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Foliofn Users at Lending Club Are Not Second Class Citizens

by Peter Renton on June 13, 2013

[Editor's Note: Today we have a guest post from New Jersey Guy - he is an active member of the Lend Academy Forum and investor on the Lending Club trading platform. In this post he provides his reasoning on why it is better to invest via Foliofn for Lending Club investors.]

Whether you’re new to Lending Club or already a seasoned investor, I’m sure you’ve already made one important discovery.  The Lending Club platform to invest in new loans is only available to just over HALF of our 50 states.  This leaves 24 states (including my state of New Jersey) dangling in the wind, left only with the secondary market as a means to invest in peer to peer lending.

Foliofn (or Folio for brevity’s sake) is the gateway to the secondary market.  Unfortunately, the platform is viewed as inferior and filled with notes (as one forum member put it) considered to be “the toiletries of loans.”  Stop here for a second.  On any given day, there are over 60,000 notes listed on Folio.  Look at that number again…..60,000!  That’s a lot of notes available for sale!  It’s a ton more than you’ll ever find for sale on the Lending Club Platform at a single time!  But again, they must all be poor performing notes that are not making payments and on the verge of default, right?  Well, as of this writing 56,000 of those notes are showing up as either freshly issued or current in their payments.  Only 4,500 notes are showing up as being over 30-days late.  Not quite the toilet as we were led to believe!

Granted, Folio is the market where investors will dump very poor performing notes.  However, ultra-conservative investors will dump perfectly good notes at the drop of a hat.  You know the old saying!  “What’s one mans garbage is another mans treasure!”  Yup, there’s treasure in there, and if you know how to mine Folio for it, you can create a portfolio that will rival any investor on Lending Club.  This article is going to show you different thoughts and ideas that aren’t available to Lending Club retail platform users.

Undoubtedly, the two biggest disadvantages of using folio is the platform itself and the search filters.  In a word, they stink.  I’m sure you certainly don’t want to be looking at 60,000 notes, one note at a time.  If you haven’t already, it’s a must that Folio users sign up with one of the various services that offer more defined filters to narrow down the number of notes to look at.  Personally, I use Interest Radar.  Interest Radar offers great filtering for Lending Club Platform users.  However, the site is one of the few that actually puts a super strong emphasis for Folio users which is nearly equal to the Lending Club section.  I’m not making a plug for Interest Radar, but other sites take a narrow approach to Folio as if we were second class citizens making the secondary market look like something nobody wants to be bothered with.

8 Reasons Why it is Better to Invest Through the Trading Platform

Okay, let’s start with some thoughts, ideas and strategies:

1.  A common myth is that unlike purchasing off of Lending Club, Folio members can’t invest in fresh loans.  Totally untrue!  Many Lending Club platform users will purchase Freshly Issued Notes with the intent of reselling them on Folio at a slight profit.  Thanks to people like these, Folio states can choose brand new notes each and every day (7,800 listed at this very minute).  Keep in mind, though, that sellers must pay a 1% Folio fee, so most of the notes for sale will be slightly marked-up.  This is not always the case. But even with a 2% to 3% mark-up, you can still find quality notes offering attractive yields.  One big advantage is that you can still find fresh notes that are offered at a discount. There are currently 84 notes listed at discounts up to 1%.  Unlike Folio buyers, Lending Club retail platform buyers are never offered a discount.

2.  Folio buyers don’t have the issue problems that Lending Club buyers have.  With the rise of institutional buyers on Lending Club, it’s getting harder and harder for individuals to get their money vested in new loans.  In addition, they tie up their money.  Even if they get their money vested in a note, there is no guarantee that the loan will issue.  Lending Club (or the borrower) can cancel the application resulting in the investors’ money being returned without a cent of interest paid.  In this business, idle money is bad money!  Since the loans on Folio have already been approved and issued, you can put your money right to work.

