[Editor's note: This is the longest post I have ever done but I wanted to make this a comprehensive review of the Lending Club trading platform. I have included lots of sub-headings for easy skimming if you don't have time to read the entire article.]
When Lending Club launched in 2007 there was no trading platform. There was no way to sell notes; once you invested in a loan you had to hold that note to maturity.
But then came the Lending Club quiet period in 2008. When they reopened in October 2008 after they had completed their SEC registration there were several changes to their platform. The investor notes were now considered securities, in a similar way that common stock is considered a security, so they could now be traded on a secondary market.
Selling Lending Club Notes on FOLIOfn
Lending Club chose FOLIOfn to manage their trading platform. This is the same company that manages Prosper’s trading platform but the program is run separately and you need to open up separate accounts on FOLIOfn for each platform. It is a very simple process to sign up for a trading account, it only takes a couple of minutes. Once signed up every time you click on the Trading Account link from your Lending Club account you will be taken to your FOLIOfn account.
At Lending Club the trading platform brings a way for investors in most states to invest with p2p lending. Lending Club operates for retail p2p investors in just 28 states but with the trading platform many more states are opened up. Only residents of the District of Columbia, Kansas, Maryland, Ohio, Oregon, and Vermont are ineligible for investing on the trading platform.
Investors Can Liquidate a P2P Portfolio
What the trading platform brought to Lending Club and p2p lending in general was liquidity. It provided a way for investors to liquidate their entire portfolio if needed. If an investor finds themselves in a bind and needing their money back as soon as possible they can sell their notes. As long as they are willing to sell their notes at a discount then they can liquidate an entire portfolio in just a few days.
You may decide to liquidate just a portion of your portfolio. For several months now I have been focusing my new investments on loan grades D-G. But I have many A- and B-grade loans in my portfolio that were part of my initial investment strategy. I have slowly been liquidating some of these loans and using the proceeds to invest in loans that pay a higher interest rate. So when your strategy changes the trading platform provides an efficient way to offload loans that no longer meet that strategy.
Selling Late Loans
Some investors use the Lending Club trading platform as a vehicle to sell the late loans in their portfolio. You can put a loan up for sale on the trading platform as soon as it goes into In Grace Period. Now, many notes that go into In Grace Period go current again so many investors ride it out. Some wait until a loan is 16 days past due and then put it up for sale. Either way, to sell a note that is late you will most likely need to price it at a discount.
See the Credit Score History of a Borrower
Now, you don’t have to wait for a loan to go late before selling it on the trading platform. It is sometimes possible to anticipate loans that may go late. I know some investors who monitor the credit score of their borrowers and when they see a downward trend in credit score then they put the loan up for sale on FOLIOfn.
When you click on the Sell Notes link on Folio you are given a list of all the notes in your portfolio. You will see a Credit Score Change column that indicates whether the borrower score has gone up, down or is unchanged. When you click on the note (by clicking on the link in the status column) you are provided with more detail about this note.
Below is a chart showing one of my notes that is over two years old. They have paid on time every month but their credit score has fluctuated from 679-713 (where it was when the loan was issued) all the way down to 550-599. Some investors might have sold this loan when the score dropped that much but this borrower has remained current during the entire life of the loan.
Some Rules For Selling Notes
Earlier this year Lending Club changed the rules for selling notes on the trading platform. Now investors must adhere to the following rules:
- Notes will be offered for sale for seven days only
- You can not list a note that is in default or has been charged off
- Pricing of notes is now capped at 70% over par value
Some investors will price their notes at a large premium over their par value in the hope that an unsophisticated investor may buy the note. Since this change the 70% cap has at least removed from the platform those notes that were priced at ridiculous levels – sometimes several thousand percent above their par value. But their are still many notes on the trading platform that trade for an unreasonably high markup. I see many notes that are put up for sale for a 5% premium even before any payments have been made – and even late loans are sometimes listed for a small premium. It is very unlikely that any investor would buy such notes.
How to Price Loans for Sale
This is the big issue for most investors. I spoke with several people about this topic and there was a wide variety of opinions. But most people said that the market is inconsistent and that some days you can sell a current note at a small premium and other times it will not sell at all.
Before we can price a loan for sale we need to understand the concept of par value. When you put a note up for sale Lending Club will tell you the par value of that note. This number is the total amount of principal left plus any accrued interest for the current month. You can then chose to go above or below that par value when setting the price for your note.
