Author Topic: Grace Period Track Record  (Read 12630 times)

SeanMCA

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Grace Period Track Record
« on: July 10, 2015, 12:09:22 AM »
Is there an easy way to sort all your notes to see which ones have entered into the Grace Period at some point? The amount of notes I have in the Grace Period category at any given moment is appalling. I rarely if ever see my A or B notes in there. It's always C and worse. As of a few weeks ago, I began only buying A and B notes and don't plan to change that any time soon.

I don't mind lending to people with damaged credit but I don't want to lend to people who are so broke that their bank account is empty just a few months in to a long term loan. Considering how many people have overdraft protection, a bounced ACH means that some of these borrowers are so broke that they've already capped out the maximum negative amount the bank will possibly let them hit.

The biggest irony is that in tech-based business lending, the single most important factor during analysis is the applicant's cash flow history. They use api tools to log into the borrower bank accounts and analyze the deposit history and daily ending average balance. If the person is broke, they don't get funded, no matter how good the credit and all the other "thousand data points" look.

In tech-based consumer lending, nobody seems to care whether or not the borrower is already broke. The lenders don't ask and nobody talks about it. Instead we rely on silly assumptions based on incomplete information. Why are we relying on outdated formulas when the technology to find out if a borrower has any money already exists? Why are we making presumptions about what someone could afford when we can just easily find out? This can easily be scaled. The first thing business lender Kabbage does when an applicant applies is log into their online banking through an API and download every transaction and balance for the last 90 days. And if they're not broke, then they ask what the borrower's name is. I'm not kidding. They log into your bank account before they even ask what your first and last name is. Because if you're broke, the rest doesn't matter...

Consumer lenders
Does the borrower have great credit? Yes
Is the borrower dead broke with -$10,000 in the bank and about to blow up and file bankruptcy? Meh, who cares
Approved!

We laugh at these pseudo calculations in business lending. Lend to people with money, decline people who are broke.
« Last Edit: July 10, 2015, 12:11:27 AM by SeanMCA »
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lascott

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Re: Grace Period Track Record
« Reply #1 on: July 10, 2015, 10:20:29 AM »
That was a very interesting read. Thanks.

I've only been lending for 1.4 years and am still investing a fair amount each month so it seems most of notes in grace are brand new and I assumed it was something to do with the automatic bank payment not being correct right at the beginning. I'm about out of my discretionary Lending Club investment money so I will see how graces and lates work by the end of the year.

I think the altruistic view is these consumers are paying so much in variable interest rates that we are hoping a fixed interest rate and payment will let them get ahead / back-on-their-feet.

I definitely have gotten more conservative since I started.  See my ABCs vs DEFGs.
1.4 yr old -- Taxable account




2 mo old -- Roth account

« Last Edit: July 10, 2015, 10:27:30 AM by lascott »
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lascott

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Re: Grace Period Track Record
« Reply #2 on: July 10, 2015, 10:32:08 AM »
<snip>
The first thing business lender Kabbage does when an applicant applies is log into their online banking through an API and download every transaction and balance for the last 90 days. And if they're not broke, then they ask what the borrower's name is. I'm not kidding. They log into your bank account before they even ask what your first and last name is. Because if you're broke, the rest doesn't matter...
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 ?!?
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thezfunk

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Re: Grace Period Track Record
« Reply #3 on: July 10, 2015, 03:11:03 PM »
Yeah, exactly.  I am guessing that consumer lending doesn't attempt that because of the competition.  Nobody would subject themselves to that when there are opportunities everywhere to not have to do that.  Business lending is much tougher and businesses are used to subjecting themselves to those types of requirements.

I remember the Prosper CEO talking about how their volume went up by a huge amount by just streamlining the application process on their website.  We can't have anything getting in the way of people getting your money.  Another point that I see brought up over and over again is if the originators had an incentive to not have these notes default, then we would start seeing some common sense changes.  Right now they don't care you lose your money.  The only reason they have to care right now is if people stopped investing and they had problems getting sucke...er...investors to give up their money.  The platforms in this country make money on originations not whether or not you get paid back.

