At the end of every year I like to look back at the biggest stories that made news in the previous 12 months. As the sun sets on 2015, it will be remembered as a banner year for marketplace lending with all the major players experiencing a great deal of success. The rapid growth continued unabated, many new partnerships were forged, new innovations developed and many new entrants launched.

It was a year with countless big stories. Below are my top 10 news stories that we published on Lend Academy in 2015.

1. An In Depth Look at the OnDeck/JPMorgan Chase Deal

This was the biggest story of the year in my opinion. We have this country’s largest bank, Chase, partnering with our industry’s largest small business platform, OnDeck. Chase decided they did not have the expertise or the inclination to build an operation themselves, so they have partnered with OnDeck to provide the underwriting engine and servicing for small business loans that Chase might not otherwise make. More coverage of this story is in The Wall Street Journal.

2. A National Tragedy With a Link to P2P Lending

This article is near the top of my list, not because I think it is a significant story in itself, but because it was so widely reported. The mainstream press covered the story of the San Bernardino shooters taking out a Prosper loan more than any other story in our industry’s history. There were literally thousands of articles written about this, many with glaring inaccuracies unfortunately, so I felt the need to set the record straight. More coverage of this story is in Bloomberg.

3. Goldman Sachs Is Entering P2P Lending Becoming the 1st Bank to Launch a Platform

I don’t think many people, myself included, expected the first major bank to build their own online lending platform to be Goldman Sachs. Even though this story is from June there has still been no official announcement from the firm but they appear to be building out their platform and readying for a launch some time in 2016. More coverage of this story is in The New York Times.

4. Responses from the Treasury RFI on Marketplace Lending

This past summer the U.S. Treasury sent out a request for information on marketplace lending. They asked 14 quite detailed questions and received over 100 responses including the thoughts from most of the major players in the industry. More coverage of this story is in The Wall Street Journal.

5. Madden 2015 Has Nothing to Do With Football

The Madden v. Midland case had nothing directly to do with marketplace lending but its implications are already being felt by many platforms. The core issue here is whether interest rates charged on a loan by an issuing bank can be exported across state lines when a loan is sold. Given every state has different usury limits this can be an issue when the rate charged is above another state’s usury limit. Which is what led to Madden v. Midland. The case has now been sent to the U.S. Supreme Court. More coverage of this story is in Bloomberg.

6. SoFi Raises $1 Billion and Continues to Shake up the Industry

There were a lot of big funding rounds announced this year but none were bigger than the SoFi announcement of a $1 billion round from SoftBank Capital. The equity round was the largest ever by a fintech company and cemented SoFi as a leader in marketplace lending. But as CEO Mike Cagney pointed out in our interview, SoFi is about far more than just lending – they want to shake up many areas of financial services. More coverage of this story is in Bloomberg.

7. Lending Club Signs a Deal With a Consortium of 200 Community Banks

The partnership between Lending Club and BancAlliance, announced in February, is a big deal for both Lending Club and the 200 community banks in BancAlliance. Community banks, in many ways, have the most to gain by partnering with marketplace lending platforms. They can offer new loan products to their members as well as provide a diversified investment opportunity for their deposit holders. More coverage of this story is in The Wall Street Journal.

8. Prosper Makes its Second Acquisition, a Personal Finance Company Called BillGuard

When I first heard about this story I didn’t see Prosper’s logic in acquiring BillGuard, a a personal finance analytics company based in Israel. But as I thought more about it I realized that this deal provides Prosper with something that few marketplace lenders have: a valued added offering to engage potential borrowers before they need a loan. More coverage of this story is in The New York Times.

9. CreditEase’s Online Platform Yirendai Becomes the Third Major P2P Lender to IPO and China’s First

We have reported many times here on Lend Academy that China is the largest and most innovative market in the world for P2P lending. Just before Christmas we had the largest P2P platform in the world, CreditEase, conduct an IPO on the New York Stock Exchange, for their online lending division Yirendai. More coverage of this story is in The Wall Street Journal.

10. Fundrise Launches First Ever eREIT To Invest In Commercial Real Estate

Retail investors have continued to get a raw deal as marketplace lending has taken off. The only real options for investors have been Lending Club and Prosper. With this announcement from Fundrise everyday investors can now invest in commercial real estate through their new eREIT. More coverage of this story is in Wired.

One of the big stories of the year that didn’t make the list was the Lending Club partnership with Citi. This was announced at LendIt USA 2015 and we were so busy with LendIt we were not able to cover this story in depth on Lend Academy. We also didn’t cover some of the groundbreaking securitization deals that happened this year as the number of these new deals skyrocketed.

Happy New Year everyone. I hope you have an enjoyable long weekend and all the best for 2016. It is going to be another fascinating year.

The post The Most Important Marketplace Lending News Stories of 2015 appeared first on Lend Academy.

This is part of our semi-regular series where we take an in-depth look at the platform experience from the borrower side. A few months ago I took out a loan on Lending Club and I recorded the entire experience for Lend Academy readers. This was my second time applying for a loan on Lending Club, I first did this back in 2011 and you can read about that experience here. 

Now, I didn’t actually need this loan from Lending Club, I just wanted to get a first hand look at their entire borrowing process. For investors I think it is important to have some understanding of the borrowing process, this is the core of what marketplace lending is all about and something few of us stop to consider. And for potential borrowers it is good to know how the process works before you apply for a loan.

When I was applying for this loan I created a screencast video of the process. This video walks you through the different screens and lets potential borrowers know what to expect. It runs just under six minutes and if you are looking to obtain a loan on Lending Club I highly recommend you watch the entire video.

Find Your Rate Without Entering Your Social Security Number

Most borrowers typically want to know two things: their interest rate and whether or not they have been approved. So, Lending Club makes it quite easy to find out those two pieces of information quickly. Lending Club will do a soft pull on your credit after you enter your name, address and income. No social security number is entered until you see whether you have been approved or not. If approved, you will see your interest rate and monthly payment and only after that do you have to enter in your social security number.

Once you have been approved and received your interest rate you are under no obligation to accept the terms that Lending Club offers to you. I chose a small amount of $2,500 and my loan was graded A2 with a 6.24%% interest rate (7.60% APR). Once you accept the loan terms Lending Club will do a hard pull on your credit and then you will see an inquiry for this loan on your credit report.

A couple of interesting points to note here. One, when I applied for a loan back in 2011 I was actually rejected by Lending Club. Back then I was self-employed and Lending Club made it very difficult to get a loan in those circumstances – I ended up getting a loan in my wife’s name so I could record the experience. Two, I noticed when applying for this loan that Lending Club offered me a lower rate 2-year loan option. I have never seen 2-year loans offered to investors so I thought that was interesting. Clearly, this is a special program Lending Club has recently created and my guess is that it is for one of their bank partners.

A Quick Turnaround on My Loan

When you have completed the online loan application process there is still more you need to do. Lending Club does verification on all their borrowers. Given that I had been an investor for 6+ years this verification was minimal. In fact all Lending Club did was to call me up to answer some questions to verify my identity.

Just like my my recent Prosper loan, my Lending Club loan was funded instantly by one investor – it obviously went to their whole loan platform. For those interested you can see my listing here.

Four Working Days from Loan Application to Money Received

The entire process was quick and easy. From the time I started the process until the money was in my bank account was just four working days. Here is a timeline with most of the steps involved:

Day 1 – Applied for a loan on Lendingclub.com
Day 2 – Loan is made available to investors
Day 2 – Loan is fully funded by one investor
Day 5 – Lending Club telephoned to do identity verification
Day 5 – Loan issued
Day 6 – Money appeared in my bank account

I did not have to provide any additional information to Lending Club beyond a phone call. I did have to verify my email address and bank account but that was basically it. 

Overall, I was very happy with the entire process at Lending Club. Now, if you want to take out a loan from Lending Club then you can use this link (it is an affiliate link).

The post How to Apply for a Loan on Lending Club appeared first on Lend Academy.

When investing in p2p lending there are a few best practices that every investor should follow. These best practices should be applied to any investment on a marketplace lending platform, including Lending Club and Prosper. We first covered this topic in 2011 and while many of the best practices remain the same, there are new considerations as the industry has matured.

Diversification

Investors should start an account by investing in at least 100 notes, and preferably many more. In the case of Lending Club and Prosper this means an account size of $2,500 ($25 x 100 notes). We’ve covered diversification in depth and this remains the most important factor in having a successful p2p investing experience.

The reason for this boils down to one point which is that the more notes you invest in, the less impact one individual note default will have on your portfolio. Your investment strategy should always start with investing in as many notes as possible and as a general recommendation this should be your approach as your account grows unless you are unable to keep cash invested. We often find individuals that have had a negative experience with a platform lack this key best practice.

Accredited investors should also consider investing across many platforms since there are many more options available today. Many of these other lenders focus on other demographics, whether it is the sub-prime market with higher projected returns or the millennial demographic. Beyond consumer credit, there are now platforms that cover almost every lending vertical including  small business loans, real estate loans, student loan refinancing and many more.

Throughout the next few years we are likely to see more options for retail investors in the form of Regulation A+ deals such as the new Fundrise eREIT and 40-Act funds. These will increase opportunities for further diversification.

Understand P2P Lending Risks

As with any investment, you should understand the risks that are associated with investing. Marketplaces that exist today for retail investors allow individuals to invest in unsecured consumer credit. Rates paid by the borrowers typically fall below rates which they would pay on a credit card and are typically higher than a secured loan such as a car loan or a mortgage. A majority of the borrowers state credit card refinancing or debt consolidation as a loan purpose, but loan proceeds can be used for any reason.

As an investor you will undoubtedly have defaults, but your performing notes should make up for those that default leaving you with a positive return. There are many factors that could have a negative effect on your portfolio that every investor should understand. These include:

1. Recession
2. Unemployment
3. Interest Rates
4. Regulation
5. Platform Bankruptcy

While the industry has not really weathered rising unemployment or a recession, there is a likelihood of a recession in the future. Like credit card defaults, there is a high correlation between unemployment and unsecured consumer credit.

Regarding other risks, we have seen a few developments in recent years. We’ve seen Lending Club raise interest rates for borrowers following the Fed move in late 2015. If Lending Club continues to raise interest rates to the borrower and thus pass the higher return on to the lender this may not be as big of a concern. However, interest rates have only slightly increased so the impact of rising interest rates still remains to be seen.

In regards to regulation risk and platform bankruptcy, these are less of a concern these days. Both Lending Club and Prosper are well established companies who combined are well over $20 billion of loans funded. Lending Club is now a public company and holds $1 billion in cash on their balance sheet. Additional regulation is on the horizon, but it isn’t likely that this industry will be regulated out of existence. More likely is that any impending regulation will be somewhat burdensome but able to be weathered easily by the major platforms.

Research

One of the most incredible things about the marketplace lending industry is the amount of transparency the companies provide. As a new investor you are going to need to answer many questions.

• How much should I invest in p2p lending?
• What is the purpose and time horizon of my investment?
• Am I a conservative or more aggressive investor?
• What type of loans and loan grades will I invest in?

There is a wealth of information on this site, on the Lend Academy Forum as well as third party sites to help you make the best decision in your situation. To get an idea of the loans you would like to invest in you can use NSR Platform. Click on the Analytics tab and view Back Testing for the platform you are investing in. You can view loan performance from Lending Club and Prosper across years and dozens of credit criteria. This can help you understand what historical returns have been given specific filter criteria.

As you watch your account performance, it is important to understand how returns are reported within your account. Returns initially will be stated much higher until your notes have seasoned around 18 months. This is because it takes around 3 months for a loan to be charged off. After your weighted age of portfolio reaches 18 months, most loan defaults have already occurred and stated returns are likely to be accurate. It is recommended to utilize Lending Club’s Adjusted Net Annualized Return or calculate returns using XIRR.

