Lending Club Loan Listing Date - Not All Patterns are Relevant

Loan Volume

As the chart below shows, the volume of loan listings goes down during last week of the month. As I posted in my previous post Month-end Rush to Issue Loans at Lending Club, there is a pattern of high volume of loans issued at the end of the month. It is possible that one team within Lending Club manages both listing and issuing loans at the end of the month, the group's focus shifts from listing to issuing loans. But then, I don't have insights into inner workings of Lending Club organization.

Also, as Peter Renton commented and my previous post Lending Club Loan Application Date - When to Invest? mentioned, the spike in volume of loan issued has shifted to start of the month in 2012. There doesn't appear to be any such shift in loan volume by Loan Listing Date in 2012.

The chart above shows the volume of loan listings by week of the year. The rapid increase in the volume of loan listing masks any discernible patterns in the chart except that there is a spike in loan listings after the Thanksgiving (getting ready to shop for Christmas) and after the new year (Holiday shopping bills start showing up).

Loan Status

The chart below shows, the status of loans based on loan listing date by the day of the month. I observed two interesting patterns in this chart:

1. The Late (16 -30 days) status only appears for loans that were listed later in the month.
2. The In Grace Period status mostly appears for loans that were listed earlier in the month.

The chart below shows, the status of loans based on loan listing date by the week of the year. This chart is as confounding as the previous one.

1. Both loans with Late (16 - 30 days) and loans with In Grace Period status appear to be listed on certain weeks within the year for two to three weeks consecutively.
2. The loans with In Grace Period status appear to be listed right after the loans with Late (16 - 30 days) status were listed.

At this point, I didn't have faintest of idea on how to explain these patterns in loans with Late (16 - 30 days) and In Grace Period status. Then, I decided to chart for Loan defaults by day of the month and by week number using Application Expiration Date to compare if the pattern for loans with Late (16 - 30 days) and In Grace Period status change or shift.

As the chart below shows, the loans with Late (16 - 30 days) and In Grace Period status have swapped the positions approximately for Application Expiration Date when charted by the day of the month.

As the chart below shows, the loans with Late (16 -30 days) and In Grace Period status also have swapped positions approximately for Application Expiration Date when charted by the week of the year.

These patterns exist for both Application Listing Date and Application Expiration Date. As listing and expiration date are approximately two weeks apart and the pattern shift is approximately two weeks too, these patterns appears to be a factor of when the historical loan data file was last updated. I am working with a data file that was up to date as of end of month. I am sure a data file that was up to date as of middle of month will show patterns for loan with status (16 - 30 days) and In Grace Period that is reverse of patterns shown above.

Key Takeaway

Originally, I was as lost in explaining the patterns in the above charts for Application Listing Date as I was after watching the series finale of TV series LOST!. But after reviewing the similar charts for Application Expiration Date, I am confident that the patterns are neither related to anything specific with loans nor Lending Club process but artifact from transitioning of In Grace Period status to Late (16 - 30 days) status during the month and the time of month when the historical loan data file was updated.

This particular analysis shows that not necessarily all data analysis result in insights. Sometime observed patterns can be result of how and when data was collected.

By all means, if you have any other ideas, please share using comments or direct messages. Thank you for reading.

Checkout view of a venture capitalist on P2P Lending - Grass Roots Capitalism: P2P Lending.

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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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Lending Club Loan Interest Rate and Return - Do Defaults Matter?

Interest Rate

As the chart below shows, since inception the interest rate profile of Lending Club loans has been broadening, from 7.12% to 15.96% in 2007 to 5.42% to 24.59% in 2011. They offer lenders loans with a broad range of interest rates to chose from. The dense colored area within a bar indicates high volume of loans were issued. Whereas the white space within a bar indicates no loans were issued.

For further analysis, I decided to allocate loans in 11 different buckets (called bins) based on interest rate of the loan. One interest rate bin (bucket) has interest rate spread of 1.99% with midpoint listed on the charts below. For example, the interest rate bin labeled 12% includes loans with interest rate from 11% to 12.99%.

