Author Topic: Lending Club Problems  (Read 9671 times)

tylerherman

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Lending Club Problems
« on: April 23, 2013, 08:21:16 PM »
It seems like I've had notes sitting in In Funding for a month or more. And 3-4 of them end up not getting approved. So I have to find more Notes, which end up sitting In Funding. Is Lending Club getting incredibly overloaded and can't keep up or is there some other problem? I've also noticed the amount of the good notes I'm looking for are become pretty scarse. Maybe too many lenders not enough borrowers?

Also, since this money is just sitting in my account not earning anything, do they account for that in your Net Annualized Return? If every note has to sit for a month or more before getting approved I'd think that would effect your return.

http://www.forbes.com/sites/marcprosser/2013/02/23/is-lending-club-going-through-growing-pains/

The only real article I could find on the subject since everyone and their mom is writing "blog posts" about Lending Club since they have an affiliate program. You can't find any real information on the subject.

Cycler

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Re: Lending Club Problems
« Reply #1 on: April 23, 2013, 11:09:34 PM »
I've noticed the same issue over at Prosper this past month. I'm finding it extremely hard to invest in my typical searches due to a lack of any results. That and the past 3 I've invested in haven't been approved.

Seems like an oversupply of lenders as of late with all the press.

tylerherman

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Re: Lending Club Problems
« Reply #2 on: April 23, 2013, 11:11:29 PM »
That sucks to hear.

I just opened a Prosper account but my money hasn't been deposited yet. Was hoping things might be better over there and generally wanted to compare the two.

Alex in Virginia

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Re: Lending Club Problems
« Reply #3 on: April 24, 2013, 05:12:36 AM »
I'm going to guess this is a "problem" only relative to what your loan search criteria are.  I've got 800 notes at Lending Club (800 x $25 = $20,000) and I haven't experienced the in-funding situation as a problem.  In my experience, it takes only a couple of weeks max -- and, remember that 2 weeks is the time window Lending Club allows for full funding of a new note.

Rather than be super picky on an individual note basis, I have opted for the "law of averages" approach which, according to Lending Club statistics, makes it very, very unlikely that an investor will lose money if that investor is holding 800 notes.  I still do have minimum criteria, but maybe not so stringent as you.

Anyhoo, that's my 2 cents.

Alex in Virginia

firefergy

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Re: Lending Club Problems
« Reply #4 on: April 24, 2013, 08:44:12 AM »
I have not had any problems with notes sitting in the funding stage.  I have 20k invested and another 10k I am putting in still.  While it takes a while to get your money in I think it will be worth it in the end.  With my criteria it is taking about 30 days to invest 10k at $25 per note.  My main filters are C, D,E,F,G four years of employment and owns a home.  If I added B notes and lowered my employment requirement I could invest much faster. 

yolfer

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Re: Lending Club Problems
« Reply #5 on: April 24, 2013, 02:59:57 PM »
I also haven't had any problem with LC, and I have pretty strict criteria for funding. Sorry you're having this trouble :(

Perhaps this post on their blog will help:

http://blog.lendingclub.com/2012/08/06/help-put-your-money-to-work-faster-with-the-%E2%80%9Capproved%E2%80%9D-reviewstatus-filter/

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By using our “Approved” Review Status filter you may be able to put your money to work faster by selecting only loans that have already been approved by our credit team.  These Notes may fund more quickly and generally are less likely to be removed from the Lending Club platform.

It reduces the number of loans to choose from, but improves the odds that a loan will get funded.

tylerherman

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Re: Lending Club Problems
« Reply #6 on: April 24, 2013, 05:33:31 PM »
I also haven't had any problem with LC, and I have pretty strict criteria for funding. Sorry you're having this trouble :(

Perhaps this post on their blog will help:

http://blog.lendingclub.com/2012/08/06/help-put-your-money-to-work-faster-with-the-%E2%80%9Capproved%E2%80%9D-reviewstatus-filter/

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By using our “Approved” Review Status filter you may be able to put your money to work faster by selecting only loans that have already been approved by our credit team.  These Notes may fund more quickly and generally are less likely to be removed from the Lending Club platform.