Automate Your Investment

Although you may initially hand select notes on a platform, you’ll eventually find that this is a time consuming endeavor, especially if you have a large account. To solve this manual process Lending Club offers its own free automated investing, formerly called Prime.  Prosper has a similar automation tool called Automated Quick Invest. While these tools provide basic functionality, some investors opt for a more powerful third party tool or opt to have their account managed by someone else entirely. The four major tools are listed below and I recommend researching each one to see which is the best fit for your situation.

• NSRInvest
• LendingRobot
• Bluevestment
• PeerCube

Keep Funds Invested

When you first open your Lending Club or Prosper account it may take several days or even weeks to deploy your capital. However, as the borrowers begin to make payments you will see the principal and interest payments build up in your account. It’s important to continue to keep your investment working for you by reinvesting the payments. Cash drag can significantly impact returns in an account.

Conclusion

These best practices are meant to serve as a starting point for new investors to understand how to be a successful p2p lending investor. If you search on this site you will find more detailed information on several of these topics. If you have other insight on other best practices when investing in p2p lending let us know in the comments below.

The post P2P Lending Best Practices 2016 – An Investor’s Guide appeared first on Lend Academy.

Even the average returns from p2p investing are appealing to many investors, especially in a low interest rate environment. However, one of the great things about investing in peer to peer lending is the availability of historical data. If you’re a self directed investor there are a few simple filters that could potentially outperform average returns over time. In this post, we’ll outline simple filters for both Lending Club and Prosper.

We are backtesting data on each platform using the beta version of NSR Platform’s new code base (version 3.0), which will officially launch in the first quarter of 2016. These filters are an update from our 2012 post and take into consideration recent loan performance. It’s important to note that Lending Club and Prosper adjusts interest rates over time so while these strategies have performed well in the past, this may not be the case in the future.

Simple Lending Club Filter Strategy

To start, take a look at the below chart which outlines the average returns from Lending Club.

This chart includes all loans that were issued 18 months or more before the last day of the most recently completed quarter (Q3 2015).

Since we are targeting higher returns, we’ll focus on the higher loan grades: C, D, E. Grades F and G have higher returns, though the risk trade-off is too high for this exercise.

• Grade: C,D,E
• Inquiries in the last 6 months = 0
• Loan Purpose: Debt Consolidation, Credit Card Refinance
• Optional: Home Ownership: Mortgage or Own
• Optional: Annual Income over $45,000

According to the NSR back-testing tool, loans that were originated before January 1, 2014 generated an ROI of 10.00% using this strategy. Over the same period, grades C, D and E with no additional filters generated an ROI of 8.08%. Looking at data from 2014 and 2015 these simple filters generate an ROI of 10.20%. This compares to an ROI of 8.65% without additional filters. This shows that this strategy continues to provide alpha even in recent years. Note that returns shown for 2014 and 2015 are likely overstated since these loans have not yet seasoned.

Lending Club Filters

Lending Club Filter Results

Simple Prosper Filter Strategy

Below are Prosper’s average returns by loan grade. Keep in mind that their loan grades appear similar to Lending Club’s, but the interest rates differ.

Historical performance of originations from July 15, 2009 through May 31, 2012.

For our simple filters with Prosper, we’ll focus on grades C through HR, which include loans that carry the highest interest rate — and the highest risk — with Prosper.

• Prosper Rating: C,D,E,HR
• Inquiries in the last 6 months = 0
• Listing Category: Debt Consolidation, Other, Home Improvement
• Optional: Is Homeowner = Yes
• Optional: Income Range > $25,000

According to the NSR back-testing tool, loans that were originated before January 1, 2014 generated an ROI of 11.92% using this strategy. These results are on around 6,000 loans due to the date restriction, but Prosper has had significantly more volume in 2014 and 2015. The total count of loans now meeting this criteria since 2009 is over 23,000 loans. Over the same period, grades C, D and E with no additional filters generated an ROI of 10.48%. Looking at data for 2014 and 2015, these simple filters generated an ROI of 9.88%. Without additional filters, the ROI is 8.15%. Again, we see that these filter criteria continue to produce alpha.

Prosper Filters

Prosper Filter Results

Conclusion

While investors can continue to add filters to incrementally increase returns, these simple filters provide a base with substantial loan volume. Investors should ensure that with whichever filters they select that their cash is always invested, as cash drag will have a negative effect on returns. NSR Invest offers limited free backtesting using their online tools at NSR Platform. If you sign up as a Self-Directed user, you get unlimited back-testing. NSR Invest also offers proprietary credit algorithms through a “Fully Managed” service for 0.6% per year.

Full Disclosure: NSR Invest is majority owned by Cardinal Rose Group LLC, a company that also owns Lend Academy and LendIt.

The post Updated: Super Simple High Return Filter Strategies For Lending Club And Prosper appeared first on Lend Academy.

Over the last year there have been many developments for retail investors in p2p lending. This is a trend I expect to continue throughout 2016 as investors have more options to access marketplace lending and real estate crowdfunding. Most notable has been the maturing of the third party tools and new investment options in the form of Regulation A+ deals over the last year. In this post, we’ll review the state of the retail investor in p2p lending.

Lending Club and Prosper remain the only options for retail investors to invest in unsecured loans. Many investors prefer to use third party tools to direct their investments with these platforms. Some of these tools have stopped operations altogether while others have merged. We last reported on all of the third party tools in February of 2015. Here is a breakdown of the major news stories that feature the main tools still in operation for retail investors:

• Lend Academy Investments merged with Nickel Steamroller to form NSR Invest to focus on individual investors and financial advisors.
• BlueVestment is in the process of completing a merger with InterestRadar

With the consolidation that has occurred, this has left four main players in the third party tools space for retail investors:

• NSR Invest
• LendingRobot
• BlueVestment
• PeerCube

Many investors use these tools for their additional layer of credit modeling on top of Lending Club and Prosper’s underwriting. P2P-Picks, a popular credit model service closed in 2015 due to the founder taking a position at another firm in our industry. This led to several of the platforms listed above offering a P2P-Picks style credit model to their investors.

In August, 2015 Lending Club announced an opportunity for further integration with third parties with the introduction of Lending Club Open Integration (LCOI).  This has allowed investors to create Lending Club accounts directly with a third party, such as the ones listed above. Lastly FOLIOfn released an official API to allow for automated trading on the secondary market. This is an important step to improve liquidity when investing in p2p lending and many retail investors were excited about this announcement.

Lending Club made progress in opening up their platform to more states throughout 2015. Investors from 43 states (plus DC) are eligible to invest on Lending Club. Prosper is currently available to investors in 30 states (plus DC).

New Investment Options Announced in 2015

Two real estate crowdfunding platforms launched with Regulation A+ deals in 2015. GROUNDFLOOR was the first to launch their offering and currently offers lending in select states. Fundrise took a different approach when they announced the first ever eREIT to easily diversify investors in multiple projects. Having initially announced their Income eREIT, Fundrise recently announced their Growth eREIT to target a different types of investments.

It was nice to see these new opportunities for retail investors and they seemed to be well received by the retail investor community. There may be other companies who announce similar Regulation A+ deals, but it’s clear that GROUNDFLOOR and Fundrise are blazing new trails in this area. We expect at least one Regulation A+ deal to launch in a different lending vertical in 2016. For the time being, these Regulation A+ deals are the only way for retail investors to diversify into other categories, but we may see that change in 2016 with the introduction of closed end funds.

We first reported about closed end funds in July 2015 with Van Eck Overland and more recently with Direct Lending Investments seeking to convert to a 40-Act fund. There are several others who are in process, but it remains to be seen who will be the first fund to launch. These funds will have a substantial impact on access to the asset class for retail investors, but there appears to be significant regulatory hurdles for these funds to overcome.

While there have been many developments over the last year for retail investors there is still a lot of progress to be made. Retail investors still don’t have access to many of the lending verticals that institutional investors do and hopefully there will be progress on this in the next year. We continue to follow these developments closely and will report any new options here on Lend Academy.

What do you think 2016 will bring for retail investor participation? Let us know in the comments below.

The post The State of The Retail Investor in P2P Lending appeared first on Lend Academy.

This morning, Lending Club held their Q4 2015 earnings call. Lending Club has been a public company over a year now and this marks their fifth earnings call where we have heard details about their recent performance. This latest quarter may have been their most impressive yet.

Let’s start with the high level financials:

• Q4 total originations were $2.58 billion, up 82% from the same quarter of 2014 bringing their total originations near $16 billion. Lending Club originated $8.4 billion of loans in 2015.
• Revenue was $134.5 million, up from $115.1 from the previous quarter.
• Earnings per share of $0.01 compared to ($0.07) for the same period last year. Adjusted EPS was $0.05 for Q4 2015, compared to $0.01 in the same period last year.
• Adjusted EBITDA was $24.6 million up from $21.2 million in Q3 2015. This resulted of adjusted EBITDA margin of 18.3%
• Sales and marketing expenses as a percent of originations increased to 2.01% in Q4 2015 from 1.87% in Q3 2015.

Lending Club adjusted their 2016 outlook higher.

Lending Club made several other announcements and provided some interesting information about the platform. Most importantly, Lending Club announced $150 million share buyback citing tremendous long term potential that is not reflected in Lending Club’s share price. In the press release, Lending Club stated that based on estimates, loans will pay out over $7 billion in principal and interest to investors in 2016. If reinvested, this would provide enough capital to fund over half of originations in 2016. If their projections are correct this means we should see Lending Club surpass $30 billion in total originations by the end of 2016. Lending Club has also continued to grow faster than Prosper, their biggest competitor, in four out of the last five quarters. Lending Club’s growth quarter over quarter was 15% compared to 7% Prosper and they now have 1.4 million customers.

During their presentation, Lending Club noted that they are still very early in market penetration. As shown below, they estimate that the addressable market totals $465 billion based on their underwriting criteria. Current penetration of the market totals just 1.3% which shows the immense opportunity still available for Lending Club and other online lenders providing unsecured credit.

Given the recent volatility and the relatively flat stock market in 2015 overall, Lending Club compared their returns across other asset classes showing average returns for investors just shy of 8% in 2015.

Lending Club also presented analysis on how performance may be affected in a recession. This is a common question among investors in this asset class and it is nice to see Lending Club present some data. Note that this analysis takes many assumptions into consideration including:

• $1,000 invested across the Standard Program platform each month from Jan. ‘12 – Dec. ’18
• unemployment rate peaks at 8% per Moody’s S3 scenario
• recession to hit immediately in Q1 2016
• remaining part of loan life for existing bookings subject to recession performance
• successive rate increases of 100bps in Jul. ‘16 and Jan. ‘17
• portfolio mix of grade and term similar to Q4 2015.

Finally, the call wrapped up with a question and answer section which highlights many of the issues investors are thinking about. Several questions are summarized below:

Q: Related to guidance, are you basing any conservatism in your view based on the health of the economy?

A: We are watching the environment with as much caution as investors. There is no sign of deterioration in demand or credit quality or investors appetite. What we have done is raise yield on the platform quite a bit over the last few months with two interest rate hikes in the last few months. This gives investors additional loss coverage in case of economic slow down. We are confident enough to raise guidance from where we were a few months ago.

Q: Is there any appetite to securitize Lending Club loans?

A: We remain very attached to the marketplace model and believe it is superior. We have no intention, as a matter of business model, to invest our own capital or take balance sheet risk. Sometimes we use our own balance sheet for test programs, but this is a very small amount.

Q: You talked about investor mix and how retail investors are usually more sticky in an economic downturn. Can you talk about your marketing plan to these investors? As the VC money is drying up, can you talk about issues in marketing channels? What about your competitors?

