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Lending Club Discussion => Investors - LC => Topic started by: gmaxwell on April 17, 2013, 11:35:50 PM

Title: Finally had my first defautó
Post by: gmaxwell on April 17, 2013, 11:35:50 PM
8 months in and I've finally had my first default,

https://www.lendingclub.com/foliofn/loanPerf.action?loan_id=1593902&order_id=3468742&note_id=14464818

Beyond the high revolving utilization are there any obvious red-flags there that I was missing?

I don't think I would have made that loan now simply because in later stats I ran it looked like CC consolidation loans where the loan amount was so off the the reported revolving did less well.  But I always try to learn more...
Title: Re: Finally had my first defautó
Post by: brycemason on April 18, 2013, 12:27:13 AM
Some defaults are just a random process. You're going to get a few.
Title: Re: Finally had my first defautó
Post by: Show Me The $ on April 18, 2013, 12:39:43 AM
it does say processing $.92 on 4/15/13 thats odd....
Title: Re: Finally had my first defautó
Post by: SarahV on April 18, 2013, 12:44:31 AM
The monthly payment is quite high compared to the salary, especially when you consider that after using the $16k to pay down debt, he'll still have another ~$20k worth of debt to make payments on. He could well be owing more than half his take home pay in debt payments, which is going to be unsustainable for most people. That is a pretty huge red flag to me.

High DTI and revolving line utilization, along with the low FICO, are also not a good sign.
Title: Re: Finally had my first defautó
Post by: Fred on April 18, 2013, 01:40:51 AM
Beyond the high revolving utilization are there any obvious red-flags there that I was missing?

I usually do not invest in notes where AmountRequested/MonthlyIncome > 3.
Title: Re: Finally had my first defautó
Post by: Fred on April 18, 2013, 01:47:02 AM
it does say processing $.92 on 4/15/13 thats odd....

Yes, it seems there is an inkling of hope on this loan.  :)

Otherwise, having only made one payment, this borrower might have tried to game the system ....   >:(
Title: Re: Finally had my first defautó
Post by: New Jersey Guy on April 18, 2013, 08:14:07 AM
"8 months in and I've finally had my first default,"

Here's my first clue:

Revolving Credit Balance    $35,937.00
Revolving Line Utilization    95.80%

And I got to agree with Fred and Sarah.  He was carrying way too much debt vs. income when you consider other things like mortgage and day-to-day cost of living.
Title: Re: Finally had my first defautó
Post by: lender_john on April 18, 2013, 10:37:22 AM

There are a few problems with the loan that would keep me from investing, but I wouldn't have expected only one payment. Sounds like someone may have tried to game the system or there was some extraordinary event..

Two inquiries, high payment relative to income, loan doesn't cover half the revolving debt, high DTI and it is FL.

Title: Re: Finally had my first defautó
Post by: PennySaved on April 18, 2013, 10:49:56 AM
This loan would not have made my revised filters.  DTI=30.64%  I try to loan only to DTI < or = 20%
Inquiries in last six months=2.  I try and keep inquiries to 0, learned this from Peter's advice.  Monthly income= $3453 per month.  I loan only  for monthly income> $5000/month   Revolving credit balance= $35,937.  I avoid loans with revolving credit balance > $30,000 even if they have high income.
Title: Re: Finally had my first defautó
Post by: Fred on April 18, 2013, 11:32:29 AM
... and it is FL.

Anybody else uses borrower's State as a risk factor?

If so, how do you define a risky state?  I am keen to know data/evidence, please do not share anecdotal support.
Title: Re: Finally had my first defautó
Post by: Laslow on April 18, 2013, 11:57:39 AM
... and it is FL.

Anybody else uses borrower's State as a risk factor?

If so, how do you define a risky state?  I am keen to know data/evidence, please do not share anecdotal support.

Search the forum and you'll find a post with a historical lookback on default rates per state. I don't personally use it as a filter.
Title: Re: Finally had my first defautó
Post by: Fred on April 18, 2013, 12:12:25 PM
Search the forum and you'll find a post with a historical lookback on default rates per state. I don't personally use it as a filter.

