Author Topic: Service fees  (Read 1741 times)

nevermore

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Service fees
« on: March 30, 2017, 08:32:31 PM »
I read in a number of LC's public docs that service fees vary by investment channel. From one of the recent 10-Qs:

"Note investors generally pay us a servicing fee equal to 1% of payment amounts received from the borrower. Whole loan purchasers pay a monthly servicing fee of up to 1.3% per annum of the month-end principal balance of loans serviced. Certificate holders do not pay a servicing fee, but pay a monthly management fee of up to 1.5% per annum of the month-end balance of assets under management."

I've been collecting data from the API, and the actual service fee rates (averages) look like this:


I'm puzzled about how this corresponds to the written policy.  Fees on F look to be significantly lower than 1%, and W fees are even lower.  Can someone explain?




lascott

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Re: Service fees
« Reply #1 on: March 30, 2017, 09:44:36 PM »
Here is an example I just looked at via my payments today via this display: https://www.lendingclub.com/account/getLenderActivity.action#

The one % is calculated accurate on the values displayed on my mouse overs.

0.7992717332 Principle from display
0.0991568382 Interest from display
0.9975854096 Total calculated

0.008984285714 One % via my calc

0.0089842857 One % via LC from display
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

Fred93

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Re: Service fees
« Reply #2 on: March 31, 2017, 05:12:20 PM »
The reason these numbers don't agree is that they are different things.  Much like your local temperature and barometric pressure. 

"Note investors generally pay us a servicing fee equal to 1% of payment amounts received from the borrower.

First we need to clarify vocabulary.  That's "note investors" which INCLUDES both fractional-loan notes and whole-loan notes.  Anyone who buys notes pays this 1% OF AMOUNTS RECEIVED.

Next, we need to talk about what percentages mean.  It is critically important that you take great care to understand what a percentage is OF.  If you compare my salary as a percentage of GDP vs your salary as a percentage of your rent, the two percentages may both represent something about salary, but you can't compare the two numbers.

Note payers pay a percentage of AMOUNTS RECEIVED


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Whole loan purchasers pay a monthly servicing fee of up to 1.3% per annum of the month-end principal balance of loans serviced.

As I mentioned above, these whole loan purchasers are NOT the guys who buy notes representing whole loans, on the marketplace.  These are BANKS who have the regulatory systems and whatnot to allow them to buy the actual loans without the intervening note.  The loans these guys buy are not visible to you on the API at all.

Loan buyers (banks) are charged a fee which is a percentage OF MONTH END BALANCE.

Quote
Certificate holders do not pay a servicing fee, but pay a monthly management fee of up to 1.5% per annum of the month-end balance of assets under management."

Similarly, folks who buy via certificates rather than notes are charged a fee which is a percentage OF MONTH END BALANCE.

So the fees paid by retail investors (ie note investors) are computed an entirely different way than the fees paid by these institutional guys.  Therefore, you can't compare the numbers directly.

Here's how you can compare.  I'll show you a way that avoids the complicated math associated with declining balance loans and payments.  Look at your monthly statement.  Look at total fees paid, and look at your month end balance.  Divide fees by month end balance.  This will give you the monthly fees pad as a fraction of month end balance.  Now multiply by 12, because you pay this every month.  Now you have your annual fees paid as a fraction of end balance. 

You will be shocked.  If you are pretty much fully invested comes out around 0.35% .  We've calculated this exactly like the fees are calculated for instutional guys, and we've come out with a smaller number.

Retail customers pay much lower fees than mid-sized institutional guys!

Now you're probably confused and disbelieving that the number came out so small.  Here's a way to get your head around why it comes out so small.  I don't want to do the math for actual loans and actual interest rates, so lets consider a 36 month loan at 0% interest.  The 0% interest just makes the math real simple.  A different interest rate will make the number come out slightly different, but not much.  So you invest $1 in this loan, and you get paid back OVER THREE YEARS.  The first year you get paid $0.33 ...  Now when LC takes their 1% of those payments, that's 1% of 33 cents, ie 0.33 cents of fees in the first year.  $0.0033 is what percentage of your original $1 investment?  It's 0.33%  The 2nd and 3rd year will come out exactly the same.  About a third of a percent.

Retail investors pay lower rates than most institutions.


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I've been collecting data from the API, and the actual service fee rates (averages) look like this:

To understand this we first have to understand what that number provided by the API is exactly.  It is not well documented.  They used to display this number on the web site, but I think they dropped it awhile back, as most people didn't understand what it was.  It is the impact that the fees have on YTM of this loan.  A loan yields less when some guy is taking a little bit out of every payment. 

Not surprisingly, because these numbers represent something different than the numbers I described above, they aren't equal to those other numbers, just like your local temperature is not equal to your zip code or barometric pressure.

You can reproduce these numbers by making a spreadsheet for a loan, and then removing 1% of each payment, and then computing the IRR (YTM is the IRR of a loan's cash flows).  Taking out the 1% (of payments) fees will make the IRR drop by this amount.  The numbers you get match the numbers from the API. 

These numbers vary depending on the maturity of the loan, and the interest rate.  Nothing else.  It just flows from the math.

This number is worthless.


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I'm puzzled about how this corresponds to the written policy.  Fees on F look to be significantly lower than 1%, and W fees are even lower.  Can someone explain?

