Monday, July 30, 2012

Mrs RT: Filtering the Currently Available Loans

Today's post is once again from Mrs. RT. As Mrs. RT became more interested in Lending Club loan selection process, she requested that I focus on automated loan filtering project for her to use instead of further analyzing historical loans.

Engaging in End-to-end Loan Selection Process

As Mr. RT is excited about gaining a fraction of interest every day through Lending Club, I’m becoming curious to know about the end-to-end loan selection process. Even though we select loans together at our Lending Club night, the prospective loans are pre-filtered by Mr. RT when I get involved in the final decision. It is like I’m taken to the restaurant Mr. RT has chosen and only activity I can do is selecting the food there. I want to see what kind of restaurants are out there and select what I really want to eat, too!

Exploring Lending Club Site

So, with Mr. RT’s account and password information, I explored the Lending Club to find loans for the first time, hoping I can find something that could lead more excitement to both of us. Once I logged in the site, first I found the double-digit net annualized return on the account summary page. Not bad considering the interest rate of 10 year treasury is less than 1.6% now and one year return of DJIA is less than 9%. I was skeptical about peer-to-peer lending when we started first, but I am convinced by the result. Keep up the good job, Mr. RT!

Next I started to browse notes. I found there were over 2,300 loans currently available for purchasing notes. I’m surely glad that Mr. RT pre-selects before Lending Club night. Otherwise, I’d be overwhelmed… But, wait, many filters are already available to select notes. I should be able to do it!

Trying Filters on LC Site

In one of my previous posts, I wrote a high interest rate loan would indicate borrower’s financial irresponsibility and I would avoid such loans as responsible lender. So, I selected interest rate A, B and C.

Now I think about double-digit return Mr. RT has achieved so far. It’s impossible to reach that rate if he selects A grade loans with interest rate of only 7.41%. From investment perspective, I excluded A grade borrowers. Now just over 1,300 notes have been selected.

Next let me exclude borrowers with public records and delinquencies last 2 years as they are considered to carry high risk of default. Even though I didn’t assume many borrowers would fall into these filters as they were categorized under higher level of credit score, to my surprise, more than 200 notes were excluded with these filters.Moreover, I totally want to remove borrowers with delinquencies. So, I chose 60 months or more since last delinquencies. There are still over 800 notes.

I want to make sure I’ll get my investment back! So, I selected borrower’s both debt-to-income ratio as low (max 20%) and revolving balance utilization as low (max 50%). Selected notes got down to almost 190.

Let me think… I’m sure Mr. RT has given valuable recommendations in his posts. Let’s see what he said.

He recommended 36 months over 60 months loans because of higher default rate of 60 months loans. So, I excluded 60 months term from the filter. Here’s another Mr. RT’s tip. He recommended avoid loans of extreme amounts. I set the max loan amount as $25,000 and still 130+ notes were selected.

Hmm, what other filters should I use…? Other filters do not seem reasonable to filter out loans. Employment length maybe, but the economy has not been good to people with even good credit score.

Discovering CSV Download

At that point I noticed a small icon at the bottom of the table, Download All. I clicked that and found all available notes, over 2.300, were imported as csv file. If I want to filter notes further, I have to filter the csv using the same criteria above again. It would have been better if only filtered notes through Browse Notes screen were downloaded at that point.

So, I started over my filtering using csv file. Most field names in the csv file are recognizable, but some are not. What are “percent_bc_gt_75” or “pub_rec_gt_100”?. It would be nice if Lending Club could provide the glossary of the description of each field for geeky lenders. Good thing about csv file is that now I have more flexibility to filter loans. I can filter out extreme low amount as well as per Mr. RT’s advice (less than $2,000), borrowers with any delinquencies in the past, etc.

As I’m interested to know about borrower’s financially responsible behavior, I filter out borrowers who opened more than five accounts in the past 24 months and had more than 2 mortgage accounts. At that point, I selected 70+ notes. There’s a field called “exp_default_rate”. Is it reliable data? I'm not sure, but I hate to lose money. So, I selected the lowest rate (2.3%).

Finally ...

Tah-dah! Finally 11 notes have been selected. It’s a good selection of notes I can recommend to Mr. RT and discuss. Mr. RT, let’s do Lending Club night!

