A lot has been written recently about institutional investors interest in Lending Club loans following the Lending Club saga, but around 50% of funding comes from individual investors. This week there was a report from Morgan Stanley highlighting that retail investor confidence may be looking up. We also reached out to retail investor portals NSR Invest and LendingRobot to get their perspective regarding their paying clients.

The Morgan Stanley report consisted of a retail investor survey and while we can’t share the exact report we can talk in general about the results. Most investors were aware of the departure of Lending Club’s CEO Renaud Laplanche, but a majority of respondents were still positive about Lending Club with only a small percentage reporting they would stop investing. This is no surprise but it seems like the confidence of retail investors still remains strong given the results of the survey.

NSR Invest, a p2p investment advisor for financial advisors and individuals, noted material drops for two weeks following the Lending Club news. They also provided the following data points:

• For the month of May new accounts and existing accounts both had net positive additions at NSR (3% growth in assets).
• 2%-3% of our clients voiced serious concern.
• Less than 1% paused their investments.
• Well less than 1% requested liquidity.

CEO Bo Brustkern stated by early June, new accounts at NSR Invest are back to normal levels. What’s interesting is compared to the study above by Morgan Stanley NSR Invest’s reported numbers were significantly better, showing perhaps that those who use a third party tool such as NSR have more confidence in their investment in the asset class.

Emmanuel Marot, CEO and Co-Founder of p2p lending robo-advisor LendingRobot shared a similar sentiment. Shortly after the news they reported several clients questioning if they should be worried, with a few pausing their investments and no massive exodus.

Emmanuel stated that they are still growing and their assets under management as of June 16 are significantly larger than they were just two weeks ago and new investors are coming in at approximately the same rate as before. He expects that the news will actually help increase investor returns with their most recent Adaptive Portfolio Rebalancing feature due to the increase of notes on the secondary market.

Emmanuel also brought up the fact that some early adopters and tinkerers may have left due to the fact that they felt let down by a company they had an emotional attachment to. In fact, most questions they have received are coming from long time Lending Club investors. Newer investors are coming for the attractive returns offered by p2p lending and look more at note payments and performance than an incident that didn’t have any direct effect to retail investors.

From a personal perspective, the Lend Academy team remains bullish on Lending Club. Peter, the Founder of Lend Academy recently published an in depth article on why he is keeping his money at Lending Club. I personally have continued investing with Lending Club and in light of the recent interest rate increases decided to add a small amount to my Lending Club account. After a long period of decreasing rates, Lending Club has now raised rates 4 times (12/22, 1/28, 4/20, and 6/7) since December 2015 which I believe may result in higher returns going forward.

Conclusion

There has certainly been concern from investors following the Lending Club news, but perspectives from those closest to retail investors seem pretty positive. Regarding loan volume and platform health, while it is certainly down significantly from before May 9, we have seen that loan volume has increased slightly in the last week. But it’s hard to draw any conclusions on trends with loan fluctuations until we have more data. We continue to monitor weekly volumes to the fractional and whole loan pool. Based on what we’ve seen in recent weeks there certainly has been a broader confidence issue in Lending Club, but it seems as though the retail market remains strong.

The post Update on Retail Investor Sentiment Following the Lending Club Saga appeared first on Lend Academy.

The Lending Club news hit over a month ago now, but there has been plenty of talk since then about the future of Lending Club and the marketplace lending industry. NSR Invest, a sister company to Lend Academy and Emerald Direct Lending Advisers are hosting a webinar tomorrow, June 21 from 1:30 pm – 2:30 pm ET to give their perspectives in light of what has been going on in the industry.

The conversation will be centered around all things Lending Club including: the corporate situation, stock dynamics, risk of failure, as well as recent lending activity. If you have been wondering what the future holds for Lending Club, tomorrow will be a great chance to ask questions and get perspectives from experts in the area.

Panelists will include Joseph Besecker, Founder & CEO, Emerald Direct Lending Advisers and Bo Brustkern, Co-Founder and CEO, NSR Invest. Summer Tucker, Director of Client Success at NSR Invest will be moderating the discussion.

If you’re interested in attending, you can sign up for the free webinar here.

The post The Future of Marketplace Lending After the Lending Club News Webinar appeared first on Lend Academy.

The fallout from the departure of former Lending Club CEO Renaud Laplanche is still on the minds of many. Although this undoubtedly will have consequences in the years to come for the company it seems as though we may be moving towards the recovery phase. This morning, Lending Club issued a press release providing several updates on the company, including the conclusion of the internal investigation. They also hosted their annual shareholders meeting after postponing it earlier this month.

In the press release the board of directors officially named Scott Sanborn as Lending Club’s CEO and President. He was previously the acting CEO following the departure of Renaud Laplanche. This isn’t too surprising given that Scott has been with the company in various leadership roles since 2010. He began as the Chief Marketing Officer and starting in 2013 took on the role of Chief Operating Officer.

With the internal investigation coming to a close, two previously unknown items were brought to light. First, six funds that were managed by Lending Club’s subsidiary LC Advisors (LCA) were not valuing assets consistent with generally accepted accounting principles. This affected the net asset values as well as the monthly return figures for the funds. Lending Club is reimbursing investors in these funds. Subsequently, Lending Club enlisted the help of an independent valuation firm to make changes which includes an independent governing board.

Second, Renaud Laplanche and three family members took out loans in December 2009 totaling $722,800 to inflate origination numbers. Back in 2009 Lending Club still reported loan origination numbers on a monthly basis. NSR Invest shared with us that originations in November 2009 were $6,848,875 and December 2009 came in at $7,126,475. This is a difference of $277,600 which means December would have been a down month but for these loans from Renaud and his family. Lending Club noted that they are confident that there are no other situations where loans were inappropriately originated after December 2009

Not surprisingly Lending Club shared that originations for Q2 are slated to be one third lower than the first quarter of 2016. It’s important to note that the Lending Club debacle began mid-quarter so this estimate doesn’t show the full impact to the platform. It’s possible that Q3 2016 originations could come in even lower than Q2 depending on investor confidence. In Q1 2016, Lending Club originated $2.75 billion of loans. Assuming the one third drop estimate is accurate, we will see originations fall to around $1.8 billion in Q2. For historical perspective, Lending Club originated around $1.6 billion in Q1 2015 and $1.9 billion in Q2 2015. Unfortunately the recent issues and lower volume has resulted in Lending Club eliminating 179 positions.

Lending Club also announced several actions they have recently taken including:

• Increasing testing of data changes.
• Increasing compliance and oversight resources.
• Aligning business and control functions into a better risk management structure.
• Retraining employees on code of conduct and ethics and reinforcing importance of a high compliance culture.
• New policies on pledging Lending Club shares.
• Prohibiting the company from making investments in ecosystem partners that invest in Lending Club loans.

Lending Club 2016 Annual Shareholders Meeting Review

Hans Morris, Lending Club’s chairman began the meeting by apologizing for delaying the shareholder meeting originally scheduled for early June. He stated that the company needed additional time for review and that they now believe the review is substantially complete.

Scott and the rest of the team highlighted the difficulty in Q1 2016 with investors and borrowers as well as the investor demand as of late. They shared that many investors paused investing following the news on May 9th, but many investors are coming back with most having satisfied their diligence process. Larger investors, such as banks will take longer to come back to the platform. To attract investors, Lending Club has offered incentives to investors which will total approximately $9 million.

As a result of the decreased capital demand Lending Club reduced their variable marketing to realign loan volume with current investor capital demand. Of the 179 positions that were eliminated, a majority of them came from loan volume oriented teams.

Lending Club continues to believe the marketplace model remains efficient.  However with their strong balance sheet, they are open to investing in their own loans with the intent to resell them once demand stabilizes. By the end of June, Lending Club will have about $40 million of loans on their balance sheet which equates to approximately 2% of originations.

There were just a few questions that were asked which I’ve paraphrased below:

Q: Did the board act in the best interest of shareholders in letting CEO go? 

A (Hans Morris): Unquestionably yes, Lending Club conducted a very thorough and fair review with the help of outside independent counsel. We were also aware the news would affect the company. If we insist everyone in this company has to have unquestionable trust and accountably those characteristics apply to everyone, especially in senior leadership. We took swift and decisive action and acted in the long term best interest of investors. We were profoundly disappointed as Renaud was a friend of many. The fact is, they know the decision made the company better and Scott is the right guy.

Q: How are conversations with investors going?

A (Scott Sanborn): We are making good progress, but are not at the volumes we were at in Q1. The assets we generate provide great returns and that hasn’t changed. Lending Club needs to support investors in diligence process. Different investors are coming back at different rates of speed with banks understandably taking longer.  All of the classes of investors are back on the platform. An example of a new investor is an asset manager that began diligence over a year ago. They did a re-underwriting process in May and have long term targets. They have purchased $200 million since May 9 and expect to have $1 billion invested soon.

Q: Why Scott to be CEO? 

A (Hans Morris): Any CEO has to have 3 characteristics

• Absolute integrity
• Deep knowledge of the industry
• Must good cultural fit with company and rest of board

At first we were open minded with no decision having been made. The last 7 weeks have been quite the test and we are confident Scott has these characteristics. Scott is honest, makes high quality decisions, knows the business and the team believes in him.

Q: How is credit performing? Why raising rates?

A (Scott Sanborn): We recently released updated loss curves that show stable losses especially in A-C loans which account for a majority of originations. Lending Club also increased rates of about 50 bps on average. We see adjustments of signs of functioning marketplace to balance supply and demand and believe the assets are more attractive to investors.

Conclusion

While Lending Club still has a lot of work to do, it is nice to see at least their internal investigation triggered by Renaud Laplanche’s departure come to a close. We still have to wait to hear about the DOJ Grand Jury subpoena as well as the SEC investigation. Now that Lending Club officially has a new CEO and have put measures in place to prevent issues in the future, the company can begin to shift the focus to moving forward. Expectations for Q2 2016 have been set but we will need to wait and see if and when they can get back to where they once were.

The post Latest Updates from Lending Club Post 2016 Shareholder Meeting appeared first on Lend Academy.