A: We continue to like our retail base and have a healthy mix of institutional and individual. We are dedicating more resources to marketing and the product development team. The retail team is growing faster with more focus on retail coming this year. Retail investors is a core competency and competitive advantage of Lending Club and no other platform has scale in retail distribution. It is a nice differentiator if and when the economy slows down since retail is sticky. Venture capital investments in general and in fintech has reached its peak last year. We anticipate it will continue to slow down this year, providing less capital to smaller players. We may start seeing less competition from smaller platforms. We did not feel much of an impact from competitors last year and don’t anticipate a huge boost due to lower spend of competitors.

Q: Guidance in Q1 implies acceleration given what you’ve already seen. How much is coming from share gains as a result of improving competitive position versus acceleration for demand.

A: We continue to see appetite on both sides and awareness coming on the consumer side. They are more aware of personal loans as an alternative. On investor side, markets are turbulent. Sometimes we see divergent behavior from different pockets of capital, but diversification shows the power of our model. Behaviors differ between insurance companies, pension funds etc. who all have different objectives. We have diversity and breadth of platform participants on both sides.

Q: You mentioned operational and contractual changes you are putting in place with issuing bank partners. Do you foresee any other changes related to your issuing bank partner and are these changes you mention in place? Is it possible you will have to seek state licenses? What about the Midland case?

A: We do not foresee any other changes with our bank partner. The changes mentioned are being made by the end of this quarter. I wouldn’t put too much focus on these changes. Our main message on Madden is we believe we are in a different position than those in that case. The changes were made out of caution. We haven’t seen any change in volume going to loans in Connecticut, New York and Vermont.

As far as state licenses it’s a possibility, but unlikely. We have a large number of state licenses and this is how they started, but what we found is that a bank issuance framework is more efficient and is a better experience for consumers who get all the same terms no matter state of residence.

Q: You mentioned rates in January and that rates will give more of a buffer. What prompted that change?

A: The global environment has changed, there are more concerns about global growth in the economy. We don’t pretend to know more, but in times of uncertainty it’s good to be prudent. Rates are dynamic on the platform so if we see any sign of degradation we will act accordingly. If things improve than interest rates may go down and that is the benefit of the marketplace model – pricing equilibrium.

Q: Did institutional demand effect this?

A: Every interest rate change is informed by what we see on the platform. We have a large number of touch points and discussions. Some investors have different views and some people have more bearish views.

Q: Regarding education and patient financing. is there any overlap with other customers? Can you talk about repeat borrowing? Any update on new product? Is your goal to be a broad based platform?

A: Our goal continues to be to transform the way consumers access credit. We can make it more affordable and our goal is to cover the entire range of credit products including, auto, mortgage, student loans. We want to be helpful in every stage of life. We’ve said previously we are gearing up for a major product launch. This will be the first of a major extension to product suite, but not the last.

Conclusion

Lending Club continues to deliver on their quarterly results as we’ve reported since they became a public company. The market responded favorably to Lending Club’s results and their stock price was up around 5.7% today to close at $6.88 while the broader market as a whole went down. 2016 is going to be an interesting year as they announce a new product in the first half of the year. With the largest borrowing base in the industry there is a lot of potential to cross market new products.

If you’re interested in digging deeper I highly recommend listening to the webcast yourself or going through the presentation yourself for topics not covered here. Those materials can be found on Lending Club’s investor relations website.

Disclosure: Peter Renton, the founder of Lend Academy and Ryan Lichtenwald, the author of this post own shares of Lending Club.

The post Lending Club Reports Q4 2015 Results and Initiates $150 Million Stock Buyback appeared first on Lend Academy.

There has been a lot of news recently with regards to interest rates and loan performance on the Lending Club and Prosper platforms. While some may argue that these concerns are unfounded, investors are clearly taking an increased interest with the changes going on and the recent market volatility. In this post, I’ll address interest rate increases and then delve into vintage performance at both Prosper and Lending Club, which is the best gauge of performance.

Below are stories that received a lot of press, leading to additional speculation of poor loan performance:

• Santander recently sold nearly $1 billion of Lending Club loans to JP Morgan.
• Several articles were released stating that the Lending Club models had “misfired”. This report was addressed by Lending Club directly who stated that the chart in question was misinterpreted. The truth is that while some pockets of loans out-perform and some under-perform, general performance is in line with expectations.
• This past week, news broke that Moody’s may downgrade bonds sold by Citigroup which included loans originated by Prosper citing slower repayment and increased charge-offs.
• Today the Financial Times came out with this article discussing possible worrying signals from p2p lending platforms.

Increasing Interest Rates at Lending Club and Prosper

Increasing interest rates at Lending Club started back in December when the Fed increased interest rates by 0.25%. Lending Club responded immediately and raised interest rates by the same amount and subsequently increased rates again in late January. In Lending Club’s Q4 2015 earnings call CEO, Renaud Laplanche cited concerns in the global economy for increasing interest rates. The increase gives investors coverage if we experience an economic slowdown. As Renaud stated, one of the benefits of a marketplace model is pricing equilibrium. If there is any sign of degradation, they will act accordingly.

The increasing interest rates on Lending Club is a reversal of what we have seen since the beginning of 2014. The below chart taken from Lending Club’s statistics page shows the steady decline of interest rates across a majority of loan grades on the platform. Renaud stated several times throughout 2015 during earnings calls that investors were willing to accept lower yields given the confidence in past performance. The sentiment has now changed, but it’s important to understand the historical trend of interest rates over the last few years.

We reached out to Prosper for this article, who also announced increased interest rates this month.  According to Prosper:

The recent move to increase risk-adjusted returns is a continuation of moves we began making in August of 2015. The move highlights our dedication to running a balanced marketplace that provides fair rates to borrowers and investors alike. Since 2013, the cumulative loss of our book has remained very stable (as indicated by the charts later in this post).

Lending Club Loss Curves

Below are Lending Club charge-offs by vintage for both 36 and 60 month loans taken from their earnings presentation. While it is still very early for the 2015 vintage loans, they appear to be tracking with other vintages that have experienced lower charge-offs.

In the case of 36 month loans, there is a clear difference from the worst vintage in 2009 compared to more recent vintages. If you’re interested in a more detailed look at performance by vintage you can view the cumulative charge off rates in spreadsheet format at additionalstatistics.lendingclub.com.

Prosper Loss Curves

Prosper’s loss curves paint a similar picture to that of Lending Club’s. It appears that all vintages are tracking on a similar course at this time with losses remaining far below the performance we saw from 2009 through 2012.

36M, All Ratings – Cumulative Chargeoffs (% of Originations) as of December 31, 2015

60M, All Ratings – Cumulative Chargeoffs (% of Originations) as of December 31, 2015

Independent Analysis from PeerIQ

Over the weekend PeerIQ released this excellent analysis on the potential Moody’s downgrade of Citi’s bonds noted at the beginning of this article. They have confirmed what we have shown above. Loss rates remain relatively steady with a mild increase in delinquencies in the second half 2015 loans compared to the previous year. Based on their analysis, concerns of some media pundits are overblown.

While we should be paying close attention to delinquencies, and it is certainly possible they will increase, we as investors are being compensated for that risk by the increasing interest rates being charged to borrowers. PeerIQ concludes that the level of delinquencies we are seeing are still at multi-decade lows according to Fed data.

Conclusion

From the data above, it appears as though there isn’t any meaningful deviation from the performance we’ve seen in recent years. While some investors may have seen some under performance in their portfolios, overall performance appears to be in line with expectations of each platform.

It’s important to remember that Lending Club and Prosper are continually monitoring performance and continue to improve underwriting. There will likely always be some pockets that out-perform or under-perform an indexed portfolio. The increased interest rates on each platform should give investors confidence in the platforms to react to uncertainty. Although there are not any red flags at this point, as an investor in this asset class it’s important to be prudent and monitor vintage performance and other economic data points such as unemployment closely.

The post Lending Club and Prosper Interest Rates, Loss Curves and Loan Performance appeared first on Lend Academy.

For four years now I have been sharing the quarterly returns of my P2P lending investments here. I get emails from so many people who like this feature of the blog so I know it is one of the most popular parts of Lend Academy. Needless to say I am committed to continuing this practice.

There has been some talk in recent months both in the media and on the forum about an increase in defaults. Ryan covered this topic well earlier this week so I won’t dwell on it here. Suffice it to say that there is some evidence that defaults have increased slightly in the second half of last year and those increases are more pronounced in the higher risk loans. This also happens to be where my portfolio is concentrated and as you will see my returns have been impacted.

So, let’s get right to the numbers.

Overall P2P Lending Return Now at 9.85%

For the first time since 2012 (when my account had a more conservative mix) my overall returns have dropped below 10%. My trailing twelve month return ending December 31, 2015 stood at 9,85% a decline of almost 1% from three months ago. The returns for my core six holdings, each one has been open for several years, has dropped to 8.96%.

Throughout 2015 both Lending Club and Prosper reduced their interest rates, with that trend only reversing in the past couple of months. I am very curious to see if this increase will have a material impact on returns going forward or if it will be offset by a future rise in defaults. Suffice it to say the days of easy 10-12% returns that many of us have enjoyed will become more difficult.

Now on to my numbers. Click the table below to see it at full size.

As you look at the above table you should take note of the following points:

1. All the account totals and interest numbers are taken from my monthly statements that I download each month.
2. The Net Interest column is the total interest earned plus late fees and recoveries less charge-offs.
3. The Average Rate column shows the weighted average interest rate taken directly from Lending Club or Prosper.
4. The XIRR ROI column shows my real world return for the trailing 12 months (TTM). I believe the XIRR method is the best way to determine your actual return.
5. The four newer accounts have been separated out to provide a level of continuity with my previous updates.
6. I do not take into account the impact of taxes.
7. The extended chart showing returns displayed at Prosper and Lending Club as well as my adjusted returns can be viewed here.

Now, let me go through each account in turn, to give you some context to the above table.

Lending Club Main

This is the account that started it all. I opened this account back in June of 2009 with $500. I have added to it several times, an additional $24,000 to be precise, although it has been several years now since I have added any new money here. This is a taxable account and my policy is to only add new money in my retirement accounts now.

You will see two graphics with this account. I have taken a screenshot of both the standard account screen (above) as well as the screen that shows adjusted returns (below). You can see the difference in the return numbers for both – the adjusted returns looks at all your late loans and reduces your return based on future expected defaults. You will see the account value as well as the annualized return are adjusted downwards. I think this is a more accurate way to look at returns.

Lending Club Roth IRA

While only a small account my Roth IRA has always been one of my favorites. It has been one of my best performing Lending Club accounts for many years – one of the advantages of a small account is that you can get very targeted with your filters and so only choose a tiny proportion of Lending Club’s platform. For the last several years my strategy with this account has been based on my Filter 1 in this post.

Lending Club Traditional IRA

This account is almost six years old now. This is my largest account at either Lending Club or Prosper and it seems to have settled into a consistent 9-10% return now. I like the fact that this account just passed a quarter of a million dollars in repayments of both principal and interest since I opened it back in 2010 by rolling over my wife’s old 401(k).

Lending Club Roth IRA – 2

This account used to be the most conservative in my portfolio. It was originally setup as a Lending Club PRIME account in 2010 and I let Lending Club manage my investments for me investing only in B- and C- grade accounts. I still let Lending Club invest automatically in this account but I now do so using my Super Simple filter which is more aggressive. My returns have increased from a low of below 5% to almost 8% today.

Prosper Main

Now five years old my first Prosper account continues to be a strong performer. After starting with just $1,000 this taxable account has had exactly $50,000 in deposits since inception so I have now surpassed a 50% increase in value. My XIRR return has remained steady from a quarter ago at 9.35%.

Prosper – 2

This account is my fun account I have created as an experiment. From day one (almost 5 years ago) I have focused solely on E & HR loans, the very riskiest of all loans on Prosper. Because it is such a small account investing in the highest risk loans returns have been volatile – ranging from a high of 23.56% to a low of 4.93% in 2014. Less than 18 months since that low the return has more than doubled. This is what can happen when you have a minimally diversified portfolio focused on high risk loans.

