Author Topic: LC prepayments rising  (Read 11640 times)

Fred93

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LC prepayments rising
« on: November 15, 2016, 02:49:30 PM »
In the past I haven't thought about prepayments much.  They happen.  We put up with them.  In recent months tho, something is changing.  Prepayments are increasing.  (For the record, worrying about this was Rob L's idea.)

The chart below shows prepayments in the first few months of a loan.  Each curve shows how prepayment by certain "age" of the loans varies with vintage.  The curves are cumulative.  The red "month 1" curve shows the fraction of loans that have prepaid by the end of month 1, so it includes the month 0 prepays.  The horizontal axis shows the quarter in which the loan was issued, more or less (1).

Look at the right side of the chart.  You can see that in the past nobody ever prepaid during the first month (month 0), but recently 1.5% of borrowers are doing just that.  Furthermore, that rate is still climbing.  Interestingly, the increase is all in month 0, which is the month that in the past never had any prepays.



I wonder what is going on here.  Why do people prepay before the first payment is due?  And whatever the reason is, why is it happening now and not in prior years?  I have a theory. 

My idea is that this is a sign of competition among online lenders.  There are now a lot of different online lenders.  Suppose you pick one and borrow, but during your investigation you discover all these other guys, and you check the interest rate they offer.  Seems likely that quite often you would find another guy who offers you a lower rate.  At that point a logical person might borrow from the 2nd guy and pay off the 1st guy. 

If I'm right, then the proliferation of online lending is generating competition whose impact we can see.  I'm thinking that this is an explicit example of pressure on LC to keep rates low.  We lenders tend to ascribe the "bad" rate reductions during the past 2 years to LC & Prosper's lust for growth.  Growing competition was likely part of the picture.

There have been a few articles recently about "stacking" by online borrowers.  The credit bureaus have noticed more folks borrowing from more than one online lender in rapid succession.  The thrust of these articles is always that this is a sign of fraud.  Maybe it is.  However, credit bureaus, who want to sell new services, seed such articles with the intent to frighten their customers, so we should stay skeptical.  Some of these stackers are apparently just repaying their loans with cheaper ones.


(1) footnote: I've recently learned that when LC provides data by "vintage", that they assign the vintages by the date of the first payment, not the date of origination.  I learned this only by processing the payment history file.  In fact, this probably occurs because some fellow at LC is generating the prepayment data from the payment history file.  The payment history file only contains information about payments, not origination.  Because LC allows borrowers to set the payment day, and then censors the payment day from the payment history file, there is no way to reconstruct the issue date.  All of which is to say that while we think of the vintage quarters (like "15Q4") as being the quarter of loan origination, actually there can be up to 1 month of slop.  This may only matter to data nerds who expect consistency between data from multiple files provided by the same company, but don't find it.  For example, if you add up the number of loans in a given quarter from the loan history files, they don't match the number of loans in a quarter from the payment history file, because of this slop.  Personally, I prefer consistency.  Its something you can test for to help ensure that your software isn't fouling up.  Of course when the guy upstream from you is completely undisciplined and issues massive data files that are inconsistent by design, then this doesn't work. :-\
« Last Edit: November 15, 2016, 06:36:38 PM by Fred93 »

RT45

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Re: LC prepayments rising
« Reply #1 on: November 15, 2016, 04:00:16 PM »
Two other things I've seen:

1) Person applies for a loan, they realize they can optimize their rate by obtaining a loan with a different purpose, lower amount etc. and applies for a more optimized loan.

2) Spouse 1 applies for a loan, realizes there are more efficient ways to borrow be it credit score, or the reasons listed above and applies for a loan under Spouse 2.

LendingClub is definitely cannibalizing their own business by trying to refinance borrowers very early on causing many widespread pre-payments, but that is a separate issue and likely wouldn't be related to a prepayment on the 1st payment.

Rob L

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Re: LC prepayments rising
« Reply #2 on: November 15, 2016, 04:02:58 PM »
Yeah, I posted this about a month ago and it seemed not to generate any interest. Now I see you were interested!
I was only addressing MOB 0 (your blue line). You covered the first 4 (MOB 0 through MOB 3).

As for the reason for the change your theories may be correct or maybe not.