From the above chart, two observations stand out right away:

1. The number of interest rate bins has increased with time. In 2007, there were only five interest rate bins while in 2011, interest rate bins reached to 11 most likely result of increasing volume of loans, diversity of borrowers, return expectations of lenders, and general economic environment.
2. Though rising, the loan volume at higher interest rate is only a small fraction of total loan volume. This scarce availability of loans with higher interest rate is a challenge for lenders when trying to create a significant size and diverse portfolio of high interest loans in expectation of higher returns.

Default Rate

Peter Renton pointed out in his comment on my previous post Lending Club Loan Issue Date and Default Rate that  loans from 2007 and 2008 may not be representative that of loans issued in 2009 and after due to worst financial crisis in 2007 and 2008 and major changes made by Lending Club in its loan underwriting model.

The significantly small volume of loans issued in 2007 and 2008 also creates larger uncertainty in expected defaults and returns due to small sample size. Though the loan volume is still not sufficiently large in 2009, it is the best we have available to analyze defaults and returns for a 3 year term loan.

The above chart shows the percentage of loans charged off and default as well as fully paid. As the chart indicates, the aging of loans has major impact on both rates - charged off and fully paid. As expected, the default rate rises with rising interest rates (almost linearly with the interest rate bins for years 2009 through 2011). Though default rate at various interest levels in 2009 are significantly better than 2007 and 2008, readers need to keep in mind that only 3 year term loans issued in first four months of 2009 have matured and only about 45% of loans issued in 2009 are fully paid by May 1, 2012.

In my opinion, the default rate for 2009 issued loans are understated and most likely will rise to be somewhere in between the current numbers and ones for 2008 and 2009. It is just a hunch based on the slope of the trend lines for different years and expectation of slope for 2009 trend line to be similar to 2007 and 2008.

Expected Return

At this point, I have information about expected default rates for different ages of loans and  for different interest rate bins. It shouldn't be that difficult to calculate the expected return on three year term loans.

I made the following assumptions to calculate the expected return:

1. The default rates for past three years 2011, 2010, and 2009 are representative of expected defaults for first, second, and third year respectively of a three year term loan.
2. The portfolio contains a large number of loans and same amount invested in each loan. I haven't determined an optimum number of loans in portfolio yet. Lending Club claims no negative returns for a portfolio with 800 loans.
3. All loans that default in a year happen at the same month within that year and subsequent years. For example, default in 1 month indicate that loans defaulted in first month of first year, in first month of second year, and in first month of third year, i.e. 1st month, 13th month, and 25th month in the three year life of the loans.
4. All payments received until the month of default are full (no partial payments) and after defaults no payments are received.
5. Late payment fees, collection fees, tax deductions from principal write-off, taxes on interest received are not considered in expected return calculations.
6. The loan service charge is 1% of monthly payment received.
7. All loans in portfolio are issued same month and are part of same interest rate bin as defined above.
8. Inflation and cost of capital are not considered in expected return calculations.

The chart below shows the value of portfolio at the end of 3 year for an initial investment of $2,500 in 100 $25 notes at different interest rate bins and for various default month.

Key Takeaways

1. The portfolio has positive return for all interest rate bins and various default months. It leads me to ask the question "Do defaults really matter?"
2. Even though the expected return analysis doesn't consider fluctuations in expected default rate, an hands-off approach with PRIME Account and preset Options with targeted returns offered by Lending Club appear to be attractive feasible options for time-constrained lenders.
3. Due to low volume of loans with high interest rate, it is difficult to build a diversified portfolio solely from such loans. Also, the expected default rate, and in turn expected return, may have wide variance due to the small sample size for loans with high interest rate.

Brady at Lucrative Lending recently wrote about importance of credit report inquiries in making investing decision in a loan by a lender. I agree with his assertion about filtering available loans based on number of inquiries in past six months. Number of inquiries in past six months is the sixth most important criteria in my loan selection process at Lending Club.

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