Tuesday, May 29, 2012

Lending Club Loan Application Date - When to Invest?

Loan Issued Date Recap

As discussed in my previous post Month-end Rush to Issue Loans at Lending Club, I noticed patterns of high volume and high default for the loans issued at the end of the month. Peter Renton mentioned in his comment that the rush to issue loans at the end of the month was due to LC Advisors making most investment in last few days of the month. He also mentioned that high loan origination flow recently has shifted to early in the month. As the year over year chart shows below, the volume of issued loans was definitely high at month-end for 2010 and 2011. In 2012, the loan origination volume seems to have shifted to first few days of the month.

It is possible that LC Advisors was funding the remaining portion of loans at month-end that were partially funded by other lenders, and due to close relationship with Lending Club had shortened loan approval process. It is also possible that LC Advisors shifted to investing early in the month in 2012 after noticing higher defaults for loans issued at month-end. But I suspect that the spike in loan issued was not due to activities of LC Advisors solely. In my opinion, such actions will create serious doubts about integrity of Lending Club platform. Lending Club need to be more transparent around such potential conflict of interest scenarios.

The analysis of Loan Issued Date identified quirks in loan underwriting process and generated some useful observations for trading in secondary market. But it is not a useful factor in selection strategy for new notes as lenders don't know when Lending Club will issue the loans.

Loan Application Date

I assumed that the Loan Application Date, as the name implied, is the date when a borrower submits a loan application to Lending Club. This parameter may provide insights into the behavior of borrowers. But soon after I started reviewing Loan Application Date data in historical loans data file, I realized my assumption was wrong. The Loan Application Date is actually the Loan Listing Date on Lending Club platform when lenders can start buying notes in the loan.

It was disappointing as my hypothesis was that using actual loan application date, I will be able to separate the two clusters of borrowers, ones who believe Lending Club is "one more" source of unsecured loan to borrow from versus the others who believe Lending Club to be "alternate" source of unsecured loan with attractive terms. I expect later to have lower default rate than the former.

Unfortunately, all date parameters in historical loans data file could tell more about underwriting process and lenders rather than borrowers. There are no data parameters that could give insight into behavior of borrowers. Hence, here is my request to Lending Club.
"Hey Lending Club!, can you please consider renaming the Loan Application Date to Loan Listing Date and providing the actual date when a borrower submits the loan application to Lending Club? Thanks."

When to Buy Notes During the Week?

As the chart below shows, the volume of new loan listing declines as the week progresses, highest on Monday and Tuesday and lowest on weekend.

The middle of the workweek appears to be a good time to buy notes because a lender gets the chance to invest in the most number of new listings and early enough for good loans to be not fully funded already. This suggestion assumes that note selection strategy doesn't depend on:
  • Percentage of loan amount already funded, or
  • Number of lenders already invested in the loan, or
  • Average amount already invested in loan per lender, or
  • Focuses on only high interest bearing notes.
Personally, after this analysis, I switched my notes selection day to Wednesday night from Tuesday night as I review available notes only once a week.

Loan Listing Day of the Week and Status

As the chart below shows, there is no specific pattern that stands out for Charged Off, Default, Performing Payment Plan, and Late loan status. But with day of the week, from Saturday to Friday, there is a rise in percentage of loans with In Grace Period status.

Why would loans issued later in the workweek go in to Grace Period more often? At this point, I have no idea about reasons for rising loans in grace period. As I further analyze Loan Listing Date and Loan Status, I hope to gain some insight into this peculiar trend.

Key Takeaways

  1. Don't assume that the data represents what the label implicitly means.
  2. The volume of new loans listings declines as workweek progresses.
  3. Middle of the week is good for lenders who focus on selecting loans once a week. The lenders interested in high-interest bearing notes may need to select loans more frequently during the week.

Zack Miller on Seeking Alpha wrote a very good article "Why I'm A Converted Believer In Investing In P2P Loans." I agree with him that P2P lending deserves to be a new asset class in an investor's portfolio.

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