Author Topic: How does Default status work?  (Read 16055 times)

Fred

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Re: How does Default status work?
« Reply #45 on: February 23, 2016, 01:36:14 AM »
I would prefer if LC took a percentage of it's origination fee every month, instead of upfront all at once. (Equivalent to no origination fee and a bigger service fee.)

This would put LC to death quickly.  I don't want that to happen.  ;-)

BTW, LC's 2015 10-K has just been published today.   It shows 2015 Transaction Fees (aka Origination Fees) of 373M, while Servicing Fees only 32M.

http://www.sec.gov/Archives/edgar/data/1409970/000140997016001762/a201510-k.htm

Ran

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How does Default status work?
« Reply #46 on: February 23, 2016, 09:26:39 AM »

LC should never invest their own capital on the loans they originated. And I believe LC will not. Doing this will effectively skyrocket LC bankruptcy chances and investors will simply pull out in such a case. No one will trust a platform that may just blow up when it's own investment goes bad and capital is depleted in any given year. Investing it's own capital on risky loans is a much more risky business compared to charge a fixed fee for loan origination.

Based on latest quarterly earnings[1], revenue to origination ratio is 5.21%. Lending Club is making 5.21% (top line) on every dollar of origination while lenders on LC platform on average are making 7.84% (bottom line) [2].

It is already a bad business deal for Lending Club to make less in top line than the lenders on the platform (higher portion of economic profit going to lenders). Basically, Lending Club is borrowing funds from lenders at 7.84% to lend when it could easily borrow the same amount as debt at much lower interest rate. Recently, I was looking at a junk level corporate debt of a company, it's borrowing cost 3.8%. It makes no sense for Lending Club to be borrowing funds at 7.84% from lenders, when it could get same funds from a corporate debt at much lower rate. Or Lending Club could become a bank like Ally Bank which pays depositors 1% and lends majority of these funds at much higher rates to auto loans and keep all the profits for itself.

So, count your blessings that you are already getting extra returns. Sooner than later, this gravy train will need to stop for Lending Club to be a viable, standalone and scalable business and shareholders are going to demand that. Either Lending Club will have to become pure balance sheet lender or offer lenders a fixed return (or variable return within a fixed range) like some UK p2p platforms. In my estimates, if Lending Club becomes pure balance sheet lender, it can raise its top line from 5.21% to almost 10% with a combination of origination fees and interest received from loans.

[1] Lending Club Reports Fourth Quarter and Full Year 2015 Results and Announces $150 Million Share Buyback https://finance.yahoo.com/news/lending-club-reports-fourth-quarter-123000094.html

[2] Edited Transcript of LC earnings conference call or presentation 11-Feb-16 1:30pm GMT https://finance.yahoo.com/news/edited-transcript-lc-earnings-conference-210404329.html



LC makes 4 times a much on the Origination Fee. Immediately. And they don't give it back even if the loan defaults.

Are you not aware of this?

rj2

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Re: How does Default status work?
« Reply #47 on: February 23, 2016, 11:07:02 AM »
I would prefer if LC took a percentage of it's origination fee every month, instead of upfront all at once. (Equivalent to no origination fee and a bigger service fee.)

This would put LC to death quickly.  I don't want that to happen.  ;-)

BTW, LC's 2015 10-K has just been published today.   It shows 2015 Transaction Fees (aka Origination Fees) of 373M, while Servicing Fees only 32M.

http://www.sec.gov/Archives/edgar/data/1409970/000140997016001762/a201510-k.htm

They can charge a higher servicing fee and no origination fee. That would align them with investors and if they can't stay in business from servicingthe loans that remain current then the point we were making had truly been made!

Fred93

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Re: How does Default status work?
« Reply #48 on: February 23, 2016, 01:30:44 PM »
They can charge a higher servicing fee and no origination fee.

