Author Topic: How does Default status work?  (Read 15734 times)

lascott

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Re: How does Default status work?
« Reply #15 on: February 19, 2016, 10:49:02 AM »
I have 12,000 notes in my portfolio currently
Fred has WAY too many loans in his portfolio.  I have a much more reasonable 4,146 active loans.
Some would say you have "WAY" too many loans in your portfolio as well.  I think it partially depends on how big ($) your account is and if you can keep your "Available cash" at a reasonable level based on your $/Note investment.

Related to this thread ... the theory goes, a person with 10000 $25 notes will have 2 defaults statistically compared to a person with 5000 $50 notes having 1 default (ie. same account value and same $50 worth of defaults).  Feels better to only lose $25 at a time to these "straight rollers" tho <grin>.

Bryce M and others have talked about CI in the past to show how it changes.

Tools I use: (main) BlueVestment: https://www.bluevestment.com/app/pricing + https://www.interestradar.com/ , (others) Lending Robot referral link: https://www.lendingrobot.com/ref/scott473/  & Peercube referral code: DFVA9Y

rj2

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Re: How does Default status work?
« Reply #16 on: February 19, 2016, 11:02:41 AM »
Why is that enough? ... Then they can do it again in seven years. ... Doesn't seem like reporting is enough unless there is additional legal action being taken

Sadly, legal action is very expensive and uncertain.  That's just the way it is.  Because of this all banks and other lending companies use it sparingly.

Because of the anonymity, it is very difficult to track what LC is doing exactly.  You can scan the various court web sites for cases involving Lending Club.  Back in the early days of Prosper, when borrowers often put enough info in their listing descriptions to identify themselves, I used to scan the court web sites and find specific cases, and lenders used to follow them and discuss progress.  What I learned thru this is just what I said above.

From an emotional point-of-view I agree with you.  People who cheat us ought to be slammed.  One of my early Prosper loans was to a guy who was a former state senator from an eastern state.  A grade loan.  He stopped paying after just a few payments.  He continued to be quite a public figure, having opened a gay bar that got a lot of news.  I was astonished and angry.  My anger did nothing useful.  Nothing I could do.  In those early days, Prosper hadn't yet learned how to manage nonpayers.  Both P & LC are much more sophisticated now.  I have learned to back off and let them manage. 

From a more logical perspective, what matters to an investor is that the lending company do enough to keep fraud under control and produce good numbers.  That's what all lending companies try to do.

So you can look at results, and decide whether you want to buy Bank of America stock, Wells Fargo stock, etc, or buy notes thru Lending Club or Prosper.

The various lending laws pretty much prohibit you from getting involved personally, so you need to step back and the guys who can make these decisions do so.

What is LC's incentive?

The last financial crisis happened because the people originating mortgages had no skin in the game. They offloaded crap through securitization and didn't give a damn whether anybody actually paid.

LC loses nothing when a loan goes bad, and therefore has precious little incentive to take harsh legal action to make an example out of fraudsters.

Legal action is a deterrent. Of course it is expensive, but if you don't do it in at least a few cases the fraudsters will assume that they are safe and you never will.

What motivates LC to take this action and how can we as investors see for ourselves that they do this in an appropriate fashion?

I don't need to know that my loan in particular was prosecuted, but can you show data that LC is just as aggressive in court as lenders whose own money is at stake?

DaveSch

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Re: How does Default status work?
« Reply #17 on: February 19, 2016, 04:35:58 PM »
If the loan investors were paid first, and the Lending Club (and Prosper) received their origination fee and payment fees at the end, I'll bet that more care would be taken in issuing the loans.

Now, LC & P only have incentive to offer as many loans as they can. The incentive for successful completion of the loans? Not so much.

Disclosure: My Prosper loans are nearly done, and LC in another year or so.

Dave

Fred93

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Re: How does Default status work?
« Reply #18 on: February 19, 2016, 04:59:04 PM »
Now, LC & P only have incentive to offer as many loans as they can. The incentive for successful completion of the loans? Not so much.

That's not right.  IF LC were to issue a bunch of crap loans and drive investor's returns negative, it would greatly harm their brand.  There would no longer be all the institutional money and retail investor money beating down their door.  They would stop growing and start shrinking.  I will grant you that this maintenance of brand is a longer term objective.  Money made this quarter thru loan origination fees is immediate.