Thursday, July 26, 2012

Guest Post: Attraction to Lending Club

Today's post is once again from Mrs. RT. She is making sure that I continue to maintain the consistency of posting twice a week at least. Due to work spilling after-hours and other commitments, I didn't have a chance to make much progress on my analysis this week.

Attraction to Lending Club
by Mrs. RT


Mr. RT and I have been doing Lending Club night for a few months now. He’s very excited and proudly reports me the earnings time to time… actually almost every night! The gains are very small, so far.

Compared to the earnings that we've been receiving through our traditional investment vehicles, the gains from Lending Club are not comparable; a few digits are off. Still, we rarely check those investment accounts. Even if we did and found out we had gained much more than expected in one quarter, the excitement is not comparable to a fraction of gains through Lending Club about which Mr. RT is excited. I also started to get excited about that small amount of gain as well. Joy is contagious, you know? But, I wonder why?

Boring Investments

As for the traditional investment, we have mutual funds and ETFs and most of them are index based. We used to pick and choose actively managed funds, but we got rid of most of them and now stick to the index. We still do re-allocation time to time.

We also buy individual stocks hoping we may be able to beat the index. But we don’t buy and sell; we buy and hold the stocks with a long-term vision. We rejoice when the stock goes down, so that we can buy more. Our portfolio typically gains and loses more or less according to the market.

We check this portfolio time to time and find returns are 10% gain, 3% loss, etc. But not so much emotion is attached to it. Because these results are beyond our control. Tons of elements impact the market and it goes up and down. Not only the government’s reports and policies, the conditions of housing market and job market, but also every single major incident in the world is considered to be critical ingredients to the direction of the market. Even smartest economists cannot figure out why the market moves this way that way. There’s no crystal ball, as they say.

Unpredictability of Market and Life

What can you control in the traditional market? The market is too big, so, let’s narrow down to an individual company. We think we have analyzed one company in and out, we know some litigation issue is going on, its products are selling, etc. Yet, it’s very difficult to take that much effort to analyze one company and make decision as part-time investor like us. Moreover, we should not put eggs in only one basket. Investment is so uncontrollable and it’s not our wisdom that decides the return most of the time, but God of the market seems to decide the return. It doesn't do us any good to become sad or happy when focusing on something we cannot control.

Come to think of it, life is full of unpredictability and surprises, both small and large scale… I thought you would cook tonight, but you didn't and now I’m hungry! I thought you would be back home by now, where are you? There was restructure of my company and laid off our team, what should I do now? etc., etc., etc. Then, if there’s no change, we complain life is boring. Human beings are complicated things.

Sense of Control

Anyhow, why is Mr. RT so excited about small return through Lending Club? Because he can control. He picks up loans (with help from me, of course) and can get the return as it’s promised. It’s like science experiment we used to do it as a kid. Wow! I can make a fire through a magnifier! Remember those days? Mr. RT is just behaving like a kid as he does all the time.

This excitement may wear off as he gets used to this or he starts to see default loans later as loans age. But for now, as I see him, he’s a happy camper and so am I.

Monday, July 23, 2012

Lending Club Loan Amount: Default of Loans with 8% and higher Interest Rates

This post is continuation of my analysis of loan amount for different interest rate bucket from previous post Lending Club Loan Amount: Defaults for Loans with <8% Interest Rate.

8 - 9.99% Interest Rate

The chart below shows the loan status for different loan amount bins at 8% interest rate bucket (contains loans with interest rate of 8% and higher but below 10%). The left axis and stars show the actual number of loans. The right axis and bars show the percentage of loans. The 36 month loans are separated from 60 month loans. The loans listed before 2009 are excluded from this analysis.

I keep on being amazed that, at lower interest rate, there is no trend between loan amount and default rate. I had expected to see trend of rising defaults with rising loan amount for the same interest rate bucket. The 36 month loans listed in 2009 do show the rising default on percentage basis with loan amount; however the number of loans in this interest rate bucket is so few for results to be meaningful.

As with the 6% interest rate bucket discussed in the last post, what stands out right away in this chart is that there are no 60 month loans with charged off, default, late and in grace period status that were listed in 2011 and after. The default rate for 60 month loans listed in 2010 is comparable or worse than 36 month loans issued during the same time period. This may indicate that 60 month loans take 18 months or more before defaults and late payments start to occur.


10 - 11.99% Interest Rate

The chart below is similar to the one above for loans with interest rate of 10% and higher and below 12%.