True.  They could.  The big servicing fee would replace the money taken away when you dropped the origination fee.  However, it would have to be a quite substantial increase in the servicing fee, and this would REDUCE RETURN FOR LENDERS.  Somehow I don't think most lenders would think of that as a great thing. 

yojoakak

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Re: How does Default status work?
« Reply #49 on: February 23, 2016, 05:23:46 PM »
They can charge a higher servicing fee and no origination fee.

True.  They could.  The big servicing fee would replace the money taken away when you dropped the origination fee.  However, it would have to be a quite substantial increase in the servicing fee, and this would REDUCE RETURN FOR LENDERS.  Somehow I don't think most lenders would think of that as a great thing.

If my math is correct, with 0% Origination Fee and a 4.5% Service Fee both LC and the Lenders come out in pretty much the exact same position on a Fully Paid loan.

Rob L

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Re: How does Default status work?
« Reply #50 on: February 23, 2016, 06:16:47 PM »
If my math is correct, with 0% Origination Fee and a 4.5% Service Fee both LC and the Lenders come out in pretty much the exact same position on a Fully Paid loan.

Sure, but that doesn't address the basic dilemma (presuming there is one) i.e. loans not fully paid off. Your point is made.
In that scenario it still doesn't much matter to LC if loans are fully paid or charged off (so long as all loans applications vetted are fully funded).

Bottom line; we depend on LC to underwrite "as if" the loans are their own (give University of Chicago and all those Noble Laureates its props for "as if").
If they don't it will be fatal to LC's long term business as we lenders (small or large) are killed off and exit the playing field.

rawraw

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Re: How does Default status work?
« Reply #51 on: February 23, 2016, 07:37:51 PM »
I disagree that LC should earn higher profits than the balance sheet lenders (us) and that their shareholders want them to be a balance sheet lender.  LC doesn't want to be a specialty finance business; they want to be a tech business for several reasons.  But this is all my opinion

Rob L

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Re: How does Default status work?
« Reply #52 on: February 23, 2016, 09:29:24 PM »
they want to be a tech business for several reasons.  But this is all my opinion

This is a great opportunity to bring up something I've long thought. LC isn't rocket science and IMHO the barrier to entry is almost zip. We're not talking about Intel, Microsoft, or even Apple. I value your opinion and expertise in this area. It may be what LC wants, but why should LC be considered a tech business?

And meanwhile I wonder where Goldman stands regarding its entry into the space. Any rumors there?

Fred

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Re: How does Default status work?
« Reply #53 on: February 24, 2016, 12:49:12 AM »
If my math is correct, with 0% Origination Fee and a 4.5% Service Fee both LC and the Lenders come out in pretty much the exact same position on a Fully Paid loan.

Not sure if this makes sense.

In 2015, LC's origination fee was almost 12x servicing fee: 373M vs 32M.   Besides, I don't think LC would agree to spread the upfront origination fee over several years.  It's the bread and butter of LC livelihood.

Hey, just realized that your name read backward is kakaojoy -- you a chocolate aficionado?
« Last Edit: February 24, 2016, 01:23:16 AM by Fred »

yojoakak

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Re: How does Default status work?
« Reply #54 on: February 24, 2016, 11:00:31 AM »

This is a great opportunity to bring up something I've long thought. LC isn't rocket science and IMHO the barrier to entry is almost zip.

LendingClub was a money loser until just recently. Apparently they spend a lot of money on advertising and trying to drum up borrowers.


Not sure if this makes sense.

In 2015, LC's origination fee was almost 12x servicing fee: 373M vs 32M.   Besides, I don't think LC would agree to spread the upfront origination fee over several years.  It's the bread and butter of LC livelihood.

That does seem high. Plus the Origination fees are less than 5% on some loans. Maybe it's due to the exponential growth of Originations? http://www.lendingclub.com/public/borrower-rates-and-fees.action



Quote
Hey, just realized that your name read backward is kakaojoy -- you a chocolate aficionado?

Hey, I never noticed that before! Good eye!


