and then sending the borrower on their merry way.

Remember too here I was specifically trying to find the number of LC refis.  Not just multiple loans over years.  Part of why I was being extra strict in my matching with the intent to extrapolate up from there.  I loosened the matching to close to your 20% number (21,6196 People) and I'm doing a run now.  But it might take a while since that means it has to process 42k of LC loans.

Title: Re: LC prepayments rising
Post by: SeanMCA on February 24, 2017, 10:55:40 AM
The name of the game LC is in is to give as many loans to their good paying borrowers as they can handle for as long as they can handle them. Even more so since they're publicly traded and criticized on every metric like how many loans they're making each quarter. They're likely pounding existing borrowers in good standing with offers to take another loan. POUNDING. I have seen borrowers talk about this on consumer forums.

 
Title: Re: LC prepayments rising
Post by: jheizer on February 24, 2017, 04:30:40 PM
First run this morning failed out of memory.  Had to clean up my code a bit.

So with the much looser same person detection, out of 261,189 people (so at least 522378 loans) where the first one is in "Fully Paid" status and the second one:
40,702 - ... is ONE letter grade better or more.
8,469- ... is ONE letter grade better or more and the second loan was started after 350 days and before 550 days of the first loan.

So still out of 1.3M loans not that many point to LC solicited refis soon after 1 year.  I can run it with other date ranges or what ever else someone may want.  Note that running against all these took a few hours.  If we have a few I'll move my DB to the SSD to speed things up.
Title: Re: LC prepayments rising
Post by: Rob L on February 24, 2017, 08:48:22 PM
If we have a few I'll move my DB to the SSD to speed things up.

Move it to your RAID 0 dual M.2 NVMe SSD's.  :) LOL, maybe someday I'll save up for a rig like that.
Title: Re: LC prepayments rising
Post by: jheizer on February 24, 2017, 09:11:23 PM
If we have a few I'll move my DB to the SSD to speed things up.

Move it to your RAID 0 dual M.2 NVMe SSD's.  :) LOL, maybe someday I'll save up for a rig like that.

My desktop has a single M.2 drive, i7, and 16GB ram.  Its nice when work and play interests overlap (and foot the bill).  I even have enough room for this tiny DB there.  Server is more storage based with many TB of ZFS storage and one lonely little SATA SSD.

Title: Re: LC prepayments rising
Post by: RT45 on February 24, 2017, 10:19:25 PM
This is an area I have spent an extensive amount of time in looking at behavior of repeat / pre-paid borrowers.

I agree with SeanMCA with the 20% figure. Renaud previously stated that 14% of borrowers were repeat borrowers and that was nearly two years ago. He didn't specify how many had simultaneous loans outstanding or were used to pay off another loans - and yes, LendingClub absolutely DOES have this data, unless they are somehow not collecting Social Security Numbers for every borrower - which they are.

We also know that in month 8th, LendingClub begins soliciting refinances of the existing borrowers and is actively promoting it.

Conservatively there are at least 20k borrowers with matching credit profiles, closer to 30k at this point that are either repeat borrowers / pre-pay / or have simultaneous loans outstanding.

Source: https://www.bloomberg.com/news/features/2016-08-18/how-lending-club-s-biggest-fanboy-uncovered-shady-loans

Title: Re: LC prepayments rising
Post by: Fred93 on February 25, 2017, 02:56:21 PM
Conservatively there are at least 20k borrowers with matching credit profiles, closer to 30k at this point that are either repeat borrowers / pre-pay / or have simultaneous loans outstanding.

Presuming that 30k number is right ...
That's out of 1.3 Million loans. 

Lets see 30K/1300k = 2.3%

2.3% just doesn't seem like a big number to me.
Title: Re: LC prepayments rising
Post by: Rob L on February 28, 2017, 03:45:17 AM
About a month ago I began investing in B grade only loans and created a new portfolio for them.
...
Issued                 231
Fully Paid              2
...
Makes no sense!

It is however consistent with data the LC has published on prepayments.  LC publishes a spreadsheet of prepayment statistics broken down by vintage (and if you manipulate the pivot table, you can see it by grade as well).  It says that for recent vintages, about 1.4% of loans prepay in month 0.

1.4% of 231 = 3.2 which is similar to the 2 you see in your portfolio.   

I should say at this point that I have tried to figure out what it all means... and I have to say that it is unclear at this point.  If you look at past vintages where prepayments were a lot higher than normal in early months (back in 2009 for example) this did NOT result in a higher total cumulative prepayment.  In other words, people prepaid earlier than expected, but did not prepay overall more than in other vintages.  Given this history, I am shy about simply extrapolating the current vintage and concluding that total prepayments will be huge.

I'm up to 5 of the 259 loans bought beginning 1/31/2017 pre-pay in month zero.
Days from loan issue to fully paid were 10, 18, 24, 24 and 31 (1.9%). In line with LC's number but still crazy to me.
Title: Re: LC prepayments rising
Post by: jheizer on March 01, 2017, 11:10:49 AM
I was just sitting here thinking about a very simple way to see if in my own account if prepayments were increasing or not.  I only have the last 14 months of this data on hand and I included the average age of the notes since that could also have an effect.  But the of loans going into the fully paid status each month has been really stable for me.

(https://lh3.googleusercontent.com/-7WA7czWYm-Q/WLbyBr2abMI/AAAAAAAAF7s/FyKevxBuPD8/s0/soffice.bin_2017-03-01_10-08-37.png)

Green = Average age of the portfolio
Blue = Total number of notes in the Fully Paid status
Title: Re: LC prepayments rising
Post by: fliphusker on March 01, 2017, 03:23:24 PM
I am seeing a spike of prepayments in the past month.  The vast majority are coming in regards to my FOLIO notes.  As I do not buy notes at a premium it is not a huge deal. 
But what I do find strange is that a lot of these notes have a sub 640 FICO with under 20 payments remaining.  One that just prepaid had around $6k left with a 560 FICO.  Who refinances that?  One, in particular, had 600 FICO with IGP the past three months. 
This is a bit concerning if there really is a credit market out there that is willing to take on borrowers with such shaky credit. 
Kudos to the guy for getting out from underneath his 19% rate.  (He was a cop who rents making 48k/year.)
Title: Re: LC prepayments rising
Post by: dr.everett on March 01, 2017, 03:54:35 PM
Bear in mind that we are into tax season- people may be taking tax returns (assuming they get them) and using them to pay off debt. (If they are wise)

I check my full pays daily and move them to a folder. This morning I had 40 fulls in my IRA, and about 15 in my Taxable account.

I mention the tax refunds because I already received my State refund back- a week after I filed. Waiting on the Fed refund- would be nice if it came this week.  ;D