Today, Lending Club announced their Q2 2016 earnings. This is their first earnings release since the news of the resignation former CEO Renaud Laplanche that rocked the industry. While we all knew this would have a dramatic impact on the company we now can see this impact through the numbers Lending Club shared today.

One of the most important metrics is Lending Club’s quarterly originations. Total originations for Q2 2016 came in at $1.96 billion, down from $2.75 billion in Q1. This marks the first time ever (other than 2008 when the company was going through SEC registration) that quarterly originations have declined. This number, however, was an increase from the $1.91 billion originated in the same period last year. Also, in this most recent quarter Lending Club officially crossed the $20 billion mark in originations since inception.

Below are the financial highlights from the press release:

While Lending Club exceeded most people’s low expectations on originations given recent events, earnings took a significant hit in the second quarter. Some of this is due to an increase in one time unusual expenses due to the May 9th news.

Lending Club still holds $832 million in cash and equivalents with no outstanding debt. They leveraged a portion of this cash to purchase $135 million in loans in the second quarter with a majority of these loans being resold at a later date.

Lending Club also had some positive news as of late, including their first ever securitization that closed this month that was three times oversubscribed as well as rumors of new significant loan buyers. Scott Sanborn, CEO and President of Lending Club outlined their progress in bringing back existing investors:

Our efforts to reengage investors are working, with fifteen of our top twenty largest investors back on the platform today. Despite the unusual disruption to our supply of capital in May, we facilitated nearly $2 billion of loans to nearly 170,000 borrowers. While we still have a lot of work ahead, the value that we bring to borrowers and investors is stronger than ever, and we believe we have the resources and resolve to execute on our mission.

Scott Sanborn did note on the call that some bigger investors came back albeit at lower amounts with some exceptions. On the retail investor side 135,000 self-managed retail investors invested over $327 million in the second quarter. Lending Club now has a borrower base 1.5 million strong.

Lending Club also announced several leadership changes. Most significant of these changes is the resignation of current CFO Carrie Dolan who plans to pursue a new opportunity. She has been with the company since August of 2010. According to the release she had notified Lending Club earlier in the year about her future plans but was asked to postpone given the departure of Renaud Laplanche in May so she could help with the transition. Lending Club has already begun a search for a replacement CFO.

Lending Club Earnings Call Review

For the first time ever, Lending Club broke out several of their different products as shown below. The products, which fall outside of their standard A-G loans we see as retail investors are available to accredited and institutional investors.

The breakout for “Personal loans – custom” includes their near prime and and super prime loans. “Other” includes their patient finance and small business line products. For Q2 2016, approximately 74% of the loans fell into the standard loans category.

Lending Club also provided information on the different types of investors in Q2 2016 as well as pre and post May 9 numbers. According the the earnings call 51% of originations occurred before May 9 and 49% occurred after. The below chart shows the shift of investors from Q1 to Q2 2016 and you’ll notice that banks dropped by 6%. Self-managed accounts, individuals increased 2% which highlights the importance of a retail base and just how resilient they can be as an investor class.

The intra-quarter chart below highlights the time before May 9 when the news hit as well as after. The drastic pull back of banks is even more apparent here. Managed accounts post May 9 made up over 54% of the investor mix and banks dropped from 43% to 12% of the total.

Lending Club broke down the recent pricing actions that they have taken since December, 2015. Rates have been raised 4 times with an overall portfolio rate increase of 1.35% across grades. They have also highlighted the credit policy actions they took which mainly affected the higher risk loans. Compared to November, 2015 you can see the substantial interest rate increases, especially in the lower grade notes.

Below are summaries of a few questions that were asked on the call:

Q: You mentioned that expenses will remain elevated. How much of this would you consider is unusual and what do you anticipate this dropping to throughout the year?

A: We do an anticipate that these unusual expenses will fall through the end of the year down to 80% or so. What’s to be determined is what that run rate will be going forward. Lending Club has spent time looking at compliance, legal and support and has subsequently made a number of changes as a result.

Q: The press release shared that 15 of the 20 largest investors were back. What is the magnitude of now versus before?

A: The level of investment varies as a whole. In general at lower levels then pre-Mother’s Day. Although there are some exceptions.  Incentives were useful in kickstarting platform activity and we do anticipate those will end at the end of this quarter. The incentives were volume based and for smaller volume investors, some incentives have already ended. These investors have continued to invest into August.

Q: Any update on SEC, DOJ investigation timelines?

A: No new news on that front.

Q: Give us a sense as to how you are establishing more stable funding sources. Can you give us an idea of where the strategy could go longer term? 

A: The immediate focus is re-engaging and we are making good progress there. Going forward we are exploring adding additional funding sources and structures to increase resilience and diversity. That would include committed capital that might be a beneficial addition to the mix, but will come at a cost. We are being thoughtful about the size and scale of that and will explore it actively once pre-existing investors are fully engaged.

Q: Marketing efficiency is continuing to go down. What does it look like when you take the noise out and what is your expectation going forward? Will this stabilize? 

A: In Q2 there was quite a bit of noise which is harder to read. There were a number of expenses in sales and marketing that were not directly related due to severance cost, etc. Second and third quarters are usually more favorable as far as momentum so take that into consideration. As we adjust rates that has an impact as well on sales and marketing.

Q: Help me understand what gives you conviction that the banks are returning to invest in loans as they previously were especially without incentives.

A: The banks have not been as motivated by incentives. They have clear and lengthy diligence requirements unlike third party funds etc. that can respond much more quickly. Banks have a longer process and go through internal risk processes and they must deal with their own regulators. We have confidence that we have a clear working plan with banks including diligence lists, going through and ticking each requirement, timelines on each side of the equation and have seen many banks back already. The larger the institution the longer it is going to take for them to invest again.

Q: Investors are more aware of the events of May 9th, but has there been any impact on borrowers to choose you versus a competitor? How that might be filtering through? Can you talk about the under performing tranches? Will you re-establish them?

A: Borrowers are less likely to be exposed to recent events and we have seen no impact at all on the borrower side. Our NPS remains strong and have received no questions on the topic. Our response rates remain solid. The way to think about this population is really around the normalization of credit. As the recovery gets longer, credit is more available. These [under performing] borrowers had the propensity to build debt into the loan and continuing to build debt as opposed to leveraging the loan to pay it off. Is it permanent? It’s pretty organic, these changes reflect the current environment. There are things Lending Club can do to manage this population differently like with direct pay where loan proceeds go directly towards paying off the debt. Given modest near term ambitions and attractiveness it was the right decision for now.

Q: Where are things with LC Advisers?

A: Across all categories we saw a pullback of investors and with LCA, the way they do that is with a redemption.  We have been taking a number of steps to improve management, governance over LCA funds. We believe in the value LCA provides, in its index format and are confident we will be able to grow it over time.

Conclusion

This was certainly a tough quarter for Lending Club and Q2 2016 will no doubt go down as their most challenging as a public company. Losing Carrie Dolan, an experienced CFO who has been with the company for six years will also hurt. However, we have seen some promising news as of late and it seems as though Lending Club has made good progress on the investor front, better than we expected here at Lend Academy. While guidance for next quarter is mostly flat and we may see this extend into subsequent quarters, the company did tease that future products are still in the works. We also learned that their technology teams were less affected by the recent layoffs which shows that Lending Club is still investing in its future.

The full earnings call and presentation is available on Lending Club’s website.

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 Reports Q2 2016 Results With $1.96 Billion in Originations appeared first on Lend Academy.

Last week Bloomberg published a lengthy piece titled “How Lending Club’s Biggest Fanboy Uncovered Shady Loans”. The article focuses on Bryan Sims, an individual investor who, like many people, has taken an interest in Lending Club and was attracted to the transparency of their loan book. He decided to do some detailed analysis on this loan book.

There are two key takeaways in the article. First, it discusses the loans taken out by Renaud Laplanche and his friends and family back in 2009 that was done supposedly to inflate origination numbers which has been widely reported. This was a significant misstep in my opinion, so I have little issue with any of the points made about this.

Second, the article discusses the fact that Lending Club doesn’t report when borrowers take out a second loan. Now, before we go any further I should say that I have been urging Lending Club to disclose this kind of information since I first met with Renaud Laplanche and Scott Sanborn back in 2011. But the fact is the article misconstrues so much here that I felt like a response was needed.

The Missing Pieces Not Mentioned in the Article

Here is the major issue I have with this article. The Bloomberg reporters imply that Lending Club has lax underwriting standards because the same person has taken out two different loans at different rates:

It was one person with two active loans, and Lending Club was treating them as completely unrelated, charging wildly different interest rates. The borrower was paying about 15 percent interest on one loan of about $15,000; on the other, he was paying 9 percent on twice the principal. That meant the investors who held only the second loan were leaving money on the table. And Lending Club didn’t seem to be doing anything to help them.

Let me explain how Lending Club, or any online lender for that matter, works. A borrower takes out a loan and Lending Club analyzes their financial situation at that moment and provides an interest rate (assuming they are approved). If this same borrower takes out a second loan Lending Club analyzes this person’s new financial situation and makes a decision based on that. It is quite possible that a person’s financial situation has changed – the first loan could have been used to pay down higher interest credit card debt for example. This could even be the case for a borrower that was taking out two loans within a month of each other which was another example given in the article.

Now, we should point out that Lending Club has rules on taking out a second loan. Typically, borrowers have to wait 6, 9 or 12 months in order to take out a second loan depending on a number of credit factors. Prior to 2013 there was an exception to this – for borrowers who did not get their loan fully funded. They could re-list the portion of the loan that was not fully funded within this minimum window. But there has not been a loan go unfunded at Lending Club since 2013 so that is a moot point today.

Transparency and Prosper Performance

Having said all this, I believe Lending Club should be providing details on repeat borrowers. Why? Because repeat borrowers actually perform BETTER than borrowers who take out just one loan. Allow me to explain with examples from Prosper. Lending Club’s rival provides details on repeat borrowers – in fact Prosper has 15 elements exposed including details on loan amount, earliest pay off, number of prior loans, number of prior loans still active, balances outstanding, details on late loans etc.