Here is a Google Spreadsheet I put together that calculates the borrower, lender, and LC cash flows. Anyone should be able to copy it and play around with the numbers: https://docs.google.com/spreadsheets/d/1BW2n_6m3RIz52Yhw_SZrIhhDWQx1pclgZXfExp0dIys/edit?usp=sharing
« Last Edit: February 24, 2016, 11:05:28 AM by yojoakak »

rawraw

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Re: How does Default status work?
« Reply #55 on: February 24, 2016, 02:32:23 PM »
they want to be a tech business for several reasons.  But this is all my opinion

This is a great opportunity to bring up something I've long thought. LC isn't rocket science and IMHO the barrier to entry is almost zip. We're not talking about Intel, Microsoft, or even Apple. I value your opinion and expertise in this area. It may be what LC wants, but why should LC be considered a tech business?

And meanwhile I wonder where Goldman stands regarding its entry into the space. Any rumors there?
Is Uber a technology firm or a taxi cab company? They don't seem to have huge barriers of entry either outside of network effects.

Along those lines, is LC a lender? Well no, you have to take credit risk for that to occur. It seems for the box they fit in is a technology that matches buyers and sellers, just like Uber matches those driving and those needing transportation.  But is that technology for LC more or the same as a loan broker? I think that's the area for debate

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jheizer

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Re: How does Default status work?
« Reply #56 on: February 24, 2016, 03:06:35 PM »
As a software dev I hate thinking of them as a tech company.  API sucks!  :)
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AnilG

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Re: How does Default status work?
« Reply #57 on: February 24, 2016, 04:06:22 PM »
Uber is somewhat controversial comparison as whether it is taxi company, transportation company or technology company is up for debate. Last year, there was interesting debate about valuation of Uber between valuation gurus including Aswath Damodaran http://aswathdamodaran.blogspot.com. My impression from that debate was in the end the valuation depended on who treated Uber as what.

LC is a lender because they are taking credit risk. While LC may claim member-dependent notes, the lenders are lending to LC and LC is lending those funds to borrowers. There is very tenuous connection, if any, legally between the two. Also, LC doesn't have network effect like Uber or AirBnb. LC has to go out and actively acquire new borrowers unlike Uber and AirBnb where the drivers/hosts and passengers/guests are mostly repeat users.

LC CEO likes to portray LC as Technology company with network effect as getting classified such get you much higher valuations. LC is nothing more than specialty finance company using similar processes and technology as traditional lending company (exclude lender management side).

 
Is Uber a technology firm or a taxi cab company? They don't seem to have huge barriers of entry either outside of network effects.

Along those lines, is LC a lender? Well no, you have to take credit risk for that to occur. It seems for the box they fit in is a technology that matches buyers and sellers, just like Uber matches those driving and those needing transportation.  But is that technology for LC more or the same as a loan broker? I think that's the area for debate

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nonattender

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Re: How does Default status work?
« Reply #58 on: February 24, 2016, 04:17:30 PM »
And meanwhile I wonder where Goldman stands regarding its entry into the space. Any rumors there?

I heard that some guy stood up in a meeting a couple of weeks ago and said "Sir, are we really sure that American consumers are going
to want to borrow from Goldman Sachs - especially the millennials?" and then he was promptly beaten to death with ripped off chairlegs.
A little nonsense now and then is relished by the wisest men.

nonattender

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Re: How does Default status work?
« Reply #59 on: February 24, 2016, 04:28:18 PM »
LC CEO likes to portray LC as Technology company with network effect as getting classified such get you much higher valuations. LC is nothing more than specialty finance company using similar processes and technology as traditional lending company (exclude lender management side).

And yet, they somehow manage to spend much, much less - consistently - than their competitors (new and old) on customer acquisition.

Hmm, I dunno.  Think there might be a couple (^2) things to this whole "network effect" idea that the kids are talking about these days.

;)
A little nonsense now and then is relished by the wisest men.