It reduces the number of loans to choose from, but improves the odds that a loan will get funded.

Maybe I'm just having some bad luck. But the Approved Review Status filter does look useful. I'll have to remember to keep that checked. Thanks.

Joet

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Re: Lending Club Problems
« Reply #7 on: April 28, 2013, 08:14:44 PM »
what kind of returns [inclusive of defaults], less fees are you guys getting?

I was always under the impression that P2P/microlending was a collection of unsecured loans that the banks wont touch so the default rates can be 5% + [credit cards have a historic 3% or so avg, I presume these are as bad or worse]

like say LC/prosper takes a 1% fee, you get a 6% note or something, and have a 5% default, leaving you about even, with a pretty substantial risk profile. Perhaps you string together a couple lucky-years in a recovering economy and it looks good, then when the economy turns a bit you get stuck with a stash of bad loans and you've got nobody to insure your losses [unlike the banks].
Am I wrong about this? Sounds like un-compensated risk to me. Junk Bonds in an index look safer.

tylerherman

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Re: Lending Club Problems
« Reply #8 on: April 28, 2013, 09:47:22 PM »
what kind of returns [inclusive of defaults], less fees are you guys getting?

I was always under the impression that P2P/microlending was a collection of unsecured loans that the banks wont touch so the default rates can be 5% + [credit cards have a historic 3% or so avg, I presume these are as bad or worse]

like say LC/prosper takes a 1% fee, you get a 6% note or something, and have a 5% default, leaving you about even, with a pretty substantial risk profile. Perhaps you string together a couple lucky-years in a recovering economy and it looks good, then when the economy turns a bit you get stuck with a stash of bad loans and you've got nobody to insure your losses [unlike the banks].
Am I wrong about this? Sounds like un-compensated risk to me. Junk Bonds in an index look safer.

No not really at all. Junk bonds don't pay even remotely close to the same returns.

Most of the loans are debt consolidation. Credit card interest rates rape people so most borrowers are glad to get a lower interest rate with Prosper or Lending Club and I'm glad to get an awesome return on my money.

6%? I'm invested in high risk Notes paying me 18%-24%. So far my default rate is non-existent but yah, if the economy takes a shit I'm sure the default rate will skyrocket. We'll see what happens.

Bonds are barely beating inflation at this point so I'd say now would be a good time to check out peer-to-peer.

---

Regarding setting the Review Filter to Approved, there are 0 notes that show up so it's pretty much useless. Just had another couple Notes not get approved... another month sitting In Funding...

Nords

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Re: Lending Club Problems
« Reply #9 on: April 28, 2013, 10:59:40 PM »
what kind of returns [inclusive of defaults], less fees are you guys getting?
I was always under the impression that P2P/microlending was a collection of unsecured loans that the banks wont touch so the default rates can be 5% + [credit cards have a historic 3% or so avg, I presume these are as bad or worse]
like say LC/prosper takes a 1% fee, you get a 6% note or something, and have a 5% default, leaving you about even, with a pretty substantial risk profile. Perhaps you string together a couple lucky-years in a recovering economy and it looks good, then when the economy turns a bit you get stuck with a stash of bad loans and you've got nobody to insure your losses [unlike the banks].
Am I wrong about this? Sounds like un-compensated risk to me. Junk Bonds in an index look safer.
Here's the Cliff Notes version of the deal:
- Unsecured consumer loans for terms of three years (although in some cases it could be five years).
- Default rates ranging from 2% to about 4%, but that depends on the quality of the borrower.  Defaults rise pretty closely with interest rates.
- Defaulted borrowers get hammered on their credit reports, just like walking away from a credit card or a mortgage.  Rather than default, it's in their best interest to file for bankruptcy (because they're unsecured loans).
- ~10% of borrower's applications are approved.
- ID theft on applications is so low as to be insignificant (35 cases for LC out of thousands of borrowers).
- LC pulls a credit report and a FICO score.  Everything else is taken at the borrower's word (including stated income).  In situations where LC has asked borrowers for additional verification, 40% of those borrowers have declined to provide it.  I see this as the majority of borrowers being honest.
- LC takes 1% of the payments.  They also take a fee from the borrower, and they take a fee from collections of late payments.  (LC is just the servicer.)  the yields that are reported from their website are assuming that the loan is paid back on time (no late fees) and those numbers are reported after LC's fees have been deducted.
- LC and Prosper have been through the 2008-09 recession.  Their theory is that defaults won't be any worse than those from that era.  If defaults are rising then their interest rate committee will raise rates to compensate.

