The identiy fraud repayment promise

[Fred93]

Lending Club promises to buy back loans (notes) "where the loan was obtained as a result of identity theft or fraud".

From the LC investor agreement...
https://www.lendingclub.com/info/lender-agreement.action

4. Limited Repurchase Obligation for Identity Fraud. If the Member Loan designated for the proceeds of your purchase of a Note was obtained as a result of identity theft or fraud on the part of the purported Borrower Member, we will (a) provide notification either directly or indirectly to you as soon as reasonably practicable upon our becoming aware of such a situation; and (b) repurchase your Note by crediting your account for the outstanding principal balance of your Note. For the avoidance of doubt, (i) if you purchased the Note indirectly through a third-party platform or entity, we will work with such third party to credit your investment account through that entity or platform for the outstanding principal balance of your Note, and (ii) if you purchased the Note through FOLIOfn Investments, Inc., we will credit the Lending Club account that you established in order to purchase Notes through FOLIOfn Investments, Inc. We may, in our reasonable discretion, require proof of the identity theft, such as a copy of the police report filed by the person whose identity was wrongfully used to obtain the fraudulently-induced Member Loan, before we credit your applicable account and repurchase your Note. You agree that you will have no rights with respect to any such Notes except the crediting of the purchase price to your applicable account

Here's the thing that bothers me.  Since 2009 I have bought 8399 notes from Lending Club.  (I bought some before 2009 too, but I don't know how many, because they aren't included in my notes file any more.)  Given that I have bought a very large number of notes, how come I don't recall LC ever notifying me of an identity theft note?  Not even once!

How can this be?  I figure LC is pretty good at weeding out identity theft, but there are people who work at it all day long every day.  There was one talk at Lendit where the speaker talked about massive amazon cloud driven identity theft attacks on lenders.  Wow.  So even if LC is very very good at weeding out ID theft, one would imagine that a few still get thru.  If so, then some fraction of notes we buy from LC must be ID theft notes, and ID theft notes will surely charge off, which concerns us, right?

If even 0.1% of LC notes are ID theft, then out of the 8399 notes I have purchased, there would be about 8 ID Theft notes, right?

Why have I never seen one?

Perhaps LC has been notifying me, and I've been ignoring the notifications somehow.  So I'll ask the rest of you...

Have you ever been notified by LC that a note you have purchased is an ID theft note? 

Ever had such a note repurchased?

If none of us have ever been notified or reimbursed, then there is something wrong, because I refuse to believe that 1.3 Million loans have been issued without a single case of ID theft.

[BritishJim]

I currently have over 70,000 active notes and easily have double that amount purchased since Lending Club opened their doors. I've never looked to see if I was ever reimbursed for an identity thef loan but I think I keep a pretty good eye on my account and would have noticed that. Excellent question and one as a group of investors would be worth getting an answer to.

[rawraw]

The one time I saw it happen, there was no notification. Just a notation in the collection log of a previously defaulted note

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[Fred93]

The one time I saw it happen, there was no notification. Just a notation in the collection log of a previously defaulted note

Then did you actually receive the money back?

What did the note in the collection log say exactly?

[rawraw]

Yes I received the principal. I don't remember what the language was. Now that your asking, I'm questioning if I imagined it! Lol

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[Fred93]

I'm wondering how these loans show up on the web site, on my statements, in the notes file, etc.

I'm thinkin' maybe they DON'T show up most of these places.  Maybe they are made invisible, like non-persons.  (Ie are dropped from my notes file.)

There would have to be a transaction, ie cash moving to my account, but the way the LC web site works these days, transactions are incredibly difficult to look for.  They are hidden in daily sums, and the pop up windows which expand the daily sums don't let you do anything useful. 

Seems like a transaction would have to appear on my statement, but unless I know the words they use to describe such a transaction on a statement, I won't know what to search for. 

[jheizer]

I tried skimming my statements in the recovery type section and didn't see anything.  Be nice if it was a loan status.

[AnilG]

I also remember in the past we discussed such "identity fraud" loans on the forum. IIRC, Lending Club made investors whole when loans were discovered to be "fraud". Also at one time few years ago there was a big news (may be just forum discussion or disclosure by Lending Club) with few fraudulent Loan IDs being disclosed. Sorry, don't remember more specific details.

[Fred93]

...at one time few years ago there was a big news (may be just forum discussion or disclosure by Lending Club) with few fraudulent Loan IDs being disclosed. Sorry, don't remember more specific details.

I also have a vague memory of something like that.

Seems like it should be happening EVERY DAY tho!

[Fred93]

I got a response from LC.  I take this as an initial response, not necessarily the whole story...

They say that there is presently no notification.  They say they're working on a uniform process to communicate these events.  They say these loans show up as "full payment" on the loan status page.

These answers raise many more questions, for which I have no answers.

I have asked them to tell me all the loans for which this has occurred.  This may seem like a bold request, but I pointed out that notification was and is an explicit formal requirement of the lender agreement.  In other words, they were supposed to tell us, and they didn't tell us, so the very least they can do now is to tell us now, after the fact.  Doesn't make up for their omission, but it would at least show good faith.

[Fred93]

2nd response from LC, clarifying ... They say such loans will definitely show up as prepayments.  The loans are not deleted. 

[Fred93]

3rd response from LC, clarifying...  They say they are preparing a list showing which of MY loans (not everybody's loans) were repurchased due to identity theft.

I intend to share info when it arrives.

[BritishJim]

How did you contact Lending Club? I wouldn't mind getting a list for my loans.

[nonattender]

Yes, who doesn't want to see these notes annotated to reflect their true state(s)?

LC attacking this on a case-by-case or user-by-user basis - especially when they have a clear, legal obligation to notify when such is the case - strikes me as someone thinking small and trying to save workload, when, in fact, they ought to just update their database to properly reflect all loans which have been bought back due to the ID theft guarantee.  This may also have some positive implication vis a vis the prepayment rates (which all investors monitor, closely - or should) and would likely reduce that number (and thereby some of the concerns which arise around the prepayment rate, if the ID-thefy reimbursements show up merely as "fully paid", in the data, shortly after origination) - not mentioning some other benefits which may accrue, regarding backtesting for investors and credibility for the platform.

There's no good reason not to do it for the entire dataset.  If they're going to do it, they may as well do it right.

Good catch, Fred.  I had the same thoughts when I watched Scott's keynote (which otherwise I liked) --- my mind instantly went to the opposite of what he said re: "we have a strong incentive to catch ID theft since we're on the hook" (paraphrased), to which my mind immediately translated "no, you have a perverse/reverse incentive not to monitor for ID theft, since otherwise you're on the hook".

Transparency solves for most of that.  Let's see it.  Thanks.

[Rob L]

Good catch, Fred.  I had the same thoughts when I watched Scott's keynote (which otherwise I liked) --- my mind instantly went to the opposite of what he said re: "we have a strong incentive to catch ID theft since we're on the hook" (paraphrased), to which my mind immediately translated "no, you have a perverse/reverse incentive not to monitor for ID theft, since otherwise you're on the hook".

Transparency solves for most of that.  Let's see it.  Thanks.

I had the identical thought. LC has negative incentive to identify identity theft. By not segregating out the numbers it's impossible for us to tell if they are detecting an overall number of cases consistent with  industry averages.