Anyone (including Bloomberg reporters) can use NSR Invest to analyze loan performance on any of these filter criteria and through this you can get a really good understanding of how repeat borrowers perform.

Take a look at the graphic below. I filtered on all loans that were originated prior to June 1, 2013 to focus on 36 month loans that were pretty much fully mature. This table provides ROI information on the borrowers based on number of prior Prosper loans. What is interesting is that borrowers with two prior loans perform better than borrowers with one prior loan and they both perform better than new borrowers.

I first wrote about this phenomenon back in 2011 and to this day I still maintain repeat borrowers as one of my selection criteria when investing in loans on Prosper. This is the main reason I lobbied hard for this inclusion at Lending Club.

Conclusion

Lending Club has many challenges, of that we are all aware. But weak underwriting is not one of them. While it is far from perfect it is so much better than this article implies. Sure there have been minor upticks in defaults from time to time but investor performance has been strong now for many years.

To make assumptions  based on incomplete facts is dangerous. Bryan Sims assumed he knew more than Lending Club. More than an experienced credit underwriting team with decades of experience underwriting consumer loans. The Bloomberg reporters agreed with Bryan Sims, that maybe he did know more. A deeper analysis would have led to a more complete story but probably one that would have been less controversial. And in the end the story should have come to a quite different conclusion.

The post Not Shady At All: Perspective on Repeat Borrowers at Lending Club appeared first on Lend Academy.

A question investors often ask when investing in Lending Club and Prosper loans is whether they should invest in 36 month loans, 60 month loans or both. This question up until recently was more difficult to answer because few 60 month loans had reached maturity. We’ve been able to analyze 36 month vintages for quite some time but 60-month loans only began in 2010 and initially it was at a very small scale. In this post we’ll dig into what the data says using NSR Invest and also provide other considerations to help answer this question.

According to NSR Invest, Lending Club has originated 791,826 36 month loans and 327,355 60 month loans as of Q2, 2016. As of Q2, 2016 Prosper has originated 390,782 36 month loans and 168,881 60 month loans. As a side note Prosper has also issued 1,614 12 month loans, but we will ignore these loans for this analysis since they have not originated 12 month loans since 2013. Our analysis will focus on a subset of these loans of fully matured vintages.

There are a few things to keep in mind as you go through this analysis:

• Generally loans of a longer term have higher interest rates to compensate for the additional risk.
• Both Lending Club and Prosper continually modify their underwriting models. What may have produced higher or lower returns in the past may not do so in the future.
• There are interest rate considerations that may affect returns. Since your money is tied up for longer with 60 month loans you may be better off if interest rates decrease over time. Vice versa if rates increase you aren’t reinvesting as fast in these new, higher interest loans.

Lending Club 36 vs. 60 Month Loans

First we’ll look at Lending Club 60 month loans using the following filter criteria. The same criteria will be used to our 36 month analysis with the exception being to only include 36 month loans.

• Issue date: 1/1/2010 – 8/31/2011
• Assumptions: Equally weight all loans at $1000
• All loan grades

Lending Club 60 Month Loans

Lending Club 36 Month Loans

For comparison purposes we’ll ignore loan grades F and G since there weren’t enough loans originated in these grades for the numbers to be significant in our analysis.

Average Interest rates (Lending Club 36 vs. 60)

The trend of average interest rates across grades is not surprising. With the exception of C grade loans, loans of 60 months carry a higher interest rate.

• A36: 7.02% vs. A60: 7.27% (25 bps increase)
• B36: 10.72% vs B60: 10.88% – (16 bps increase)
• C36: 13.55% vs. C60: 13.51% – (4 bps decrease)
• D36: 15.44% vs. D60: 15.86% – (42 bps increase)
• E36: 17.19% vs. E60: 17.72% – (53 bps increase)

Returns (Lending Club 36 vs. 60)

The results are mixed. 36 month loans outperform 60 month loans in grades B and C. Returns for grades A, D and E are higher for 60 month loans. What’s interesting is that B and C grade loans represent the smallest difference in interest rates between 36 and 60 month loans (16 bps and 4 bps respectively). For loan grades A, D and E the difference in interest rates is 25, 42 and 53 bps respectively. There are many variables at play here so it is impossible to draw conclusions on the reasoning for the similarities in interest rates for B and C graded loans across loan terms. For instance, perhaps only high quality borrowers had been offered these 60 month loans.

60 month E loan grade loans were the best investment over this period returning 8.16% to investors. E 36 month loans returned 6.82%. If you were to have invested across all loan grades your returns would have been higher with 60 month loans (6.82%) than with 36 month loans (5.62%). Given the higher returns on average at least with these vintages make a strong case for including 60 month loans in your portfolio.

• A36: 4.22% vs. A60: 4.82% (60 bps increase)
• B36: 5.98% vs B60: 5.61% (37 bps decrease)
• C36: 6.70% vs. C60: 6.18% (52 bps decrease)
• D36: 6.56% vs. D60: 7.04% (48 bps increase)
• E36: 6.82% vs. E60: 8.16 % (134 bps increase)

Prosper 36 vs. 60 Month Loans

For Prosper loans we will look at similar loan filter criteria but we will ignore loan grades since the sample size of each loan grade is not large enough for comparison purposes.

• Issue date: 1/1/2010 – 8/31/2011
• Assumptions: Equally weight all loans at $1000

Prosper 36 vs. 60 month loans

If you were simply looking for a higher ROI, investing in 36 month loans in Prosper would have resulted in a higher return. However, The 720 60 month loans that meet our filter criteria also had a lower average rate. Lower rates generally correlate with less risk and thus lower returns so this is an important factor to keep in mind.

Conclusion

Deciding what loan terms to invest in comes down to personal preference and there are many considerations. Given the data, there is no clear conclusion as to what is the best strategy. Even though we focused only on mostly mature vintages in this post you can still see for yourself how other vintages are tracking using NSR Invest. This can help you make a decision with more recent data and take advantage of the changes that both Lending Club and Prosper have made to their underwriting over time. If you currently only focus on one loan term, diversifying into the other is something worth considering.

The post Comparing 36 and 60 Month Loans on Lending Club and Prosper appeared first on Lend Academy.

Sharing the details of my returns is one of the regular features on Lend Academy and one that I am quite passionate about. It is also the feature that I get the most emails about – people really like to see actual returns on seasoned investments. I have been investing since 2009 and opening up my accounts for the world to see since Q4 2011.

You can go back and follow my journey from an investment that has grown from $84,000 in Q4 2010 to around $681,000 today. Now, I have added substantially to my initial investments and will continue to do so for the foreseeable future. Eventually, I plan to have a diversified seven-figure portfolio made up of consumer, small business and real estate loans.

Overall P2P Lending Return at 8.72%

Now on to the numbers. Once again my trailing twelve month (TTM) returns have dropped from the previous quarter. While still a respectable 8.72% it is down from 11.30% just a year ago and also down from 9.28% last quarter. This is a trend that has continued for a couple of years now but I expect I am close to the bottom (assuming the economy still keeps chugging along). While declining interest rates and increasing defaults have been the norm for some time now there are signs this trend is coming to an end. The average interest rate on most of my accounts has risen in the past quarter as the platforms have raised rates quite aggressively this year. My six core holdings, those that have been opened the longest, also continued their decline to come in at a TTM return of 8.01%.

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.

Now, I will break down each of my investments from the above table grouped by company.

Lending Club

My very first Lending Club account was opened in June 2009 – the above screenshot is of that account taken at the end of last quarter. One of the interesting things about mature accounts is that you get to cycle your money many times over. I have only invested $25,000 in this account (made over the first three years) but my total amount invested in notes is now over $140,000. And I have made $27,000 in interest, more than the original investment, but also have suffered $12,000 in charge offs. I have not added to this account for many years as I only invest through retirement accounts now. I try to invest in different notes across all my five Lending Club accounts using mutually exclusive filters.

Prosper

My first Prosper account was opened in September 2010. Prosper recently have done a redesign of the investor experience and you can see the new screenshot above. This is my largest taxable account – when I first opened this account Prosper didn’t have an IRA option. So, I ended up investing $50,000 in this account over a number of years. Back when I started this was my best performing account – Prosper had higher rates than Lending Club and provided higher returns to investors. That is no longer the case with Lending Club providing slightly higher overall returns in recent years (according to NSR). My newest Prosper account is my Roth IRA account which has been open for just over two years and focuses on a more conservative strategy with the lowest average interest rate of any of my Lending Club or Prosper accounts.

Direct Lending Income Fund

The Direct Lending Investments fund is over three years old and invests in high yield, short-term small business loans across multiple lending platforms and has consistently been my highest performing investment. Today, the fund has changed from buying whole loans to providing a credit facility to a number of different alternative lenders. Returns have been dropping ever so slightly as the fund has grown but at a TTM return of 12.77% I am very happy with the work that Brendan Ross and his team have been doing.

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. Like many funds this year, the returns here have been hit by the interest rate rises at Lending Club and Prosper. This fund uses the Fair Value method for calculating NAV and loan valuations are adjusted whenever interest rates increase or decrease. The interest rate increases we have seen have hit the NAV thereby reducing investor returns.

P2Binvestor

Asset-backed small business lender P2Binvestor continues to perform well and is one of my favorite investments (full disclosure: I am on the advisory board of this Denver based company). These are short-term loans, backed by accounts receivable, with 30-60 day liquidity. I have never lost any principal to defaults and with returns over 10% I am very pleased with this investment.

Final Thoughts

As my returns have been decreasing for a long time now I have been wondering when the decline will stop. I am hopeful that I am near the bottom as interest rates have risen and defaults have been remaining steady. With so much invested in existing three and five year loans it will take a long time for these increases to show have a material impact. While I would love to be earning more than 10% again I don’t expect to get back there any time soon. Regardless of what happens to my returns I will continue to share the results here.

Finally, I always highlight my Net Interest earned number. As you can see in the above table this quarter it is $54,936 for the previous 12 months. This is actually down slightly for the second quarter in a row which has come as a surprise to me. But I like to highlight this number because this is what we actually earn and for anyone looking for passive or retirement income this is the most important number.

As always feel free to share your thoughts in the comments below.