<edit>
Doesn't the borrower have to give LC a significant amount of money up front in origination fees (withheld from $ placed into their account)?
How can they just give that money away and come out ahead with another lender?
That implies the second loan they get is enough to pay off entire principal, not just the amount they received from LC.
Then the APR from the second lender must be low enough to pay all that and the borrower wind up with a lower monthly payment.
Nah; I wouldn't be surprised there's some scam here and it's growing. Just not devious enough to figure it out yet.
<end edit>

REGARDLESS THIS IS A MAJOR BEHAVIORAL CHANGE!!

If it isn't unusual that makes it all the stranger to me.
Can you put an approximate percentage on it without taking too much effort? TIA

LC publishes prepayment data on their web site by vintage, by month of prepayment.

Yes they sure do. Thanks for the tip.
For all vintages from 08Q1 through 14Q3 (over 6 years!) loans fully paid with months on books (MOB=0) was 0%, nada, zip, cypher, ....
I don't mean there were zero occurrences, just 0% of originations per LC's numbers.
An then:

36 month term:
14Q4      15Q1      15Q2      15Q3     15Q4      16Q1     16Q2
0.29%    0.47%    0.64%    0.70%    0.70%    0.97%   1.51%

60 month term:
14Q4      15Q1      15Q2      15Q3     15Q4      16Q1     16Q2
0.25%    0.48%    0.61%    0.81%    0.75%    0.93%   1.38%

Now roughly 3 loans in every 200 are fully paid before the first payment comes due. Makes no sense to me.
Somebody want to try and explain this (or show me where I messed up the data)?

It isn't that unusual (maybe the 2 weeks is, most wait at least 4).
At least LendingClub changed the rules a while back so you don't actually lose money on these.

Yep. Thank goodness for that!
« Last Edit: November 15, 2016, 04:41:07 PM by Rob L »

Fred93

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Re: LC prepayments rising
« Reply #3 on: November 15, 2016, 04:22:52 PM »
Yeah, I posted this about a month ago and it seemed not to generate any interest. Now I see you were interested!

If you keep beating us over the head with it, eventually it gets thru.

Rob L

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Re: LC prepayments rising
« Reply #4 on: November 15, 2016, 04:35:44 PM »
LOL  ;D (and you did tell me where to look for the data I posted).

PS: I added some stuff to the initial reply.
« Last Edit: November 15, 2016, 04:39:46 PM by Rob L »

yojoakak

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Re: LC prepayments rising
« Reply #5 on: November 15, 2016, 05:02:48 PM »
Doesn't the borrower have to give LC a significant amount of money up front in origination fees (withheld from $ placed into their account)?
How can they just give that money away and come out ahead with another lender?
That implies the second loan they get is enough to pay off entire principal, not just the amount they received from LC.
Then the APR from the second lender must be low enough to pay all that and the borrower wind up with a lower monthly payment.
Nah; I wouldn't be surprised there's some scam here and it's growing. Just not devious enough to figure it out yet.

Origniation fees  are 1% to 5% on A loans, and 5% to 6% on B-G loans. The rate on a new loan would have to be pretty low to make it worthwhile.

https://www.lendingclub.com/public/borrower-rates-and-fees.action

Fred93

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Re: LC prepayments rising
« Reply #6 on: November 15, 2016, 06:34:00 PM »
Doesn't the borrower have to give LC a significant amount of money up front in origination fees (withheld from $ placed into their account)?  How can they just give that money away and come out ahead with another lender?

It is a mystery.  My best guess is that many borrowers don't do the math right. 

Just comparing interest rate or APR won't do it.  If you compare monthly payment, you can get the right answer, but only if you know to oversize the 2nd loan so you can pay back the full amount borrowed from the 1st guy, not just the amount he deposited in your bank account (which has the origination fee subtracted from it).

Suppose you need $10,000 for the new boat, summercamp, or to fix the ex-wife's car.

Because there's a 5% origination fee, you have to borrow $10,527.  At 15%, with 36 payments, you'll pay $364.92/month.

If you get a replacement loan within a few days (so we don't count interest on the 1st loan), you'll need to borrow $11,081 to pay back the 1st lender including the origination fee, ie the full $10,527 and to cover the origination fee of the 2nd lender, about $554 to net you the $10,000 you need.