3.   Typically, a newly issued loan bought off of Lending Club will need to wait at least 30-days before the first payment is made (and the first interest payment made to the investor).  Again, idle money.  When you buy a note off of Folio, that clock has already begun ticking.  I’ve bought notes where first payments are made within days of me purchasing them.  So, Folio buyers can receive quicker gratification!

4.   Previously issued notes are NOT “used” notes!  We’re not talking about old socks here!  There are advantages to buying notes that are 3, 4, 5 even 15 months old.  First, a payment track record has already been established for you to study.  On a fresh issue, no such track record exists.  Secondly, you can compare the borrowers current FICO score to their FICO at origination.  A sharp decline can warn you to stay away. Plus, if there were any communication between Lending Club and the borrower, this would show up in the collection log.  Again, it’s additional information you can use to your advantage.  Both of these tid-bits of information were NOT available to the investor who bought this note off of the Lending Club retail platform.

5.  Folio buyers have the option to skip the first 12-month “Danger Period”.  Ask any investor if they experienced a new loan that made 1 payment, 2 payments or even NO payments, then defaulted on the loan!  It happens!  And when it does, you can count on losing nearly all of your principal.  Studies have shown that 50% of all defaults happen on loans that have made 10 or less payments.  That means you risk the highest chance of default during the first year.  Folio buyers have the option to purchase notes over 1-year old.  This is no guarantee that the note won’t default, but you tip the odds slightly more in your favor.  Plus, you won’t be paying a full $25 for the note.  36-Month notes that are 1-year old will generally run you $18.  Shop a little bit, and odds are you’ll find some nice notes at additional discounts, which could really boost your Yield-to-Maturity (YTM). Lastly on this thought, your note will mature faster.  If you buy a 36-month note that’s already a year old, you only have to hold it for 2 years.  Lending Club retail platform buyers do not have these options!

6.  Lending Club retail platform buyers will argue that by buying a note that’s a year old, you’ll miss the highest pay-out of interest that occurs during the first few months.  Seem logical, right?  Not quite!  First off, you’re not investing $25, but a much smaller amount.  So yes, you’ll receive less cash over the life of the loan.  However, it won’t alter your Yield-to-Maturity (YTM) that much.

7.  Folio buyers have the opportunity to “Hedge” their portfolio.  Do you want to boost your returns by 1%, 2%, 3% or more?  Folio gives you that opportunity!  Ultra-conservative investors will dump a note at the first sign (of what they think) is trouble.  Personally, I’m not that conservative and those notes seem perfectly good to me! (What’s one mans garbage….)  Every now and then, I’ve purchase a “Grace Period” or “16-30 days late” note for up to 50% off.  That would give me a YTM of 90%, 120% or even 150% on that particular note as most of the money I make is in Capital Gains.  As of this writing, I have not had one go into default.  This could many times be a good gamble, as you’re not risking tons of money.  Besides, if you spent $10 on a note and it did default, that $10 won’t send your portfolio into a downward spiral.  In actuality, if the note failed to pay, odds are you could resell it on Folio and recoup part of the $10.  In order to have this opportunity, all investors must turn to Folio as it’s not an option with Lending Club.

8.  Here’s a penny-stock type of idea that even a new investor can do with as little as $100.  Use Folio to purchase 36-month notes that have 11-12 REMAINING payments.  “Whaaaat?”.  Here is the logic behind that madness.  Everybody knows that “A” and “B” quality notes are considered the safest but unfortunately offer the lowest rate of return.  However (in my unqualified opinion) after 24 months, all the notes, regardless of grade, start to become more equal as far as overall risk.  If you find an “F” or “G” note that shows a perfect payment record of 24 months, odds are that “F” and “G” note will continue to pay perfectly throughout the rest of the loan term.  Folks, let’s not forget something here!  “F” and “G” borrowers are NOT the “Dregs of Society”!  These are people with respectable jobs, lives and credit. They were approved by Lending Club’s rigorous application process.  “F” and “G” borrowers DO pay!  So after 2 years, what’s the difference between an “A” borrower with a perfect track record and a “G” borrower with a perfect track record?  The rate of return, that’s what!  You can build a sizeable portfolio of nothing but these inexpensive notes.  With risk now starting to diminish and equalize, you can buy “E”, “F” and “G” notes with more confidence and less fear of default.  Average cost is about $8 per note, and you can still yield a YTM of 8% to 12% depending on how you pick your notes.