In the end you have to have faith in management's understanding and intentions and skill to maintain the brand.  This is a bit easier with LC than with P IMHO as LC simply has classier management folk.

nonattender

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Re: How does Default status work?
« Reply #19 on: February 19, 2016, 06:59:08 PM »
The real "sue" that you "sue 'em all" guys should think about is Single Unit Economics;  I don't want to sacrifice return to "feel better" or
"make a point".  The best way to feel better and make a point is to continue refining credit/risk models, weed on front end - and bank $.

I apologize if that sounds blunt, but some of you sound a little "emotional" about what LC should do as my fiduciary agent for my funds.
Their job is to make me money; their job is not to tax me to do something inoptimal with my money in order to appease emotional guys.

Fred93 has this one right and put it a lot more softly than I did, if you don't understand the nuances of the economics of debt collection.
A little nonsense now and then is relished by the wisest men.

Rob L

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Re: How does Default status work?
« Reply #20 on: February 19, 2016, 07:20:37 PM »
The real "sue" that you "sue 'em all" guys should think about is Single Unit Economics;

Doesn't seem the consensus is to "sue em all", just the "straight rollers". Personally I think that would be money well spent.
Maybe that's LC's policy. We really don't / can't know but the CEO commented in his interview that these folks are taken seriously.
Guess that's where faith in the brand comes in.


rawraw

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Re: How does Default status work?
« Reply #21 on: February 19, 2016, 07:22:07 PM »
Why is that enough? ... Then they can do it again in seven years. ... Doesn't seem like reporting is enough unless there is additional legal action being taken

Sadly, legal action is very expensive and uncertain.  That's just the way it is.  Because of this all banks and other lending companies use it sparingly.

Because of the anonymity, it is very difficult to track what LC is doing exactly.  You can scan the various court web sites for cases involving Lending Club.  Back in the early days of Prosper, when borrowers often put enough info in their listing descriptions to identify themselves, I used to scan the court web sites and find specific cases, and lenders used to follow them and discuss progress.  What I learned thru this is just what I said above.

From an emotional point-of-view I agree with you.  People who cheat us ought to be slammed.  One of my early Prosper loans was to a guy who was a former state senator from an eastern state.  A grade loan.  He stopped paying after just a few payments.  He continued to be quite a public figure, having opened a gay bar that got a lot of news.  I was astonished and angry.  My anger did nothing useful.  Nothing I could do.  In those early days, Prosper hadn't yet learned how to manage nonpayers.  Both P & LC are much more sophisticated now.  I have learned to back off and let them manage. 

From a more logical perspective, what matters to an investor is that the lending company do enough to keep fraud under control and produce good numbers.  That's what all lending companies try to do.

So you can look at results, and decide whether you want to buy Bank of America stock, Wells Fargo stock, etc, or buy notes thru Lending Club or Prosper.

The various lending laws pretty much prohibit you from getting involved personally, so you need to step back and the guys who can make these decisions do so.

What is LC's incentive?

The last financial crisis happened because the people originating mortgages had no skin in the game. They offloaded crap through securitization and didn't give a damn whether anybody actually paid.

LC loses nothing when a loan goes bad, and therefore has precious little incentive to take harsh legal action to make an example out of fraudsters.

Legal action is a deterrent. Of course it is expensive, but if you don't do it in at least a few cases the fraudsters will assume that they are safe and you never will.

What motivates LC to take this action and how can we as investors see for ourselves that they do this in an appropriate fashion?

I don't need to know that my loan in particular was prosecuted, but can you show data that LC is just as aggressive in court as lenders whose own money is at stake?
Yes that's the correct way to think about it.  But also remember, not all mortgage brokers engaged in this practice.  Management is a crucial part of a company and what they end up doing.  Just look at LC and Prosper at 2008

You guys can sue all you want, but only if you pay higher servicing fees to LC to do it.  Everyone wants to complain, but I doubt you'd want to pay

rj2

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Re: How does Default status work?
« Reply #22 on: February 19, 2016, 09:29:56 PM »
The real "sue" that you "sue 'em all" guys should think about is Single Unit Economics;  I don't want to sacrifice return to "feel better" or
"make a point".  The best way to feel better and make a point is to continue refining credit/risk models, weed on front end - and bank $.

I apologize if that sounds blunt, but some of you sound a little "emotional" about what LC should do as my fiduciary agent for my funds.
Their job is to make me money; their job is not to tax me to do something inoptimal with my money in order to appease emotional guys.

Fred93 has this one right and put it a lot more softly than I did, if you don't understand the nuances of the economics of debt collection.

There is merit in what you say, on the flip side we don't know if lending club EVER sues. If they never do then they become a target and fraud spikes up.