The post My Quarterly P2P Lending Results – Q2 2016 appeared first on Lend Academy.

Retail investors have been longing for a more robust secondary market feature set, something that wasn’t possible until this year when FOLIOfn, Lending Club‘s secondary market provider, announced their API. NSR Invest has dedicated a significant amount of time to building support out for the secondary market this year and last month they released it to the world. In this post, we will share the features and what makes NSR Invest’s offering unique.

The Components of the NSR Invest’s Secondary Market Technology and What is New

For many years retail self directed investors have used the NSR Invest platform to develop loan purchasing strategies on the primary market. To buy notes on the FOLIOfn secondary market that met their filter criteria, investors would have to sift through loan listings by hand, using limited filters offered on Lending Club’s website. The secondary market functionality has been incomplete and investors have wanted more for quite some time.

Recently, Lending Club has updated their API, which has been adopted by FOLIOfn and has improved their secondary market by making it possible to buy and sell notes in an automated fashion.

NSR Invest has built features and functionality to improve their clients’ secondary market experience.  Specifically, they have expanded beyond just sharing loan listings to also offering additional functionality including the ability to:

• Filter loans that are listed on the secondary market
• Purchase loans that are listed on the secondary market
• Automate a buying strategy for continued purchase of loans that meet your filter criteria
• Automatically sell loans on the secondary market

Automated Selling on the Secondary Market

Many investors have used FOLIOfn to sell their notes for some time. But this has always been a manual and laborious process with no way to set an automated selling strategy. With their new roll-out NSR brings these features in house.

Now NSR investors can access selling by clicking on “Investing” and then “Sell Strategies.”  You are presented with the below chart and filters. Modifying the filters below the chart allow you to understand the average markup/discount of similar notes. For instance, if you were interested in selling your 36 month riskier grade notes in grace period, you could select E,F,G, 36 months and “In Grace Period”. This will give you the average markup/discount by remaining payments. However it’s important to understand that this includes current listings, not transactions where the notes have actually sold. Thus, these figures should only be used as a guide. Changing the filter criteria also allows you to see the notes and principal remaining that match your selected criteria, pictured under the Sales Estimates section.

Once you’ve selected your criteria you can create a sell strategy. In the example below the notes will be initially listed at a 7% markup, eventually decreasing to 4% over 9 days. Each day the markup decreases evenly across the 9 days, in this case 0.33% each day ((7%-4%)/9 days). Listings will be removed after the 9th day.

Automated Buying on the Secondary Market

For investors who are familiar with setting up filters on NSR Invest, setting up an automated buy strategy on the secondary market is largely the same, albeit with 12 additional filter criteria specific to the secondary market. Filters can be built by selecting the “Markets” tab and then “Secondary” under Lending Club.

All of the existing filters available on the primary market are also available to use on the secondary market, which is where NSR’s offering really shines. If you were to login directly to FOLIOfn, you’d only have access to 12 criteria to filter note purchases. With NSR you have over 100 filters you can apply to narrow down the notes you want to invest in. Additionally, investors who backtest filter strategies can easily make them compatible with the secondary market. This makes it easy to use the same filters on the secondary market as you do on the primary market, a first for the industry, and a request that some investors have had for many years.

In the example below the red colored filters are specific to the secondary market.

Once you’ve saved your filter strategies they can be applied in the accounts section. Here you can select your bid amount and whether you would like to purchase on the primary market, secondary market or both.

Pricing

All NSR Invest clients may take advantage of the new selling functionality as well as the ability to individually filter and select FOLIOfn notes for purchase. Clients with over $20,000 in connected marketplace accounts (the amount that NSR Invest starts charging for self directed users) may also setup automatic buying for their Folio strategies. NSR Invest charges 0.45% on the outstanding principal of any notes purchased on the secondary market.  Sell strategies are free for paying customers.

Conclusion

It’s nice to officially have a secondary market API with FOLIOfn and NSR Invest has integrated buying and selling seamlessly into their existing platform. There are many investors who have had a great deal of success investing in the notes on FOLIOfn and now it’s much easier to do.

Now that investors have this functionality, one of the common topics brought up, especially on the Lend Academy forum is transparency around pricing. Since completed transactions are hidden by FOLIOfn it is impossible to know what the value of a given note is and what investors are willing to pay. If this data would be made available it would lead to a much more efficient market and offer even more liquidity to investors. While automated buying and selling is a great step we look forward to a time when investors can liquidate an entire portfolio almost instantly as opposed to over days, weeks or months.

Full disclosure: NSR Invest is a sister company to Lend Academy.

The post Lending Club Secondary Market Automation with NSR Invest appeared first on Lend Academy.

One of my hobbies is playing the mileage and frequent flier points game. I travel a lot, therefore I earn a lot of miles. I also like to maximize my benefits here, so I am always looking for easy ways to earn bonus miles. With that in mind, an email I received today from United Airlines piqued my interest.

It was a promotion for Lending Club. Basically, you can earn up to 100,000 United Airlines MileagePlus miles for opening and funding a new account at Lending Club. The minimum investment is $2,500 and that will earn you 1,250 miles, so basically you are earning 0.5 miles per dollar invested up to a maximum $200,000 investment.

Now, this is only open to new investors so people like myself will be unable to take advantage of this offer unfortunately. Here is some of the fine print from the email:

Upon the transfer and investment of the first $2,500 of New Funds, a new investor will qualify to receive 1,250 miles. For every dollar of New Funds transferred and invested in excess of $2,500, a new investor will qualify to receive .5 miles, up to a maximum aggregate bonus of 100,000 miles per calendar year. One bonus per United MileagePlus® account for new investor registration (investors will be eligible for future offers, if any, once they become existing investors). Offer expires on or before October 12, 2019. Offer not valid for non-taxable IRA accounts. Notes on Lending Club platform may have limited inventory or availability and Investor ability to invest in Notes is subject to Note inventory and availability on Lending Club platform.

It will be interesting to see what comes of this campaign. If you have not received the email you should be able to go to this link to sign up for a new Lending Club account and get the bonus miles. The first thing you must do is enter your MileagePlus number in order to get credit for the miles. Then you walk through the typical investor signup process that happens to be co-branded with United MileagePlus.

Lending Club Continues to Reach Out to Retail Investors

I have seen borrower offers before where you can earn frequent flier miles for taking out a loan (Prosper ran one a couple of years ago) but this is the first time I have seen an effort like this targeting investors.

What this email tells me more than anything is that Lending Club is focused on adding new retail investors. And they are putting some real dollars into this effort. I don’t know what the cost per mile is to Lending Club but it likely isn’t cheap. Lending Club has shared that they have more than 135,000 retail investor accounts, they will likely add to that number with this promotion.

The post Lending Club Looking for New Retail Investors with the Help of United Airlines appeared first on Lend Academy.

Lending Club made news earlier this month when they announced they were increasing interest rates again. But what they also shared was that this was partly due to an increase in delinquencies in particular at the higher risk end of the credit spectrum.

Grades E, F and G at Lending Club are at the highest interest rates ever with the top rate for a G5 rated loan now at 30.99%. The interest rates on these higher risk loans have been steadily increasing for many years. I have a screenshot I took back in October 2010 when a G5 loan had an interest rate of 21.14%. Today, a loan with that interest rate would be rated D5 at Lending Club

So, does this mean that the G5-rated borrower of today is more risky than the G5 of 2010? Certainly the expected loss for the 2016 borrower is far more than this same person in 2010. But while interesting I don’t think this says much about the possibility of a recession in the near future. It simply means that Lending Club is targeting a higher risk borrower.

Having said that, the reality is that there has been higher than expected delinquencies in the higher risk portions of Lending Club’s portfolio. Here is a paragraph from their 8-K released last Friday:

Consistent with observations earlier this year, we have continued to observe higher delinquencies in populations characterized by high indebtedness, an increased propensity to accumulate debt, and lower credit scores. Although the trend can now be observed across grades, it is less notable in lower risk grades and more notable in higher risk grades, particularly grades E, F and G, which account for approximately 12% of platform volume. Higher delinquencies are more evident in 2015 and early 2016 vintages, which coincides with an uptick in consumer indebtedness in the U.S.

What we also need to keep in mind is that Lending Club runs a pure marketplace. This means that they need to price loans that investors will find attractive. This fact is often overlooked but it is one that has been a driving force in the multiple increases in interest rates we have seen this year not just at Lending Club but at Prosper as well.

The other piece of news that caught my eye was this piece from American Banker last week on the increase in loan loss reserves at many of the large banks. Big card issuers like JPMorgan, Citi and PNC have been moving down the credit spectrum a little which has led to increases in expected delinquencies. So, this seems to be consistent with what Lending Club is saying, that those higher risk customers are experiencing higher delinquencies than they have in the recent past.

So, while I could speculate what this all means I decided to reach out to two people who follow the loan performance trends in this industry very closely. First, we will hear from the CEO of PeerIQ, Ram Ahluwalia:

Forecasting recession is very difficult. That said, the data is generally positive and recession probabilities appear low.

• Leading indicators such as the financial markets are not pricing in a recession. Financial markets have famously predicted 9 out of the last 3 recessions. They are not pricing in a recession at this time. Credit spreads are tight and equity markets are richly valued.  Also, headline inflation expectations are increasing. Access to credit continues to expand. These are not trends consistent with recession.
• Coincident indicators are uneven – unemployment, industrial production, and capacity utilization have improved in recent reports. There is some weakness seen in recent reports from the Chicago Fed National Activity Index and manufacturing data.
• Increased delinquency rates are occurring across multiple credit asset classes at riskier credit asset classes – auto, student, credit card and also installment loans. The rise in delinquencies is primary driven by a mix shift to towards originating riskier loans. This is consistent with expansion of credit underwriting amidst increased competition for borrowers.
• On the prime portion of the credit spectrum, if you look at the delinquency data at the master trust portfolios of high credit quality master trust securitizations from JPMorgan, Citi and Bank of America we see a decrease in the path of delinquencies.

I would not draw the conclusion that increased loss-rates are sign of impending recession over the next 6 months.

Perry Rahbar is the CEO of dv01 and here is what he had to say when I asked him what the Lending Club and bank data means.