I’m sure other Folio users probably have additional advice.  I know there is a lot more than what I posted.  But, you know, when you step back and think about it, it appears that Folio players have more options than those that play on the Lending Club retail platform alone.  Folio has more diversification, more choices and offers up opportunities that Lending Club can’t!

{ 23 comments… read them below or add one }

SarahV June 13, 2013 at 11:41 am

I guess it’s a little sad that my immediate reaction upon seeing the title of this article was – “Yes we are!” ;-) But that is thinking about the interface/filters, not the opportunities for buying notes.

Aside from IR, are there any 3rd party sites that do anything meaningful for Folio users?

Overall: nice article, NJ Guy! Thanks.

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BruiserB June 13, 2013 at 11:44 am

Does investing in Folio notes introduce any record keeping nightmares above what we already deal with on Lending Club? It’s already a bit of a chore having to figure things out at tax time but at least you can pretty much figure things out with the guides Peter has posted here. But since you may buy a note for more or less than the principal owed, do you need to keep track of each note individually? I have been afraid of opening the Pandora’s box of tax record keeping that this could cause. However the advantages you point out are compelling, so if I could ease my fears of record keeping, I might be willing to jump in. Thanks for the article!

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New Jersey Guy June 13, 2013 at 12:03 pm

Bruiser….Good Question! Capital Gains are not calculated on Lending Club. And their tax statement at the end of the year sucks. Yea, it shows what you sold a note for, but fails to show what you paid and whether or not you had a loss or a gain.

I created a template on Excel that allows me to set up a monthly program to track my sales. Believe me! Excel and I are not the best of friends, and I can’t understand 97% of the fancy stuff on that. But setting up a simple tracking program was quite easy, even for a dofus like me. Basically, my chart consists of:

1.) Date of Sale
2.) A space that allows me to copy/paste the loan title from Folio (Which has the loan ID on it)
3.) What I paid
4.) What I sold it for.
5.) Profit or loss

At the very top of the page, it calculates:
1.) Total Paid for all my notes.
2.) Total amount of all sales.
3.) Total Profit/loss.
4.) % gain/loss against what I paid for those notes.
5.) %gain/loss against my entire portfolio.

At the end of the month, I simply put in the amount of interest I made (gain) and another line showing my Folio fees (loss). This gives me a great summary of how all my notes performed, not just my speculative notes. Plus, it’s more truthful come tax time.

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BruiserB June 18, 2013 at 8:50 am

I still have a hard time understanding exactly how a transaction should be accounted for on taxes. I guess if my account was an IRA, I would have a lot less hesitation. I can see how your spreadsheet helps you keep track of your personal rate of return for your own knowledge, but how would you show this on your taxes? Would you have to account for each note as a separate line item?

For instance, if you bought a note that still had $17 owing for $15 and it was still paying out for 22 months, how would that impact your taxes? There is some sort of capital gain component because you effectively gained $2 in value and then there is an interest (or OID) component because you were paid interest on the $17 over the next 22 months of the amoritization. And what happens if the borrower pays for 5 months, taking the principal owed down to $12 and then defaults? So you have a gain ($2) on your purchase, interest earned and recovery of $5 worth of principal during the 5 months, and then a $12 loss on default. How many tax reportable events happened here? How do you account for each one on your return? Is it possible to do this in aggregate, or do you have to have separate line items on your return for each note?