Prosper – Roth IRA

I opened this account back in 2014 with a slightly different intention. All of my other P2P lending accounts have been invested aggressively in higher risk loans, so I wanted this new account to take a more conservative approach. I rolled over $50,000 from a Roth IRA account and I have our sister company, NSR Invest, manage this account with our balanced portfolio. It invests primarily in A, B and C grade loans at Prosper using proprietary credit models.

Lending Club Traditional IRA – 2

This account was open out of necessity. I needed to do a recharacterization of my Roth IRA because my income ended up being higher than expected and I no longer qualified to contribute to a Roth IRA. Since I had already made my contribution to the Roth IRA I had to get these loans moved to a new Traditional IRA. Lending Club made this process very easy as they transferred loans that were held in my Roth to this Traditional IRA. This account is just over a year old and therefore still has a relatively high NAR.

Direct Lending Income Fund

But for my investment in the Direct Lending Income fund my overall returns would be far worse. It continues to be the best performing investment in my entire P2P lending portfolio. Being a fund this is a completely passive investment – the fund manager, Brendan Ross, does all the work in selecting loans. The focus of this fund is in short term, high yield small business loans through a variety of online platforms.

Lend Academy P2P Fund – Roth IRA

This is my other fund account. This one is managed by NSR Invest and it is a private fund for accredited investors. Late last year I rolled over a large part of my Roth IRA into this fund. It invests in the loans issued by Lending Club, Prosper and Funding Circle with a small position in Upstart as well. The net return was much lower in December than it has been historically and here is the explanation from the CEO of NSR Invest, Bo Brustkern:

The Lend Academy fund’s NAV reflected the change in rates at Lending Club and Prosper when each of these origination platforms raised rates, in the month it occurred. That means an immediate price adjustment is recognized, which is very different from what happens for a fund using the typical Loan Loss Reserve methodology, which nearly all other funds in our industry are using. Funds that use Fair Value are attempting to deliver a more accurate NAV, which naturally means a more “fair” NAV for investors entering and exiting a fund.

Final Thoughts

It seems we have entered a new normal. No longer are 10-12% returns easy to achieve – I think the new normal is 8-10% for sophisticated investors. And for those people who look at their Lending Club or Prosper returns and see double digits I encourage you to compare that number with the XIRR method and see the difference. I only have one Lending Club and Prosper account that shows a return of less than 9.9% but in reality my TTM return is only 8.96%.

At the end of every quarterly update I like to highlight one number: Net Interest earned. This is the money that shows the actual gains in your account (before taxes). I always like to see this number grow because eventually, when I retire some day, I want to live off the interest generated by these investments. As I continue to add to my investments I expect this number to keep growing – it now stands at a healthy $56,960 for interest earned in 2015.

I am always happy to hear what you think and answer your questions – please share your thoughts in the comments section below.

The post My Quarterly P2P Lending Results – Q4 2015 appeared first on Lend Academy.

[Disclaimer: I am not an accountant nor am I qualified to provide tax advice. This post merely shares how Lending Club and Prosper are presenting their tax information this year. You should seek professional advice before taking action on any of the ideas presented here.]

Filing taxes with Lending Club and Prosper can be confusing since it is different than the tax treatment of most other investments. If you’ve had losses or recoveries in your account you’ll see several different forms provided by Lending Club and Prosper.  It’s important to keep in mind that new investors may not have some of these tax forms since it can take several months for notes to chargeoff. This post will outline information regarding filing your taxes for 2015. We’ll also highlight any significant changes. 

Lending Club Taxes

Probably the biggest and most welcome change for this year is Lending Club’s integration with TurboTax. For investors who use TurboTax, this will simplify the tax reporting process. Lending Club has a page dedicated to importing your Lending Club tax forms into TurboTax. If you don’t use TurboTax or want to fully understand the tax implications of your Lending Club account, Lending Club has provided an updated tax guide for retail investors.

Your tax statement is available in the Statements section of Lending Club’s website. There you will find a Tax Statement section which will direct you to your 2015 tax forms which will be titled 2015 Consolidated 1099 Package. In the tax guide, you will see an outline of the forms that may be included in the 1099 package.

Lending Club has again shown an example of where income and short/long term losses may be reported when filing. The only difference from last year is that they show listing out each loan separately. Below is an example of how short term losses may be reported.

Short Term Losses Example

Perhaps the most complicated part of taxes with Lending Club is if you participated on the secondary market by purchasing notes. If you have not purchased or sold notes on the secondary market you can skip over this section. Note sales are accurately reported in a separate section and it is straight forward. Below is a screenshot of three notes I sold in 2015.

Click to view full-size image.

However, if you purchased notes on the secondary market, you may need to update your cost basis. A Lend Academy reader who only participates on the secondary market shared with us information on his account and I have verified this information on my account as well. For starters, Lending Club alludes to this in their tax guide:

Please keep in mind that Notes purchased on the Folio Investing* Note Trading Platform may have been purchased at a discount or premium relative to outstanding principal plus accrued interest at the time of purchase, and additional information is provided in order to help you determine the cost basis for transactions involving these Notes. However, investors are ultimately responsible for tracking their tax cost basis. The basis reported on Form 1099 may differ materially from an investor’s tax cost basis, depending on the investor’s personal tax situation. For more information, please consult your financial or tax advisor.

Below is a screenshot taken from my Lending Club tax statement which includes note 1182183 (third row) that was purchased on the secondary market. It was charged off in 2015 and reports a cost basis of $8.75.

Click to view full-size image.

I looked at this note on Lending Club’s website and found that the $8.75 is the exact amount of the outstanding principal.

However, digging into my FOLIOfn statements I found that the amount I paid for this note, or the cost basis is a much higher amount of $18.16.

Click to view full-size image.

Thus, it seems as though investors on FOLIOfn may have additional work to do by updating their cost basis which will in turn affect their losses for the year.

At the end of the tax guide Lending Club shares their guidance on reporting gains and losses as they have done in the past. This is an important piece of information for investors to understand which I discuss more in detail towards the end of this article.

Generally gains and losses from recoveries, sales or charge-offs related to Lending Club Notes are reported for tax purposes as capital gains or losses, rather than ordinary gains or losses. Generally, Lending Club Notes are considered capital assets because they are owned for the purposes of investment (similar to a stock or a bond). Generally, realized capital losses are first offset against realized capital gains. For individuals, any excess capital losses can be deducted against ordinary income up to $3,000 ($1,500 if married filing separately). Capital losses in excess of this limit may be carried forward to later years to reduce capital gains or ordinary income until the capital losses are fully utilized. For more information, you may want to refer to Chapter 2, Ordinary or Capital Gain or Loss of IRS Publication 544 – “Sales and Other Dispositions of Assets”.

Prosper Taxes

Prosper provides similar tax forms to that of Lending Club and the tax treatment is also similar. Although they do not have a tax guide, they do offer some frequently asked tax questions on their website. If you’re looking for your statements they can be found under History when hovering over your account name. From the History screen, select Statements. Instead of all of your tax documentation being consolidated in one report, you’ll find several different forms. I have shown the ones listed in my account below.

Below is the breakdown taken from Prosper’s FAQ that highlights the forms you may receive from Prosper (if applicable) for your account. Included below are screenshots from my Prosper account.

1099-INT

You will receive a form 1099-INT in each tax year that you earn $10 or more in interest on Notes purchased prior to 2009, unless you live in a state for which there is an applicable reporting exception.

1099-MISC

You will receive a form 1099-MISC in each tax year that you receive borrower late fees, referral awards, bonuses, incentives, and the like. Income shown on form 1099-MISC will be reported to the Internal Revenue Service and State tax authorities in the event applicable thresholds as established by them are met.

1099-OID

You will receive a form 1099-OID in each tax year that you have interest income on Notes originated in 2009 or later. Income shown on form 1099-OID will be reported to the Internal Revenue Service and State tax authorities in the event applicable thresholds established by them are met. This form details income reported on Notes that are subject to OID tax reporting.

1099-B

If you sold Notes on the FOLIOfn trading platform during the tax year, you will receive a Form 1099-B from FOLIOfn that shows your sale date, proceeds, and cost basis, broken down into short and long term gains. You will receive a Form 1099-B from Prosper for any Notes that were charged off/ discharged during the tax year or recovery payments received during the tax year.

Short-term Losses

Example of recoveries and chargeoffs on 1099-B

A Case For Investing In a Tax Deferred Account

Since we are talking about tax treatment of this asset class, it’s important to note that investing in Lending Club or Prosper has a more unfavorable tax treatment compared to other investments. Due to this, there is a strong case for investing in a tax deferred account like a traditional IRA or a Roth IRA. This is something that every p2p lending investor should at least be aware of, keeping in mind that this is also a personal investment decision.

Income through p2p lending is taxed as ordinary income, similar to that of a regular job. As covered above, losses fall into two categories: short and long term capital losses, which means that losses don’t necessarily offset the gains of your ordinary income as I’ll cover below. In a tax year, the maximum capital losses you can deduct is $3,000. The remainder is carried forward to future years. If you’re focused on investing in higher interest loans, this means that you’ll hit $3,000 of capital losses with around a $30,000 investment.

Additionally, capital losses first offset capital gains. If you have no capital gains, then you can deduct losses from your ordinary income. For most investors this is not the case. Depending on your ordinary income tax rate, this means that your capital losses may be offset first by long-term gains that have more favorable tax treatment, usually 15% (depending on your income), as opposed to your potentially higher ordinary income tax rate. Short-term gains on the other hand have a higher tax rate, similar to the ordinary income tax rates (see Capital gains tax in the U.S.). There is also the consideration that p2p lending is an income producing investment. To optimize taxes, fixed-income investments like p2p lending are better placed in tax deferred accounts. 

Conclusion

For the 2015 tax year it was nice to see Lending Club fully integrate with TurboTax and hopefully Prosper will follow suit in the coming years. Taxes on investing in both Lending Club and Prosper are sometimes confusing for newcomers, but hopefully this guide helps you better understand how to file your taxes and the tax implications associated with investing in a taxable account.

The post Lending Club and Prosper Tax Information for 2016 appeared first on Lend Academy.

There is no industry standard when it comes to calculating returns on Lending Club and Prosper but this is something that is very important from an investors perspective. This is an updated post that we first covered in 2011 on different ways of calculating returns on Prosper and Lending Club. While both companies continue to provide returns in your account, there are some updates to what is provided by them and many people prefer other methods.

Here are six different ways for investors to get a handle on their returns.

1. Rely on Lending Club and Prosper

Both Lending Club and Prosper will give you their estimate of the return on your p2p lending portfolio. At Lending Club you are given the option to see your Net Annualized Return or your Adjusted Net Annualized Return. Lending Club breaks down returns into three categories: Primary Notes, Traded Notes and Combined return as shown below.

You can read more about the calculation Lending Club uses, but the major difference between net annualized return and adjusted net annualized return is that adjusted net annualized return takes into consideration loss assumptions based on loans that are in grace period, late or in default. This is their estimate of the return on the outstanding principal in your portfolio. Because they are only calculating returns based on outstanding principal, your returns may be overstated if you have idle cash in your account.

Prosper has a similar way of calculating returns, but instead of adjusted annualized returns they use a seasoned only number. Here is what they say about returns:

To calculate Annualized Returns, a total gain or loss is calculated by summing all loan payments received net of principal repayment, credit losses, and servicing costs. The gain or loss is then divided by the average daily amount of principal outstanding to get a simple rate of return. To annualize that rate, we divide it by the dollar-weighted average Note age of your portfolio (calculated in days) and then multiply it by 365.

Prosper breaks out returns on notes that have seasoned, meaning this number only uses those notes that are 10 months or older. These numbers are shown both on the overview and investing page.