To get the payment on that 2nd loan down below the payment on the 1st loan, interest rate on the 2nd loan would need to be below 11.40%  From 15.0% to 11.4% is a big drop, and that's just to get to parity!  The second loan has to be even lower to motivate the borrower.  Is it possible that differences between rates offered by different online lenders vary this much?  Kinda shocking, but I'm thinkin' maybe they do!

Another problem with the logical borrower replacement loan theory is that if this theory is right, I would expect to see some bump up in month 1 as well, and maybe month 2, but we don't see that.  The effect is all in month 0. 

Another possibility is that there are some magic words which will make LC refund the origination fee on a very quickly repaid loan.  Sorta like an annulment.  Don't know what this might be, but there are all manner of curious consumer protection laws.

Another possibility is that these are not repaid loans at all, but some new quirk in the data.  There are lots of quirks in LC's data, so a new quirk would not be lonely.  Perhaps there are some circumstances where LC changes its mind and jerks back the money real quick?  Just to be clear, I've never heard of such a thing, but they don't tell us every time they change policy.

Edited to add: I just now sent a query to LC asking them about this possibility explicitly.


Quote
REGARDLESS THIS IS A MAJOR BEHAVIORAL CHANGE!!

Yea.  The thing that gets me is the big quarter/quarter change.  Will it jump again in Q3?

Darn good thing we beat them up awhile back and got the policy where they waive the service fees on quickly repaid loans.
« Last Edit: November 15, 2016, 06:54:46 PM by Fred93 »

Rob L

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Re: LC prepayments rising
« Reply #7 on: November 15, 2016, 07:07:36 PM »
Another possibility is that there are some magic words which will make LC refund the origination fee on a very quickly repaid loan.  Sorta like an annulment.  Don't know what this might be, but there are all manner of curious consumer protection laws.

One thing that is very common is for the consumer to have the option to reject the whole deal within a "cooling off period". We've all been there.
For purchases made within the rules of the FTC that is 3 days. Who knows what the CFPB cooling off period for mpl loans is? Is it possible that "poachers" could discover LC loans via credit bureau data (external or external), contact borrowers offering lower monthly payments and lower APR, and convince 1-2% of them to force LC (us) to unwind the loan no fee no charges? How would LC record such a thing if not a loan that was paid off in MOB 0?

Fred93

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Re: LC prepayments rising
« Reply #8 on: November 15, 2016, 08:51:59 PM »
One thing that is very common is for the consumer to have the option to reject the whole deal within a "cooling off period". We've all been there.  For purchases made within the rules of the FTC that is 3 days. Who knows what the CFPB cooling off period for mpl loans is?

I can't find any such federal thing for consumer loans.  Several states have some rules for payday loans, but I don't think these loans qualify, tho I'm not sure, and I'm not gonna go digest all the state rules!

Quote
s it possible that "poachers" could discover LC loans via credit bureau data (external or external), contact borrowers offering lower monthly payments and lower APR, and convince 1-2% of them to force LC (us) to unwind the loan no fee no charges? How would LC record such a thing if not a loan that was paid off in MOB 0?

I believe poaching is possible, as the credit bureaus are in the business of selling data any way they can.  However, I'm guessing that a poacher would have to approach a large number of borrowers to win 1 borrower, so there would be widespread activity, and we would have heard about it from borrowers.  Also, this poacher would have to offer a much lower interest rate... See earlier numbers.

Also, how would another lender "force" LC to unwind the loan giving back the origination fee?  That's where LC makes most of their bread.  There would have to be some legal hook. 

I'm not sayin' its not happening.  These obstacles make me skeptical.

Finally, wouldn't some of the poachers end up affecting month 1? 

rawraw

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Re: LC prepayments rising
« Reply #9 on: November 16, 2016, 01:55:13 AM »
Isn't the simplest explanation that LC is being more aggressive in cannibalizing loans to restore volume?

Fred93

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Re: LC prepayments rising
« Reply #10 on: November 16, 2016, 03:21:55 AM »
Isn't the simplest explanation that LC is being more aggressive in cannibalizing loans to restore volume?

In Month 0?  Really?  Unlikely that FICO would have improved in just a few days.  Do you think they would spontaneously drop interest rate by enough to make this work without a FICO bump?  I'm not saying its impossible, simply that this explanation has difficulties to overcome just like all the rest.

