Author Topic: Victim of Lending Club facilitated fraud, or just REALLY bad timing?  (Read 10843 times)

CALL 911

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I have some money in Lending Club. I invest in new notes, and sometimes buy/sell notes on the secondary market.

I bought a note on the secondary market, for a modest discount, in line with other notes I have purchased before. The loan history was perfect, no late payments, no grace period payments, etc.

The next day (literally, the next day), the loan was posted as having filed Chapter 7 bankruptcy, and is going to be unrecoverable/valueless.

Did the seller or Lending Club know about the Chapter 7?
« Last Edit: May 08, 2016, 08:22:06 PM by CALL 911 »

MustacheAndaHalf

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Re: Victim of Leding Club facilitate fraud, or just REALLY bad timing?
« Reply #1 on: May 08, 2016, 10:49:06 AM »
My (out of date) experience with the FolioFn secondary market matches your experience.  Notes sold there tend to have something wrong with them.  So most likely it was not co-incidence.  You should look at the note's history to see how often payments were made on time and for the full amount.

bobechs

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Re: Victim of Leding Club facilitate fraud, or just REALLY bad timing?
« Reply #2 on: May 08, 2016, 10:55:34 AM »
You should look at the note's history to see how often payments were made on time and for the full amount.

It seems like that is what OP did.  So what then is your point; a note with perfect payment history is a red flag with sparkles?


Another Reader

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You don't see the large banks making a big effort to derail Lending Club and the rest of these lenders.  My guess is their models tell them they are not really threatened and these businesses will eventually fail.  Haven't studied them, but there is no way they maintain the reserves or have the liquidity that Chase and Bank of America do.  When the market changes and defaults go up, small investors will lose their appetites for these loans.  Originations will drop, and someone will get stuck with the junk paper.

forummm

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You don't see the large banks making a big effort to derail Lending Club and the rest of these lenders.  My guess is their models tell them they are not really threatened and these businesses will eventually fail.  Haven't studied them, but there is no way they maintain the reserves or have the liquidity that Chase and Bank of America do.  When the market changes and defaults go up, small investors will lose their appetites for these loans.  Originations will drop, and someone will get stuck with the junk paper.
I also won't touch the stuff. Same with peer real estate lending. No matter how much those firms pay bloggers to write about them, it doesn't make them good investments.

Proud Foot

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As you stated it was literally the day after purchasing the loan that it was posted as chapter 7/uncollectable, I would look into it.  You didn't state the amount you purchased it for but if you can prove that the seller/lending club knew about the chapter 7 before the sale I would think you could pursue getting your money back.  Look into it and talk with customer service to see what you can find out.  I wouldn't pay a lawyer to look into it or to sue unless it was a significant amount.  Chalk it up as a learning lesson. 

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beltim

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Did the seller or Lending Club know about the Chapter 7?

You invest in notes.  Can you figure out a way to know if a given note is going to go into bankruptcy in the next 24-48 hours?

Tjat

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Did the seller or Lending Club know about the Chapter 7?

You invest in notes.  Can you figure out a way to know if a given note is going to go into bankruptcy in the next 24-48 hours?

Agreed. I'm trying to liquidate from LC investments and just put up all my notes for sale without even looking at them.

chasesfish

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Re: Victim of Lending Club facilitated fraud, or just REALLY bad timing?
« Reply #10 on: May 10, 2016, 04:14:01 AM »
You don't see the large banks making a big effort to derail Lending Club and the rest of these lenders.  My guess is their models tell them they are not really threatened and these businesses will eventually fail.  Haven't studied them, but there is no way they maintain the reserves or have the liquidity that Chase and Bank of America do.  When the market changes and defaults go up, small investors will lose their appetites for these loans.  Originations will drop, and someone will get stuck with the junk paper.

I work in bank leadership - Banks generally won't do this type of lending:

1) Charge-off rates are too high - Even if the net yield is 7%, banks have to report charge-offs in aggregate.  Anything over 0.50% right now hurts stock prices

2) These loans are too small to generate enough interest income to make them worth closing/funding through a Bank.  Bank lending involves people touching the loans.

The "altering applications" in the recent claim is interesting.

CALL 911

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Re: Victim of Lending Club facilitated fraud, or just REALLY bad timing?
« Reply #11 on: May 10, 2016, 09:56:11 AM »
The amount of money isn't significant. I just had a "feeling" about the peer to peers that kept me away for awhile. Finally, with apparent stability in the marketplace and MMM's experience, I finally thought I'd try it out.

This probable bad luck, coupled with apparent fraud (see above links for the removal of the founder/CEO), is making me very seriously consider liquidating all of it and going back to something more traditional.

I guess my first question was really "do lenders get some kind of notification that bankruptcy is initiated before being listed in the loan history" and nobody has addressed it, so I'm guessing not.

Thanks everyone. I'm not sure where I'm going to go from here with it.