If you are referring to this link (http://www.lendacademy.com/forum/index.php?topic=509.msg1483#msg1483), this only provides analysis based on each investor's notes.csv -- not market-based.

Or, perhaps I am missing something else?
Title: Re: Finally had my first defautó
Post by: Randawl on April 18, 2013, 01:51:55 PM
Search the forum and you'll find a post with a historical lookback on default rates per state. I don't personally use it as a filter.

If you are referring to this link (http://www.lendacademy.com/forum/index.php?topic=509.msg1483#msg1483), this only provides analysis based on each investor's notes.csv -- not market-based.

Or, perhaps I am missing something else?

I believe it was something Anil posted.  He showed us some excellent graphs of the data.  IIRC, it was in a thread with some posters thinking CA was the state with the highest % defaults but his graphs of the data showed that it is NV and UT.
Title: Re: Finally had my first defautó
Post by: AnilG on April 18, 2013, 02:30:29 PM
Anybody else uses borrower's State as a risk factor?

If so, how do you define a risky state?  I am keen to know data/evidence, please do not share anecdotal support.

I covered default rate by states based on historical data several times on my blog http://andirog.blogspot.com/search?q=state. Also, take a look at forum thread on state at http://www.lendacademy.com/forum/index.php?topic=733.0.

Based on PeerCube historical performance review, NV currently has 4.61% default rate with negative average ROI.
Title: Re: Finally had my first defautó
Post by: Fred on April 18, 2013, 03:11:58 PM
Thanks Randawl & AnilG,

This question intrigues me quite a bit, so I decided to use LC loanstats data to see it myself.

A table showing charged-off rates by states is attached.

It seems like NE is now (mid-April 2013) the worst offending state: 3 out 11 (27%) loans from NE are charged off.

The top 10 worst charged-off states are highlighted; FL is on the 5th.  WY is the best.

I didn't use Default status, since default is a transient state & since default rates are universally smaller than those of charged-off.

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Title: Re: Finally had my first defautó
Post by: AnilG on April 18, 2013, 04:52:49 PM
I didn't use Default status, since default is a transient state & since default rates are universally smaller than those of charged-off.

Can you elaborate what do you mean by "default is transient state"? I combine the loans with charged off and default status to calculate default rate.

Actually NE default rate is over 50% when loans with default and charged off status are considered together. But the loan volume for NE is insignificant so I wouldn't put much faith in high default rate for NE or any other state that has less than couple of hundred loans issued to date.
Title: Re: Finally had my first defautó
Post by: edward on April 18, 2013, 05:33:15 PM
Looks like the states with the highest default rates really aren't significant in their number of loans, and of course, as you remove states from your list, you lower the number of loans available to pick from. Actually, it's not all that bad since the vast majority of states are under 4%. Not that 4% default is good, but it seems state selection, in my humble opinion, really doesn't matter as much as does borrower credit characteristics. But it's a great discussion regardless.
Title: Re: Finally had my first defautó
Post by: Fred on April 18, 2013, 06:24:38 PM
Can you elaborate what do you mean by "default is transient state"? I combine the loans with charged off and default status to calculate default rate.

Transient in the sense that it is not the final state.

The progression of LC loan statuses: Current --> Late 15-30 --> Late 30-120 --> Default --> Charged Off.

You can see the separation between Default and Charged Off statuses on the "Account Details" page https://www.lendingclub.com/account/lenderAccountDetail.action.

Lastly, it seems that LC includes Default loans in the "Outstanding Principal" numbers, which leads me to suspect that LC may still accrue interests on Default loans.
Title: Re: Finally had my first defautó
Post by: rawraw on April 18, 2013, 06:34:01 PM
This project's DTI is too high and the global DTI is too high.
Title: Re: Finally had my first defautó
Post by: Fred on April 18, 2013, 08:08:40 PM
This project's DTI is too high and the global DTI is too high.