With regards to Lending Club, I think they’re still learning and iterating with their underwriting/pricing. To be honest, I’m a bit confused by Lending Club because the lower grades in the standard program continue to drive a negative PR effect for them when it’s become less and less a focus of their business. Just look at the volumes, they’re pretty small. Additionally, they have a pretty robust near prime program that’s covering similar territory, is pretty big in size, and is performing a lot better. Last, this is all only a conversation because of the transparency Lending Club offers and the tools we all have, whether it’s us or Orchard, etc…, to be able to quickly digest the performance data and derive actionable insights from it.

As for JPMorgan and the increased credit reserves, post crisis, banks pulled back significantly from lower credit borrowers. In fact, this was a big reason so many marketplace lenders had an opportunity to enter the market because they often targeted borrowers that were no longer serviced by the system. Given the strong credit environment, banks have recently expanded their boxes again and I think the increased reserves is a sign of them being responsible from a risk management standpoint.  I think they’re choosing to err on the side of caution this time around.

Conclusion

While investors never like to see an increase in delinquencies I think the reality is that the economy is still in remarkably good shape. Another recession will certainly happen at some point and that will lead to increases in delinquencies across all credit grades. It seems that the increases we are seeing now is more about lenders (both marketplace lenders and banks) moving down the credit spectrum than about any macro economic issues.

I have asked many guests of the Lend Academy Podcast over the last six months about what they are seeing as far as delinquencies in both consumer and small business lending. Without exception, everyone has said that the loan data is telling us that a recession is simply not on the cards in the near term. Even the latest data seems to continue to bear that hypothesis out.

The post Are We Seeing the First Signs of the Next Recession? appeared first on Lend Academy.

Back in April at LendIt USA 2016, Lending Club teased that they would be announcing a new consumer lending product in June. This was pushed back following the subsequent news that rocked the marketplace lending industry. Now just a few months later Lending Club has officially announced their move into auto lending with a refinance product focused on prime consumers.

We spoke with Todd Denbo, Vice President of Consumer Auto Lending at Lending Club to learn more about the product and his experience prior to joining Lending Club. Todd has been with the company for a year and a half and his previous experience includes nearly 17 years at Wells Fargo. He worked in consumer lending on the credit card side and also led direct auto for a number of years at Wells Fargo.

While the entire outstanding debt for auto loans totals $1 trillion, Lending Club estimates that the refinance market stands at $40 billion annually today. Todd believes the market opportunity for auto refinance is at least double that size if the process for obtaining a loan was more simple.  The problem in the auto refinance space is that the process is cumbersome and consumers equate the pain of refinancing an auto loan to that of going through a mortgage refinance.

According to Todd, the major player in auto refinance is Capital One along with some banks and credit unions. Most banks don’t focus on refinancing auto loans since they have deep relationships with dealers who markup the loans. Since consumers usually negotiate on the price of a vehicle and fail to shop around for credit, consumers are paying more than they need to. According to Lending Club, consumers pay 200 bps higher interest rates than they should. This 200bps difference is $1,350 the consumer could otherwise be saving over the life of the loan.

The Lending Club Auto Refinance Product

The new refinance product is initially only available to borrowers in California, but we can expect that they will roll this out similar to what they have done with their unsecured loan product over time. Lending Club will lean on the same marketing channels as their core unsecured product for customer acquisition. They plan to leverage data sources to target borrowers who have demonstrated on-time payments and help consumers by offering a more affordable loan. Below are the details of the initial offering to prime consumers:

Todd shared that the average loan on used cars is in the high single digits with an average loan size of $18,000. With rates starting at just 2.49%, Lending Club can provide significant cost savings to prime borrowers.

Offering a compelling product from a cost savings standpoint is only one piece of the puzzle. Lending Club also needs to deliver on speed and customer experience. Lending Club states that the speed to offer is on average less than 1 minute for borrowers to see what offers are available which includes loan rate and term. There is no impact to the borrower’s credit score. Borrowers will be given two offers, lowest APR and lowest monthly payment and the application process will look similar to that of their unsecured consumer loan product.

What’s most interesting is that Lending Club has significantly streamlined the application process compared to what currently exists in the market. Todd shared that on average most companies who currently offer auto loan refinancing will ask north of forty questions. Lending Club’s application will have a dozen questions about the individual and five questions about the vehicle. Lending Club has also moved questions about the VIN number and getting in touch with the previous lender about the previous loan amount to the end of the loan process.

Besides underwriting just the consumer, Lending Club will plug into data sources from TransUnion and NADA to determine a vehicle’s value. They are also leveraging a leading loan servicing company in the auto segment. According to Todd, servicing auto loans is a critical part of the equation and they wanted to use an industry leader. Todd stressed that this is a conservative step into auto, focusing on the prime consumer and that the goal is to keep the consumer in the car as long as possible. In the event that a consumer fails to pay, the third party servicing company will repossess the car.

Auto Lending Historical Performance and Loan Funding

Lending Club also shared historical defaults across various asset classes since early 2006. Looking at the chart below, the auto lending vertical is a relatively stable performing asset class even in the depths of the recession compared to mortgages and credit cards. Since mid 2011, defaults in auto lending have been extremely stable at around 1%.

As Lending Club CEO Scott Sanborn reiterated at last month’s Marketplace Lending + Investing event, Lending Club continues to focus on the pure marketplace model. However, Scott did mention that they do lend on balance sheet for new product launches and that is the plan with this new auto refinance product. Todd noted that they are already in talks with several institutional investors to invest in whole loans, similar to how institutions invest in Lending Club’s unsecured loans. Given that this is a brand new product, it will only be available to institutional investors. We will have to wait and see if Lending Club ever opens up access to the retail investor community.

Conclusion

When I first heard the news of Lending Club’s move into auto lending I was surprised that the launch had only been delayed 4 months. The summer of 2016 brought news of many companies scaling back and Avant publicly announced that they were delaying their own auto lending plans. Many people have doubted Lending Club in recent months and there has been no shortage of negative news stories on the company and on the industry. It’s great to see that Lending Club continues to push forward despite the headwinds of 2016. It seems that things have stabilized for Lending Club to a point that they were comfortable in expanding to a new category.

Entering into auto refinance is a different beast than unsecured loans, but is a natural expansion for a company that has had incredible success in consumer lending. The biggest challenge that Lending Club may have is making consumers aware of auto refinancing as it is not a commonly discussed product compared to mortgage refinance. It will be fascinating to watch and see if they can bring their successes in unsecured loans to the auto space.

The post Lending Club Moves into Auto Lending with New Refinance Product appeared first on Lend Academy.

There have been several groups formed in the online lending industry but the latest one doesn’t focus on a voice in Washington but rather seeks to tackle another challenge facing online lenders: fraud. The new consortium called Online Lending Network was announced this week at Money 20/20 by ID Analytics, a firm focused on risk management.

Founding members include the leaders in online unsecured consumer lending: Lending Club, Prosper and Marlette Funding. Other lenders also part of the consortium include other online, marketplace, specialty finance and social lenders. What makes this newsworthy is that all of the major players have signed on, which is critical in combating fraud and gaining insight into a borrower’s intentions.

Al Pascual, senior vice president, research director and head of fraud & security at Javelin Strategy & Research shared just how serious fraud is in online lending:

New-account fraud more than doubled in the past year. Fraudsters are always looking for an easier way to make more money and are targeting this relatively new financing model by going after businesses that lend online.

These criminals are often taking advantage of what is often called “loan stacking”. It involves submitting multiple loan applications through various online lenders in a short period of time with no intention of paying back the loans. This type of fraud is made possible due to the lag time that data points such as inquiries for credit and outstanding credit are reported by credit bureaus. Since reporting isn’t instant, platforms like Lending Club, Marlette and Prosper are unable to determine whether the same borrower has already taken out a loan with one of their competitors. It’s important to keep in mind that loan stacking is not a new issue, but the fraud is made easier as loans are readily available online at faster speeds.

To combat this type of fraud, ID Analytics has created a near real-time repository for online loan activity. This will allow participating platforms to assess a borrower’s intentions and combat fraud not only with loan stacking but also with identity theft. ID Analytics explains the process in their press release:

Through the Online Lending Network, lenders report when a consumer requests an offer for a loan product, submits a loan application, or when a loan is funded. In return, the lender receives information on whether that consumer has either requested other loan offers or applied for loans elsewhere in the days, hours or minutes before. The near real-time nature of the response makes high-velocity fraud, like loan stacking, very difficult. It also has the potential to protect authentic consumers from overextending their credit capacity to facilitate responsible lending…The Online Lending Network will also provide access to tools to evaluate credit, including the detection of synthetic identities, and detection of potential identity theft, as online lenders are a target for fraudsters using stolen identities.

Conclusion

The key to this new consortium was getting buy-in from the major players, which ID Analytics has successfully done. This is the biggest step we’ve seen in the online lending industry in combating fraudulent activity. As technology companies, the platforms, along with innovative service providers like ID Analytics are well suited to deal with fraud in a way that hasn’t been done before. Although fraud will likely always exist on some level, this new consortium will go a long way in lowering the impact of fraud on online lending businesses.

The post New Consortium of Online Lending Leaders Aims to Combat Fraud appeared first on Lend Academy.

This morning, Lending Club announced their Q3 2016 earnings. In the third quarter, the company originated $1.97 billion in loans, marginally up from $1.95 billion in the second quarter. The financial highlights from the company’s press release are shown below:

From strictly an origination perspective the company did not have much growth in the quarter, but financials did improve from the prior quarter. The company highlighted $14 million of investor incentives that occurred in Q2 and $11 million in Q3. Also effecting the company’s financials were the $15 million and $14 million in expenses related to the board review that took place in Q2 and Q3 respectively.

The biggest news coming out of earnings was that Lending Club announced a large funding deal with Credigy, a subsidiary of the National Bank of Canada. Credigy will invest up to $1.3 billion in Lending Club loans and has already committed $325 million. Credigy is a consumer finance investment company which makes them a perfect fit to invest on the platform. Lending Club has long had banks investing through their platform but this is one of the few deals made public and the investment amount is significant.