MidWestLove

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Re: Victim of Lending Club facilitated fraud, or just REALLY bad timing?
« Reply #12 on: May 10, 2016, 10:37:08 AM »
more of "bad timing" categories. as you probably very well know
- all investing involves risk, always.
- there is always an internal understanding of part of that risk is that you may lose some/all of principal of your investment
- portfolio wise, there is 'lessons learned' percentage of acceptance 'misses' which should always be calculated into risk/return variables

your situation is not dissimilar to say me going to a discount broker, buying shares of div paying company and then later hearing that board of directors decided to terminate dividends or that DoJ is shutting down the company. The dividend thing actually happened with me in case of Kodak (EK) , a good reminder of risk involved in individual stock investments and investments in general. in either case, I have no claim again some mythical seller (as my shares may have actually come from  many sellers) or the brokerage house, I went into this knowingly, understanding that I may see both return as well as loss on the investment .

Now, you can always join some class action and get pennies for that or pay attorney separately. unless you are talking about very large amounts I doubt it worth the attorney fees to make some case against Lending Club. in my opinion, you are very unlikely to have anything at all against the "seller"   

MidWestLove

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Re: Victim of Lending Club facilitated fraud, or just REALLY bad timing?
« Reply #13 on: May 10, 2016, 10:40:23 AM »
"
The amount of money isn't significant. I just had a "feeling" about the peer to peers that kept me away for awhile. Finally, with apparent stability in the marketplace and MMM's experience, I finally thought I'd try it out.

This probable bad luck, coupled with apparent fraud (see above links for the removal of the founder/CEO), is making me very seriously consider liquidating all of it and going back to something more traditional. "

I think that is wise, and you are right on. very similar to my feel on this - too new, too risky, very bad information disadvantage , high transaction costs and fool money rushing in. I feel the same for crowd funding 'hard money lending' (which another member of the forum here is a huge fan and individual promoter of) or any other desperate searches for yield where people forget why something pays X (close end funds, Canadian natural resource partnerships, etc.)

beltim

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Re: Victim of Lending Club facilitated fraud, or just REALLY bad timing?
« Reply #14 on: May 10, 2016, 10:53:40 AM »
I guess my first question was really "do lenders get some kind of notification that bankruptcy is initiated before being listed in the loan history" and nobody has addressed it, so I'm guessing not.

You are correct.  My point earlier was that since you invest in notes, you can already check this and see that you don't get any notification as an investor in the note.

AlanStache

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Re: Victim of Lending Club facilitated fraud, or just REALLY bad timing?
« Reply #15 on: May 10, 2016, 12:36:26 PM »
One bad instance does not mean anything.  There may well be fraud going on but I would check the win/loss rate you have observed with that of the published data.  As with many things in life do your math homework - see what the data says.

https://www.lendingclub.com/info/download-data.action

CALL 911

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Re: Victim of Lending Club facilitated fraud, or just REALLY bad timing?
« Reply #16 on: May 10, 2016, 01:11:35 PM »
I agree with everything you said, AlanStache, but math is only useful if 2 conditions are met:

1.) Efficient markets. Lending Club is pretty efficient. There is the primary market, and an active secondary market.
2.) Honesty. Lending Club has failed here. They took an investors money and promised a set of borrowers that met his criteria. The loans they provided did not meet the criteria, despite their representations otherwise. Was this a single instance of a lone person going rogue? Is it systemic? Is it somewhere in between? At this point, there is no way for anyone outside the company to know.

MidWestLove

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Re: Victim of Lending Club facilitated fraud, or just REALLY bad timing?
« Reply #17 on: May 10, 2016, 01:39:26 PM »
I think a bigger question is do people really think this - "The loan history was perfect, no late payments, no grace period payments, etc. " constitutes a prime credit level customer?  I would argue it does not, all it is a very small set of data points, and it does not in any way guarantee or predict future results (as you discovered)

bigger question is that why would prime customer go anywhere near lending club and pay all of the rates and fees (if the world is full of credit cards falling over themselves with various benefits and 0% offers for such customers) ?  I am actually curious on whether anyone who is using it to lend money is severely underestimating risk from get go 

AlanStache

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Re: Victim of Lending Club facilitated fraud, or just REALLY bad timing?
« Reply #18 on: May 10, 2016, 01:52:17 PM »
I agree with everything you said, AlanStache, but math is only useful if 2 conditions are met:

1.) Efficient markets. Lending Club is pretty efficient. There is the primary market, and an active secondary market.
2.) Honesty. Lending Club has failed here. They took an investors money and promised a set of borrowers that met his criteria. The loans they provided did not meet the criteria, despite their representations otherwise. Was this a single instance of a lone person going rogue? Is it systemic? Is it somewhere in between? At this point, there is no way for anyone outside the company to know.