Sounds like a CFO talking.  8)
Title: Re: Finally had my first defautó
Post by: GS on April 20, 2013, 01:16:30 AM
They made $3400/mo and their payment was $608.  That is 18% of their income.  I keep that ratio at less than 10%.
Title: Re: Finally had my first defautó
Post by: edward on July 17, 2013, 09:49:01 PM
Earlier in this thread, Fred said:
The progression of LC loan statuses: Current --> Late 15-30 --> Late 30-120 --> Default --> Charged Off.

Has anyone done any research on the percentages of loans that follow this specific pattern, versus those that move, say, directly from Current to Charged Off (as in filed bankruptcy)?
Title: Re: Finally had my first defautó
Post by: SeattleSun on July 17, 2013, 11:06:07 PM
... and it is FL.

Anybody else uses borrower's State as a risk factor?

If so, how do you define a risky state?  I am keen to know data/evidence, please do not share anecdotal support.


I have been looking at the unemployment rate by state as a guideline but will use data in this thread going forward.  I figured one of the reason to fail to pay your loan is you lost your job.  So to me the unemployment rate is an indication of how easy it would be to find a new job.  Following that logic I like lending to nurses as I know they can quit their job in the AM and have a new job in the PM.

I do shy away from lending into Nevada (NV) as 50% of the people who live in NV are actually in Clark County i.e. Las Vegas.  I just spent the better part of the last 7 years in Las Vegas and I can honestly say it is one sick place and I loved every minute of it.  But lend those guys money, no way.   lol

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Title: Re: Finally had my first defautó
Post by: LonghornSF on July 18, 2013, 01:19:46 AM
A couple of things I notice that wouldn't pass my filters:

1) Debt / income > 100% - automatic disqualify

2) Amount requested < 50% of total debt - would never do such a loan if the stated purpose is for refinancing. To me this signifies a desperation loan - no intent to pay off the original debt just trying to keep their head above water.

3) credit card utilization > 95% - I've done a few of these but usually only at higher rates (E,F,G). Not worth the risk at 19% interest rate. In general I would pass regardless of the interest rate though.

4) DTI ratio > 30% - automatic disqualify


Also the income is pretty low, not below my cutoff but I'd be looking for a higher quality loan at that income level.
Title: Re: Finally had my first defautó
Post by: Fred on July 18, 2013, 02:30:57 AM
A couple of things I notice that wouldn't pass my filters:

1) Debt / income > 100% - automatic disqualify

2) Amount requested < 50% of total debt - would never do such a loan if the stated purpose is for refinancing. To me this signifies a desperation loan - no intent to pay off the original debt just trying to keep their head above water.

3) credit card utilization > 95% - I've done a few of these but usually only at higher rates (E,F,G). Not worth the risk at 19% interest rate. In general I would pass regardless of the interest rate though.

4) DTI ratio > 30% - automatic disqualify


Also the income is pretty low, not below my cutoff but I'd be looking for a higher quality loan at that income level.

What's the difference between "Debt / income" in 1) and "DTI ratio" in 4) ?
Title: Re: Finally had my first defautó
Post by: thezinfan on July 18, 2013, 10:37:03 AM
"What's the difference between "Debt / income" in 1) and "DTI ratio" in 4) ?"


I think he is multiplying the monthly income by 12 ( Total Income), then comparing the revolving debt balance number. DTI is (monthly debt payment)/(monthly income). The debt payment could be pretty low, since it could be minimum payments on credit cards.
Title: Re: Finally had my first defautó
Post by: LonghornSF on July 18, 2013, 02:44:13 PM
A couple of things I notice that wouldn't pass my filters:

1) Debt / income > 100% - automatic disqualify

2) Amount requested < 50% of total debt - would never do such a loan if the stated purpose is for refinancing. To me this signifies a desperation loan - no intent to pay off the original debt just trying to keep their head above water.

3) credit card utilization > 95% - I've done a few of these but usually only at higher rates (E,F,G). Not worth the risk at 19% interest rate. In general I would pass regardless of the interest rate though.