Finally, the expectation of rising default with loan amount for the same interest rate bucket have started to materialize. Except for very small loan amount, the default of loans in 10% interest rate bucket appears to be rising with rising loan amount. So, it appears that default of loans with less than 10% interest rate may be driven by factors other than borrower's inability of making regular monthly payments.

Another notable change in pattern found in this interest rate bucket is the appearance of 60 months loans listed in 2011 with loan status of charged off, default, late, and in grace period. The default rate of 60 month loans is comparable or worse than that of 36 month loans listed during the same time frame. It appears that  the 10% interest rate is the magic threshold beyond which the monthly payments start to impact the borrower's ability of making regular monthly payments.


12 - 25.99% Interest Rate

As the patterns for different interest rate buckets for 12% interest rate and higher are very similar, I decided to combine all the buckets for interest rate 12% and higher. The chart below shows the loan status of different loan amount for interest rate buckets with 12% interest rate and higher.


If any reader is interested in a particular interest rate bucket, please comment below and I will post the chart in my future blog posts. The table below also shows (click on the image to zoom) the number loans with different status for different loan amount buckets and interest rate buckets, separately for 36 months and 60 months loans.


Takeaways

  • Similar to previously discussed 4% and 6% interest rate buckets, there is no trend of rising default of loans with loan amount for loans of 8% interest rate bucket. Only beyond 10% interest rate, the larger the loan amount, higher the default of loans.
  • Purchasing new 60 month loans in 8% interest rate bucket and selling them off at par or at premium within 18 months on secondary market may be a potential interest harvesting strategy. Of course, impact of transactions fees need to be considered to assess viability of such strategy.

Do you want a new P2P lending data platform? Support P2PLoanStats crowdfunding campaign.

Thursday, July 19, 2012

Lending Club Loan Amount: Defaults for Loans with < 8% Interest Rate


Charged Off and Defaults

The chart below shows the percentage of loans with status of charged off, default, late, in grace period, and performing payment plan (size of red dot) for loans listed in 2010, the earliest year when 60 month loans were issued. I made the following observations:
  • In general compared to 36 month loans, higher percentage of 60 month loans have status of charged off, default, late, in grace period, and performing payment plan.
  • There is no discernible pattern of loan status with respect to loan amount and interest rate.


As we can see from above chart analyzing loans for loan status with all combinations of loan amount funded and interest rate can become quite unwieldy. Similar to previous post Lending Club Loan Amount and Interest Rate, I'll analyze data by small chunks. The following analysis divides the loan amount funded into $5,000 buckets (8 buckets or bins) and the interest rate into 2% buckets (11 buckets or bins). The analysis is only performed for loans listed in 2010 and after.

4 - 5.99% Interest Rate

The chart below shows the loan status for different loan amount bins in 4% interest rate bucket (contains loans with less than 6% interest rate). The left axis and stars show the actual number of loans. The right axis and bars show the percentage of loans. The 36 month loans are separated from 60 month loans.

What stands out right away in the chart is that, for 36 month loans listed in 2010, there were no charged off and defaults and only one loan in grace period and one loan 31 - 120 days late in payment. Overall, 36 month loans in this bucket appears to have much lower defaults, especially for loan amount less than $20,000.

A definite conclusion can't be made for 36 month loans with amount higher than $20,000 and for 60 month loans due to smaller number of loans. No new 60 month loans have been issued since the beginning of 2011 with interest rate less than 6%.


6 - 7.99% Interest Rate

The chart below is similarly drawn as the one above but for the loans with interest rate of 6% and greater but below 8%. The loans listed before 2010 are excluded from the analysis for clarity, unusual financial events, and changes in Lending Club underwriting process. I made the following observations:
  • For 36 month loans, the charged off and defaults for loan amount less than $5,000 is higher than loans for greater amount. Supposedly, the loans with low interest rates are issued to higher creditworthy borrowers. The default rate for such loans seem to indicate impending unusual change in their financial situation rather than to their ability to payback unsecured loans.
  • The charged off and defaults are declining as the loan amount is rising for 60 month loans. There are no charged off and defaults for 60 month loans listed in 2010 for amount greater than $15,000. This trend seems to give credence to my theory, put forward in previous post Lending Club Loan Length: Best 60 month spread with B4 Grade Loan, that longer length loans for smaller amounts are being issued to meet the lower monthly payment requirement of the borrowers. When I review loan purpose and revolving credit balance in the future, I expect to find much more loans issued in this category for purposes other than debt consolidation or for loan amount less than the revolving credit balance.
  • Another interesting observation in this interest rate group is that while some of the 36 month loans listed in 2011 have status of charged off, default, in grace period, or late in payment, none of the 60 month loans listed in 2011 have such status. All 60 month loans listed in 2011 are either Fully Paid or Current. This is highly unusual and remains to be seen whether 2011 vintage 60 month loans similar to such 2010 vintage loans.


