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The Collection Practices at Lending Club

by Peter Renton on October 10, 2012

Last month I chatted with the head of collections at Lending Club, Cathy Pickhover, about their collections practices. It was quite an illuminating discussion. We covered a number of different topics related to collections and we started off talking about what happens when a borrower misses a payment.

Q. Describe the process when a borrower misses a payment.

A. Because nearly all borrowers are doing ACH payments every month we know almost immediately if a payment fails. We then contact the borrower by phone and/or email to find out what is wrong – attempting to shape borrower behavior in the first contact attempt is critical. If that contact fails, we will generally continue trying for the next 30 to 60 days depending on a combination of the escalation behaviors such as no contact, refusal to pay, etc. If there has been no payment, we will outsource the loan to a third-party collections agency that can use even more advanced technology and tools.  Note that, depending upon the borrower response (or lack thereof), we may hand off the loan even sooner than 30 days.

Q. Tell us about your collection agencies. Who do you use and why?

A. After reviewing a variety of collection agencies earlier this year, we decided on FMA Alliance in Houston and FMS Inc. in Tulsa as our current providers.   These two are continually evaluated head to head in a champion/challenger setup so that we can closely monitor performance and reward excellence.  We want partners that can scale with our growth. Moreover, we want agencies with the latest technology, excellent security, catastrophe planning and also reasonable fees that would reward us for the increased volume.

Q. The question many investors want to know is how are you combatting fraud – such as those instances when a borrower takes out a $35,000 loan then never makes a payment.

A. We take these situations, called “straight rollers”, very seriously at Lending Club. The first thing we look at is the viability of a collections lawsuit  and post-judgment remedies  such as real estate liens, bank levies, and wage garnishments if allowed in the borrower’s state. If we believe we have a reasonable chance of recovery, we most likely will sue the borrower.  We have dozens of judgments and stipulations to judgement out against borrowers right now and I may even be appearing at trial next month.

Q. What about those instances when a borrower just declares bankruptcy after recently obtaining a loan? There is nothing that annoys an investor more than that.

A. If a borrower has retained a bankruptcy attorney, we must immediately discontinue contact with them.   We will typically charge-off the loan 60 days after notification of the filing.  If we feel there is obvious fraud at work we may file a bankruptcy objection. (Note: this is very expensive and we need to be sure we have a solid case).

Q. What about debt sales? Do you sell your charged-off loans?

A. We have just recently put the systems in place to allow for charged-off asset sales. And for those loans that we cannot sell we continue to work the accounts internally or by using third-party agencies.

Q. What is the deal with payment plans? It seems like there are a lot of borrowers on payment plans and some are on one very briefly?

A. We have just over 300 borrowers on performing collections payment plans involving temporarily reduced payment amounts (details are available in the downloadable historical file).  For reference you can compare that to the over 55,000 currently active loans.

Q. These are fixed term loans so how long will you allow someone to be on a payment plan?

A. We don’t grant term extensions or restructuring for borrowers who are late. We expect a borrower to begin recapturing any deferred amount within six months.

Q. How many people in the collections department at Lending Club?

A. While we can’t share exact numbers I can say this – we have doubled the number of people in the collections team in the last six months and the total resources we are utilizing (ie including agencies) are scaling with loan volume.

Q. Are collection efforts done in a uniform manner or is more effort put into the larger dollar amounts?

A. Our collection procedure is uniform across all loans. The only time the size of the loan may matter is when we are deciding whether or not to take legal action – here a larger loan may make it more worthwhile to pursue in court.

{ 24 comments… read them below or add one }

Michael October 10, 2012 at 7:57 am

Thanks for this insightful post. It’s unfortunate trying to reclaim loss in the event of a bankruptcy is cost prohibitive. I think we all agree someone that files bankruptcy months after obtaining a loan knew full well they were headed in that direction. Proving that in court is another thing. A smart law would disallow new debts less than 6 months old from being protected.

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Peter Renton October 10, 2012 at 9:09 am

Yes Michael I agree that would make sense. Even if we had to do three months I could live with that but I don’t think we will see a change like this any time soon…if ever.

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Bryce M. October 10, 2012 at 9:01 am

May call BS on just 300 loans on Payment plans. Might have to go through my 750 loans, count those on plans, and do a chi squared test to see if it is out if synch with the population average. I bet it is.

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Peter Renton October 10, 2012 at 9:13 am

So here is the thing about Payment plans. There are many people legitimately on payment plans and then there are many other borrowers who are put on payment plans very briefly. For example, if a borrower decides they want to change their ACH date from the 10th of the month to the 25th of the month Lending Club allows that but for 15 days their loan will have an official status of On Payment Plan. I am not sure if that would allow for the difference.

And they did say “Performing Payment Plans” there are probably many people who are on non-performing payment plans. Between those two things that might make up the difference.

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Larry Ventura October 10, 2012 at 9:49 am

I have at least 15 loans on payment plan. 2300 notes. Would be nice if that was a searchable status.

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Dan B October 10, 2012 at 6:47 pm

A “non performing payment plan” is just a nicer, less transparent way of saying that it is LATE. Let’s just call it what it is.

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Dan B October 10, 2012 at 6:48 pm

Bryce…………..I’d bet you’re correct.

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Danny S October 11, 2012 at 6:50 am

I just checked my notes.

I have 18 notes, out of 1281, on “Payment Plans”. At least thats how many I know of, because every time a note of mine goes into Grace Period (or later), I immediately move it into a portfolio I call “watch list”. There may be more notes that are on Payment Plans which were worked out even before a note went into Grace Period so I dont know about it.