4) DTI ratio > 30% - automatic disqualify


Also the income is pretty low, not below my cutoff but I'd be looking for a higher quality loan at that income level.

What's the difference between "Debt / income" in 1) and "DTI ratio" in 4) ?

DTI is based upon payment due whereas debt to income is based upon the amount owed. DTI will always be lower than debt to income. Granted this is a confusing, but very important, distinction.
Title: Re: Finally had my first defautó
Post by: Fred on July 19, 2013, 03:19:54 AM
What's the difference between "Debt / income" in 1) and "DTI ratio" in 4) ?

DTI is based upon payment due whereas debt to income is based upon the amount owed. DTI will always be lower than debt to income. Granted this is a confusing, but very important, distinction.

I see.

Not sure if this is your intention or not, but if you  divide #4 by #1, you'd get essentially the aggregate interest rate of all debts.
Title: Re: Finally had my first defautó
Post by: pplinvestor on July 19, 2013, 09:31:50 PM
But when total # of loans is only 10 - 30, there is no statistical significance.  So you'll eliminate the top 3.  That's leave FL as #2 high charge-off (default) state.
Title: Re: Finally had my first defautó
Post by: slypete on July 23, 2013, 10:26:26 PM
I have a lot of questions while trying to understand what happened with this note. How can the borrower just simply walk away with $16k of our money? It's kind of infuriating.

Why would Lending Club write this off after only five months and no bankruptcy filing? What happens to the borrower's credit in this scenario?

Imagine for a moment that the borrower does the right thing and starts paying on this note again in a year or so, would the investors receive the payments?

Title: Re: Finally had my first defaut—
Post by: yojoakak on July 23, 2013, 10:39:21 PM
How can the borrower just simply walk away with $16k of our money?

Actually, the Borrower walked away with $15,604 of (y)our money.

LendingClub walked away with the other $821 (as an Origination Fee).
Title: Re: Finally had my first defautó
Post by: Fred on July 23, 2013, 11:03:45 PM
Why would Lending Club write this off after only five months and no bankruptcy filing? What happens to the borrower's credit in this scenario?

Imagine for a moment that the borrower does the right thing and starts paying on this note again in a year or so, would the investors receive the payments?

It is a common practice in the credit world to give borrowers up to 120 days to catch up on their loans. 

Per LC 10-K filing to SEC:    A Member Loan is considered defaulted when at least one payment is more than 120 days late and it is charged-off no later than when it reaches 150 days late.

If the borrower starts paying again a year after the loan has been charged off, I don't think LC will even accept the payment.  The damaged has been done: lenders will have considered the note as loss, and borrower will have suffered significant credit score degradation. 

LC, on the other hand, keep their origination, servicing, collection fees.   ;)
Title: Re: Finally had my first defautó
Post by: brycemason on July 23, 2013, 11:14:32 PM
LC will accept payments on charged off loans. In early 2013 I saw a loan from 2007 become "Fully Paid" from "Charged Off."
Title: Re: Finally had my first defautó
Post by: GS on July 23, 2013, 11:25:00 PM
Isn't it common practice to sell defaulted loans in bulk to debt collectors for pennies on the dollar?  I remember reading that some lenders got a small bulk payments for several defaulted notes a few weeks ago.  I suppose that could have been LC dividing up proceeds from a bulk sale rather than defaulters actually paying.
Title: Re: Finally had my first defautó
Post by: Zach on July 23, 2013, 11:44:40 PM
Isn't it common practice to sell defaulted loans in bulk to debt collectors for pennies on the dollar?  I remember reading that some lenders got a small bulk payments for several defaulted notes a few weeks ago.  I suppose that could have been LC dividing up proceeds from a bulk sale rather than defaulters actually paying.

Yes, I do believe you are correct. I recall from the earlier days of Prosper that they commonly did debt sales, but later stopped as they felt it wasn't an effective way to mitigate loss.
Title: Re: Finally had my first defautó
Post by: Fred on July 24, 2013, 01:15:56 AM
LC will accept payments on charged off loans. In early 2013 I saw a loan from 2007 become "Fully Paid" from "Charged Off."

