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Topics - AmCap

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Investors - LC / Consensus question
« on: September 19, 2013, 06:10:37 PM »
Hey team - looking for you guys to weigh in. What's the community consensus on a benchmark return. Give me insight on your reasoning,  if possible.  I am not gonna be more specific just yet.

Congrats to Peter and Bryce on the mentions! 

Boneheaded quote of the day comes from the Indiana securities commissioner: ""But there are limitations on the financial data that is available, and a chance of default, so we need to protect investors."

Limitations on the financial data available...right.

Where exactly do they think IR01 and IR04 come from?

General P2P Lending Discussion / Lendit
« on: June 18, 2013, 09:43:36 AM »
Hey are any of you folks going to be in NY for the conference (or in NY generally)?  I can't make the conference but I am going to try to make the meetup scheduled for tomorrow at Goodwin Proctor.  It'd be nice to match a a screenname. :-)

Investors - LC / Champagne Problems
« on: May 22, 2013, 07:52:23 AM »
Like any securitization, LC's structure makes yields more attractive relative to risk in a lending situation because it provides diversification and liquidity.  This structure then encourages more people to lend, as we've seen over the last 6 months.  At what point does the borrower side of the benefit come in via lower cost of borrowing.  Part of the rationale for securitization in other contexts is that, as lending into the structure becomes more attractive and more lenders enter to market, interest rates should drop because of the increased supply of money.

When will LC get there?  At some point, to meet the demand on the investor side, aren't they simply going to have to lower yields to entice more borrowers to borrow?

Investors - LC / Recoveries
« on: May 20, 2013, 05:31:55 PM »
All - is anybody else being credited with a boatload of recoveries today?

Investors - LC / Folio Folks - Remind me
« on: April 23, 2013, 07:52:23 AM »
What is your tolerance level for premiums on relatively young notes - I know there's been previous discussion on this but I can't recall the sense of the body...


Unfortunately it appears that one of the safeguards to prevent abusive use of the bankruptcy process has fallen victim to budget cuts.

Investors - LC / Peter's Tax Post
« on: March 08, 2013, 07:47:47 PM »
Peter wanted to know my thoughts on his tax post.  Of course well written but I have to quarrel with some things.  Generally not Peter's fault, but rather LC and Prosper's since it looks like they gave him incorrect information in several respects. 

1099-OID – Now, your 1099-OID should accurately reflect your total earnings. Service fees are now deducted from the amount of your 1099 as well.  Here is the exact formula for the number in box 1 of your 1099-OID as provided by Lending Club:

    1099 Interest = (regular interest + regular late fee – service fee) + (recovery interest + recovery late fee – recovery service fee)

I'm bewildered that LC told you that.  That is not OID plain and simple.  From the LC prospectus:

the Notes
...the Notes will have original issue discount, or OID, for U.S. federal income tax purposes because payments on the Notes are dependent on payments on the corresponding member loan. Further, a holder of a Note will be required to include the OID in income as ordinary interest income for U.S. federal income tax purposes as it accrues (which may be in advance of interest being paid on the Note),regardless of such holder’s regular method of accounting.


  The amount of OID includible in a U.S. Holder’s income for a taxable year is the sum of the “daily portions” of OID with
respect to the Note for each day during the taxable year in which the holder held the Note. The daily portion of OID is determined by
allocating to each day of any accrual period within a taxable year a pro rata portion of an amount equal to the product of such Note’s
adjusted issue price at the beginning of the accrual period and its yield to maturity (properly adjusted for the length of the period). The
adjusted issue price of a Note at the beginning of any accrual period should be its issue price, increased by the aggregate amount of
OID previously accrued with respect to the Note, and decreased by any payments of principal and interest previously made on the
Note (net of the 1.00% service charge). A Note’s yield to maturity should be the discount rate that, when used to compute the present
value of all payments of principal and interest to be made on the Note (net of the 1.00% service charge) under the payment schedule
of the Note, produces an amount equal to the issue price of such note.

Cash payments of interest and principal (net of the 1.00% service charge) under the payment schedule on the Notes will not be
separately included in income, but rather will be treated first as payments of previously accrued but unpaid OID
and then as payments
of principal.

The quotes from the prospectus are accurate statements of law, and reflect that OID is an accrual-based form of taxation.  The cash payments you actually receive should not have any bearing on the amount of OID you include in a tax year.

Prosper's statement is similarly incorrect. 

We have modified our OID methodology to use actual interest received...