So thats at least 1.4% of my notes. I think its a fairly representative sample that could be applied to LC as a whole.

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Danny S October 11, 2012 at 6:52 am

Let me add that I have 44 notes on my Watch List portfolio. So just under half are on a Payment Plan while the others are not

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Jessica S October 11, 2012 at 10:22 pm

“Watchlist” Portfolio is a great idea. Stealing it, thx.

Anil @ PeerCube October 11, 2012 at 10:55 pm

Why not use historical loan data file to find loans with status of performing payment plan as Peter mentioned in his post? The Oct 3rd historical loan data file has only 206 loans listed with status performing payment plan.

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Zach October 10, 2012 at 4:21 pm

It seems rather strange why they won’t share the number of employees in the collections department….For a company that stresses transparency, it doesn’t seem like something that should be held confidential. Did she explain why?

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Peter Renton October 10, 2012 at 7:59 pm

Zach, The reason I was given why they didn’t want to share this and other information was that they didn’t want their competitors, namely Prosper, to know too much about their operation.

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Dan B October 10, 2012 at 9:52 pm

Peter………..Wow, really? Were you able to find out what brand of coffee LC serves in the lobby/waiting area…………..or is that also a state secret that they want to keep Prosper from finding out?

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Dan B October 10, 2012 at 9:58 pm

Zach………..”Transparency” is kind of like “freedom”. If you say it often enough & claim that you’re offering or practicing it often enough, people will believe it. Whether it actually exists or is actually occurring may be a different matter entirely.

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Phillip McFarland October 10, 2012 at 7:16 pm

Great insight to the process. It’s good to see transparency and that they’re actually trying compared to P2P Lending 1.0

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Peter Renton October 10, 2012 at 8:01 pm

Phillip, I get the sense that this year they have put a great deal more effort into collections that the past. Cathy Pickhover brings 20+ years experience in collecting consumer debt and she has overhauled their collections process.

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Chris October 11, 2012 at 12:40 pm

I view it as a cover for a low number. Having two people in collections and “doubling” the number doesn’t provide for a lot of people doing collections. I’m new to LC and only have 19 loans. Of those, one made five payments and straight to bankruptcy. Another is now in collections. I would expect, due to the nature of the business, that they have a low number of employees overall. It’s not as if they need a hundred salesmen pounding pavement selling loans. Look at most Internet start-ups, even with tens of millions of funding capital, they often just operate on 5 – 10 people and maintain that until they have to expand. Heck, I work for a company that’s the largest and most well known of it’s kind in it’s field. It’s been around for 15+ years and runs on 6 people.

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Peter Renton October 11, 2012 at 2:31 pm

Chris, You may be right. My guess was they went from 3 to 6 people in their collections team but it could just as easily be from 2 to 4. I can tell you that overall LC is now at over 100 employees and they are expanding their office space. I visited their headquarters in late August and they have easily doubled the number of employees since my first visit back in June of last year.

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Danny S October 12, 2012 at 11:32 am

I agree 100%. Doubling means nothing to me without a base # of people, because just as you say, it could be from 2 to 4 people. That would be totally insufficient to service the # of loans out there right. I’m guessing its a larger team than 4 or 5 people but it still may not be sufficient.

But to me, more important than just the # of people from their internal department, is the external agencies they use. I did some basic Googling on FMA and FMS. Of course there are complaints by people not wanting to pay them… but compared to other collection agencies that I’ve heard of, both seem to be fairly reputable and capable in their ability to collect. So thats certainly a big positive from my viewpoint.

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American in Busan February 11, 2013 at 6:22 pm

What do you mean by reputable? Call me heartless, but I’d rather have loan sharks on my collections team than 4 guys behind a computer and landline. Most of my 11 charge-offs didn’t even pay 1/4th of what was owed, and I guess that infuriates me more than I should let it. IMO if the lender has flesh, the lender has assets.

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JDH October 31, 2012 at 10:09 pm

Found this article after one of my borrowers took a 15K loan and then immediately filed for CH 7 with zero payments. This is clearly fraud and irritating….. but diversification within the portfolio will handle the loss.

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Hrant March 5, 2013 at 10:54 am

I have loans showing 30-120 days for months, yet they are on a payment plan, paying monthly…on time…so, perhaps another category should be included, instead of 30-120 days late, which is misleading
Also, have loans that went into default after one or two payments. …does every loan get approved prior to funding by checking out data (ex. employment, income, etc?) or is it taken for granted that people do not lie on their applications? Sometimes notes I selected do not go thru as investments, yet are denied. Is every loan looked at for fraud, and verified?
If not, why not? Would a bank/credit card lender lend monies out w/o verification?
Also w/notes that are months late, and with one call or e mail attempted???
Another issue I seem to have observe is that if a payment is due 3/1, on top portion of the field shows…”in process”, yet below, in the notes shows that payment was not made…why the delays for info, if all is handled thru ACH’s? and is real time?

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Peter Renton March 5, 2013 at 6:37 pm

Not every loan is verified for income. Mostly it is the A and B grade borrowers who don’t get verified. This is because these are the best borrowers who have many options for taking out a loan. If you make it too difficult for them they will go away.

The interesting part of this is that there is not a big performance difference between verified and unverified loans as evidenced by this article from a couple of years ago:
http://blogs.reuters.com/felix-salmon/2011/02/07/lending-clubs-loss-rate-numbers/

And yes, plenty of credit card companies issue a credit card without verification – it is called instant approval and is used extensively in the credit card industry.

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