Like I said earlier, if this was within a tax sheltered account like an IRA it wouldn’t be a concern, but it seems like a record keeping nightmare for a taxable account.

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Chris July 1, 2013 at 1:32 pm

I am also very concerned about taxes. I only buy / sell on Folio but I just started this year and haven’t dealt with it yet. I do believe I am making a tax nightmare for myself. We’ll see.

The IRS publications on OID discuss buying at a discount or premium and how to handle it. Seems like a real pain though. I’d be interested in seeing definitive examples of how to account for the various scenarios (buying at discount, at premium, re-selling later at discount/premium, late payments, defaults, etc.).

BTW, lending club told me you can’t trade on Folio in an IRA. I don’t know if that’s true but they would not let me open an IRA account since I’m in a second market only State. If I could have I absolutely would have done it that way to avoid the whole problem.

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Peter Renton July 2, 2013 at 8:51 pm

Chris, You are correct that you cannot open an IRA from a Folio-only state.

As for taxes there is some disagreement on how they should be handled but here is an article as well as two threads on my forum that provide more information:
http://www.lendacademy.com/the-2013-lending-club-and-prosper-tax-guide/
http://www.lendacademy.com/forum/index.php?topic=739
http://www.lendacademy.com/forum/index.php?topic=781

Jamie July 14, 2013 at 12:04 am

Hey, I was wondering if you could help me make a spreadsheet like this? I don’t really know a lot about spreadsheets, I’d be grateful if you could re-create yours in a Google Spreadsheet (as opposed to Excel) and share it with me. I’d like to have something like this to keep track of all my data, too.

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thezfunk June 13, 2013 at 12:56 pm

I definitely appreciate the article. It was a good introduction to the secondary market. Personally, I was a very conservative p2p investor that is now looking to dump some of my conservative notes so I can reinvest that money into higher interest notes. I don’t know where to begin when it comes to listing them in the secondary market. A walk-through or how-to would be very helpful and some guidelines on how to list them to get them to sell.

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New Jersey Guy June 13, 2013 at 2:07 pm

Thezfunk……….Getting you’re notes on the secondary platform is simple.
First, log onto Lending Club like you normally do. Go to your account page.

On the upper left hand side of the page, you’ll see a link for “Trade Notes”. That will take you directly into the “Browse” section of Folio.

Look at the top of the page for the “Sell Notes” link. Click it. You’re in!

Now, all you do is use the simple filter to narrow down your notes. Click the box next to any note you want to sell. Once done, click the big “Sell Notes” button and you’re on the way to pricing them.

About pricing? Well, that’s subjective and a highly talked about topic on the forum. You’re not the first one to ask this question! One place to start would be here: http://www.lendacademy.com/forum/index.php?topic=952.msg5793#msg5793

But, search around on the forum. I know there have been other threads concerning the pricing of Folio notes that would be of interest. If it comes down to specific questions, feel free to start a new topic! Answers come quickly.

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Peter Renton June 13, 2013 at 3:29 pm

As New Jersey Guy says there is a lot discussion about pricing on the forum and I highly recommend you read through some of that to give you an idea of what others are doing. If you are looking for an introductory primer then you can check my original Folio review for new investors that I did about 18 months ago. Sadly, nothing much has been updated since then so it is still quite current:
http://www.lendacademy.com/an-introduction-to-the-lending-club-trading-platform/

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Rob L June 13, 2013 at 4:54 pm

Nice job with the guest post! I’m so new to the P2P thing I haven’t even started looking into Folio. Your guest blog was a very interesting intro to the basics and has made me aware of what Folio has to offer. Thanks!

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Matthew Allen June 13, 2013 at 8:54 pm

I wish you wouldn’t have posted this – I don’t want the secret out about how great it is to invest via the secondary platform at Foliofn! J/K – I’ve blogged about this a little bit myself. I was maintaining a 22%+ NAR pretty easily with only notes bought on Folio. I did have one default recently, but still have an NAR at 17.54%. Very nice post New Jersey Guy.