Key Takeaways

  • Borrowing small amounts by high creditworthy borrowers may signal the impending change in financial situation of the borrowers.
  • All 60 month low interest rate loans of 2011 vintage with either Fully Paid or Current status is very unusual. Are 60 month loans with low interest rate at higher loan amount better deal? I can not answer this question until I see at least another year of performance for such loans.

Monday, July 16, 2012

Lending Club Loan Amount and Interest Rate


Average Total Amount Funded

The chart below shows the average loan amount funded as a function of loans length and loan listing date. I made the following observations from this chart:
  • The average loan amount for 36 month loans dropped 11% due to the introduction of 60 month loans in Q2 of 2010.
  • The average loan amount for 60 month loans has almost doubled (95%) while only 26% growth for 36 month loans since the introduction of 60 month loans in Q2 of 2010.
  • Since the introduction of 60 month loans, the average loan amount for 36 month loans has been hovering around $10,000 level. Recently, the average loan amount for 60 month loans is achieving a plateau around $20,000.
I wouldn't be surprised to see Lending Club introduce 84 month loans with target average loan amount around $30,000 in near future. Actually, it would be great  if Lending Club could introduce 84 month convertible loans for business purpose that would convert to equity upon default once SEC defines the crowdfunding rules for the JOBS act.


Interest Rate

The chart below shows the number of loan listed in the first two quarters of 2012 as a function of loan amount funded, interest rate and loan length. The size of the Blue and Orange dots shows the number of loans listed with 36 month and 60 month respectively. I made the following observations from this chart:
  • Most of 36 month loans are concentrated in lower left quadrant, primarily loan amount under $20,000 and interest rate under 18%.
  • Most of 60 month loans are concentrated in upper right quadrant, primarily loan amount over $16,000 and interest rate over 12%.
  • In order to build a high return portfolio with lower and predictable risk primarily with 36 month loans, some 60 month loans of loan amount over $20,000 and interest rate over 18% will need to be added.


Loan Amount Funded and Interest Rate

As we see from above charts and discussions that analyzing loans with all combinations of loan amount funded and interest rate can become unwieldy. The following analysis divides the loan amount funded into $5,000 buckets (8 buckets or bins) and the interest rate into 2% buckets (11 buckets or bins).

The table below shows the number of 36 month and 60 month loans issued with each combination of loan amount and interest rate. For each loan length, the darker color area represents the higher percentage of loans issued with that combination of loan amount and interest rate. I made the following observations from this table:
  • Most 36 month loans are issued for loan amount up to $20,000 ($19,999.99 to be exact) and interest rates between 6% and 16% (15.99% to be exact).
  • Most 60 month loans are issued for loan amount between $5,000 and $25,000 and interest rates between 10% and 22%.

As the loans for amount greater than $25,000 were not issued until 2011, the number of such loans are still small to show up in the higher percentage of loans region in the table above. The table below shows the number of 36 month and 60 month loans issued in the first two quarters of 2012. I made the following observations from this table:
  • There is much more concentration of 60 month loans for amount greater than $25,000 in 2012.
  • Most 36 month loans are listed for loan amount up to $20,000 and interest rate between 6% and 18%.
  • Most 60 month loans are listed for loan amount between $10,000 and $35,000 and interest rate between 12% and 24%.

Key Takeaway

  • As default profile of 36 month loans is better understood at present, a portfolio of primarily 36 month loans can be complemented with 60 month loans for loan amount above $20,000 and interest rate above 18% to increase the average interest rate of portfolio beyond what can be achieved with only 36 month loans.
The big news this week in Peer to Peer Lending world was that Lendstat decided to discontinue providing analytical tools for p2p loan filtering and the reason of its termination of service is unknown other than service provider's fatigue. Even though, I have not used the service personally, I noticed a lot of lenders relied on LendStat to make p2p lending decision and were caught off-guard. Based on Peter's comment on his blog post Lendstats Loan Filtering is Down ... Permanently?, it appears that there will be a few new choices on the horizon to fill the gap.