2. The Simple Method

If you did not add to or withdraw from your account at Lending Club or Prosper then you can perform a simple calculation to calculate your ROI based on your balance on your monthly statement. You can do this for the latest month, quarter, year or any other period. For example, here are my numbers from Prosper for the third quarter of 2015. I did not add or subtract money from this account in that quarter.

Statement balance 6/30/15:     $6,486.08
Statement balance 9/30/15:     $6,710.33
Gain:                                           $224.25

Then by performing this calculation: ($224.25/$6,486.08) * 4 you can find out your annualized ROI for last quarter. This computes to 13.8%, which is fairly close to Prosper’s estimate. The good thing about this method is that it does take cash into consideration since it is part of your account value.

3. NSR Platform Portfolio Analysis

The NSR Platform calculation is very similar to Lending Club’s adjusted net annualized return. The calculation is based off outstanding principal with notes being placed in separate buckets for grace period, each late status, default and chargeoffs. A loss factor is then assumed for each bucket based on historical data to calculate your ROI which is discounted by the expected loss rates. These assumptions can be altered for more optimistic or pessimistic projections. NSR’s calculation may differ slightly to Lending Club’s due to the lack of servicing fees provided in data exports

The benefits of using NSR to calculate your returns is that you can view the breakdown by any filter criteria which can help you better understand the breakdown of your returns. This is beneficial to determine which areas of your portfolio may be under or over-performing. For instance, in the below screenshot from NSR you can see that my D grade loans seem to be out-performing my E grade loans. I also need to take into consideration the average age of each grade and amount of notes, but this may make me reconsider my allocation to E loans.

4. XIRR() – Most investors preferred method

XIRR is the preferred way of computing p2p lending returns for many investors. Peter Renton, the Founder of Lend Academy uses this method to calculate his returns. By using the balances on your monthly statements and taking into account any withdrawals or deposits you can get an accurate picture of your ROI over any historical period.

The XIRR() function (it is explained well here) provides a way to calculate returns when you are adding or subtracting to your account regularly. It is simple to setup in a spreadsheet is an easy way to calculate a historical ROI number.

The chart to the left is an example of how your own spreadsheet might look when calculating returns over 12 months. The initial balance is reported as a positive number and ending balance is always represented as a negative number. Contributions and withdrawals are listed as positive and negative numbers respectively. In the example to the left, there are only contributions, no withdrawals. These numbers should be inputted on the day the contribution or withdraw occurs.

The XIRR() calculation is a simple one. You have the dates in one column and the additions and withdrawals in the other column – this is the calculation for the spreadsheet above: =XIRR(B2:B14,A2:A14). XIRR is not perfect but it is the most accurate way to calculate ROI for any historical period.

XIRR has a few shortcomings. First, it doesn’t provide any guidance of ROI going forward. Second, no assumptions are made regarding status of notes, it is simply a calculation of money in, money out and ending balance. Finally, for new accounts it is likely to provide an inflated return due to fact that the notes haven’t seasoned. If you’re interested in calculating returns with XIRR, you can download our spreadsheet for free here.

5. Fair Value method of calculating investment returns

Although this method won’t apply to self directed investors, it is important to understand for investors who either invest or are considering to invest in a fund like the one offered to accredited investors from NSR Invest.

It is the most sophisticated method of measuring returns and has a deceptively simple name. It is called Fair Value. “This method is typically conducted by those practiced in the art of valuation,” says Bo Brustkern of NSR Invest, the General Partner of the Lend Academy P2P Fund.

Mr Brustkern’s fund uses the services of Arcstone Partners, a specialist valuation firm, to render a Fair Value of the fund’s assets for its monthly Net Asset Value (NAV) calculation. “It’s not for the faint of heart,” said Mr Brustkern, “because Fair Value valuation involves a note-by-note analysis involving thousands of positions, taking into account the contractual cash flows of each note, each note’s age and payment status, a discount rate that reflects current yields on comparable notes, and risk of default as of the valuation date.”

Fair Value attempts to deliver a more accurate NAV, which naturally means a more “fair” NAV for investors entering and exiting a fund. If there is a downside, it is that Fair Value also increases the volatility of fund returns. For example, the Lend Academy fund’s NAV reflected the change in rates at Lending Club and Prosper when each of these origination platforms raised rates. Since stability of returns is supposed to be one of the hallmarks of marketplace lending, the use of Fair Value is anything but uniform among funds in the industry. “When returns are lower because of external events our investors notice, and they are not always pleased” said Mr Brustkern. “Still, we stand by the fairness principle that underpins Fair Value calculations.”

6. LendingRobot’s Expected Return Calculation

LendingRobot recently announced a new way of calculating expected returns on a portfolio. I reached out to Emmanuel Marot, CEO and Co-Founder of LendingRobot to better understand this new calculation given that it is quite complex. If you’re interested in diving into the details you can read about it here.

Regarding their reasoning for this new calculation, Emmanuel stated:

Most of the loans investors have put money in are still on-going. Until they’ve reached maturity, have been repaid early or have defaulted, calculating their performance requires to predict how much they will keep paying. The reductionists may consider they will sum up to the outstanding principal, while optimists may believe all payments will be made on time, and pessimists may think it’s worth zero because it may default at any time. The truth is somewhere in between, and that’s precisely what LendingRobot aims to determine, based on typical loans characteristics

To explain it simply, Emmanuel provided this example highlighting the challenge that the current facts are not enough:

For instance, you invest $100 on a 13%, 36-months loan, that makes 3 net payments of $3.34. So the outstanding principal is now $93.07. What’s your return? (calculating ROI for the sake of simplicity, of course IRR would be more accurate):

• If you consider only the payments so far, your return is 3*3.34 / 100 – 1 = -99%
• If you add the outstanding principal, your return is (3*3.34 + 93.07) / 100 – 1 = 3%.
• If you add all the made and future payments, it’s (3 + 33) * 3.34 / 100 – 1 = 11%

In other words, to show current returns, you always need to predict the future payments or at least the value of the outstanding principal.

Conclusion

While most investors have their preferred method of calculating returns, it’s important to understand how returns are calculated on Lending Club and Prosper. If you’re interested in comparing your returns to other Lend Academy readers you can contribute to this forum thread.

What is your preferred way of calculating returns? Let us know in the comments below.

The post Different Ways to Calculate P2P Lending Returns appeared first on Lend Academy.

We often discuss the benefits of investing in p2p lending in a tax advantaged account, but we haven’t covered the actual process in detail. Readers often ask: How do I create a retirement account or rollover an IRA into Lending Club or Prosper? Both Lending Club and Prosper make this process simple and we’ll outline the steps to do this below. For investors looking to open an account with Lending Club this is a great time since the bonus for opening an account is at an all time high. While your offer may differ from Lending Club we have seen bonuses top out at $2,000 for a $100,000 account. Of course, there are terms and conditions to Lending Club’s offer which they will be happy to share with you. But to be eligible for this offer you need to email retire@lendingclub.com.

Besides rolling over an IRA from a previous employer or rolling over an existing traditional IRA or Roth IRA you can also open a new traditional or Roth IRA directly with Prosper or Lending Club.

Open Up a Lending Club IRA

To begin, head over to Lending Club’s website to create a new account which will prompt you for basic information. You will also be asked to choose from a variety of IRA types including: Traditional, Roth, SEP, SIMPLE and inherited. Accounts can be funded with an annual contribution, rollover or direct transfer.

Once registration is complete you will receive an email to sign your account application. Lending Club uses DocuSign for electronically signing documents which means the process is paperless for 401k rollovers and annual contributions.

Next, investors need to fund the account. Checks need to be sent to Lending Club’s preferred custodian Self Directed IRA Services, Inc. (SDIRA) and made payable to “SDIRA FBO {your name}”. This applies to both annual contributions as well as rollovers. For rollovers you will need to work with your current plan administrator to get the check sent for transfer.

For direct transfers you need to fill out information about the source account and print and sign the account application as well as the transfer request. Submit these documents to retire@lendingclub.com. This information is used by SDIRA to initiate the transfer. Once funds have been accepted by SDIRA they will be made available to invest.

SDIRA charges an annual account fee of $100 for administering a Lending Club IRA, but this fee is covered by Lending Club on your behalf if you have an initial minimum balance of $5,000. Lending Club will continue to pay this fee in subsequent years if your account maintains a balance of $10,000 or more.

Open Up a Prosper IRA

The first step in opening up a Prosper IRA is creating an account on the Prosper website. Once completed, investors need to create an account with a custodian. Prosper’s preferred custodian is Millennium Trust and the form investors need to complete is available here.

Next, users transfer assets into the new Millennium account. For new Roth IRA or traditional IRAs investors fund from their personal bank accounts. For rollovers and transfers, investors need to work with their current provider to have the funds sent to Millennium Trust.  Once Millennium Trust has the funds, they wire transfer them to Prosper for deposit into the new Prosper IRA account. The investing process remains the same for a retirement account.

Prosper has a $5,000 minimum deposit to open a Prosper IRA account. With the minimum deposit, Prosper will pay your annual IRA fee for the first year. They will continue to pay the annual IRA service fee on your behalf each year if you reach and maintain a $10,000 invested balance in the second year and beyond. If your initial transfer is over $10,000 your IRA fees will be paid each year.

Conclusion

There are significant benefits to investing in a tax advantaged account with p2p lending, especially since p2p lending is a much more tax inefficient investment compared to many other asset classes. Both Lending Club and Prosper make the process of investing in tax advantaged accounts very easy. Remember for the 2015 tax year, you have until April 18th to contribute to a Roth or traditional IRA.

The post How to Rollover a 401k or IRA to Lending Club and Prosper appeared first on Lend Academy.

It has been a long time coming. A trade association has been on the minds of many people in the marketplace lending industry, including myself, for quite some time. Today, Funding Circle, Lending Club and Prosper announced the formation of the first association that establishes a business code of conduct across marketplace lending. The association will officially be called the Marketplace Lending Association (MLA) and is a non-profit membership organization.

It is based somewhat on the UK model where the Peer to Peer Finance Association (P2PFA) is the voice of the industry there. Even though the P2PFA has only eight members out of more than 100 platforms, it is a powerful organization that helped formulate regulation in the UK. The three founding members of the MLA have been quietly developing this new organization here for many months and they decided to launch it on the eve of LendIt. Like the P2PFA, it is not an association that is open to everyone, although any platform can apply. But there is a long list of standards that must be in place before a platform can be considered for membership.

The MLA is Open to True Marketplace Lenders

On the MLA website is a six page document that details the operating standards that all members must commit to follow. Membership is only open to true marketplace lenders which is defined as “platforms that match at least 75% of loans, by dollar, with commitments for funding from investors, before the loans are issued.” So, basically balance sheet lenders are not eligible – the majority of a platform’s loan volume must come from their marketplace.

There are five key operating standards:

1. Investor Transparency and Fairness – detailed loan level data must be made available to investors.
2. Responsible Lending – ensure transparent and fair loan pricing in adherence with fair lending laws.
3. Safety and Soundness – have a six month operating cash reserve and establishment of business continuity plans.
4. Governance and Controls – maintain strong internal controls to ensure compliance with laws.
5. Risk Management – maintain robust risk models with fraud detection and anti-money laundering while protecting all customer data.

These are all reasonable standards which most established platforms have in place already. The one sticking point that I am sure many of the major online lending platforms may have an issue with is the 75% threshold for marketplace loans. Industry leaders like OnDeck and Avant both have active marketplaces but are probably well below this threshold.

I have spoken with representatives of the three founding members several times in recent weeks and they are all very committed to this new effort. But it is still very much in its nascent stages. While the MLA has a website and operating standards it has no staff yet and they are just beginning their search for an executive director. Having said that, I intend to support this initiative in any way I can and I hope they can get all the necessary pieces in place quickly.

