Finally had my first defaut—

[yojoakak]

How can the borrower just simply walk away with $16k of our money?

Actually, the Borrower walked away with $15,604 of (y)our money.

LendingClub walked away with the other $821 (as an Origination Fee).

[Fred]

Why would Lending Club write this off after only five months and no bankruptcy filing? What happens to the borrower's credit in this scenario?

Imagine for a moment that the borrower does the right thing and starts paying on this note again in a year or so, would the investors receive the payments?

It is a common practice in the credit world to give borrowers up to 120 days to catch up on their loans. 

Per LC 10-K filing to SEC:    A Member Loan is considered defaulted when at least one payment is more than 120 days late and it is charged-off no later than when it reaches 150 days late.

If the borrower starts paying again a year after the loan has been charged off, I don't think LC will even accept the payment.  The damaged has been done: lenders will have considered the note as loss, and borrower will have suffered significant credit score degradation. 

LC, on the other hand, keep their origination, servicing, collection fees.   

[brycemason]

LC will accept payments on charged off loans. In early 2013 I saw a loan from 2007 become "Fully Paid" from "Charged Off."

[GS]

Isn't it common practice to sell defaulted loans in bulk to debt collectors for pennies on the dollar?  I remember reading that some lenders got a small bulk payments for several defaulted notes a few weeks ago.  I suppose that could have been LC dividing up proceeds from a bulk sale rather than defaulters actually paying.

[Zach]

Isn't it common practice to sell defaulted loans in bulk to debt collectors for pennies on the dollar?  I remember reading that some lenders got a small bulk payments for several defaulted notes a few weeks ago.  I suppose that could have been LC dividing up proceeds from a bulk sale rather than defaulters actually paying.

Yes, I do believe you are correct. I recall from the earlier days of Prosper that they commonly did debt sales, but later stopped as they felt it wasn't an effective way to mitigate loss.

[Fred]

LC will accept payments on charged off loans. In early 2013 I saw a loan from 2007 become "Fully Paid" from "Charged Off."

I stand corrected.  Yes, LC do accept payments from Charged Off loans.

This is also noted on the Form 10-K filing, around page 17 here http://www.sec.gov/Archives/edgar/data/1409970/000119312513136975/d450565d10k.htm.

On the right-most column of the bottom table, you see "Gross Amount Recovered on Loans Charged-Off", which was $476,628 -- for the period of LC beginning to 12/31/2012.

[slypete]

Seeing this borrower not only succeed at gaming the system but effectively steal from his/her fellow peers is very upsetting to me. Investors should join together after the charge off and offer the russian mafia 25% of all collections 

[pplinvestor]

I'd assume that collection agency will sue the borrower (if borrower did not file bankruptcy) and then garnish the wage.  But LC collection logs do not say any of those.  That's too bad.

[Fred]

I'd assume that collection agency will sue the borrower (if borrower did not file bankruptcy) and then garnish the wage.  But LC collection logs do not say any of those.  That's too bad.

The Fair Debt Collection Practices Act (FDCPA) (http://en.wikipedia.org/wiki/Fair_Debt_Collection_Practices_Act)  is the main federal law that governs debt collection practice in the US. 

It  limits what a debt collection agency can do, including threatening arrest or legal action  that is either not permitted or not actually contemplated.

If a debt collector chooses to file a lawsuit, it may only be in a place where the consumer lives or signed the contract.

[pplinvestor]

Fred,
Are you saying all those LC borrowers do not sign anything when they get money from us?   That's scaring.  Lend someone $35K without any signed document.  Scaring.   

[Fred]

Fred,
Are you saying all those LC borrowers do not sign anything when they get money from us?

I neither said nor implied that.

[pplinvestor]

Fred,
Are you saying whatever paper Borrowers signed is not sufficient for lawsuit?  I want to know whether LC/collection agency can file lawsuit and garnish wage.   Most likely Borrowers will not show up at the court since they know they owe money.  So lawsuit shall be automatically win.  Wonder why we don't see any lawsuit and wage garnish.

[gamassey]

Fred,
Are you saying whatever paper Borrowers signed is not sufficient for lawsuit?  I want to know whether LC/collection agency can file lawsuit and garnish wage.   Most likely Borrowers will not show up at the court since they know they owe money.  So lawsuit shall be automatically win.  Wonder why we don't see any lawsuit and wage garnish.

Very good point, seems to me that unless a bankruptcy is filed, wage garnishment would be automatic.  The only reason this would not happen is if there is no lawsuit filed to recover the debt.

[Fred]

What I tried to say is that legal action for debt collection is complicated and costly.

1. There is Fair Debt Collection Practices Act and state laws -- any violation of these can be costly to the debt collector or LC
2. Where to file the lawsuit -- borrower lives all over the 50 states
3. It takes time, maybe months, per loan
4. It might cost more than $35K for lawyers alone

I think the conventional ways of doing debt collection (i.e., calling, emailing, tracing) are more effective than legal actions.  The considerable negative impact on credit history is another cost to bear by borrower, making it difficult to borrow money for a car or home, or to receive credit cards. The default status remains on the credit report for many years.

Of course, legal actions are always available  to purse if considerations on regulations, time, and money have been taken into account.