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New Jersey Guy June 14, 2013 at 7:23 am

Matt….Don’t worry! I didn’t give away anybody’s Secret Sauce Recipe (Including my own). But you’re right! The potential of making over 20% is quite real and achievable.

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edward June 14, 2013 at 4:19 pm

Excellent article NJ Guy. Really eye-opening and informative. Gave me lots of ideas for investment opportunities on Folio. Thanks for sharing your wonderful knowledge. You have a great writing style too! Now, about that secret sauce…….?

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storm June 18, 2013 at 8:17 am

On point #2, if you are selling or buying a note with a payment currently being processed, there is a good chance the transaction will be cancelled if and when the payment goes through. As a seller, it is frustrating because I have to relist the note after I thought it was sold. Granted your money is not in limbo as long as if you invested in a new note (probably a few days at most), but it is something to consider.

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New Jersey Guy June 18, 2013 at 10:10 am

“On point #2, if you are selling or buying a note with a payment currently being processed, there is a good chance the transaction will be cancelled if and when the payment goes through.”

That’s true! However, as a seller, I’ve found the reason that most sold notes get cancelled IS because there is a payment being made. A status change can affect the value of a note, so I don’t mind it so much.

On the other hand, as a buyer, it is disappointing to find a good note only to have it cancelled the next day. I do believe in all fairness the selller should get credit for the payment. But, it’s frustrating to have notes cancel, especially after you shopped hard the day before and needed those notes to maintain your quota.

In this business, idle money is dead money.

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Martin June 19, 2013 at 7:58 pm

Although many times I sell on Folio notes I myself consider junk (and many times I wonder who is willing to buy it), but the main reason for Folio is that if you need to raise cash, you have a place to do it. It is like issuing IPO at the stock market and have no stock market available. Once you initiate a loan, you act somewhat like a market maker buying IPOs and then sell them on secondary market (Wall Street).
I am now investing in Lending Club for my retirement, but once I decide to withdraw my cash, I expect to have ability to sell and raise cash when needed. Without Folio it would be impossible.

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Jim June 23, 2013 at 4:54 pm

This is an excellent rundown of some good reasons to trade in LC’s secondary market. There is one big negative, though. You can’t do it with an IRA account. I’m trading there with a regular account because my state is barred from the retail side; but I would really like to do it from a tax-advantaged account. So far, no dice.

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Chris July 2, 2013 at 11:05 pm

This is great info. I too am investing exclusively through FolioFN and agree it can be made to work well. I’ve got a couple comments though regarding two of your items.

#3) This is not idle money; it is invested and earning interest. If you want to start receiving payments in less than 30 days, fine, but why?

#6) True enough except for fees. Lending Club charges a 1% fee on the total amount of the payment and the payment remains a constant dollar amount throughout the loan. So near the end you are mostly just getting your principal back but you are still paying 1% on the payments. Early on the interest amount is much larger than the fee.

If you are looking at YTM this is taken into account but if you just look at the interest rate you need to consider this.

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scott June 2, 2014 at 1:09 pm

It was my understanding that there are more defaults after 12 months. Are there any numbers / articles that talks about where borrowers default the most? Within the first 12 months. Between year 1 and year 3? Maybe E, F, G borrowers have a higher % of default the first year but A, B borrowers have a higher % of default in year 3. Do you have any information on this?

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BruiserB June 2, 2014 at 1:21 pm

LendingRobot’s blog has an interesting post on this and on their algorithms to predict which loans are more/less likely to default.

http://blog.lendingrobot.com/post/87123011616/predicting-the-number-of-payments-in-peer-lending

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scott June 3, 2014 at 12:22 pm

thank you very much.

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New Jersey Guy June 2, 2014 at 2:14 pm

Lendingmemo also has a good, easy to understand article.

http://www.lendingmemo.com/lending-club-prosper-return-curve/

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