SeanMCA

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Re: Grace Period Track Record
« Reply #4 on: July 10, 2015, 11:37:10 PM »
Yeah, exactly.  I am guessing that consumer lending doesn't attempt that because of the competition.  Nobody would subject themselves to that when there are opportunities everywhere to not have to do that.  Business lending is much tougher and businesses are used to subjecting themselves to those types of requirements.

With tools like Yodlee, there is not really much work involved to have the lender access your bank account. Basically you enter in your routing number and that brings up the login/pw and any security questions screen for that bank. You enter that stuff in and boom, instantly done. Yodlee securely accesses the data from the bank and downloads it to the lender where a basic script or algorithm can analyze the last 90 days and issue an immediate decline or next set of questions like your first and last name.

The lender never captures your bank credentials, just the data from the last 90 days. In business lending the old adage used to be that "small business owners would never want to spend time filling out 3 extra fields or enter in their bank username and password to apply for a loan because it wouldn't feel safe," but lo and behold, once the technology was there, business owners didn't flinch.

The only real reason to not reveal your daily ending bank balance and transaction history to a lender is because you don't want them to see what's really going on. As long as the lender relies on presumptions, they'll never be able to detect if you're broke.

And as long as we don't care if the borrowers are broke, then we will really never know the portfolio's risk or how to predict a looming crisis.
I'm a merchant cash advance veteran exploring the p2p lending waters.

SeanMCA

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Re: Grace Period Track Record
« Reply #5 on: July 10, 2015, 11:40:10 PM »
I remember the Prosper CEO talking about how their volume went up by a huge amount by just streamlining the application process on their website.  We can't have anything getting in the way of people getting your money. 

Sounds exactly what a payday lender would say...

And considering they don't know or care if the borrowers are broke but they make the loan anyway, then they have the same attitude as a payday lender.

As long as the math works in our favor for the time being, who cares right? We're all in the payday lending business.
I'm a merchant cash advance veteran exploring the p2p lending waters.

bobeubanks

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Re: Grace Period Track Record
« Reply #6 on: July 11, 2015, 12:07:40 AM »
And considering they don't know or care if the borrowers are broke but they make the loan anyway, then they have the same attitude as a payday lender.

Actually a payday loan lender has more motivation than LC to check to see if the loan will be repaid.

thezfunk

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Re: Grace Period Track Record
« Reply #7 on: July 11, 2015, 01:04:43 AM »
Don't get me wrong Sean, I don't disagree with you.  Unfortunately, LC and Prosper have no incentive right now to verify accounts as you describe.  We, as lenders, would love that but the originators have no incentive. 

What I don't get are the people borrowing some of my money at ~30% interest.  It is never a ton of money.  I never see a $20k or $30k loan at ~30%.  It is always only a few thousand.  I know what the borrowing is thinking...hey, I can make that monthly payment and the interest rate is secondary or of little concern to them.  In my experience, that is how poor people think.  Those type of people will never get out of situations where they feel they need to borrow at ~30% because they don't know any better.  It is ignorance and somehow those people need a better financial education.  You couldn't get me to borrow money at ~30% no matter what the circumstances were.  I know it is a rip off and I would never do it.  Maybe they do know and they just plan on running off with my $25.  In that case, the interest rate is totally irrelevant. 

SeanMCA

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Re: Grace Period Track Record
« Reply #8 on: July 11, 2015, 11:44:43 AM »
As of a few months ago, I stopped buying notes of anyone making less than $85,000 a year. You can make that amount or much more and still be broke, but at least it reduces the odds that the borrower will be poor.

I don't want to lend to people whose bank balance is always zero or just enough to make the payment and it's not just for moral reasons, it's because as soon as there's a blip in the economy, these accounts will be the first to fall. As helpful as all the ratios and statistics that Lending Club provides are, I really think it's kind of reckless that we don't know how much money these people actually have in the bank when the loan is issued.
I'm a merchant cash advance veteran exploring the p2p lending waters.

lascott

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Re: Grace Period Track Record
« Reply #9 on: July 11, 2015, 01:07:43 PM »
As of a few months ago, I stopped buying notes of anyone making less than $85,000 a year. You can make that amount or much more and still be broke, but at least it reduces the odds that the borrower will be poor.
An isolated analysis gives that impression but there are certainly other factors.  No matter what you strategies it has to be sustainable (nbr of notes available) to keep your cash invested.