Thursday, July 12, 2012

Lending Club Loan Amount and Defaults

I have refreshed historical loan data file. All analysis from this date forward is being performed using the latest Lending Club historical loan data file captured on July 1, 2012.

Loan Volume

The chart below shows the percentage of loans issued as a function of loan amount funded and loan length for past three years of loan listings. I made the following observations from this chart and associated data:
  • Lending Club didn't start issuing loans for the amount greater than $25,000 until 2011. I expect default rate to show up much lower for loans with amount greater than $25,000 because such loans haven't aged enough yet.
  • In 2011, 60 month loans for the amount greater than $25,000 were issued almost two-and-a-half times more than those with 36 month term (4.63% for 60 month term versus 1.82% for 36 month term). In 2012, it is no longer true that much more loans are issued for loan amount greater than $25,000 with 60 month term than that with 36 month loans (4.68% for 60 month term versus 4.11% for 36 month term).
  • Lending Club issued 20.8%, 18.08%, and 3.82% of total loans for amount less than $15,000 with 60 month term in 2010, 2011, and 2012 respectively. This downward trend seems to indicate that Lending Club's reliance on partners in originating loans is declining as Lending Club doesn't issue 60 month loans for amount less than $15,975 unless originated through a partner as mentioned in the prospectus [PDF]:
"Notes from $1,000 to $15,975 are only issued with three (3) year terms, unless the loan request comes from a partner that allows borrower members to select the amount and term, which selections will be honored."


Default Rate

The chart below shows the loan status as a function of loan amount funded and loan length since 2007. The bars show actual number of loans with axis on the left. The line shows percentage of total loans with axis on the right. I made the following observations from this chart:
  • It may appear that both 36 month and 60 month loans with loan amount funded greater than $25,000 have very low default. As I mentioned above, Lending Club didn't start issuing such loans until 2011 thus these loans haven't aged enough. As the age of loan has greatest impact on default, I expect these loans will have much higher default with age.
  • It may appear that the default rate profile for both 36 month loans and 60 month loans is similar. We need to be cognizant of fact that none of the 60 month loans have aged to maturity yet as Lending Club introduced them in 2010. Also, the default profile of 36 month loans has loans with full maturity for 2007, 2008 and first two quarters of 2009. The default profile of 36 month loans is more likely to be closer to expected default rate.
  • Loans for very low amounts seem to have higher default rate for both 36 month and 60 month loan terms. Loan amount below $2,000 for 36 month loans and below $5,000 for 60 month loans have exceptionally high default (greater than average plus one standard deviation).
  • Loans for high amount (greater than $24,000) seem to have higher default rate for 36 month loan term. Currently there is no such pattern for 60 month loans. Based on the high percentage of loans with status of In Grace Period, Late, and Performing Payment Plan for higher loan amounts, I expect with aging such 60 month loans will show similar patterns as 36 month loans.


The chart below shows the loan status as a function of loan amount funded for 36 month loans listed in 2009. Why did I select year 2009? Because the loans listed in the first two quarters of 2009 have fully matured and loans from the last two quarters of 2009 are very close to maturity. The defaults for 36 month loans from these quarters provide a very good indication of the default rate we can expect to see in our 36 month loans to full maturity. In this chart, I assumed that the loans that have status of In Grace Period, Late, and Performing Payment Plan are going to be charged off and combined such loans with loan status of Charged Off and Default.
  • Based on average default rate for loans listed in the first two quarters of 2009, we can assume expected default rate to maturity for 36 month loans to be about 16.73% without considering loan credit grades. We need to remember this default rate is number of loans that may default and not the dollar amount lost by lenders. It should be considered as worst case default rate.
  • Even though, the expected default rate to maturity may seem quite high, the loans that go into default at later part of maturity tend to have lower impact on losses to the lenders in dollar terms. When I review the variables associated with loan repayment in historical loan data file, I will be better able to quantify default rate in dollar terms.


