Author Topic: Is LendingClub Broken?  (Read 13393 times)

fliphusker

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Re: Is LendingClub Broken?
« Reply #30 on: June 07, 2016, 02:00:47 AM »
If LC bought some portion of their loans, it would signal to me that - at least in theory - they would pay more attention to underwriting, or at the very least they would adapt more when they noticed a deterioration of credit quality. It might also make me more of a willing partner in loans.

What would really signal confidence in their underwriting would be for them to buy the remainder of any loan not funded within a certain time frame.
For me, that would have the opposite effect.  That note is going unfunded for a reason.  I do not want the undrafted free agent being a starter for my team.  So hope that NFL analogy carries over. 

Fred93

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Re: Is LendingClub Broken?
« Reply #31 on: June 07, 2016, 02:38:40 AM »
What would really signal confidence in their underwriting would be for them to buy the remainder of any loan not funded within a certain time frame.

This seems strange to me.  I equate "good underwriting" with an outcome where chargeoffs occur at about the expected rate.  Your scheme would have LC buy loans when they haven't managed the supply/demand balance perfectly.  Managing this balance is one of their jobs sure, but it isn't at all the same as underwriting.

dompazz

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Re: Is LendingClub Broken?
« Reply #32 on: June 07, 2016, 08:25:28 AM »
What would really signal confidence in their underwriting would be for them to buy the remainder of any loan not funded within a certain time frame.

This seems strange to me.  I equate "good underwriting" with an outcome where chargeoffs occur at about the expected rate.  Your scheme would have LC buy loans when they haven't managed the supply/demand balance perfectly.  Managing this balance is one of their jobs sure, but it isn't at all the same as underwriting.
Exactly.  When LC starts buying their own loans, they now have an incentive to manage new loans towards their desired risk preference, not ours.

Rob L

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Re: Is LendingClub Broken?
« Reply #33 on: June 07, 2016, 09:29:30 AM »
....  I do not want the undrafted free agent being a starter for my team.  So hope that NFL analogy carries over.

Unless his name is Malcolm Butler.

fliphusker

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Re: Is LendingClub Broken?
« Reply #34 on: June 07, 2016, 09:49:20 AM »
....  I do not want the undrafted free agent being a starter for my team.  So hope that NFL analogy carries over.

Unless his name is Malcolm Butler.
1 INT in the SB does not make a superstar.  Butler started only one game the year they won the SB, for a reason. 

SLCPaladin

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Re: Is LendingClub Broken?
« Reply #35 on: June 07, 2016, 10:57:23 AM »
If LC starts buying loans en masse, that will make quick work of their cash reserves - hence the worries about bankruptcy.

Jenn

That is a good point. In the short run, I certainly don't think LC should deploy their cash to buy loans unless they have exhausted all their funding avenues and concluded that to allow loans to go unfunded would be riskier than to deploy their own cash. We are witnessing the value of LC having a big cash buffer during turbulent times. But let's say that they were to buy loans (at some future, post-crisis date), it's not as if the cash would be evaporating from their balance sheet like it were an ill-fated marketing initiative. LC would have an income-producing asset.

In the long-run, and once this storm has passed, it could prove to be a superior way to generate revenue. Granted, this would represent a shift in LC's model and it would may necessitate a leaner corporate structure and conscientiousness regarding expenses at every level. It would certainly change the growth trajectory from targeting % instead of multiples. Personally, I RL recognized this and is part of the reason he was orchestrating the whole Cirrix shenanigan. The way it all went down was not good (an understatement, to be sure), but I think there is something to be said about LC's revenue not being solely dependent on originations and servicing revenue.
« Last Edit: June 07, 2016, 10:59:12 AM by SLCPaladin »

bobeubanks

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Re: Is LendingClub Broken?
« Reply #36 on: June 07, 2016, 11:28:40 AM »
What would really signal confidence in their underwriting would be for them to buy the remainder of any loan not funded within a certain time frame.