Here is what I have found in my research. Notes that are current can sell for a 1% – 2% premium as long as there is not a rapidly declining credit score. Notes with an increasing credit score and a good payment history are easy to sell for a small premium but once you price it at more than 2% over par you reduce the pool of willing buyers. Notes that are In Grace Period can sell for a 5-10% discount as long as they have a decent payment history. Notes that are 16-30 days past due need at least a 25% discount to sell. Seriously past due loans may not sell at all regardless of discount but I have sold a couple of 30-60 day past due loans for a 50% discount.
Keep in mind that FOLIOfn takes a 1% cut of the sale, so to break even on a loan you need to price it at a 1% premium.
Active note traders should check out the Lending Club Experience blog. Marc is a relatively new investor who is an active trader. He is in a state that does not allow investors on the retail platform but that hasn’t stopped him from getting excellent returns, at least so far. When I reached out to him while researching this article he responded in great detail which he made into this blog post.
Buying Notes on the Trading Platform
One of the reasons that the Lending Club trading platform is so vibrant is that there are a large number of investors who can only invest in p2p lending by using the trading platform. This means there is a large and willing market of buyers of notes.
Not a User Friendly Interface
If investors are looking for a similar interface to the one that is available on the retail platform they will be sorely disappointed. It is a completely different interface and one that is not very user friendly. It lacks polish and it is not easy to wade through the thousands of notes for sale.
And there is one feature that is downright misleading. There are seven check boxes for the average interest rate in the Browse Notes screen. But these check boxes do not refer to interest rates at all – they actually refer to the Lending Club loan grades. For example, if you click on the 14% average rate – you will get notes that range in interest rate from 15.95% to 20.3% (as of this writing). You will not actually get ANY loans at 14%. This is because this selection does not refer to interest rates at all, it refers to loan grade. By clicking the 14% box you are actually selecting all E-grade loans which can vary in interest rate quite a bit. I am not sure why Lending Club hasn’t changed this, it is very misleading for investors.
Filtering Options are Lacking
On the Lending Club retail platform you can filter the available loans by dozens of different criteria. On the trading platform that is not the case. You can filter loans by just three criteria: average interest rate, payment status of the loan and the number of remaining payments. There is no way to choose loans based on credit criteria such as number of inquiries, number of delinquencies, public records, etc. To see whether a loan might meet your criteria you need to click on the loan and then click on the small original listing link at the top right of the screen.
There is one more tool, thankfully, that can help investors. You can click on any of the columns and sort the data in ascending or descending order. So, you can browse the notes in order of their markup or discount, that is something that many buyers find very useful.
Smart Investors Use Home Grown Tools
I know of at least four investors who don’t rely on the trading platform interface at all to do their investing. They are obviously very IT-savvy and they have developed their own tools to go in and scrape the data from FOLIOfn and then filter all the loans based on their own algorithms. Unfortunately none of these investors have made their handiwork commercially available but if you are a programmer then you can likely create a tool to help you invest.
How Investors Buy Notes on the Trading Platform
Now, not many of us can program a script to scrape the data from the trading platform so we are left with using the main interface. Here are the steps I recommend investors use when making an investment.
- Choose your filters – you only have three choices but choose your average interest rate, payment status and number of remaining payments. If I am buying notes I like to see notes that have had a few on time payments and have never been late. By choosing the status of “Never Late” and 54 or less remaining payments you filter out about two-thirds of the loans on the platform.
- Sort by Markup/Discount – This will bring to the top the notes with the largest discounts.
- Look at Credit Score Change – You don’t want to overpay for a declining credit score. It could signal some payment problems ahead.
- Look at Yield to Maturity (YTM) – If you are looking to pick up a bargain this number should always be greater than the stated interest rate. If YTM is 15% and the interest rate is 20% then you are paying a premium for that particular note. That may be ok if there is an on time payment history and an increase in credit score but if not you are likely overpaying for the note.
Of course, you could decide to venture in to the late loans in the hope of picking up a bargain but that is something I can’t recommend. If you get lucky you can get great returns by doing this but it is a gamble.
What about others? I know there are many investors out there who have a lot more experience on the trading platform than I do. Please add your words of wisdom in the comments.
Later this week I will be reviewing the Prosper trading platform.