Grace Period Track Record

[Lovinglifestyle]

The last time one of my sale-eligible notes changed from late to current was July 7 and that is the only one on a long list to go positive. 
Seems odd to me.  Last month a fourth of the lates for sale went current. There must be quite a few costly to me/profitable to them collection fees to be had in the bunch.
It does make sense to raise the price the way you say, Rob.

[SeanMCA]

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

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

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

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

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

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

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

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

I'm having trouble reconciling the discrepancy when we are very often lending the same amount to the same people...

[AnilG]

Not verifying bank account transactions may have to do with consumer protection or consumer lending laws. Recently, I financed a new car through Chase Bank. The bank also didn't check the bank account history or verified income. There seems to be lot of trust on FICO Score and Credit Report when it comes to consumer lending.

[Fred93]

There is information about a bank account beyond just how much money is in the account at this instant.

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

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

AnilG raises an interesting question re how this sort of thing intersects with consumer protection/lending/credit laws.   I have no idea.

[rawraw]

Besides consumer protection laws, the credit quality of ondeck borrowers is nothing like most Lendingclub borrowers.  Business lending and consumer lending are extremely different. Consumer lending is about managing a pool of homogeneous credit and less about the underwriting of any particular credit

[lascott]

<snip>
All the tech-based business lenders say bank data is king but you guys are saying it's too much work for consumers to type in 3 fields on a website and that things basically work different 'round these parts and that it's not important.
<snip>

I don't recall people telling you it is "too much work" for a borrower to fill in their bank account information.  We questions if borrowers would just go to another place to get the loan. What if LendingClub started to require access to crawl peoples bank accounts.  How many days later would Propser, LendingTree, etc have adds or public statements saying that they don't require that and encourage borrowers to go to them.

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

Would that work in consumer lending if only, say, Lending Club did that. Wouldn't many/most borrowers just go to Prosper, Avant [Credit], LendingTree, Lightstream, Wells Fargo, etc ?!?

[rawraw]

Now that I know he has business lending background, I understand where his points of view are coming from.  It's just different when dealing with consumers vs a business.  For one, businesses have much harder time getting loans (and as a result, bank has more leverage).

[SeanMCA]

Thanks to everyone that has shared their thoughts.

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

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

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

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

I want my investment to be as risk-free as possible and shareholders want to do new and crazy things to fund more loans and acquire more market share.

[SeanMCA]

Well, I just talked to my friend who is an underwriter for a credit card issuer. He manages a department that approves consumers for credit cards. They regularly ask for bank statements from applicants to prove income and it is required for any line of 25k and over. That combined with proof of address he says is necessary for them to stay compliant with the Bank Secrecy Act.

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

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

There are no consumer protection laws in play here, at least none that don't allow a lender to require banking data. In the case of my friend working for a credit card issuer, asking for bank statements from consumer applicants is part of BSA compliance...

[Fred93]

Good info.

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

They even have a loan application API.  I would imagine this is for affiliates or partners or whatever they call them to forward loan application info.

[rawraw]

Well, I just talked to my friend who is an underwriter for a credit card issuer. He manages a department that approves consumers for credit cards. They regularly ask for bank statements from applicants to prove income and it is required for any line of 25k and over. That combined with proof of address he says is necessary for them to stay compliant with the Bank Secrecy Act.

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

Also, FICO isn't useful in business for several reasons -- one is that the business is subject to risks that a consumer's income source is normally not subject to, or at least not subject to such a large degree .  In consumer lending, its highly predictive and it is just a cultural change.

[lascott]

Well, I just talked to my friend who is an underwriter for a credit card issuer. He manages a department that approves consumers for credit cards. They regularly ask for bank statements from applicants to prove income and it is required for any line of 25k and over. That combined with proof of address he says is necessary for them to stay compliant with the Bank Secrecy Act.

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

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

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

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

More Information About Our “Verified Income” Filter

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

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

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

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

Image: http://i.imgur.com/aG9E66l.png