This seems strange to me.  I equate "good underwriting" with an outcome where chargeoffs occur at about the expected rate.  Your scheme would have LC buy loans when they haven't managed the supply/demand balance perfectly.  Managing this balance is one of their jobs sure, but it isn't at all the same as underwriting.

They shouldn't be managing the balance within the bucket. The buckets should contain notes with the same substantial chargeoff risk. They aren't (I don't think) intentionally putting a few gems down in E to balance up for notes that they know should have been G. It might well be that people's filters can find the better notes within a bucket, but ideally (my opinion) for LC to be attractive to a broad investor base, there should be NO need to filter at all.

So if LC committed to buying the rest of all loans that investors don't fully fund, that is a pretty big statement from LC saying that all loans within a bucket are substantially equal.

bobeubanks

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Re: Is LendingClub Broken?
« Reply #37 on: June 07, 2016, 11:32:47 AM »
Exactly.  When LC starts buying their own loans, they now have an incentive to manage new loans towards their desired risk preference, not ours.

I think investors broadly would prefer that notes be consistent within the grades so that extra filtering is unnecessary. I realize that many (an likely a large majority) of people on this forum would rather retain the ability to find the best notes within a grade.

SLCPaladin

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Re: Is LendingClub Broken?
« Reply #38 on: June 07, 2016, 11:48:04 AM »
Quote
So if LC committed to buying the rest of all loans that investors don't fully fund, that is a pretty big statement from LC saying that all loans within a bucket are substantially equal.

Agreed. I remember listening to a podcast that Peter had with RL a few years ago where he discussed the issue of underwriting and individuals using filter data to get better returns ("secret sauce"). RL countered that they (LC) had all the data and that overtime, opportunities for filtering and producing better returns would (in theory) disappear because LC could analyze the same data and take this into account in their underwriting. In other words, the possibility of "beating the average" should disappear. This has certainly proven true with the whole active vs. passive strategy for stocks and bonds. Buffett has been very vocal about how passive indexing has consistently outperformed the so-called experts ("Hedge funds are good for Wall Street, bad for investors").

The idea of adverse selection has always been one of my dilemmas when investing at LC as a retail investor. With the myriad professional services and bots that pick notes, there is always a lingering feeling that I might be getting stuck with the sub-par notes because I don't have the time, nor the technical expertise to write algorithms to skim the creme de la creme. The idea that I may be getting stuck with sup-par loans because I don't have the right filter makes me leery of investing on the platform. I think it discourages me from actually deploying more cash. If I knew that LC was willing to pony up their own cash and buy notes, that would signal to me that I could be confident in buying notes, even if I wasn't willing to analyze spreadsheets upon spreadsheets trying to concoct some "secret sauce."

LonghornSF

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Re: Is LendingClub Broken?
« Reply #39 on: June 07, 2016, 01:40:24 PM »
LC buying notes would be a bad idea since it would increase LC's risk, which would further undermine retail investors' confidence, which would increase LC's risk, on and on. They really need to implement a BRV first before putting their own capital to work buying loans.

dompazz

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Re: Is LendingClub Broken?
« Reply #40 on: June 07, 2016, 01:55:20 PM »
Exactly.  When LC starts buying their own loans, they now have an incentive to manage new loans towards their desired risk preference, not ours.

I think investors broadly would prefer that notes be consistent within the grades so that extra filtering is unnecessary. I realize that many (an likely a large majority) of people on this forum would rather retain the ability to find the best notes within a grade.
Not what I meant, in anyway. 

I agree with Fred93, underwriting should strive to have each loan rating have an expected loss rate.  A1 loses less than A2, etc.  That's the job of underwriting, find the the appropriate risk bucket and price it accordingly.  I think that is your point as well.  Cool, we all agree.

The marketing department's job is to find borrowers.  They need to balance supply of loans in each underwriting bucket with investor demand.  If there is a supply / demand mismatch, then marketing can attempt to find supply to meet it or let underwriting know so that they can adjust the price of risk.