Key Takeaways

  • Much more loans of both 36 month and 60 month term are being issued for large loan amounts.
  • Lenders may want to consider avoiding loans for extreme amounts, either very small amounts, i.e. less than $2,000 or very large amounts, i.e. more than $24,000.
  • Default rate to maturity of 16.73% is a reasonable estimate for expected default rate of 36 month loans in the future.
A few P2P lenders and bloggers posted updates on their portfolios, check them out to see real returns from P2P lending platforms:
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Monday, July 09, 2012

Lending Club Q2 2012 Update - Credit Grade, Days to Issue, and Funded Amount

Following is the last of two updates on the second quarter data for Lending Club. The first one covered Loan Volume, Term and Interest Rate. This one covers Credit Grade, Days between Listing and Issued Dates, and Loan Amount.

Credit Grade

The chart below shows the number of loans issued quarterly by credit grade for past three years. The colored bars represent the loan volume with actual value listed just below the end of the bar and axis at the bottom. The colored stars represent the percentage of loans in the quarter of specific credit grade and axis at the top. I made the following observations:
  • The listing of grade A loans declined 14.3% in the second quarter compared to the first quarter of 2012. The listing of grade A loans grew 22.7% and 39.8% for the same quarter of 2011 and 2010 respectively. The listing of grade G loans declined 8.7% for the second quarter compared to the first quarter of 2012. The listings of grade G loans also declined 19.4% for the same quarter of 2011. The drop in number of grade A loans is surprising. It may be the result from a combination of lower demand for low interest rate loans and improved accessibility to low interest rate loans through traditional banks for borrowers with better credit rating. 
  • The listings of grade B, C, D, E, and F loans grew between 17.4% (grade B) and 42.1% (grade C) in the second quarter compared to the first quarter of 2012.
  • The grade mix of loans listed in the second quarter continues to be similar to those of previous quarters. Over the years, more than half of the loans listed on Lending Club have been of high quality (grade A and B).


Days between Listing and Issued Dates

The chart and table below show the percentage of total loans issued in a quarter with days between Listing and Issue of Loan. I made the following observations:
  • During the second quarter of 2012, about 70% of loans with 36 month term (Blue) and about 67% of loans with 60 month term (Orange) were issued within 10 days of listing date.
  • In the second quarter of 2012, 60 month loans are taking about the same time as 36 month loans to be funded and issued after being listed. In prior years, the 60 month loans always took longer to be funded and issued. The closing gap in issuance after listing between 36 month and 60 month loans is puzzling considering, with 60 month loans, the uncertainty of default risk due to limited history, larger loan amount, and longer repayment period when things could go wrong for borrowers of 60 month loans.


Loan Amount

The chart below shows the total loan amount funded by loan length during the past three years. I made the following observations:
  • The total loan amount funded for 36 month loans grew 7.9% in the second quarter compared to the first quarter of 2012. The second quarter growth over the first quarter was 16.7% in 2011. In 2010, there was decline of 9.2% in the second quarter primarily due to introduction of 60 month loans. The total loan amount funded for 60 month loans grew 20.1% in the second quarter compared to the first quarter of 2012. The second quarter growth over the first quarter was 35.1% in 2011. The total loan amount funded for all term loans grew 11.3% in the second quarter compared to the first quarter of 2012. The second quarter growth over the first quarter was 25.4% in 2011 and 22.7% in 2010.
  • Only 29.9% of loan amount funded during the second quarter of 2012 had 60 month term compared to 51.1% during the same quarter of 2011.
  • During the first six months of 2012, the loan amount funded has reached 88% of the loan amount funded for the full year 2011. Though impressive, Lending Club most probably will fall short of 226% growth in total loan amount funded in 2011 over 2010.


Key Takeaways

  • Lending Club continues to enjoy healthy growth in total loan amount funded, similar to growth in loan volume mentioned in previous post Lending Club Q2 2012 Update - Loan Volume, Term and Interest Rate, though growth is slowing.
  • Lending Club continues to manage credit grade mix of loans and focus on listing high quality loans on its platform.
  • The recent trend of 60 month loans taking about the same time to be issued after listing as 36 month loans seems very peculiar and reasons unexplained.
Recently, Lending Club CEO Renaud Leplanche interviewed with Zack Miller at Tradestreaming. Thomas DeLong wrote an excellent recap of interview in his post Lending Club's data about their borrowers could help them more efficiently price risk in future P2P lending markets. It seems Lending Club is aspiring to become financial social network. Check out the article and interview. One of my friend was disappointed to read that Lending Club is already working on incorporating social information into the risk pricing metrics as he has been working on offering similar service.