Before you respond "Yeah, but..." to any of the foregoing, I recommend that you read the prospectus below.

Both major companies have sucked down millions of venture capital and are not profitable.  (Although LC had positive cash flow last quarter.)  When Prosper closed their latest round, the VCs cleaned house on the board and in the exec suite.  Maybe the company will get back on the fast-growth track, or maybe they'll need another 6-12 months to recover.  Both have backup entities that would continue to service the loans if LC or Prosper went bankrupt.  If a BK were to occur it is unclear whether borrowers would continue to pay, and whether the entities could pick up servicing without an "interruption", and what the bankruptcy lawyers would try to do with the setup.  I'd bet that accounts would be frozen for several months, and there would be unsettling "processing delays".  But that's just my opinion.

Loan funding is rising at a monthly increase in double digits.  The "problem" is that LC is understaffed and can't process the applications quickly enough.  Right now, too many lenders are chasing too few loans.  This is going to lead to quality-control problems with borrower applications.

I think the primary attraction of P2P lending is the tremendous amount of data and analysis tools available to the retail investor.  Lenders get a really cool website with plenty of power tools and lots of ways to slice the data.  We hands-on control freaks can even read the personal pleas statements of the borrowers and make moral judgments on their financial lifestyle choices.  The illusion of control is very powerful, and it reminds me a lot of the early days of online brokerages or The Motley Fool.

I'll let Brewer analyze the relative benefits of junk bonds vs LC.  They're two completely different assets and I don't think you're going to get an answer that'll make you happy.  The only realistic answer is to diversify-- if you think one is better than the other then buy more of it. 

For those who like to read 100-page prospectuses, here's one:
https://www.lendingclub.com/fileDownload.action?file=Clean_As_Filed_20121128.pdf&type=docs


Joet

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Re: Lending Club Problems
« Reply #10 on: April 28, 2013, 11:16:13 PM »
I'm just saying I suspect the risk profile is similar. I doubt there's tremendous difference between the A,B,C borrowers but I could be wrong. Certainly you could assemble a LC/prosper portfolio with similar default expectations as High-Yield [cough junk] bonds.
But I defer to you guys. Over on bogleheads they are not particularly bemused with the risk/default potential of microlending.

Maybe they're missing the boat and overestimate the risk. [maybe not]

Nords

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Re: Lending Club Problems
« Reply #11 on: April 28, 2013, 11:40:32 PM »
I'm just saying I suspect the risk profile is similar. I doubt there's tremendous difference between the A,B,C borrowers but I could be wrong. Certainly you could assemble a LC/prosper portfolio with similar default expectations as High-Yield [cough junk] bonds.
But I defer to you guys. Over on bogleheads they are not particularly bemused with the risk/default potential of microlending.
Maybe they're missing the boat and overestimate the risk. [maybe not]
When you say "risk profile" I think it's worth specifying whether you mean volatility, default rates, regulatory agencies, or some other characteristic.  If you're trying to say that you'd rather invest in junk bonds because you could get 7-8% APY without having to try something new & different (and with scant operating history) then I agree.  But if you're trying to compare the risk of junk-bond defaults with the risk of P2P borrower defaults then I think you're on shaky ground.

As for the Bogleheads, maybe they've been a few laps around the track... especially guys like Bernstein, Swedroe, & Ferri.  Every time that people have been chasing yield, many of them have been sorry that they made the effort.  But maybe this time it's really really different.

I can understand the fascination of the concept and the tech, especially for an investor who would rather "earn more money" than "cut spending".  However I'd like to hear from any investor of at least 35 years in age (hypothetically old enough to have an online brokerage account during the late '90s, and not Jonathan Lebed) who has invested over $100K of their own money.

Personally I have one foot in each camp, and I think there needs to be more analysis, but the rapid growth rate is a disturbing trend.

