The following article is a guest post from Bryce Mason, the founder of P2P-Picks, about the whole loan program at Lending Club. He looks at the percentage of loans reserved for this program and whether or not participating investors are getting a random sample of all the loans as was initially promised by Lending Club.
On September 28th, 2012, LendingClub announced that, as opposed to its standard fractional investment business model, it would begin setting aside some loans that could only be purchased in their entirety–or as whole loans. Part of that announcement were promises that whole loans would be chosen randomly from the general pool and that anyone would be able to participate in the whole loan program. With the one-year anniversary of the whole loan program right around the corner, has LendingClub met its promises?
Before we dive into answering these two questions, it might be useful to understand how many loans are part of the whole loan program. Using a data set of all issued loans with a listing date of at least September 27th, 2012 (the first day of the program), we can see that 26% have been partitioned off as whole loans. According to the blog post referenced above, the program came about because some institutional investors felt that owning the entire loan allowed them special legal and accounting treatment that was more consistent with their goals. Thus, the whole loan program was set up with institutional investors in mind, and we might expect its use to scale with them. It appears that the probability of a loan being selected for the whole loan program is a parameter that LendingClub can set depending on their institutional investors’ needs. The table below shows that, as the whole loan program began, fewer than 20% of loans were selected. Subsequent months brought selection up to about 30% on average, with selection slowing down in May 2013 to a more average range.
|Month||% Whole||Total Loans|
Note: Data extract ended on August 7th.
Can Any Investor Join the Whole Loan Program?
The easiest question to address first is whether LendingClub allows any investor to join the whole loan program. It appears to me that the answer to this question is yes, with a caveat. Due to my business of independent P2P loan underwriting, I recently asked for whole loan access from my account representative via my personal account. He merely asked that I reply to his email with a copy of a paragraph disclaimer about the risks associated with investing in whole loans. A few hours after I sent in that text, whole loans started appearing on the platform. While I cannot speak for everyone, it certainly seems that a process is in place to provide retail investors with whole loan access.
Given that whole loans are a large chunk of originations and that most retail investors do not have the account balance to participate with sufficient diversification, the retail investor’s most important consideration should be whether LendingClub has made good on its promise to set aside whole loans randomly. Any other selection method would invariably produce different pools of loans for institutional and retail investors, ultimately yielding returns that would probably be preferential for one group.
A Random Selection of Loans for Large Investors
Thankfully, LendingClub appears to be fulfilling its random selection promise. Using the same data from above, we performed simple t-tests to determine if a number of borrower attributes differed by initial listing status (whole vs. fractional). If LendingClub selected whole loans randomly, then there would be no average difference between the pools.
|Loan Amount ($1k)||14.6||14.8||0.01||8.1||0.02||different|
|60-month (%)||22.7||22.3||0.25||0.42||0.01||not different|
|Employer N/A (%)||6.1||6.1||0.93||0.24||0||not different|
|Public Records||0.11||0.11||0.88||0.41||0||not different|
As one can see from the table, the averages of a number of attributes are statistically different across initial listing status. However, with almost 90,000 loans in this study, there is so much statistical power that even very small differences might be deemed statistically significant. More important in this case is whether the reader finds the differences practically significant. The mean FICO score, for instance, differed by 1 point between the two groups. This difference (d) represents a little less than four one-hundredths of a standard deviation–a very minor difference–and is the largest of the bunch in those terms. So, while there are statistical differences, overall there are do not appear to be any meaningful differences between whole and fractional loans.
LendingClub should be commended on its transparency, allowing investors the opportunity to hold them accountable for their promises. It is very rare in the investing world to have access to this kind of data.
[Update: The July and August numbers in the above chart have been updated slightly to remove the "Policy Code" of 2, which was a recent addition to the LoanStats download file. These records are void of most borrower attributes and the loans do not adhere to the current underwriting policy of Lending Club - hence the number 2 in the policy code field. According to the data, this program began on July 9th, 2013. Originations stemming from this program accounted for about 5% of total origination dollars since it began. Interestingly, the average funded amount of these loans is roughly half of other LendingClub loans. There will be an upcoming post on these policy code 2 loans explaining this new program in more detail. Thank you to an anonymous reader for pointing out the existence of this second whole loan program.]