Interested in learning to invest in stocks by reading and analyzing financial statements, check out Fundamental Analysis: A Back-to-the-Basics Investment Guide to Selecting Quality Stocks and other suggestions in Random Thoughts Reading List.

Thursday, July 05, 2012

Lending Club Q2 2012 Update - Loan Volume, Term and Interest Rate


Historical Loan Data and Adjustments

I decided to switch to the historical loan data file downloaded on July 1, 2012 for further analysis of Lending Club loans. The latest data file provides information on 62,383 loans. A final list of 57,937 loans was generated for further analysis by making following adjustments:
  1. 2,749 loans were deleted that were listed as not meeting the current credit policy.
  2. 3,629 loans were deleted that had status of In Review. These loans are fully funded but haven't been issued yet.
  3. 24 loans were deleted that had status of Partially Funded. These loans were only partially funded before the loan listing expiration.
  4. 372 loans were deleted that were listed after April 7, 2008 and issued before Oct 13, 2008. This is a new adjustment that was not used in cleaning the last historical loan data file. I recently discovered following verbiage in Lending Club prospectus [PDF] that led me to believe that these loans do not represent the true 'crowdfunding' nature of Lending Club platform.
"From April 7, 2008 until October 13, 2008, we did not offer members the opportunity to make any purchase on our platform. ... ... Borrower members could still apply for member loans, but those member loans were funded and held only by Lending Club."
The latest historical loan data file downloaded July 1, 2012 contains additional 7,866 loans compared to the data file downloaded May 1, 2012.

Loan Length

The chart below shows the loan volume by quarter and by loan length for past three years. The size of the circle indicates the loan volume and the size of pie indicates the volume of 36 month loans (Blue) and 60 month loans (Orange). I made the following observations:
  • The loan volume grew 15.5% in the second quarter compared to the first quarter of 2012. In prior years, the second quarter growth over the first quarter was 28.4% in 2011 and 34.8% in 2010. The loan volume grew 80.4% in the second quarter of 2012 compared to the same quarter of prior year. The second quarter growth was 90% in 2011 compared to the same quarter in 2010. Lending Club continues to enjoy healthy growth in loan volume though growth is slowing.
  • While the volume of 60 month loans grew 20.2% in consecutive quarters, the volume of such loans fell 8.3% on year over year basis. Only 19% of total loans listed in the second quarter of 2012 had 60 month term compared to 37.3% in same quarter of 2011. As this loan volume data shows, it appears Lending Club has ratchet down on listing of 60 months loans. Peter Renton also made similar observation in his comment on previous post Lending Club Loan Length and Default Rate.


Interest Rate

The chart below shows the average interest rate by quarter for 36 month and 60 month loan lengths during the past three years. I made the following observations:
  • The average interest rate for both 36 month and 60 month loans is rising quarter over quarter and year over year indicating more lower quality loans with higher interest rates are being issued with time. Considering that loan volume is also rising, it can be inferred that more and more borrowers with lower credit quality are being funded by lenders.
  • The average interest rate in the second quarter of 2012 for 36 month and 60 month loans rose 7.9% and 4.7% respectively over the previous quarter. In 2011, this quarter over quarter rise was 4.8% for both 36 month and 60 month loans. It appears more 36 month loans with higher interest rates were issued compared to prior year.


Key Takeaways

  • Lending Club continues to enjoy healthy growth in loan volume though growth is slowing down.
  • Lending Club has ratchet down on listing of 60 month loans. In my opinion, it is a good decision considering the uncertainty in default risk for such loans.
  • As lenders are becoming more comfortable with peer to peer lending, their willingness to fund lower quality loans with higher interest rates is rising for 36 month loan term.

Checkout my Reading List to select books for your reading collection.

Monday, July 02, 2012

Guest Post: Socially Responsible "Social Lending"

I am switching to the new Lending Club historical loan data file with data up to date from the latest quarter. As I need to spend time to clean up the data file and organize it for further analysis, I inquired Mrs. RT if she will be interested in writing another blog post. She gladly obliged. I think we make a good partner in this P2P Lending and Blogging project.

Socially Responsible "Social Lending"

Mr. RT again invited me to write a blog post. I don’t know about you, but because I enjoyed writing the blog post last time, I gladly accepted his offer and decided to share my view on social lending. Let me know through comments if you enjoy my posts and any suggestions you may have for me.

Recently there was a post on Reddit about P2P lending. It’s interesting to find various views and opinions and both bad and good experiences. I learned a few things.