One of the other topics on the minds of investors is the funding mix on the platform. While CEO Scott Sanborn noted that they have re-engaged virtually all of their largest investors on the platform, he also said that there is a ramp up for banks to reach target investment levels. Lending Club’s target mix for bank funding on the platform is 25% and for the third quarter it came in at 13%. In the Q & A, Scott said that the return of banks spills over into the fourth quarter so I expect we will see a bounce back of bank involvement in the next quarter, especially with the newly announced Credigy deal.

Managed accounts, which includes a few of the new 40 act funds represented 55% of the platform mix, funding over $1 billion in loans. This is not surprising given they are able to move quickly at scale and were able to take advantage of the incentives offered by Lending Club. As expected Lending Club ended their investor incentives that were put in place post May 9th, using only half the amount planned. Retail investors and Other Institutional remained relatively stable over the quarter.

Below are a few questions summarized from the conference call where many analysts asked about Lending Club’s recently announced auto refinance product:

Q: Is there any additional color you can provide on the Credigy deal?

A: They will be a broad buyer of loans across the platform. We looked at a number of arrangements in our effort to secure up a portion of our funding. We feel good about where we are now combining with retail investors and other banks. The program is at market terms, but there are other economics that are reasonable that will be triggered if the full $1.3 billion is deployed, subject to other terms and conditions.

Q: As you’ve gone through the transition of implementing more compliance and legal controls, how much of this cost do you think is temporary? Are long term margins attainable?

A: We view these investments not as large structural costs. A lot of what we’re doing is automating things like document storage & validation, end to end data, change management processes, etc. While we are increasing size of audit and compliance, those aren’t big numbers that won’t meaningful move margins.

Q: What is the investor interest in the new auto finance product? How will your balance sheet be affected?

A: We are still in the early days of the new auto product. In Q4, there will be no significant impact but we believe the cash position lets us launch and learn. The balance sheet gives us flexibility and we can eventually move loans off of the balance sheet. We can give a better outlook in 2017 but are already in significant conversations with a number of investors.

Q: There is no origination fee on the new auto refinancing product, what is the revenue model?

A: There is a premium charged to the investor or a gain on sale margin.

Q: Do you think the cost of borrower acquisition will be materially different with the auto refinance product? What is your perspective of consumer overlap of auto refi and those who have existing unsecured loans?

A: It’s too early to get a full read of overall acquisition costs but the auto refinance product uses a lot of the same channels and techniques. The value proposition is also a similar: “You have a loan, you’re paying to much, and we can get you a better one.” The consumer overlap is something we are excited about as we have 1.7 million borrowers and they are users of credit. A significant percentage of them have car loans.

Q: What is the average yield or borrower cost to the new refinanced borrower? 

A: The target is the used car market where we tend to see average rates in the 8% range. Savings to the borrower are estimated to be between 100-300 bps. We have issued a few loans and our first customer saved over 600 bps on their cost of credit. We look at this as saving the borrower a years worths of gas or two sets of tires, providing real value.

Conclusion

What’s going to be interesting in the coming quarters is to see how originations are affected by new investments such as the Credigy deal announced today as well as the new auto refinance product. The company is still rebounding from one time expenses but they will soon put that in the past. Investors are responding favorably to today’s news with the stock up 14.72% at $5.89.

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 Releases Q3 2016 Earnings, Announces New Funding Partner appeared first on Lend Academy.

Every quarter I take some time to share how my marketplace lending investments have been doing. I open the kimono and take you inside my Lending Club and Prosper accounts, as well as many other investments, to share my returns. I do this because I believe in transparency and I want people to see how returns can change over time. I have been sharing these returns for almost five years now.

My list of accounts keeps growing. You will see in the table below that I now have 12 accounts – eight Lending Club and Prosper accounts (I know it is a little excessive) and four other investments. The new kid on the block this quarter is PeerStreet – listen to my podcast with their CEO Brew Johnson from earlier this year. PeerStreet is a real estate platform primarily focused on fix and flip properties – so short term loans. I like the marketplace lending real estate vertical and will be moving more money into this sector in the coming months.

Now, let’s get right to the numbers.

Overall Marketplace Lending Return Now at 8.21%

I am beginning to wonder when the decline will stop. I thought it would have stabilized by now but in Q3 my overall returns saw another substantial decline. I think it is safe to say that Q3 was my worst quarter ever when it comes to defaults at Lending Club. I have been focused on the higher risk end of the spectrum and those loans with vintages in 2014 and particularly 2015 continue to perform worse than previous years. Both Lending Club and Prosper have increased interest rates several times this year as well as tightened their underwriting and that will help going forward. But because these are three and five year loans I am investing in I won’t be seeing the benefit in my returns here for quite some time.

This past quarter saw another decrease in my overall trailing twelve-month (TTM) return from 8.72% to 8.21%. It has now been six quarters in a row where my returns have declined by approximately 0.5%. Just two years ago my TTM return was at 11.28%. I have been hearing from many other investors who have been experiencing similar drops in returns so I know I am not alone. And in the scheme of things an 8% return is still very good but when you get used to double digit returns year after year it is somewhat of a disappointment. My six core holdings, those accounts that have been open at least five years, also continued their decline to come in at a TTM return of 7.42%, the lowest return I have ever had.

So, here are 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 historical updates.
6. I do not take into account the impact of taxes.

Now, I will break down each of my investments from the above table grouped by company.

Lending Club

This was not a good quarter for all five of my Lending Club accounts. The above screenshot taken on October 1 is my main taxable account, that I opened in June 2009. What is interesting here is that the Lending Club Net Annualized Return number has dropped considerably this past quarter after being pretty steady for many quarters. In September I had the unusual situation of incurring more charge-offs than interest earned, so the total account value actually went down that month, only the second time that has happened. But the biggest disappointment for me this quarter was in my largest Lending Club account, my wife’s traditional IRA. The TTM return on this account dropped from 7.41% to 6.48% in this past quarter, down from 8.16% in Q1. This is a significant drop caused primarily by increased delinquencies in loans issued in 2015.

Prosper

My Prosper accounts have proven to be remarkably resilient compared to Lending Club. The reality is that my largest Prosper account, which has been open for six years, has maintained TTM returns of between 8.5% and 9% over the last three quarters. While there continues to be significant delinquencies their level has not been much higher lately than it has been in previous quarters. My newest Prosper account, my Roth IRA is focused on lower risk loans as I seek to diversify beyond the high risk segment which is where most of the increased defaults have been concentrated.

Direct Lending Income Fund

I invested in this fund, managed by Direct Lending Investments, back in April 2013 and every quarter since then it has been my best performing investment. The investment strategy has changed somewhat from investing only in short term small business loans to providing warehouse lines to a variety of platforms offering short term and high yield investments. You can learn about how the Direct Lending Income Fund works by listening to the recent podcast I recorded with Brendan a couple of months ago. The fund is now one of the largest in the marketplace lending space at almost $800 million in AUM.

Lend Academy P2P Fund

The Lend Academy P2P fund, managed by the team at our sister company NSR Invest, is my largest holding and it invests in Lending Club, Prosper and Funding Circle loans and has a small position in Upstart as well. One of the differences about investing in a fund like this one is that it creates a monthly NAV and this is impacted by changing interest rates as well as by defaults in the underlying loans. The CEO of NSR Invest, Bo Brustkern, explained how this works:

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 many 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

P2Binvestor is 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 revolving lines of credit, backed by accounts receivable, with 30-60 day liquidity.

PeerStreet

My new entrant this issue is PeerStreet, a real estate platform focused on short term loans of 6 months – 2 years. These are all secured loans with an LTV below 75% so if the borrower cannot pay back the loan the property can be foreclosed and the proceeds returned to the investor after it is sold. The loans on Peerstreet pay typically between 7% and 9% to investors. So, the purpose of this investment is not so much to juice my returns but to bring some downside protection and provide some diversification into property.

Final Thoughts

While I am disappointed with my returns this quarter I am not making big changes. I still very much believe in Lending Club and Prosper and will continue to make reinvestments there. Although I will be changing strategy somewhat and will continue to slowly move to a more conservative loan mix. More on that in a future blog post.

I am also looking to diversify beyond unsecured consumer credit. Including the Lend Academy P2P Fund, which is primarily unsecured consumer, I have well over $500k invested in this asset class. As I said above I will be looking to slowly build up other asset classes. Going forward I will be investing new money mostly in real estate as well as small business loans with the long term goal of having a roughly equal amount in all three asset classes.

At the end of every quarterly update I like to highlight my Net Interest earned number. This quarter it is $53,877 for the previous 12 months. This number really brings home to me the impact of defaults. One year ago that number stood at $56,074 on a closing balance of $640,487. Today my balance is much higher but the income generated by my portfolio is more than $2,000 lower.

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

The post My Quarterly Marketplace Lending Results – Q3 2016 appeared first on Lend Academy.

A new company called Croudify recently announced that their secondary market platform for Lending Club was launching in beta. The company describes itself as a secondary trading platform that allows you to find the best listed notes based on analytical models that they have built. I spoke with Abhishek Agarwal, Croudify CEO, to learn more about the product and also signed up for a beta account myself.

What made Croudify’s platform possible was the creation of Lending Club’s secondary market API last year. In fact, Croudify was the company that worked closely with Lending Club as they were developing the secondary market. Abhishek stated that after beginning work on their product in 2015 they eventually compelled Lending Club to build the API which was eventually made public.

One the key challenges of creating a valuable platform on top of Lending Club’s secondary market is the amount of data that needs to be collected and subsequently the cost associated with collection and storage of the data. This data is used to build Croudify’s pricing models. Croudify currently pulls FOLIOfn data every 5 minutes, which takes the company just one minute to index. According to Abhishek, the infrastructure cost for this is about $8000 per month.

The team at Croudify has an immense amount of experience in data analytics. Abhishek and their Data Scientist, Mauricio Santana both spent 10+ years building data/risk models for Bank of America. The platform, along with the analytical model they have built provides recommendations of notes to purchase on the secondary market, taking into account all data points on the loan as well as aspects such as prepayment and the markup/discount of a note. They hope to eventually provide portfolio automation for both the the primary market and secondary market for both retail and institutional investors.