That statement is, in the tax world, nonsensical.    What the hell is Prosper's "OID methodology"?  The way OID is calculated is set out in the regulations accompanying Code Section 1272.  There is only one right way to calculate OID (one ring to rule them all...if you will).  As before, OID has nothing to do at all with the "actual interest received."  It is an accrual form of taxation, even if the taxpayer uses the cash method of accounting.

So why do we care.  Well, first, there's the issue of a material misrepresentation in the prospectus; you can't tell people your securities are taxed one way, and then take a position that is inconsistent with that. 

Second, calculating OID is important for a number of other issues that could pop up over the life of the bond.  If you buy a note at issuance, hold it to maturity, and it pays on time, every time, then no there really won't be much difference tax wise.  The difference will be between how LC calculates interest and how the Code and regulations tell you to calculate it, which for an individual note will be small.  But in aggregate, it adds up. 

Second, how OID is calculated directly affects the bond premium and sale/disposition rules.  Whether a note is issued with premium for tax purposes depends on LC's accurate calculation of the notes stated redemption price at maturity.  Further, if you sell a note, or it charges off, accurately calculating your gain or loss depends on accurate application of the OID rules because includible OID increases your basis in the note (I've discussed this issue at length in other posts).


Peter's discussion of how he's filing seems fine to me.  A few nits:

All charged off debts are reported on Schedule D as short term or long term losses.

Per Code Section 166, non business bad debts are treated as short term capital losses, regardless of how long you've held the debt instrument.  See generally, for why that matters.  If you have net short-term capital loss, you can deduct against ordinary income up to $3k per year.

Note that the mandatory short-term rule only applies to losses, not to gains.  If you buy a note, hold it for a year, and sell for a gain over your adjusted basis, you get long-term capital gain (yippee!).


My final thoughts.  LC and Prosper's structure is innovative, and the tax rules don't spell out everything perfectly.  (Well, ok the rules spell out some things as clear as day and they just get it wrong). At the very least, they have an obligation to conform their reporting with their prospectus, which generally sets out the tax treatment of the notes correctly.  My creeping suspicion is that a very good tax lawyer did their prospectus tax discussion, but less sophisticated parties are in charge of LC's tax reporting.  Hence the disconnect.  Not an excuse, but maybe a reason...

I see no reason why, to the investor, the tax reporting here should be any more difficult than if you had a Scottrade account or something.  We may have a need for some innovation in this area.

If you made it all the way to the end, please reward yourself with a [large] glass of wine.  If you have any questions please feel free to ask.  If you actually enjoyed reading this, maybe no more wine for tonight... :)


General P2P Lending Discussion / Social Media
« on: March 05, 2013, 09:14:37 PM »
Hey friends - any tweeters about?  We are trying to get our social media game up and running a bit!

Investors - LC / Does anyone know....
« on: February 15, 2013, 03:18:47 PM » long LC operated and/or how much in notes they issued before the SEC required them to register?

Investors - LC / 2008 and 2011 S-1s and other docs
« on: January 26, 2013, 05:54:17 PM »
I found myself w/ some free time today, so I took some time comparing the Registration Statement LC filed in 2008 with the one currently in effect, filed in 2011 and amended from time to time.  I thought I would start a topic to post anything interesting or unusual that I found. 

I've noticed some confusion as to exactly which document does what.  The docs that are going to be important to you as investors are as follows:

The Prospectus:  The prospectus is the disclosure document that discloses all material information about the member payment dependent notes ("Notes").  Generally, a prospectus must be made available to the potential buyer of any securities by the '33 Act.

The Registration Statement (S-1):  The Registration Statement is the document that registers the Notes with the SEC.  The Registration Statement is also required by the '33 Act, and for the most part contains the same information that the Prospectus contains.  There are some differences between the two however.  There are different standards of liability and damages for material misrepresentations in a prospectus and a registration statement; generally the standards for a registration statement is stricter (that is, harder on the issuer (Lending Club)) than the standards for a prospectus.  Also, a registration statement contains information that might not be required in a prospectus.

The Indenture:  The Indenture (which is a document that I think receives far too little attention) is the legal contract between the issuer (Lending Club) and the holders (investors) of the Notes.  The Indenture is incorporated by reference in the Investor Agreement.  The difference between the Indenture and the previous two documents is key: the indenture is the document that governs the legal rights between the investors and LC.  The Registration Statement and the Prospectus are disclosure documents; although material misrepresentations do create liability, they do not themselves create any contractual obligations between investors and LC.

Probably you'll care about the Investor Agreement too, but it really just seems to incorporate the Indenture.