How would they do that?  With email like...
Quote
Dear Mr Borrower,
  Thank you for borrowing from us.  We've decided that you're such a swell fellow that we would like to lend to you at 11.2% instead of the 15% we lent to you a few days ago.  This would reduce your monthly payment from $365 to $359.  Unfortunately, regulations prevent us from changing the interest rate on last week's loan.  However, if you just click on this link, we would be pleased to offer you a new loan which you can use to pay off the first loan, and benefit from reduced payments.  Because we like you so much, we'll send you this nice toaster when the new loan issues.
Thanks so much,
Revolving Door Club

If they had been sending email like that for the last year, wouldn't some borrower have posted a copy here by now?

Some folks have offered the suggestion that people borrow from company A, then pay down credit cards to get the FICO bump that results, then take out a 2nd loan from a different lender at a lower rate.  That's believable, because the FICO bump is real.  If you've looked at those FICO trend charts for lots of LC loans, you see them during the 3-4 months or so after the beginning of the loan.  Inevitably, FICO goes down again after a few months as I suppose the borrower runs up his credit cards again.  This scenario can't explain month 0 prepays tho, 'cause its just too fast.

There was a discussion about this organic cannibalization possibility on here somewhere awhile back.  We talked about the possibility that one could use LC data to find pairs of loans from LC to the same person.  I seem to remember we even discussed possible pairs of loans.  Hmm.  Guess I need to go back and think more about this!  Thanks for reminding me.


rawraw

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Re: LC prepayments rising
« Reply #11 on: November 16, 2016, 03:28:15 AM »
Whenever Core discovered that LC was sending mailings to existing customers, it wasn't from this site but some review site.

LC doesn't disclose (to my knowledge) their underwriting like they used to. But they could be changing the rate based on something else besides FICO.  Competition just doesn't strike me as a good explanation for month 0, but I could be off. Just speculation on my end

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Zach

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Re: LC prepayments rising
« Reply #12 on: November 16, 2016, 07:31:43 AM »
While the rate would have to be somewhat lower, several balance sheet lenders (banks and others), like Discover, offer competitive loan products that don't charge an origination fee.

That makes the switching cost less if there is a slight rate improvement.

anabio

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Re: LC prepayments rising
« Reply #13 on: November 16, 2016, 07:56:46 AM »
I'm not sure if it could explain why there is a recent spike in prepayments but one reason why a loan is prepaid real early might be that the borrower became "super conscious" of the monthly payment.

What does the auto salesman talk about concerning the cost of buying a car? The monthly payment of course. "What if I can get that monthly payment down to ???". People don't seem to care about the loan amount as much as the monthly payment.

What if borrowers realized they could lower their  monthly  payment dramatically by going for a 5 year loan instead of a 3 year loan?

Someone showed a chart of 3 year loan prepayments...what does the chart of 5 year prepayments look like?

Of course...this still would not explain month 0 prepayments. I doubt the borrower would be able to get that 5 or more year loan that soon after closing on their LC loan.
As Will Rogers stated: : I'm not as concerned about the return on my money as I am the return of my money

Fred93

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Re: LC prepayments rising
« Reply #14 on: November 16, 2016, 08:25:09 AM »
While the rate would have to be somewhat lower, several balance sheet lenders (banks and others), like Discover, offer competitive loan products that don't charge an origination fee.

Excellent point.  Goldman's Marcus.com too.

Quote
That makes the switching cost less if there is a slight rate improvement.

Yep, and this is a revolting development.  A borrower can get a loan from you to refinance his boat or credit card while sitting on the couch in his PJs, but he can also get a loan from one of these other guys to refinance the loan he got from you while sitting on same couch.

Origination fees were some defense, except that I envision competitive pressure forcing LC & Prosper to drop origination fees at some point.  They make most of their money off origination fees, so they would have to substantially raise servicing fees to compensate.  Unfortunately, with no origination fee, you may get more borrower customers, but I think they are much more slippery.

Live by the speed of the internet -- die by the speed of the internet.

In the cellular telephone biz the operators report a statistic they call "churn" and churn is widely tracked by stock analysts.  Its the fraction of customers who leave every month.  In a no-origination-fee world, borrowers would need to be sticky to produce revenue, so stock investors would all be following churn.