Going to Las Vegas?

Someone mentioned social lending could be considered as gambling. I had read the similar comments at other places made by a few lenders who got burned. I don’t consider social lending as gambling in Las Vegas. It can become gamble, though, if only high return is pursued when selecting loans or if big money is invested on small numbers of loans (i.e. no diversification). Even with careful review of loans for investment, risk is definitely associated with social lending. Risk is not comparable to saving money at bank or investing on index funds. It’s important that lenders understand that they may lose money like all other investments.

As Mr. RT and I have been lending through Lending Club, let’s take a look at their web site. Overall the site is easy to navigate and the information is presented very well, except for information about lending risks and collection process. This type of information can imply negative investment experience for lenders. There’s no bullet points, no color, no graphs to explain risks. It’s just dry text and it appears to be one of those fine print materials that any seller wants to hide from buyers. I’d imagine Lending Club doesn't want to publicize investment risks to lenders. But, they could provide better graphical statistics to show the level of risks based on investment amount of each loan or number of loans invested, for example. They have done great job presenting all other data so that lenders can pick loan easier. Why not they can present associated risks in the same way?

Empowering through Lending

Back to the Reddit post. I felt good about finding out happy borrowers’ comment there:
“I am one of those borrowers that you are making money off from. I really like the idea of p2p lending. I want to start investing at lendingclub when my debts are paid off and I have a little money to throw around.”
“…The loan I got to pay off my debit has really been helping me.”
This is what I meant by “empower” in my previous post. I feel empowered when I am helping someone by lending money, even though the amount is tiny ($25 per note). That’s one of the purposes for social lending to open up opportunities to common people to be able to lend money to common people, right?

I’d understand people trying to lower hefty credit card interest rates, which can be 18 to 20% or more, by switching to social lending. We all have seen that economy has been depressed much longer than it should be. Maybe some of us are lucky enough not to suffer from the housing bubble or unemployment; yet, it definitely impacted every one of us one way or another. Is there anyone who does not know friends who lost their jobs in the past few years or whose houses are underwater? I bet all of us know such friends or relatives unless you don’t have any. It’s not good for anyone, both lenders and borrowers, when many people suffer from huge debt. I feel that lending money through social lending platform can help the economy better at the grass-root level.

Lending the Main Street Way

Let’s examine borrowers’ side further. The following loans are found as featured borrowers on the Lending Club web site. Their loans have been issued already:
  • Home improvement for $24,000 at 15%
  • Wedding for $8,000 at 17%
  • Business loan for $5,000 at 20%
Interest rates for these loans are extremely high for my standards. For home improvement, can’t you get much lower rate through home equity loan? If there’s no equity, do you still need to add more debt on not-so-worthy house? Wedding can be once in a lifetime event, but do you want to start new life with debt? Borrowing $5,000 and paying $1,000 as interest for business? I hope your business becomes profitable right away!

I consider these loans to be unreasonable and they just do not make sense to me. I suspect high interest rates were applied to these loans because of borrowers’ low credit score. LC clearly defines the loan grade and interest rate according to borrower’s credit score. There is a 10% of difference in interest rate between a borrower with 780 credit score and a borrower with 660 credit score. Ouch!

Both Mr. RT and I grew up in two different countries outside USA and left our own countries as young adult. We had to learn about personal financial system in the US from scratch. We made some not-so-financially-smart decisions when we were young; paying tuition via credit card, opening new credit cards and transferring money just for zero percent introductory interest rates, etc. I had no clue about credit score, how important it is and how it determines the interest rates. I wish I could have gained those knowledge much sooner.

For someone who grew up in this country, how difficult would that be gaining knowledge on credit score and making smart financial decision? As lender, I feel responsible not to lend money to such financially irresponsible people. We should not act like the financial institutions that encouraged people to borrow money irresponsibly to buy an house people can't afford. In the end, not only borrowers got hurt but also everyone lost something in one way or another. Having said that, I am passionate about educating personal finance to people who are disadvantaged in some way (i.e. recent immigrants, the oppressed).

I am hoping social lending platforms don't become like the traditional financial institutes, who seem to never learn. Remember recent JPMorgan Chase's $2 billion loss on risky speculative investments? And I, as lender, should be responsible of not nurturing irresponsible financial behaviors. That's all I want to say about socially responsible social lending.

Thank you for reading!