I have no idea what the time line is in a bankruptcy or if a 100% honest company could have prevented you buying that bad loan.  Regarding the underlined, no, they are upfront that all loans can go bad regardless of grade; unless they knew the loan was bad and chose not to tell you to protect the seller for some reason.  I have not looked at the secondary market at all, do you know if LC owned the loan before you or was it a third party? 

AlanStache

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Re: Victim of Lending Club facilitated fraud, or just REALLY bad timing?
« Reply #19 on: May 10, 2016, 02:07:38 PM »
I think a bigger question is do people really think this - "The loan history was perfect, no late payments, no grace period payments, etc. " constitutes a prime credit level customer?  I would argue it does not, all it is a very small set of data points, and it does not in any way guarantee or predict future results (as you discovered)

bigger question is that why would prime customer go anywhere near lending club and pay all of the rates and fees (if the world is full of credit cards falling over themselves with various benefits and 0% offers for such customers) ?  I am actually curious on whether anyone who is using it to lend money is severely underestimating risk from get go

LC offers fixed rate-fixed duration loans where the CC zero interest transfers normally have a 12-18 month fixed rate then jump to XX%, some people would want the security of knowing what it will cost them and dont want to risk having to find a new CC with zero interest transfer in a year.  This might be sub-optimal but having talked to friends this is the thought process.  Also LC loans can also be for things other than debt pay off, ie some people barrow money to redo a kitchen or have a wedding - stupid- maybe - but people do it.

CALL 911

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Re: Victim of Lending Club facilitated fraud, or just REALLY bad timing?
« Reply #20 on: May 10, 2016, 03:40:42 PM »

I have no idea what the time line is in a bankruptcy or if a 100% honest company could have prevented you buying that bad loan.  Regarding the underlined, no, they are upfront that all loans can go bad regardless of grade; unless they knew the loan was bad and chose not to tell you to protect the seller for some reason.  I have not looked at the secondary market at all, do you know if LC owned the loan before you or was it a third party?

The loans on the secondary market are owned by other individuals.

The known fraud I referenced involved a $22 million dollar purchase of a tranche of loans, meeting the buyers specified criteria. Lending Club certified to the buyer that the loans met requirements. They didn't. The ensuing fallout so far has claimed the founder/CEO. He was forced to resign/be fired. It was also discovered that he had some questionable financial relationship with a firm Lending Club was involved with.

My original question was did Lending Club, or the seller of the single note I bought, know that it had a problem before I did. If they did, that is fraud; they represented it as being fine. If they did not know, that is bad luck/timing.

Vagabond76

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Re: Victim of Lending Club facilitated fraud, or just REALLY bad timing?
« Reply #21 on: May 10, 2016, 04:36:36 PM »
These current Lending Club issues goes to show there is no such thing as "peer" to peer lending. Does anyone that borrows money from the website really believe he or she is a "peer" to Jeffries, Morgan Stanley or any of the other banks, pension funds, and insurance companies that invested in these loans?  Does an individual that invests in these loans(particularly on a secondary market) really believe he or she is on par with the competition for the loans?

MidWestLove

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Re: Victim of Lending Club facilitated fraud, or just REALLY bad timing?
« Reply #22 on: May 10, 2016, 05:41:49 PM »
"

LC offers fixed rate-fixed duration loans where the CC zero interest transfers normally have a 12-18 month fixed rate then jump to XX%, some people would want the security of knowing what it will cost them and dont want to risk having to find a new CC with zero interest transfer in a year.  This might be sub-optimal but having talked to friends this is the thought process.  Also LC loans can also be for things other than debt pay off, ie some people barrow money to redo a kitchen or have a wedding - stupid- maybe - but people do it.

"

may be, but these are few and far between  - hardly a validation of LC as place for common low risk , high credit score, low default risk borrower to go, it is best not to delude yourself thinking that this is a common and normal scenario. LC (and similar experiments) are very high risk simply because normal or low risk individual is unlikely to go to places like that as that is financially stupid.

same argument could be used for commodity futures - yes, they could be used to manage forward price risk and were originally created for that purpose but now vast majority of that is pure gambling by people who never , ever, intend to take delivery.

similarly with options, yes - in theory it could be used for risk management, while absolute majority of "traders" are doing nothing but gambling.  every time I hear "trader would take a position" (on say binary options) it is nothing but a fancy speak for placing a bet on black or red.

in short, every financial instrument mentioned could have originally been created for a valid purpose but as time passed, that became vast minority of the use, fool's money rushed in, and it is used primarily as gambling tool.

from my financial services experiences - people who trade derivatives get burned,  there are some exceptions explainable by luck but majority of them burn out their accounts  as playing zero sum game where each entry costs money (commission) will guarantee to enrich your broker and eventually wipe you out. the more leverage you take (Reg T margin or now portfolio margin), the faster you will wipe out..
 
« Last Edit: May 10, 2016, 05:43:37 PM by MidWestLove »