My Take

Now, there are other association initiatives that are in various stages of formation. I know of at least three different efforts beyond the MLA and it is quite possible we will see other efforts successfully launch. But one thing is clear. This industry needs a unified voice inside Washington DC.

We are in this interesting phase right now where the industry is maturing but we have not had an independent voice to lobby on our behalf in Washington. In my conversations with people there this is a critical missing piece for us. While Lending Club, OnDeck and others now have executives on staff based there an independent voice will be far more effective I have been told.

The MLA is using the very successful model pioneered by the P2PFA in the UK, although that was established in 2011, so in some ways they have a five year head start. But it is better late than never and I hope this initiative gains some real traction this year. We will likely see other more inclusive organizations launch supporting the broader online lending community and I think that will be appropriate. But with the three industry leaders backing the MLA this will be an organization that will immediately provide some legitimacy to our industry.

You can see quotes from the CEOs of the three founding members in the official press release. And for those people who will be at LendIt USA 2016 I will be moderating a panel discussion with representatives of all three platforms specifically talking about the MLA, its goals and vision.

The post Three Industry Titans Launch the Marketplace Lending Association appeared first on Lend Academy.

LendingRobot, an automated investing service for p2p lending announced a new mobile app yesterday. This is the first app of its kind and is something that will be welcome news to the retail investment community. The app tracks the overall status of an account and also provides insights to what is going on within a p2p lending portfolio. I spoke to Emmanuel Marot, CEO and Co-Founder of LendingRobot to get some more information about why they decided to create an app and what they have planned for future iterations.

When I asked Emmanuel about the reasoning behind an app he had an interesting response. From the start, they have positioned LendingRobot to be a set-it and forget-it type service. However, what they found was that 30% of their clients login several times a week and some even once per day. About 20% of these users were already coming from their phones using the website so the app was a natural addition to their offering. They aren’t changing their strategy, but they want to serve these users who want insight and access to their account right from their mobile phone. Marot stated it’s no surprise that a portfolio with a 1000 or more notes always has something new happening and investors will be able to see exactly what’s happening with the new app. Finally, none of the current marketplace lenders they service, including Lending Club, Prosper and Funding Circle have a mobile app for investors. Emmanuel noted in the press release that it was baffling that no one has created a ‘Mint’ for this industry.

The LendingRobot app is available as a free download on the iOS App Store and Google Play Store. There is no cost to use the free monitoring and a signed agreement with LendingRobot isn’t necessary until you begin using automated investing. LendingRobot also offers this same free functionality on their website for users.

Since I already had my account I was able to login with my existing LendingRobot credentials and the screenshots below are taken from my account with my Lending Club account connected. On the first page it gives you an overview of your account, highlighting the most recent note changes within your account which is a valuable feature. The second shows information on returns and average interest rate of the account.

The next two screenshots provide an overview of loan composition and account values.

Conclusion

While speaking with Emmanuel it was clear that this is just the beginning of their plans related to the LendingRobot mobile app. There eventually will be many more features, including the addition of functionality currently available to paying customers on LendingRobot.com. We also discussed how mobile notifications might help users better manage their p2p lending portfolios. It’s nice to finally see a polished mobile app for retail investors and its a trend that is likely to continue in the coming years.

The post LendingRobot Releases First Mobile App For P2P Lending appeared first on Lend Academy.

Former Lending Club CEO Renaud Laplanche on stage at LendIt last month

When I first read the news when I woke up this morning I thought it must have been a joke. The CEO and Founder of Lending Club, Renaud Laplanche, has resigned. But this is not April 1 and it is certainly no joke. The person who has probably had more impact on the growth of this industry than anyone else is no longer CEO of the company he founded – it is effective immediately.

Wow. Just Wow.

There is a press release out this morning with many of the details. The board asked for Renaud’s resignation following the discovery of an improper sale of $22 million in loans to one investor. According to the press release the loans in question departed from the instructions given by this investor. The loans have since been repurchased by the company. But the impropriety did not stop there. From the release:

The review began with discovery of a change in the application dates for $3.0 million of the loans described above, which was promptly remediated. The board also hired an outside expert firm to review all other loans facilitated in the first quarter of 2016 and the firm did not find changes to data in these or other Q1 loans.

The review further discovered another matter unrelated to the sale of the loans, involving a failure to inform the board’s Risk Committee of personal interests held in a third party fund while the Company was contemplating an investment in the same fund. This lack of disclosure had no impact on financial results for the first quarter.

So, it seems that not only were the loans sold to an investor against their instructions it looks like the dates were changed to possibly try and hide something. Then there was the further discovery of a conflict of interest. Given these things it is not surprising that the board asked for Renaud’s resignation.

While we don’t know Renaud’s motivations behind all this, and we probably won’t ever find out the full story, it is clear this is bad news not just for Lending Club, but for our entire industry. Really bad. Coming on the heels of the Prosper news from last week and the OnDeck earnings May 2016 will go down as the worst month ever for our industry. And we are barely a week into the month.

Lending Club released their earnings earlier today and it looks like they produced another solid performance with loan volume, revenue, and net profits all increasing nicely. But none of that is going to matter today. The news of Renaud’s resignation will overshadow everything else.

My Take on This News

People often ask me what is the worst thing that could happen to this industry. I would somewhat flippantly respond that it would be massive fraud by the CEO of Lending Club. While thankfully this is not what has happened here there has clearly been some level of impropriety at the highest level within Lending Club. I am not sure what motivated Renaud to take these actions.

This is going to have massive repercussions inside the company. Renaud was revered as CEO with an approval rate of 96% according to Glassdoor. Everyone I have spoken with at Lending Club from entry level employees on up only had good things to say about Renaud. He had put not just Lending Club but the entire online lending industry on the map.

In my personal dealings with Renaud I have always found him to be the consummate professional since I first met him back in 2011. He seemed to be a man on a mission – he was personally very driven to change the banking system and make Lending Club into one of the financial giants of tomorrow. This will clearly be a bitter personal blow for him.

Was this just a case of a CEO losing his head and misusing his power? What was the story behind this $22 million investor and why they were treated that way? How will Lending Club cope without the only leader they have ever had? Who will they recruit as the new CEO? Scott Sanborn, the long time #2 at Lending Club, is taking over for the time being but I expect they will bring in a new CEO with deep financial services experience at some point. But we may never know the answers to some of these other questions

I only just found about this news an hour ago but wanted to get an article published immediately. We will have more on this story as well as a full analysis of the Lending Club Q1 earnings shortly.

The post Lending Club Founder Renaud Laplanche has Resigned as CEO appeared first on Lend Academy.

What a day. Everyone is still trying to digest the big news from Lending Club this morning. More details are slowly coming to light but it is fair to say we do not have the full story and we will probably never know all the details. But we do know more than we did this morning. There are really three different pieces to the puzzle all of which contributed to the extremely negative sentiment.

First, we had the issue of the non disclosure of an investment from Lending Club CEO Renaud Laplanche. Bloomberg is reporting that one of the catalysts for Renaud’s resignation was his failure to disclose a personal investment in a company where Lending Club subsequently made an investment. This failure to disclose his investment along with Lending Club was a catalyst for his resignation according to Bloomberg. John Mack also made an investment but he has been cleared of any wrongdoing.

Second, we have the $22 million in loans that were reportedly sold to Jefferies that were against their express instructions. This one is a little confusing because the original press release from Lending Club stated that it was a non-credit and non-pricing issue. When you look at a loan the majority of the data pertains to credit or pricing. In reality this a moot point – the fact that it actually did go against the wishes of a major investor, whatever those wishes were, is the story here.

Third, we have the date change issue. This one is related to the previous issue. An internal investigation at Lending Club found that the loan application date was changed on $3 million of the aforementioned $22 million in loans. This seems to be have been the work of one or more senior executives within Lending Club who have since been let go. In some ways this last issue is the most damaging to Lending Club.

People today have been questioning the data integrity on all Lending Club loans – what else might have been changed? And if investors don’t trust the data in the loan history they will be very reticent to invest. Now, it should be pointed out that internal audits found no other problem with the data and you can be sure that many people will be combing over the new Q1 downloadable data that was made available today.

Any one of these three issues would have been headlines given Lending Club’s previously unblemished record and their oft repeated focus on transparency. To have all three items come to light today was nothing less than staggering. There is a lot of sadness and anger around the industry today – Lending Club has let us all down. And it is going to take a long time for them to earn back the trust we had.

With such big news I decided to reach out today to many industry leaders to get their comments. Some people declined to share their thoughts but below are comments from some of our industry leaders:

Matt Burton, CEO of Orchard:

We are saddened by today’s news surrounding Lending Club, and the resignation of Renaud Laplanche. Mr. Laplanche has been a central figure for marketplace lending and has done a lot to transform the industry. We believe this is a learning moment for marketplace lending and an opportunity for all participants to set the bar even higher in order for our industry to thrive.

We believe that marketplace lending, as a business model, is here to stay and that events like this — unfortunate as they are — present an opportunity for everyone to demonstrate that they provide a safe, responsible, compliant and sustainable model that is built for success during up times and down.

Al Goldstein, CEO of Avant:

At Avant, our goal is to transform the online lending industry for good. We strive to be the most transparent from a customer, capital markets and regulatory perspective. We don’t charge our customers origination fees, so what they see is what they get. This philosophy carries through to our approach to institutional investors: loans that are already originated and owned by Avant are sold to investors on a weekly basis. Operationally investors receive a file with the loans designated for sale for their review and approval before a specified sale date. We have over 50 employees dedicated to regulatory and compliance and we recently added former FDIC Chair Sheila Bair to our board.

We see a bright future ahead and we remain committed to delivering the most innovative, compliant and creative solutions for our customers and investors.

Ram Ahluwalia, CEO of PeerIQ:

The pace of institutional investment is well ahead of the quality of institutional infrastructure. Increased transparency and independence is necessary to re-build investor trust. The industry needs to invest in enhanced disclosures, asset review tests, second-level verification, and independent pricing and valuation.

This was true before the unfortunate news from Lending Club and remains true after.

Don Davis, Managing Partner at Prime Meridian Capital Management:

The loan performance on our LC book (as well as Prosper) remains strong.  The firm has a ton of cash on hand making current valuation quite attractive and a candidate to go private.  The internal controls and audit process at LC actually worked successfully in this case as this was caught and resolved fairly quickly.  We believe the industry will continue to strengthen and grow as a result.

Lost in the News: Another Strong Quarter from Lending Club

Overshadowed by all this news was the fact that Lending Club released their Q1 earnings today. Despite the negativity Lending Club actually had a good quarter. Ryan has put together an analysis of the numbers below.

Revenue for Q1 2016 was $151.3 million which was an increase of 87% from the same period last year. Adjusted EBITDA was $25.2 million, an increase of 137% from last year. They reported a net income of $4.1 million compared to a loss of $6.4 million last year. The table below taken from the press release breaks down their recent performance.

Loan origination growth at Lending Club continued as they originated $2.75 billion in the quarter. This compares to $1.64 billion from the same period last year and $2.5 billion for Q4 2015. They are now approaching $19 billion in total originations. Lending Club also announced that they had their first month with over $1 billion of originations with two days at or above $99 million in originations. Despite these numbers it is apparent that growth isn’t as strong as it has been in previous quarters.

Many investors also look at Lending Club’s sales and marketing costs as a percent of originations which came in at 2.35%, the highest since they became a public company. Lending Club noted that this is in part due to seasonality as depicted in the chart below.

Beyond financials, the impact of softening interest from investors is on many minds. Below is a screenshot from Lending Club’s earnings presentation. As expected, there is a drop in “Other Institutional”. “Managed Accounts, Individuals” also saw a decrease from the previous quarter while “Banks/Finance Companies” saw a tremendous increase and “Self-Managed, individuals” saw an incremental increase. It seems as though Lending Club was able to bring on additional institutional capital from banks at a time when other companies are having difficulty funding loans.