Lenders who fund with their own money seek that rational balance of suing in just enough cases that it deters fraud.

My question ultimately is whether lending club goes after fraud as aggressively as other lenders who have their own money on the line would. A bank lending from its own book doesn't sue in every case either, but it will in some.


Fred93

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Re: How does Default status work?
« Reply #23 on: February 19, 2016, 10:55:14 PM »
I logged into pacer.gov tonite and searched for all cases where "Lending Club" was a party.  78 cases appeared.  So apparently they do get involved!  I'll leave it to someone else to analyze.  Note that pacer doesn't cover all courts.

Here's the search results...
http://fred93.com/fbi/lendingclub_uspci.csv

If Excel doesn't fire up when you click on that link, try right clicking and doing a save as to create a local copy, then click on that.

On the other hand, I went to the San Francisco Superior Court web site and did the same search, and only found one case from 2010.  Somebody needs to do more searching and categorize the results.
« Last Edit: February 19, 2016, 11:03:31 PM by Fred93 »

rj2

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Re: How does Default status work?
« Reply #24 on: February 20, 2016, 02:45:59 AM »

Those look like bankruptcies. I would assume that the bankrupt themselves filed documents making LC a party to the bankruptcy.

What I'm interested is some information about how aggressively LC pursues legal action as opposed to banks that lend from their own book. My guess is that LC doesn't--that it works far less hard to deter fraud and collect than other lenders do. That's because LC has far less incentive to do so. They make their money originating loans, and other than in some marketing/PR sense, don't really care a whole lot whether those loans get paid. As in, they pursue it to the level that would avoid bad press and scare off investors, but not to the level that they would if it was their own money.

But we don't know. Until LC provides some tracking data, we can't compare that. This is something LC should put in its filings somewhere.

Rob L

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Re: How does Default status work?
« Reply #25 on: February 20, 2016, 10:08:42 AM »
Just a thought but the decision to sue may never be one in which LC is directly involved.

It may be entirely at the discretion of their third party collectors. Someone who knows more please help out here, but I think there are two categories of collectors. One category is contracted by LC, while LC still owns the loan, to act in LC's behalf. These loans are in "default" and, depending on success or lack of it, payments may be received and the loan may exit default. The other category LC sells the loan to the third party for a negotiated price (typically very little), the loan is charged off by LC and LC has nothing more to do with it.

rickhuizinga

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Re: How does Default status work?
« Reply #26 on: February 20, 2016, 12:13:20 PM »


What I'm interested is some information about how aggressively LC pursues legal action as opposed to banks that lend from their own book. My guess is that LC doesn't--that it works far less hard to deter fraud and collect than other lenders do. That's because LC has far less incentive to do so. They make their money originating loans, and other than in some marketing/PR sense, don't really care a whole lot whether those loans get paid. As in, they pursue it to the level that would avoid bad press and scare off investors, but not to the level that they would if it was their own money.

This is why I would like to see LC invest it's origination fee back into the note. It would align their interests with their investors, and they would have skin in the game. Right now, they are very much like brokers from the subprime mortgage bubble era, just pushing new crap loans as fast as they can to collect their origination fees.

nonattender

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Re: How does Default status work?
« Reply #27 on: February 20, 2016, 01:06:48 PM »
This is why I would like to see LC invest it's origination fee back into the note. It would align their interests with their investors, and they would have skin in the game. Right now, they are very much like brokers from the subprime mortgage bubble era, just pushing new crap loans as fast as they can to collect their origination fees.

Please present data or other evidence supporting your assertion that the loans are "crap".  We get a visit from a self-appointed internet
financial regulator / guy-who-just-saw-"The Big Short"-at-the-theater-and-is-now-a-credit-risk-analyst like once a week, so, data please.
A little nonsense now and then is relished by the wisest men.

Fred

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Re: How does Default status work?
« Reply #28 on: February 20, 2016, 10:05:29 PM »
This is why I would like to see LC invest it's origination fee back into the note. It would align their interests with their investors, and they would have skin in the game.

Not sure this makes sense.  It's like asking Amazon to purchase the products on its site; or asking Costco to buy the HDTVs  it's selling.

That's not how it works; that's not how any of this works.

Fred

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Re: How does Default status work?
« Reply #29 on: February 20, 2016, 10:36:14 PM »
I have 12,000 notes in my portfolio currently

Fred has WAY too many loans in his portfolio.  I have a much more reasonable 4,146 active loans.

Ha ha ha ....  This number does not include my "fleeting" notes, which I purchased from Folio and sold a few days afterwards.