Joet

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Re: Lending Club Problems
« Reply #12 on: April 29, 2013, 12:07:31 AM »
Simplistically I'm just looking at default rates. High Yield bonds look pretty good in bull markets as well. Especially in a low interest rate environment. Obviously consumer and corporate debt [even those of BB and below] are fundamentally different. I'm just comparing 'risk of default' to one's portfolio. Perhaps you're looking a bit at the 'risk of not participating', and underperformance to some level but I'm not.

Alex in Virginia

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Re: Lending Club Problems
« Reply #13 on: April 29, 2013, 05:04:55 AM »
Simplistically I'm just looking at default rates. High Yield bonds look pretty good in bull markets as well. Especially in a low interest rate environment. Obviously consumer and corporate debt [even those of BB and below] are fundamentally different. I'm just comparing 'risk of default' to one's portfolio. Perhaps you're looking a bit at the 'risk of not participating', and underperformance to some level but I'm not.

I've got high-yield corporate bonds yielding an average 9.5% and I've got a Lending Club account with 800 loans (25% A, 40% B, 25% C, <10%D) yielding about the same "net of expected defaults".  One of the differences to me regarding risk between the two investment types is the amount of capital risk per default event.  If one of my "junk" bonds goes belly up, I'm out $10,000.  If one of my LC borrowers defaults completely, I'm out $25.  My bond risk is spread over less than 10 companies, while my LC risk is spread over 800 borrowers.

I don't see why I should worry more about my LC money.

Cheers...

Alex in Virginia

Joet

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Re: Lending Club Problems
« Reply #14 on: April 29, 2013, 09:47:27 AM »
Why aren't you using a high yield index? It will spread the risk of a single issue down to the norm for the category. Afraid of bond principle reduction in a rising interest rate enviro? If so, hold the bond index to the median duration. Sounds like you're saying its ok to run across the freeway at night because you've seen some ugly car accidents.

Alex in Virginia

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Re: Lending Club Problems
« Reply #15 on: April 29, 2013, 09:43:10 PM »
Why aren't you using a high yield index? It will spread the risk of a single issue down to the norm for the category. Afraid of bond principle reduction in a rising interest rate enviro? If so, hold the bond index to the median duration. Sounds like you're saying its ok to run across the freeway at night because you've seen some ugly car accidents.

Joet, I'm not sure whether you are addressing yourself to me or not.  But just let me say this about investing in specific company bonds versus a bond index.  When I invest in company-specific bonds, I have complete control of when/whether I sell the bond. (Not to mention that I obviously have complete control of what bonds are bought with my money.) Normally, if I can't sell at a good profit I'll just hold the bond to maturity and get my capital back.  On the other hand, anyone that invests in a bond index fund places themselves at the mercy of (1) the fund manager, directly and (2) the other fund shareholders, indirectly as to whether/when the bonds get sold.  Shit happens and sales get made at a loss. 

In my view, when you run with a herd you stand a much bigger chance of getting trampled or being pushed over a cliff.  I'd rather pick my own path across that freeway you mentioned.  And my own path includes enough diversification and position-size-control (my seat belt and air bag, so to speak) to give me high confidence in my ability to either sidestep or reasonably survive one of those ugly car accidents you referred to.

Cheers...

Alex in Virginia

Joet

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Re: Lending Club Problems
« Reply #16 on: April 29, 2013, 10:56:18 PM »
being forced to hold a individual bond to maturity is no different than a bond index fund to it's median duration in a rising interest environment. I'm not really sure where 'manager risk' comes in with respect to an index fund tracking an index, perhaps you can educate me on that topic?

You carry a phenomenal risk in individual issue bonds---let alone the high yield category. I hope it works for you, though. It's not really a debatable point that your risk profile here is through the roof with individual issue junk bonds.
Found a statistic that the mean default rate for individual BBB- or lower high yield bonds since 1981 is 4.6%. Ouch. The no-brainer approach to investing in high yield bonds [should you choose to do so] is to simply invest in a high-yield index. Yield net of defaults is likely to be no big deal [unless we have another recession, then you're probably fkuced, but the individual issues probably would have been also]. my humble $0.01, individual junk bonds = playinf with fire!