Logging into Croudify you are presented with a portfolio summary which includes a snapshot of your loan portfolios, holdings by states (pictured below) and the percentage of your loans that are performing.

Digging into the portfolio details section will provide you with stats on currently listed notes. Croudify calculates the recommended price of each note based on their analytical models.

Clicking on a note shares further information.

Finally, on the trade tab you will see active primary (new) and secondary market (mature) loans which are available for purchase. You can further filter the loans shown by using the criteria on the left side. Below is a screenshot of viewing secondary market loans.  On the right side is Croudify’s analysis of loans for sale on the secondary market which will state “Neutral”, “Buy” or “Must Buy”. Clicking on an individual loan will share more details including Croudify’s recommended price of the loan. Underneath Ask Price is the percent difference between this and Croudify’s recommended price.

Conclusion

What’s interesting about Croudify is that they are currently focused on furthering the secondary market ecosystem. A lot of progress has been made over the last year with the introduction of Lending Club’s API but there is still more that can be done. While many tools have created analytical models, Croudify goes further by providing recommended pricing to the end user.  If you’re interested in checking out the Croudify platform you can signup for a free beta account here.

The post Croudify Launches Platform for Lending Club Secondary Market appeared first on Lend Academy.

I have two kids, aged 10 and 8, and unlike pretty much every other kid their age, they both take a keen interest in marketplace lending. And this is not just because their dad is heavily involved in the industry but because they both have Lending Club accounts in their own name.

I opened UTMA accounts at Lending Club late last year (more on UTMA accounts below) for both kids and transferred the money that was sitting in their savings account (earning less than 0.1% interest).  They have been saving a minimum of $1 a week from their allowance as well as a large portion of any gifts they receive from their grandparents. We track these amounts and then contribute new money to Lending Club 2-3 times a year. Now, my son will often say on allowance day, “Just put it all in Lending Club this week”. My daughter likes to spend her money so she usually just does the minimum.

So, what are the investment options for kids? I have written over 1,000 articles on Lend Academy since 2010 and have never discussed this topic so here goes.

What are UTMA Accounts?

The Uniform Gifts to Minors Act (UGMA) allows minors to own property such as securities without the aid of a guardian or trustee. The similarly named Uniform Transfers to Minors Act (UTMA) simply expands the kinds of assets that minors can hold to include real estate, art, royalties and other esoteric assets.

You can use these accounts when you want to transfer or gift money to your children. These gifts are irrevocable and when the recipient turns 18 or 21 they gain complete control over these assets. The first $1,050 of unearned income on these accounts are tax free and the next $1,050 are taxed at the child’s rate. So, you can get to a decent sized account before taxes become an issue.

What About Saving for College?

I have also funded a 529 plan for both my kids but unfortunately that has been done outside of the marketplace lending industry. Both have age-based portfolios with Vanguard that are a mix of stocks and bonds. Unfortunately, there are no options for 529 plans where you can invest in marketplace lending.

The same goes for Coverdell Education Savings Accounts. These accounts are another good option for parents trying to save money for college as all earnings grow tax free. But again this is not an option offered by any marketplace lending platform.

The Lending Club UTMA is the Only Game in Town

There is a reason I opened UTMA accounts for my kids at Lending Club. They are the only platform that offers these accounts as an option. I checked again with Prosper yesterday and they confirmed that you need to be at least 18 years old to open an account there. I researched several other accredited investor platforms and again came up blank as far as any account that can be held in a minor’s name.

It is a shame that there is still very little choice in marketplace lending for non-accredited investors. It is an even bigger shame that only one platform is encouraging kids to invest. I know my kids didn’t get excited when they see they earned pennies in interest on their savings each month. When I login to their Lending Club accounts today they see that they have earned real money. A hundred dollars in interest is a huge amount to a kid and helps stimulate a useful discussion about money and the wonderful power of compound interest.

The post The Limited Marketplace Lending Investment Options for Kids appeared first on Lend Academy.

If you’ve been thinking about opening up an IRA account with Lending Club, now is a great time to do so. The company announced yesterday their IRA bonus incentive program for new investments through April 30, 2017. The bonus is up to 3% of your investment. The bonus applies to both new IRA accounts as well as new money added to existing IRA accounts.

Below is the bonus breakdown by investment amount:

Accounts that qualify for this incentive are: Traditional IRA, Roth IRA, SEP IRA or SIMPLE IRA. Investments can come from an annual contribution, a 401k rollover or an IRA transfer. As we’ve discussed in the past, if you plan to invest in Lending Club loans it is best done through a tax advantaged account due to the tax treatment.

If you signup through the link below, Lend Academy will receive a small commission.

Open an IRA with Lending Club

The post Lending Club Bonus for New IRA Investments appeared first on Lend Academy.

Many of us in this industry will be glad to see the last of 2016. It has been a difficult year on many fronts, certainly the most challenging in the industry’s short history. This was the year of the pullback as the rapid growth of the last decade dissipated amid a downturn in investor interest due to missteps at some of the major players. But there was also some good progress made this year as you can see in many of the stories below.

Here are my top 10 most important news stories that we published on Lend Academy in 2016.

1. Lending Club Founder Renaud Laplanche has Resigned as CEO

It was a very easy choice for the biggest news story of this year. The departure of Lending Club founder and CEO Renaud Laplanche was the most important news story of this past decade. He was the leading figure in the industry. His drive and vision was one of the main reasons not just Lending Club but the entire industry had seen such growth over the previous few years. The news of his departure rocked the industry globally and led to a dismal 2016 for many lending platforms.

2. New Fintech Charter Proposed by the OCC

There has been talk about a new regulatory structure for marketplace lending since the GAO report way back in 2011. By September it was clear that the Office of the Comptroller of the Currency (OCC) was going to take the lead here. In early December the head of the OCC, Thomas Curry, announced the plans for a new fintech charter that will launch in 2017. They are currently seeking public comment on this idea until January 15, 2017. This will be a big story to watch in 2017.

3. The Goldman Sachs Consumer Lending Platform Called Marcus Has Launched

The largest and most profitable investment bank in the world became a bank holding company in 2008. Since then Goldman Sachs has bought the $17 billion in deposits from GE Capital Bank and started an online-only savings bank GS Bank. After news leaked in mid-2015 about their launch of an online consumer lending platform everyone has been waiting to see what Goldman Sachs would do. Their new platform called Marcus is now live and is available for consumers in 49 states.

4. The Pure Marketplace Lending Model is Dead, the Hybrid Takes its Place

The disruption in capital markets this year has led many people to question the pure marketplace model. My partner, Jason Jones, shared his thoughts on this topic and it has become the most shared story in Lend Academy history. He lays out a new capital markets strategy for companies entering the market today and where the marketplace model fits with more mature companies.

5. Supreme Court Denies Petition to Hear Madden v Midland

We have been following the Madden v. Midland Funding case as it made its way through the court system. At issue is whether or not an issuing bank can export the interest rate caps of one state to other states even if that rate is above the usury cap for that state. It went all the way to the Supreme Court who refused to hear the case essentially leaving in place the decision of the Second Circuit. In anticipation of this decision most marketplace lending platforms have been keeping all loans in New York, Connecticut and Vermont under the state usury limits.

6. RiverNorth Gets Approval From SEC for Marketplace Lending 40-Act Fund

This year saw the first ever 40-Act funds launch. In June the Stone Ridge Alternative Lending Risk Premium Fund (LENDX) launched buying loans on multiple US platforms including Lending Club. Then in September the RiverNorth Marketplace Lending Corporation (RMPLX) launched a fund. This was an important step in the maturation of the industry as investors in this country can now invest in this asset class through publicly traded vehicles.

7. Three Industry Titans Launch the Marketplace Lending Association

It had been talked about for years but the industry finally came together to create the first trade association, the Marketplace Lending Association this year. Lending Club, Prosper and Funding Circle were the three founding members but their goal is to expand to many more members in 2017. It should also be noted that other industry bodies also launched in 2016: The Innovative Lending Platform Association and the Online Lenders Policy Institute both came into being this year.

8. Leading Chinese Platform CreditEase Makes First Investment on Avant and Prosper

I am including this article in my top 10 not because the deal itself is significant but for what it might mean for the future. CreditEase is the leading P2P lending platform in China but they are becoming even more successful in their wealth management business. This deal was for a $50 million investment (in loans) split evenly between Prosper and Avant and is part of an initial $80 million fund. I expect to see many more deals like this one in the coming years as more Chinese money makes its way into loans issued by US platforms.

9. SoFi Weathering the Marketplace Lending Slowdown Well

While the online lending world was going through a dramatic pullback over the summer SoFi has continued to execute well. They launched new products in 2016 but also kept their core business humming. They became the first platform to receive a AAA rating (from Moody’s) on a $380 million deal completed in May. They have been in the news a lot this year and very little of it has been negative.

10. US Treasury Releases White Paper on Marketplace Lending

Their timing could not have been worse. The US Treasury released their long awaited white paper on marketplace lending the day after the biggest news story in the industry’s history. Yes, it was on May 10 that this white paper was released and as such it did not get the attention it deserved. Regardless, it was a well produced paper that has become an asset for lawmakers and regulators in helping them understand the issues facing our industry.

Now, with this list I didn’t focus on many of the negative stories from this year but I am sure readers realize that we had more than our fair share of bad news this year. There were layoffs at Prosper, Avant, Lending Club and others. There were platform failures and some articles predicting the demise of the industry. There was the news of the Ponzi scheme in China which certainly didn’t help our image globally. But most companies in this country are still standing, many stronger than they were at this time last year.

While we have all learned a lot I know I can speak for most of us when I say that we don’t want to see another year like 2016 again. Happy New Year everyone. Here’s to a healthy and prosperous 2017.

The post The Top 10 Most Important Marketplace Lending Stories of 2016 appeared first on Lend Academy.

In part one of this series we explored the interest rate movements at Lending Club over the past year. In this post we’ll review the actual performance of loans to get an idea on how the recent vintages are trending since the first quarter of 2014.