I think the big thing is that you took three different numbers, which will never be equal, and didn't realize that they are three different things.

nevermore

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Re: Service fees
« Reply #3 on: April 01, 2017, 05:07:26 AM »
To understand this we first have to understand what that number provided by the API is exactly.  It is not well documented.  They used to display this number on the web site, but I think they dropped it awhile back, as most people didn't understand what it was.  It is the impact that the fees have on YTM of this loan.  A loan yields less when some guy is taking a little bit out of every payment.

Thanks very much for the detailed response. To be clear, I know perfectly well how to interpret the percentages in the written policy---I was confused about the meaning of the "serviceFeeRate" field in the API. The above is what I needed to know.

But now there are some other things I'd like to clarify:

First we need to clarify vocabulary.  That's "note investors" which INCLUDES both fractional-loan notes and whole-loan notes.

As far as I'm aware, there is no such thing as a "whole-loan note". All of LC's filings make a clear distinction between "member payment dependent notes"  and "whole loans" as two separate kinds of investments. According to their 2016 10-K (for example), they issued $1.3 billion in Notes last year. This approximately matches the total amount funded for *fractional loans only* in their downloadable data. (It's a ballpark comparison, since---this is my understanding---some F loans get funded via trust certificates and some loans labeled W get funded via Notes after their W status expires.)

As I mentioned above, these whole loan purchasers are NOT the guys who buy notes representing whole loans, on the marketplace.  These are BANKS who have the regulatory systems and whatnot to allow them to buy the actual loans without the intervening note.  The loans these guys buy are not visible to you on the API at all.

I was able to gain access to the whole loans program by following the instructions in this post. I haven't funded any, but I can certainly see them on the investor platform and in the API. I realize that there are other types of whole loans (e.g., Near Prime) that I cannot see. But, say that I buy one of these whole loans, full funding.  Will I pay the 1.3% fee on balances even though I'm not a bank? (The policy refers to "whole loan purchasers" and not to institutions explicitly, so I would think yes, unless giving full funding to a whole loan is different from purchasing it. Maybe that's what I'm misunderstanding?)

« Last Edit: April 01, 2017, 05:50:07 AM by nevermore »

Fred93

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Re: Service fees
« Reply #4 on: April 01, 2017, 01:09:42 PM »
First we need to clarify vocabulary.  That's "note investors" which INCLUDES both fractional-loan notes and whole-loan notes.

As far as I'm aware, there is no such thing as a "whole-loan note". All of LC's filings make a clear distinction between "member payment dependent notes"  and "whole loans" as two separate kinds of investments.

Yep, there are notes which represent a whole loan.  I own many of them.  When the API says "W", that means they won't break that loan into pieces.  The buyer may be a note buyer (as I am), or a certificate buyer.  (I'm not 100% sure about loan buyers {ie banks}... I don't know if their loans are peeled off earlier, or end up on the API and web site, or what. )


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According to their 2016 10-K (for example), they issued $1.3 billion in Notes last year. This approximately matches the total amount funded for *fractional loans only* in their downloadable data. (It's a ballpark comparison, since---this is my understanding---some F loans get funded via trust certificates and some loans labeled W get funded via Notes after their W status expires.)

There are now many categories, so it is difficult to match the numbers in the 10K to the numbers in the files they expose to us.


But, say that I buy one of these whole loans, full funding.  Will I pay the 1.3% fee on balances even though I'm not a bank? (The policy refers to "whole loan purchasers" and not to institutions explicitly, so I would think yes, unless giving full funding to a whole loan is different from purchasing it. Maybe that's what I'm misunderstanding?)

They aren't very good with language, and may use slightly different words different places, which is confusing, so just be aware of that.  Don't try parsing their words with too sharp a knife.

Unless you have made legal arrangements to be a certificate buyer or a loan buyer, then you are a note buyer, and note buyers buy notes, and pay the "1% of payments" fee.  Look at the lender agreement on the web site.  Unless you've signed different legal docs that governs.  This is true whether the loans are marked "W" or "F".  That W/F designation determines whether they are willing to slice the loan into pieces.  It does not indicate the form of instrument (note, certificate, loan) that they sell to you.

Rob L

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Re: Service fees
« Reply #5 on: April 01, 2017, 02:32:17 PM »
I heard a rumor that LC was in the trial phase of a new category; "Tripartite"; loans split into three equal amounts.
The new "T" class loans would facilitate secutitization for micro banks, and we should shortly begin to see loan classes WTF in the future.

nevermore

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Re: Service fees
« Reply #6 on: April 02, 2017, 04:55:51 PM »
Unless you have made legal arrangements to be a certificate buyer or a loan buyer, then you are a note buyer, and note buyers buy notes, and pay the "1% of payments" fee.  Look at the lender agreement on the web site.  Unless you've signed different legal docs that governs.  This is true whether the loans are marked "W" or "F".  That W/F designation determines whether they are willing to slice the loan into pieces.  It does not indicate the form of instrument (note, certificate, loan) that they sell to you.

Thanks, I understand now.

There are now many categories, so it is difficult to match the numbers in the 10K to the numbers in the files they expose to us.

I discovered that the sales reports list the amount of funds provided via Notes only.  So this is doable.  I verified that $1.326 bn came from Notes in 2016 (they report $1.3 bn), and that ~70% of fractional loan volume was funded via Notes.  The remainder (from the total funded amount in the downloadable data) must be split between whole loan purchases and trust certs
« Last Edit: April 02, 2017, 05:04:21 PM by nevermore »