I stand corrected.  Yes, LC do accept payments from Charged Off loans.

This is also noted on the Form 10-K filing, around page 17 here http://www.sec.gov/Archives/edgar/data/1409970/000119312513136975/d450565d10k.htm.

On the right-most column of the bottom table, you see "Gross Amount Recovered on Loans Charged-Off", which was $476,628 -- for the period of LC beginning to 12/31/2012.
Title: Re: Finally had my first defautó
Post by: slypete on July 24, 2013, 02:46:46 AM
Seeing this borrower not only succeed at gaming the system but effectively steal from his/her fellow peers is very upsetting to me. Investors should join together after the charge off and offer the russian mafia 25% of all collections  ;D
Title: Re: Finally had my first defautó
Post by: pplinvestor on July 24, 2013, 09:42:31 PM
I'd assume that collection agency will sue the borrower (if borrower did not file bankruptcy) and then garnish the wage.  But LC collection logs do not say any of those.  That's too bad.
Title: Re: Finally had my first defautó
Post by: Fred on July 25, 2013, 12:29:02 AM
I'd assume that collection agency will sue the borrower (if borrower did not file bankruptcy) and then garnish the wage.  But LC collection logs do not say any of those.  That's too bad.

The Fair Debt Collection Practices Act (FDCPA) (http://en.wikipedia.org/wiki/Fair_Debt_Collection_Practices_Act)  is the main federal law that governs debt collection practice in the US. 

It  limits what a debt collection agency can do, including threatening arrest or legal action  that is either not permitted or not actually contemplated.

If a debt collector chooses to file a lawsuit, it may only be in a place where the consumer lives or signed the contract.
Title: Re: Finally had my first defautó
Post by: pplinvestor on July 25, 2013, 03:20:31 AM
Fred,
Are you saying all those LC borrowers do not sign anything when they get money from us?   That's scaring.  Lend someone $35K without any signed document.  Scaring.   
Title: Re: Finally had my first defautó
Post by: Fred on July 25, 2013, 10:33:18 AM
Fred,
Are you saying all those LC borrowers do not sign anything when they get money from us?

I neither said nor implied that.
Title: Re: Finally had my first defautó
Post by: pplinvestor on July 25, 2013, 10:42:49 AM
Fred,
Are you saying whatever paper Borrowers signed is not sufficient for lawsuit?  I want to know whether LC/collection agency can file lawsuit and garnish wage.   Most likely Borrowers will not show up at the court since they know they owe money.  So lawsuit shall be automatically win.  Wonder why we don't see any lawsuit and wage garnish.
Title: Re: Finally had my first defautó
Post by: gamassey on July 25, 2013, 10:50:43 AM
Fred,
Are you saying whatever paper Borrowers signed is not sufficient for lawsuit?  I want to know whether LC/collection agency can file lawsuit and garnish wage.   Most likely Borrowers will not show up at the court since they know they owe money.  So lawsuit shall be automatically win.  Wonder why we don't see any lawsuit and wage garnish.

Very good point, seems to me that unless a bankruptcy is filed, wage garnishment would be automatic.  The only reason this would not happen is if there is no lawsuit filed to recover the debt.
Title: Re: Finally had my first defautó
Post by: Fred on July 25, 2013, 11:01:14 AM
What I tried to say is that legal action for debt collection is complicated and costly.

1. There is Fair Debt Collection Practices Act and state laws -- any violation of these can be costly to the debt collector or LC
2. Where to file the lawsuit -- borrower lives all over the 50 states
3. It takes time, maybe months, per loan
4. It might cost more than $35K for lawyers alone

I think the conventional ways of doing debt collection (i.e., calling, emailing, tracing) are more effective than legal actions.  The considerable negative impact on credit history is another cost to bear by borrower, making it difficult to borrow money for a car or home, or to receive credit cards. The default status remains on the credit report for many years.

Of course, legal actions are always available  to purse if considerations on regulations, time, and money have been taken into account.