Also in the news as of late has been the increasing interest rates at Lending Club. Since December, interest rates have increased three times. According to Lending Club, the pockets of loans affected by lower performance have been in loan grades D-G which were addressed with credit cuts and rate increases. While we often hear about interest rates, Lending Club notes below that they have eliminated 15% of loan volume from credit policy starting in April 2016.

According to the release, Lending Club has repurchased 2.3 million shares of Lending Club stock for approximately $19.5 million. This leaves $130.5 million remaining to purchase shares after the board of directors approved a $150 million share buyback. Lending Club is not providing any future guidance at this time due to the recent news. Not surprisingly, Lending Club’s stock closed down 34% today.

The full earnings presentation including an audio of the earnings call can be found on Lending Club’s investor relations page.

Conclusion

While this will go down as the most challenging quarter for Lending Club in their history it’s important to note that despite the shocking news today Lending Club continues to grow profitably. The coming quarters are going to be especially telling as the company looks to put these issues in their past and move forward.

Disclosure: Peter Renton, the founder and CEO of Lend Academy, and Ryan Lichtenwald, Senior Writer at Lend Academy own LC stock.

The post More Thoughts on the Lending Club News Plus a Review of Their Q1 Results appeared first on Lend Academy.

Last week, Lending Club shook the marketplace lending industry with the news of Lending Club CEO Renaud Laplanche resigning after issues with a loan sale to an institutional investor and not disclosing a conflict of interest in a fund. Today we learned of more bad news from the company.

In a 10-Q filing it was disclosed that Lending Club had received a subpoena from the Department of Justice surrounding the events of Renaud’s departure. From the filing:

On May 9, 2016, following the announcement of the board review described elsewhere in this filing, the Company received a grand jury subpoena from the U.S. Department of Justice (DOJ). The Company also contacted the SEC. The Company intends to cooperate with the DOJ and the SEC. The DOJ and the SEC may have additional requests, and no assurance can be given as to the timing or outcome of these matters.

Also from the filing:

In addition, the Company may be subject to litigation related to the events surrounding the resignation of Mr. Laplanche. These occurrences could result in adverse publicity and adversely affect the Company’s brand. As a result, we could record goodwill impairment expense upon completion of the annual goodwill impairment test in the second quarter of 2016.

While the subpoena is certainly bad news for Lending Club, restoring investor confidence is a top priority. We already learned that the consortium of 200 community banks had temporarily paused investments as well as that Goldman and Jefferies had put their deals on hold. In the 10-Q Lending Club notes that a number of large investors have paused their investments as they perform audit and validation tests on portfolios or are otherwise reluctant to invest.

Lending Club has also listed ways they may attract investors, but keep in mind these are just ideas at this point. According to the 10-Q:

We are actively exploring ways to restore investor confidence in our platform and obtain additional investment capital for the platform loans. These efforts may take a number of different structures and terms; including equity or debt transactions, alternative fee arrangements or other inducements including equity. These structures may enable us or third-parties to purchase loans through the platform.

So, it is quite possible that Lending Club will use their own balance sheet to fund loans in the future taking them away from a pure marketplace to more of a hybrid lender similar to many other companies in the online lending space.

There is an entire section in the 10-Q titled “Controls and Procedures” which details some of the areas of weakness the company has identified in their own internal investigation. They stated that these weaknesses were “the result of the aggregation of control deficiencies related to the Company’s ‘tone at the top'”. They are certainly not trying to sugar coat their deficiencies any more.

Also released today was a letter from Acting CEO Scott Sanborn to investors providing details on the steps that Lending Club is taking with their data integrity review. They hired a Big Four accounting firm to do this review which included 673,000 loans issued over the past eight months. They found that “99.99% of the remaining loans display either no changes or changes explained by the normal course of business.”

Conclusion

It’s too early to determine how damaging the lower demand from investors is going to be over the coming months, but the news of a subpoena is not going to help restore confidence in the business whatsoever. After having a positive gain for the day, Lending Club stock has taken a hit in after hours trading.

Disclosure: Peter Renton, the founder and CEO of Lend Academy, and Ryan Lichtenwald, Senior Writer at Lend Academy own LC stock.

The post Lending Club Saga Continues as the Company Receives DOJ Grand Jury Subpoena appeared first on Lend Academy.

Emotions are running high right now. After more bad news from Lending Club on Monday afternoon it is understandable that some investors are getting nervous. And not just the investors in Lending Club equity but also investors in Lending Club loans.

Since 2010 I have hosted over a half-dozen conferences, produced over 60 podcasts, written over 1000 articles, and had tens of thousands of conversations about one thing: the peer to peer lending industry. To boil down my collective thoughts about our current situation to a single blog post feels very difficult, but I have set out to do it nonetheless. Now, this post can only scratch the surface of the issues. It is a summary of my thoughts as of this day, which run deep and broad, and may change tomorrow as this complex situation continues to unfold. Here goes.

I have had several emails and comments in the last couple of days from investors asking me if they should take their money out of Lending Club. That is, either cease investing (and reinvesting) in Lending Club notes, or sell them outright on the secondary market via Folio. While I can’t recommend any course of action for others I am happy to tell you what I am going to do with my Lending Club investments: stay the course.

Between all the Lending Club accounts that my wife and I own, including my portion of the Lend Academy P2P Fund that has about 1/3 of its invested capital in Lending Club notes, the total is well over $250,000. That is not an insignificant percentage of our liquid assets. And I am not changing anything – I continue to reinvest my principal and interest in new loans.

Why?

I am very confident that Lending Club loans will continue to perform well despite the governance issues that cropped up and came to light over the past two weeks. Renaud Laplanche’s departure is sad and unfortunate to say the least. But the likelihood that more departures will occur, that perhaps a large reduction-in-force is in the works, that banks will cease buying Lending Club paper, that origination volumes will go down, that profitability of the company itself may plummet, that Lending Club may participate partially by investing in loans using its own balance sheet, and that “experts” and pundits like Jim Cramer will cry sell! sell! – nothing in this narrative shakes my confidence in the underlying business model of Lending Club, nor the ability and willingness of my fellow Americans to pay their debts in a responsible fashion to the best of their ability.

Lending Club’s business model is about providing a lower rate of interest to American borrowers using a more responsible structure than credit card-style revolving debt, and at the same time providing a high return by passing through 99% of the cash flows (that’s 100% minus a 1% servicing fee) to investors. Lending Club’s underwriting model – the way in which it selects loans to list on its marketplace – has absolutely nothing to do with the recent events that ended in the resignation of its CEO and founder.

Possible Outcomes for Lending Club

Many have expressed concern to me over the last couple of days that Lending Club may not make it as a company. I think that is highly unlikely. To illustrate, let’s look at a few of the possible outcomes that could occur for Lending Club over the next few months. Here they are in descending order of likelihood in my opinion:

1. Originations are reduced sharply – This will in part be due to a pullback from banks, which currently comprise a material percentage of buyers on the LC platform (34% as reported in Q1). To position itself for contraction rather than growth, LC conducts a large reduction-in-force (layoffs), management changes, and raises additional cash on its corporate balance sheets to weather the storm. The company works its way through the crisis. And what becomes of my invested capital in LC notes in this scenario? It is safely generating income throughout the turmoil.
2. Lending Club is taken private – This could be done by a private equity firm and the new owners may conduct many of the above changes, and weather the storm in a more private fashion. The company returns to profitability, and goes public again at some distant point – let’s say five years out from today. Under this scenario, a more comprehensive change in management is likely. What of my invested capital? Safely generating income.
3. Originations are reduced but not as sharply as we anticipate – Lending Club is able to use its current stockpile of cash (in the high hundreds of millions of dollars) to push through the crisis, continue operations as normal and return more quickly to sustainable growth. Again, my capital would generate income in this scenario as well.
4. Lending Club is acquired by a strategic investor – Let’s say a large bank buys Lending Club and the new owner simply uses LC’s origination engine to satisfy its own thirst for high yielding prime consumer loans, improving its profitability and shutting the market to outside participants. This, in my view, is the actual worst-case-scenario for outside investors and our industry as a whole, as it would kill one of only two marketplace lending companies that serve individual retail investors at volume. In this scenario, while I would certainly expect my current investments to be serviced by the new strategic buyer, I would have to find a new place to reinvest my principal & interest.
5. Lending Club is unable to right-size its operations, unable to attract a buyer – There is no going-private transaction, no strategic purchase and it is unable to raise new equity investment at any valuation, and eventually runs out of cash and goes bankrupt. This, in my view, is a very distant possibility. But I know this is a concern for many people so more on this below.

In the first four scenarios, which I consider to be the most likely possibilities for Lending Club’s future, my family’s money is taken care of and my capital is unaffected. The likely “worst case” scenario as I see it is that Lending Club is forced to wind down their marketplace by a new owner, in which case we may be prevented from investing in new loans. While our currently invested capital would continue to be serviced, as I mentioned above, the detriment to retail investors seeking high, uncorrelated yields would be severe.

The Worst of Worst Case Scenarios

But let’s consider the case of a Lending Club bankruptcy even though I believe it is unlikely. One reason I believe it is unlikely is taking a look at Lending Club’s balance sheet. They have plenty of cash and very little debt outside the loans themselves so it is difficult to surmise what could trigger a bankruptcy.

If you are concerned about a bankruptcy I suggest you read the Lending Club prospectus closely. There are 25 pages of Risk Factors that include discussion of bankruptcy. If Lending Club was to cease operations a backup servicer is in place and they would take over the servicing of the loans – this would happen in a quick and efficient way and borrower payments would continue as before. Now, I should point out that even with a backup servicer in place, there is no guarantee that payments will flow to investors in a bankruptcy. Attorneys I have spoken with have said while borrower money will likely still flow in there is no guarantee that this money will continue to flow to investors. It says as much in the prospectus.

As I said I think that a bankruptcy is an unlikely scenario although certainly not impossible. In the end, everyone must weigh the risks, and measure the estimated consequences, for themselves.

Lending Club Has a Powerful Franchise

Here is why I think Lending Club will continue to be a going concern for a long time to come. First, I am assuming that the problems discussed ad nauseam in the press over the last nine days are isolated incidents and not a systemic problem. There is nothing I have read that indicates these problems are systemic at Lending Club.

Lending Club has a powerful franchise even after all these problems. They have well over one million borrowers, most of whom have high opinions of the company. They have an efficient system in place to obtain these borrowers and now they are not focused on growth I think we will see customer acquisition costs come way down as they cut the least profitable marketing programs.

They have a large number of diverse investors, many of whom still believe in the company, like I do, and will continue to invest. Many of these investors have automated reinvesting, which will provide a consistent source of fresh capital to fund loans as previous loans are repaid.

I am under no illusions that this will be easy. Lending Club did $2.75 billion in new loans the first quarter. I expect that number is going to drop significantly in Q2 and drop again in Q3. They may not get back to that $2.75 billion number for quite some time. But that is ok with me as long as they keep to their strong underwriting standards and continue to make the marketplace available to regular investors like me.

As long time readers know, I have always been a glass half full kind of person. But I do believe that Lending Club will get through these problems and emerge a better company and one that will have the best compliance and internal controls in the industry. I am very comfortable with my decision to stick with them.

I know others may have differing opinions – feel free to share them in the comments below.

Disclosures: Peter Renton, the founder and CEO of Lend Academy, and Ryan Lichtenwald, Senior Writer at Lend Academy own LC stock. The information in this article should not be considered investment advice. 

The post Why I am Keeping My Money in Lending Club appeared first on Lend Academy.

Much of the news about Lending Club’s recent troubles surrounding the departure of CEO Renaud Laplanche has been negative. This has caused the stock price to plummet over the past two weeks as more news came to light. However, there are certainly investors who smell opportunity and one investor just invested a significant amount in Lending Club. Today we learned that Tianqiao Chen , a Chinese billionaire now owns a 11.7% stake of Lending Club through his company, Shanda Group.