LC is operating as a market place.  They are making a market in personal loans, matching buyers (big and small) and sellers (borrowers in this case), and helping to find the appropriate price.

When LC starts to buy their own loans, the job of the marketing department begins to change.  They now are looking for loans to satisfy their internal demand.  It creates an incentive to meet that internal demand over investor demand.  It creates an incentive to skew the price of risk in their favor.  It makes the marketplace less efficient.  That is not good for me and it is not good for the borrower. 

bobeubanks

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Re: Is LendingClub Broken?
« Reply #41 on: June 07, 2016, 02:28:17 PM »
When LC starts to buy their own loans, the job of the marketing department begins to change.  They now are looking for loans to satisfy their internal demand.  It creates an incentive to meet that internal demand over investor demand.  It creates an incentive to skew the price of risk in their favor.  It makes the marketplace less efficient.  That is not good for me and it is not good for the borrower.

I think we mostly agree. But my proposal wasn't that LC would be looking for loans that meet an internal demand. It would be LC saying, "we are confident in our pricing and will buy these if and ONLY if no one else does." It could certainly morph into a whole-scale change in the LC business model, and if that happened, I agree it would be bad for investors.

mchu168

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Re: Is LendingClub Broken?
« Reply #42 on: June 07, 2016, 03:43:54 PM »
LC should invest in loans as long as the returns exceed their cost of capital.  Unfortunately, I think their cost of capital is way higher than 7-8%, so I would not advocate this path.

If buying loans is management's idea of their best alternative to deal with loans going unfunded, then they should put themselves on the block and hope that JPM takes them out. It's as simple as that imo.

nonattender

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Re: Is LendingClub Broken?
« Reply #43 on: June 07, 2016, 05:18:11 PM »
If buying loans is management's idea of their best alternative to deal with loans going unfunded, then they should put themselves on the block and hope that JPM takes them out. It's as simple as that imo.

I saw Jamie Dimon a couple of days ago after he'd gotten back from a week or so in California.  I don't think he wants them.  He's a cool customer, though.  You never know.  But it'd be pretty shocking to see him pay a multiple of their market cap when he could clone them, like everyone else with a bank charter seems to be doing lately, for a lot less money and with a whole hell of a lot less of a legal mess...
A little nonsense now and then is relished by the wisest men.

sommers

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Re: Is LendingClub Broken?
« Reply #44 on: June 08, 2016, 07:01:17 AM »
Exactly.  When LC starts buying their own loans, they now have an incentive to manage new loans towards their desired risk preference, not ours.

I think investors broadly would prefer that notes be consistent within the grades so that extra filtering is unnecessary. I realize that many (an likely a large majority) of people on this forum would rather retain the ability to find the best notes within a grade.
Not what I meant, in anyway. 

I agree with Fred93, underwriting should strive to have each loan rating have an expected loss rate.  A1 loses less than A2, etc.  That's the job of underwriting, find the the appropriate risk bucket and price it accordingly.  I think that is your point as well.  Cool, we all agree.

The marketing department's job is to find borrowers.  They need to balance supply of loans in each underwriting bucket with investor demand.  If there is a supply / demand mismatch, then marketing can attempt to find supply to meet it or let underwriting know so that they can adjust the price of risk.

LC is operating as a market place.  They are making a market in personal loans, matching buyers (big and small) and sellers (borrowers in this case), and helping to find the appropriate price.

When LC starts to buy their own loans, the job of the marketing department begins to change.  They now are looking for loans to satisfy their internal demand.  It creates an incentive to meet that internal demand over investor demand.  It creates an incentive to skew the price of risk in their favor.  It makes the marketplace less efficient.  That is not good for me and it is not good for the borrower.
EXACTLY --it has the potential/probability to put L C's interest at odds with their investors (they take the cream).  My understanding of this business is that L C was to serve as the intermediary / broker--PERIOD. 
I hope that in the interest of growth they do NOT morph into a lender (in an effort to maintain market share in the P2P space).