Since I am a tax guy, I thought I'd first post about something near and dear to my heart: the tax consequences of the Notes!  In 2008, the secondary market for the Notes had yet to be developed, so the Registration Statement had no discussion on the tax treatment of Notes that were bought or sold on the secondary market.  The 2011 S-1 adds the following language (summary below for the TLDR people):

Sale, Retirement or Other Taxable Disposition of Notes
Upon the sale, retirement or other taxable disposition of a Note, a U.S. Holder generally will recognize gain or loss equal to the difference, if any, between the amount realized upon the sale, retirement or other taxable disposition and the U.S. Holder’s adjusted tax basis in the Note. In general, the U.S. Holder’s adjusted tax basis of the Note will equal the U.S. Holder’s cost for the Note, increased by the OID and market discount previously included in gross income by the holder, as discussed below, and reduced by any payments previously received by the holder in respect of the Note.

Except as described below with respect to any Note acquired at a market discount or, as discussed above, treated as a contingent payment debt instrument, such gain or loss generally will be capital gain or loss and will be long-term capital gain or loss if at the time of sale, retirement or other taxable disposition, such Note has been held for more than one year. Under current U.S. federal income tax law (presently effective for taxable years beginning before January 1, 2013), certain non-corporate U.S. Holders, including individuals, are eligible for preferential rates of U.S. federal income taxation in respect of long-term"

So why did LC tell us that, why didn't they tell us that in 2008, and what did they tell us. The second question is easy - they didn't tell us in 2008 because you couldn't buy a note except at origination, and you couldn't sell a note period.

This disclosure is a long way of saying this: you'll include as income (or deduct as a loss, subject to the Code) the difference between what you paid for the Note plus OID or market discount accrued and minus payments you received on the note and the amount that you sold it for.  The disclosure also says that the gain or loss is a capital gain or loss (generally taxed at a preferential rate), unless it is a contingent payment debt instrument.  I will get into the market discount rules another day, but to make a long story short, the above discussion is not quite the same if you bought a note at discount.

Finally, note that, under the Code, when a note is paid in full it is treated as a taxable exchange.  But, for a note that is paid on time, your adjusted basis should be equal to the amount realized.

On the deductability of a worthless Note:

Losses as a result of Worthlessnes
In the event that a Note becomes wholly worthless, a U.S. Holder generally should be entitled to deduct the holder’s adjusted tax basis in the Note as a capital loss in the taxable year the Note becomes wholly worthless. The portion of the U.S. Holder’s adjusted tax basis attributable to accrued but unpaid OID may be deductible as an ordinary loss, although such treatment is not entirely free from doubt. U.S. Holders should consult their own tax advisors regarding the character and timing of losses attributable to Notes that become worthless.

In the 2008 prospectus, the word "wholly" does not appear before worthless; this could indicate a change in LC's tax position.  It might be that they wanted to be sure that investors didn't think they could claim a deduction for a worthless note until it was completely worth zero (e.g., a charge-off) rather than partially worthless (e.g., when the note is 31 days late). 

Also, the old prospectus had distinguished between non-corporate U.S. holders of the notes, and corporate holders of the U.S. notes.  Generally, if you hold the notes as a part of a trade or business, you can deduct the worthless notes as ordinary losses rather than capital losses, allowing you to shelter your other ordinary income from tax.  I'm curious to know why this change was made. 


Please let me know if information like this is helpful, or interesting.  If so, I'll continue to post on it periodically.  If not, I'll just go to happy hour earlier!

Vulture Guy

Investors - LC / Default - Charge off - Bankruptcy
« on: January 23, 2013, 08:42:39 AM »
Can anyone make any sense of when LC moves a note from Late to Default, and then from Default to Charge off?  Also, why is it that some loans stay out of default or charge off status even when the borrower filed for bankruptcy, in some cases months ago? 


Investors - LC / LC's expected default rate
« on: December 20, 2012, 06:18:08 PM »
All - when you are about to purchase a note, a screen pops up and shows you LC's expected default rate. Is that information compiled anywhere that is easy to get to?

Investors - LC / FMV of distressed notes
« on: December 18, 2012, 12:00:52 PM »
I'm curious about what you all think on this question: what is the fair market value of a note which has fallen 30, 60, 90, or 120 days (default) late?  By fair market value, I mean the percentage of principal and accrued interest for which a willing buyer and seller would exchange the note. I assume we all agree that a charged off note is worthless...or do we agree on that?

Please let us know what your thought process on this is!  And excuse spelling errors if any - I am on my phone at the moment.

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