According to an article from Reuters:

Shanda Group said in a statement that it was a “strong believer” in the business model that Lending Club has pioneered and was “positive on its long-term prospects as it continues to evolve and refine its business.”

The Shanda Group purchased about 29 million shares for $148.7 million which has today sent the stock price up over 8% to $4.32 at the close of trading. We haven’t heard much public support for Lending Club from any US based companies, but the market in Asia is thriving and it seems that the Shanda Group is still a believer in the Lending Club vision.

LendIt Co-Founder Jason Jones recently came back from a two week trip to China in preparation for LendIt China 2016. After a huge setback earlier this year with the $7.6 billion Ezubao fraud it seems as the industry is recovering and coming back even stronger than before. Jason had this to say after his most recent trip:

Internet finance is a major force in China.  Since there is very little banking/investment infrastructure for consumers and small businesses, there is a huge opportunity for consumer facing businesses to build products and services. In this case Shanda is a gaming company with a large cash balance that is transitioning into Internet finance. 

Shanda Group is another example of a company that is investing heavily into internet finance in the US. Renren, a Chinese firm has taken a similar approach and has a stake in many US based online lenders such as SoFi, Lending Home and Fundrise among other fintech companies.

Conclusion

It’s still too early to tell what the ultimate repercussions will be from the Lending Club saga, but it’s clear that there are still people who still believe in Lending Club. Having a large investment from Shanda Group is not something that should surprise us as fintech is truly a global trend. Investors from around the world are hoping to cash in on this trend which will continue despite any speed bumps along the way.

The post Chinese Billionaire Invests Significantly in Lending Club appeared first on Lend Academy.

We have had quite a month of news here in the P2P lending industry. But now I want to return to a regular feature on the blog, something that I have been doing since 2011: sharing my quarterly returns.

I like sharing the details of my investment returns because I believe in transparency and I know returns are what motivates many, if not most, investors. I started out with just Lending Club and Prosper but slowly have added new investments over the years all focused on the lending space. I included a relatively new account this quarter, P2Binvestor, they are an asset-backed small business lending platform open to accredited investors – you can read my original review here.

I have a total of 11 accounts now, most are with Lending Club or Prosper and I will be adding new accounts to this list over the coming year as I am adding new money into a couple of different real estate platforms. I have a relatively large exposure to unsecured consumer credit, small business loans through Direct Lending Investments and now I want to diversify a little more into real estate. More on this later in the year. Now, let’s get right to the numbers.

Overall P2P Lending Return Now at 9.28%

The downward decline in my returns continues. Almost all my Lending Club and Prosper accounts are now at least five years old and at this level of maturity my initial investment has long since been repaid and in some cases I am cycling through my original principal for the second or third time.

This past quarter saw another decrease in my overall trailing twelve-month (TTM) return from 9.85% to 9.28%. Just a year ago my TTM return was over 11% but as Lending Club and Prosper decreased interest rates for borrowers and defaults also increased a little my return has been hit. Now, the platforms have been increasing interest rates over the past several months but that will take a while before it is reflected in my returns here. My six core holdings, those that have been opened the longest, also continued their decline to come in at a TTM return of 8.39%.

Now on to the details. Click the table below to see it at full size.

As you look at the above table you should take note of the following points:

1. All the account totals and interest numbers are taken from my monthly statements that I download each month.
2. The Net Interest column is the total interest earned plus late fees and recoveries less charge-offs.
3. The Average Rate column shows the weighted average interest rate taken directly from Lending Club or Prosper.
4. The XIRR ROI column shows my real world return for the trailing 12 months (TTM). I believe the XIRR method is the best way to determine your actual return.
5. The six older accounts have been separated out to provide a level of continuity with my previous updates.
6. I do not take into account the impact of taxes.

In the past I have gone through each of my accounts in this table individually but in the interests of brevity with this post I am going to group all the Lending Club and Prosper investments together.

Lending Club

I have a total of five Lending Club accounts dating back to my very first account that I opened in June 2009 – the above screenshot is of that account taken at the end of last quarter. My original account was a taxable account and soon after opening this account I realized the tax benefits of holding these investments in a retirement account. So, I opened both a Traditional and Roth IRA in my wife’s name and now I have both types of IRAs in my own name. I try to invest in different notes across all five accounts using mutually exclusive filters. For those wondering how I feel about these Lending Club accounts given the recent news you should check out my post from last week.

Prosper

When I first opened my Prosper account back in 2010 they didn’t have an IRA option. So, the first couple of years I focused all my Prosper investing in taxable accounts. Historically, Prosper charged higher interest rates than Lending Club and had a higher risk mix of loans so my average interest rate has been higher there. Today, the platforms are more in line and the average rates are within one percentage point of each other. My newest Prosper account, my Roth IRA is focused on lower risk loans as I seek to diversify beyond the high risk segment.

Direct Lending Income Fund

This fund managed by Direct Lending Investments is now three years old and continues to be my best performing investment. It invests in high yield, short-term small business loans across multiple lending platforms and has consistently returned in the 12% – 14% range for me. I am very pleased with the work Brendan Ross and his team is doing as they continue to provide high yield even as the fund has grown tremendously in size – to around $575 million in AUM today.

Lend Academy P2P Fund

The Lend Academy P2P fund, managed by the team at our sister company NSR Invest, invests in Lending Club, Prosper and Funding Circle loans and has a small position in Upstart as well. While I have been very happy with the way the fund has performed, when Lending Club and Prosper raise interest rates, as they have done several times recently, it impacts the NAV of the fund. Bo Brustkern explained it best in my last quarterly update:

The Lend Academy fund’s NAV reflected the change in rates at Lending Club and Prosper when each of these origination platforms raised rates, in the month it occurred. That means an immediate price adjustment is recognized, which is very different from what happens for a fund using the typical Loan Loss Reserve methodology, which nearly all other funds in our industry are using. Funds that use Fair Value are attempting to deliver a more accurate NAV, which naturally means a more “fair” NAV for investors entering and exiting a fund.

P2Binvestor

My new entrant this issue is P2Binvestor, an asset-backed working capital platform for small businesses based in Denver, Colorado. Full disclosure, I am on the advisory board of this company and have known the founders since before they began operations. I am including them here now because they have built a decent track record and I believe they provide another nice diversification for accredited investors. These are short-term loans, backed by accounts receivable, with 30-60 day liquidity.

Final Thoughts

As I said in my last update I think the new normal for returns is in the 8-10% range. While I would like my returns to be higher I am not reducing my holdings by any means. I still feel that investors are rewarded well for the risks we are taking.

Speaking of risk, I have always tended to focus my investments in the higher risk segments of the platforms. These have historically been the best performing loans at both Lending Club and Prosper. But that could be changing. If and when the next recession hits the best returns may well come from the lower to medium risk loans. So, I have been slowly moving my investments into slightly more conservative loan grades.

I always like to highlight my Net Interest earned number. This quarter it is $56,582 for the previous 12 months. This is actually down slightly from my Q4 2015 update as I suffered slightly more defaults this quarter and did not add to any positions. I expect this will rebound nicely in Q2.

If you have any questions or comments I am happy to discuss in the comments section below.

The post My Quarterly P2P Lending Results – Q1 2016 appeared first on Lend Academy.

It has been exactly four weeks since the big Lending Club news. The marketplace lending world has not fallen apart but we are also in a very different place than we were a month ago. So, with this article I want to give a different perspective on the news now that we have had some time to live with the new reality.

So much has been written in the last month, most of it negative, that the casual observer could easily believe the online lending industry is dying. While I acknowledge these are difficult times I also think the fundamentals of our industry remain strong. The original premise of a better deal for both investors and borrowers is just as true today as it was last year.

To many people, myself included, this industry is more than a job. I am personally very passionate about online lending, I continue to believe in it and I want what is best for the industry. I have met hundreds of people at LendIt and other events over the years who feel exactly the same way.

For those of us who care deeply about our industry we know it has been damaged. The question now is this: what are we going to do about it?

This is Our Wakeup Call

Looking back now I can see we got ahead of ourselves. Thinking back to LendIt USA 2015 in New York there was a ridiculous amount of hype about the industry. We all thought we were changing the world and that the party would just keep going on and on.

That was a mistake. We should have kept a firmer grip on reality. Many of us tried to grow too fast, determined to make hay while the sun shines. That may be fine for a tech company like Facebook or Google but in financial services we should have taken a more prudent approach.

But we can’t have our time over again so what are we to do? It is time to rebuild the industry, time to make every company more resilient. Here are some things we can do to help move the industry forward:

1. Transparency
   This industry began with an ideal to bring more transparency to the financial system. We have moved away from this ideal somewhat in recent years. It needs to return in a big way. I think all major platforms can do much better here. It may mean risking giving away some information that you would prefer to keep private but I think every platform should err on the side of more transparency rather than less.
2. Support for a Robust Ecosystem
   It is not good enough for a platform to say that their data is trustworthy and clean. Companies like Orchard, PeerIQ, MonJa and dv01 should be encouraged to verify everything for investors. All platforms should be open to working with ecosystem providers like these.
3. Enhanced Disclosure
   For large investors to get comfortable again they are going to need to see disclosure beyond just the loan book. There needs to be operational and servicing data made available as well as financial information on the state of the business. Not to mention an established compliance culture that can deal immediately with any irregularities that occur.
4. Behold the Hybrid Model
   Many of the leading platforms in our industry are pure marketplaces, holding no loans on their balance sheet. This has been a good model but when times are tough it can be beneficial to have the ability to fund loans from your own balance sheet. While I still like the pure marketplace, I have moved on from believing it is the best way to run a business. This has nothing to do with having skin in the game, I believe pure marketplaces have that anyway, but rather having the flexibility to fund loans from your own balance sheet can make these lending platforms more stable.
5. Resist the Impetus for Rapid Growth
   In some ways I think the focus on growth is at the root of the problems we are facing. A culture centered around rapid growth may encourage a tendency to cut corners. I am not saying that is what happened at Lending Club but today rapid growth is going to be seen more as a negative than a positive. We want companies to take on a sustainable growth path that may mean the occasional down quarter and that should be ok.

The Fundamentals are Critical

What has been lost in the noise of the past month is that Lending Club had a great first quarter. Their business fundamentals have been solid. Now, their second quarter will look nothing like the first quarter as they have been dealing with the fallout. No doubt originations and therefore revenue and profits will be significantly down from Q1.

I am hoping every platform CEO has taken a long, hard look at their business over the past month and refocused their management teams on the fundamentals of the business. This means underwriting, service, compliance, marketing, engineering, legal – all the departments of a business need to focus on doing the fundamentals well.

The Rebound Has Begun

While I don’t want to paint too much of an optimistic picture I can tell you that conversations I have had in recent days leads me to believe that a rebound is already underway. Investors that stopped buying loans at the major platforms are now back or about to be back and some of these are large investors.

Now, my sense is we have a long way to go before the industry is back to where it was in Q4 as far as origination volume goes but right now some positive movement is a good thing.

Let’s Not Waste This Opportunity

Everyone is watching us. Regulators are watching. Banks are watching. The media is watching. Investors are watching. What we do as an industry in the next 3-6 months will define us for many years to come. If we go back to the status quo and nothing changes I don’t like our long-term prospects. But if embrace bank-like compliance, become more transparent and open our doors to the ecosystem we will come back stronger than ever. We may end up seeing this time as a positive turning point for our industry.

The events of last month do not undo all the good things this industry has done. We have helped millions of people access credit quickly and easily and we have provided investors with a new high-yielding asset class.

The leading company in our industry made mistakes. That is not disputed. The positive impact these mistakes can have on this industry could be the enduring legacy of this difficult time. Let’s all work together to make it so.

The post The Opportunity in Difficult Times appeared first on Lend Academy.