Delinquency Rates with Lending Club

To begin with we’ll take a broad look at the vintages using delinquency rates which helps paint a picture of what’s going on with all loans originated by Lending Club. Lending Club club shares delinquency rates on their additional statistics page. The below charts are courtesy of NSR Invest and include the most recent data from Lending Club as of Q3 2016.

36 month Delinquency rates from Q3 2013 are shown below. The light blue shaded area represents Q3 2013 36 month loans which are now fully mature. Vintages through Q2 2014 remained pretty stable, but you can start seeing noticeable increases in delinquencies in notes originated in Q3 2014 and Q4 2014. Starting in 2015, delinquencies had a much steeper slope which has continued into the 2016 vintages. Delinquency rates break 2% for many vintages compared to the peak of 1.5% for Q3 2013. What will be interesting to see is how Q3 2016 delinquencies trend once we receive 3 more months of Lending Club data on February 14, 2017 when Lending Club announces their Q4 earnings.

Click to enlarge.

The chart below also tracks delinquency rates, but only includes 2015 and 2016 vintages. It is also easier to compare the vintages with the line chart. It’s clear that early delinquency rates have been increasing in recent quarters.

Click to enlarge.

Loan Performance – Lending Club

While looking at delinquency rates is important, there is still the question of how returns are tracking for investors, especially with the changes in interest rates. For this exercise we’ll focus on Lending Club’s 36 month loans since they are more mature. The three screenshots below show show returns across loan grades. They were produced using NSR Invest, filtering on 36 month loans and selecting the option “Equally weight all loans at $1000”.

As you look at these tables it’s important to keep in mind the maturity of the various vintages or the average age which isn’t displayed. The 2014 Q1 vintage is nearly mature whereas the 2016 vintages are still relatively young. Regardless of this fact, you can still get an understanding of how the vintages are trending.

It’s hard to distinguish any degradation of performance in an index of A grade loans. In fact, the 5.25% return of 2014 Q1 A grade loans is one of the best performing quarters for A grade loans if you look at the entire history of Lending Club loans.

There is a noticeable drop in ROI however for grades B and C. Notice how on some of the younger vintages, particularly around Q1 and Q2 2015, have loss rates exceeding a nearly mature vintage (2014 Q1). Despite the lackluster performance of some of these vintages, returns are still well into positive territory.

Grade A

Grade C

Grade B

Grades D, E and F have seen more substantial impacts to performance from originations starting with Q4 2014. As you compare the loan performance by loan grades you’ll see that generally the higher on the risk spectrum you go, the lower the returns are tracking. Performance continues to lag through Q2 2016. It’s too early to make a judgement call on Q3 for Grades D and E although it’s apparent that Q3 2016 won’t be a good vintage for grade F loans.

Grade D

Grade F

Grade E

Loan Performance – Prosper

For Prosper we’ll also look at the 36 month loan performance by grade. Generally the findings are very similar to that with Lending Club. Returns in the loan grades AA, A and B have seen returns decrease, but to a lesser extent than the higher risk loans.

Grade AA

Grade B

Grade A

When looking at the higher risk loans what’s interesting is even E grade loans still have a positive ROI so far. These loan interest rates are comparable to Lending Club’s F grade loans which already have a negative ROI for Q2 and Q3 2015 as well as Q1 2016. As a side note, Prosper currently has a problem with their data files right now where recoveries are not being recorded properly.  Therefore, the Prosper returns are likely to be higher than those displayed.

Grade C

Grade E

Grade D

While we have seen numerous interest rate changes from Lending Club, there have been fewer from Prosper. The performance trends are similar, although one could argue that higher risk vintages are currently performing better at Prosper. In a recent blog post from NSR Invest, they touch on what might be the explanation for fewer interest rate changes:

It should also be noted that Prosper’s interest rate changes over the last year are dwarfed by Lending Club’s rate increases in the higher risk grades. However, Prosper’s rates already were, on average, higher than Lending Club’s in 2015 – particularly at the end of the spectrum.

Conclusion

For a long time investors have enjoyed healthy returns by investing in loans both on Lending Club and Prosper. Certainly part of the degradation in loan performance can be attributed to the platforms’ expanded underwriting and it’s clear now that interest rates were lowered too much. But there is also an important lesson to be learned. Many investors focused on the highest risk grades which historically had produced higher returns. Now that returns have come down, investors are realizing the risk in investing in the higher risk borrowers. I don’t think some investors carefully considered their personal risk tolerance before investing, they simply sought after the highest returns.

It’s hard to draw any conclusions on what will happen with the newest vintages as the latest rate changes went into affect on Lending Club in October, 2016 but a lot has changed since the loans in 2015 were originated. On a positive note, unemployment, which is highly correlated with performance of unsecured lending continues to remain low. We will carefully be looking at Q3 and Q4 2016 vintages once new data is available in February.

If you are an investor who experienced lower returns as of late, now is a great time to reconsider your investment approach whether that be continuing to invest as is, modifying the loan grades you invest in or rethinking your allocation to p2p lending within your entire portfolio. Returns in this asset class, as with others are likely to rise and fall over time and this is just one example of it.

Update January 18, 2017: Lending Club released an 8-K discussing recent loan performance. According to the release:

We have seen early signs of stabilization in delinquency rates across the existing loan portfolio following changes made several times in 2016, and implemented additional changes on January 11, 2017 to tighten the thresholds on borrower leverage on unique combinations of risk factors such as number of recent installments loans, revolving utilization, and higher risk scores on our proprietary scorecard.

The document goes on to comment on the economic backdrop, borrower performance, interest rates, and other factors such as prepayment rates and diversification. It is worth reading to learn Lending Club’s view on current trends. You can find the latest 8-K here.

Full disclosure: NSR Invest is a sister company to Lend Academy.

The post Recap of Recent Performance Trends with Lending Club and Prosper – Part #2 appeared first on Lend Academy.

Lending Club has released their Q4 2016 and 2016 year-end results. The company originated $1.987 billion in loans, up 1% from Q3 2016 of $1.972 billion. The most significant news of the earnings release was that bank participation totaled 31% of the platform in Q4 2016, up 18% from the previous quarter which shows that the banks are back. In the Q & A section of the earnings call, CEO Scott Sanborn stated, “We’ve got back on a bank by bank level all of the people we were hoping to have back.” This also happened quicker than Scott had expected. Also worth noting is that the company achieved this goal without investor incentives in Q4 unlike in Q2 and Q3 2016 where loans were offered to investors at a discount.

Last quarter the company announced a $1.3 billion deal with Credigy, a subsidiary of the National Bank of Canada. Certainly this increase is in part due to that deal and in the Q & A, CFO Tom Casey made a remark that the Credigy deal represented 10 points of the growth, although he clarified later he hadn’t done the math and this was a ballpark number. This proves that bank participation was not solely driven by Credigy’s investment which is great news for Lending Club as diversification is so important with a marketplace model. The company has made significant progress in attracting banks, approaching Q1 2016 levels where bank participation hit its peak.

What you’ll also notice looking at the chart below is that the Other Institutional category dropped 5% sequentially, from 18% to 13%. This category of investor includes investment banks, hedge funds and fund managers who typically seek higher yields. Lending Club has tightened credit and adjusted pricing which has had an effect on these investors. According to Lending Club the January 2017 credit update affected approximately 6% of the borrower funnel which means Lending Club is originating less of the higher risk loans. This shift is attributed to performance and also to banks taking up available inventory as discussed previously. Bank’s interest in loans continue to be concentrated in the high quality A & B grade loans.

Also on the investor side of the equation, Lending Club discussed the opportunity of new revenue streams, namely a sponsored securitization program. Lending Club completed their second securitization in December 2016 and we learned of a new securitization with Jefferies totaling $300 million on January 7, 2017. They plan to partner with financial institutions to control the transparency of the underlying assets. Lending Club will use some of its capital (up to $100 mn) to participate in the securitizations by warehousing the loans until the securitization takes place and the loans are sold. Although this will have an effect on the company’s balance sheet it will only be temporary as Scott clarified that they do not plan to hold loans on their balance sheet long term. One analyst asked how the profitability differs from selling whole loans to banks versus selling loans in a securitization. Tom Casey and Scott Sanborn mentioned that securitization results in higher revenue but the securitization channel is really about diversification of funding sources and allowing other types of investors to participate in securitizations as opposed to just driving revenue.

I think the other key theme coming out of the earnings call was that Lending Club is now ready to shift it’s focus now that 2016 is behind them. Scott Sanborn noted that the company is ready to leave the remediation and recovery phase after an enormous investment in that effort. The focus going forward is more on the borrower side of the business to further growth, become a more balanced marketplace and shift resources to other priorities. Scott also noted there were more opportunities on the investor side and they are actively looking to participate in deeper partnerships and make strategic use of their capital. Although there is clearly room to grow on the borrower side, Lending Club now has close to 2 million borrowers equivalent to one of the top 20 banks in the country.

Not surprisingly Lending Club did not provide much of an update on the new auto refinance product but they have now expanded from just California to 27 states. They have not marketed the product heavily but plan to do so in 2017. The company plans a $5-10 million investment this year. Revenue as well as originations with the new product are not meaningful for the company at this point. The team was also asked about the competitive landscape. Scott agreed that the landscape has changed but they now have nearly 10 years of experience and can say yes to a broad range of borrowers. The platform infrastructure is in place and the team feels good about their ability to compete with new players entering such as Goldman’s Marcus.

Lending Club’s financials for the quarter are shown below.

Conclusion

While growth from an origination perspective has still yet to materialize it’s clear from listening to their recent earnings call that the company put a tremendous effort into attracting investors in 2016. I believe they have succeeded here and the team noted strong demand from capital markets. They have also attracted more banks back to their platform in a much quicker time frame than expected.

Now the question is whether they can spur some growth in 2017 on the borrower side of the equation. The company also provided guidance for the first time in several quarters which should give investors some idea of what to expect going into 2017.

Disclosure: Peter Renton, the founder and CEO of Lend Academy, and Ryan Lichtenwald, the author of this article both own LC stock.

The post Lending Club Q4 Earnings Results Review – The Banks Are Back appeared first on Lend Academy.