Source: https://www.lendingharbor.com/hist_analysis/
Graphic: http://i.imgur.com/AJBNznp.png
« Last Edit: July 11, 2015, 01:10:44 PM by lascott »
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rawraw

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Re: Grace Period Track Record
« Reply #10 on: July 11, 2015, 04:48:45 PM »
You try getting a prime borrower to jump through hoops to get a loan.  You'll start seeing a much much lower pull through rate.  There used to be a service that people would post in the questions that the borrowers could link their debts, to confirm their debt repayment loan was paying off debts at a lower rate and payment level.  But that was back when you had leverage because loans didn't always fund so the borrowers were more likely to jump through your hoop.

Now doing this for D/E/F/G borrowers may be a good idea.  But terrible idea for a blanket use of all LC borrowers.  But I have a feeling if you ask to crawl someone's bank account, they'll just go elsewhere.  Seems that'd only work on subprime borrowers who have limited bargaining power

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 beacuse someone has had money for 90 days doesn't mean they'll have any moving forward

On a related note, I've heard from colleagues I trust that high income borrowers performed worse on their consumer credit (like auto loans) than subprime in the prior crisis (ignoring thsoe who were making liar loans and stuff), in terms of returns to the lender.  This lender was one of the biggest banks in the country.  High income people have high income expenses and it doesn't take long after losing a job for it to bring down their "large" bank accounts
« Last Edit: July 11, 2015, 04:53:13 PM by rawraw »

kya

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Re: Grace Period Track Record
« Reply #11 on: July 12, 2015, 02:06:49 PM »
the "flaw" in p2p lending to me was that lc prosper etc. dont have the incentive to collect like a normal un-secured creditor would..... the collection effort is very poor and spotty. It looks to me like collectors almost breathe a sigh of relief when the customer doesnt answer the phone. When they do by chance get a customer on the phone many times nothing is resolved. It seems like accounts just for the most part work there way through the various stages of delinq and then are charged off with nothing more than a "oh well".......i worked in collections through out my 30 years in consumer lending and have never seen anything like the lack of effort to collect accounts. I will continue to buy notes on lc and prosper but will never get carried away with the amount invested ie ( hobby $)

thezfunk

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Re: Grace Period Track Record
« Reply #12 on: July 12, 2015, 02:36:11 PM »
the "flaw" in p2p lending to me was that lc prosper etc. dont have the incentive to collect like a normal un-secured creditor would..... the collection effort is very poor and spotty. It looks to me like collectors almost breathe a sigh of relief when the customer doesnt answer the phone. When they do by chance get a customer on the phone many times nothing is resolved. It seems like accounts just for the most part work there way through the various stages of delinq and then are charged off with nothing more than a "oh well".......i worked in collections through out my 30 years in consumer lending and have never seen anything like the lack of effort to collect accounts. I will continue to buy notes on lc and prosper but will never get carried away with the amount invested ie ( hobby $)

I agree and if they were maybe forced to have some skin in the game, things would change quick.  How about refunding any note that goes delinquent?  Maybe forcing LC and Prosper to fund a fraction of every loan?  People want to cry about regulations but it is situations like this where people begin to realize 'free' and 'unfettered' are not always the best for everyone.  Until this industry is really tested in a bad economic downturn, its viability and sustainability are complete unknowns.  We are kind of like wildcatters out poking holes in the ground and praying we find oil.

rawraw

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Re: Grace Period Track Record
« Reply #13 on: July 12, 2015, 03:20:45 PM »
Collecting on an unsecured debt isn't normally cost effective.  There is almost always more senior claims against the assets and you have no leverage (i.e. take back their car, or home, or whatever other asset other loans have).  Collection efforts may be lax, but I am doubtful it is very material.  But maybe my suspicion is wrong -- if its material, it leaves room for another platform to do it differently.

Rob L

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Re: Grace Period Track Record
« Reply #14 on: July 12, 2015, 09:20:20 PM »
If collection efforts are lax and the "market" knows it then the loans will sell for more to collection agencies.
It may be more cost effective to sell the loans to collection agencies (so long as there are enough of them to make the bidding efficient), than to spend more of your own resources doing it.
When a collection agency buys the loan they have skin in the game, and they bring resources and expertise that P2P lenders may not have and are costly to duplicate.
I have no experience in collections, but this seems to make sense.