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Upstart Makes Changes Today That Benefit Investors

by Peter Renton on June 23, 2014

Upstart logo

Upstart, who just launched their p2p lending platform a couple of months ago, has made some very interesting changes today for investors. One of the complaints I hear from investors in Lending Club and Prosper is that when a loan defaults it is the investors, not the platforms that take the hit. With the changes made today, Upstart is addressing that issue head on.

Investors Will be Refunded Origination Fees if a Loan Defaults

This is the really big news for investors and the change that I am most excited about at Upstart. The industry standard today is this: if a loan defaults the investors will lose their outstanding principal. Meanwhile, Lending Club and Prosper keep the origination fees they made by issuing the loan and lose nothing. This has always felt like a misalignment of goals to me.

Upstart is taking a different approach. Now, if a loan defaults at any time over the course of the three-year loan term (all Upstart loans are currently three-year terms) then Upstart will take the revenue they earned from the origination fees and refund the money to investors.

Now, like the other platforms, Upstart has a sliding scale of origination fees ranging from 1% up to 6%. So, we could be talking a significant credit to investors in the case of a default. And I confirmed that there is no time limit on this refund. So, in theory a borrower could default in month 32 of a 36-month loan term and investors will receive the full credit for the origination fee.

No More Service Fees for Investors

That is not the only change at Upstart today. They are also doing away with investor service fees completely. Most platforms charge a 1% service fee for investors on every borrower payment, reducing investor returns. Upstart have decided that they will be foregoing this revenue now and providing 100% of borrower payments to investors.

Why Make These Changes?

When I spoke with Dave Girouard, Upstart CEO, last week about these changes he said that in his opinion this is just a fairer system for investors. It completely aligns the goals of the platform with the goals of the investors. When I asked about the hit to their income, particularly around the investor service fee, he said that Upstart will be increasing their origination fees moderately to pay for these changes. You can see their table of origination fees on their Borrower page.

Reading between the lines it is clear that Upstart is looking for more investor money. Because this is certainly a way for them to differentiate themselves from Lending Club and Prosper. Investors are going to love the refunded origination fees and I could see plenty of new investors coming into Upstart on that change alone. Combine that with no service fees and you have a more compelling offer for investors. Keep in mind, though, at this time Upstart is still only open to accredited investors.

Looking Ahead

I think this is a great change and one I hope will stir up the industry. While I don’t see Lending Club and Prosper matching this change any time soon (or ever) I like that a new platform is coming out aggressively for investors. I will be following Upstart’s progress with interest in coming months. I have just opened my own Upstart account and will be reporting back on my progress here.

You can read more about these changes today on Upstart’s blog.

{ 16 comments… read them below or add one }

Anil @ PeerCube June 23, 2014 at 5:47 pm

Upstart is making a few very good changes in attempt to differentiate from other platforms. I believe what Upstart now needs is get both lenders and borrowers to start talking about Upstart and their experiences on the platform (figure out a way to get word of mouth and buzz going).

We have tried to look at other p2p platforms beyond Lending Club and Prosper in attempt to diversify our own investments. But we have been turned off by platforms unwillingness to share data on current listings and ongoing performance of issued listings. I just don’t want to get into situations that may turn out to be like Mosaic or Funding Community.

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Peter Renton June 23, 2014 at 9:20 pm

Hi Anil, I know Upstart is working hard to get the word out and these changes will certainly help. But as for transparency I know Upstart are working on making their loan performance data available but many other platforms are not going to be quite so forthcoming.

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Chris June 25, 2014 at 5:14 pm

“But as for transparency I know Upstart are working on making their loan performance data available…”

Peter, did Upstart give you any type of ETA on this topic?

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Peter Renton June 25, 2014 at 8:54 pm

Their CEO told me they would be releasing performance data in “a couple of months”.

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Dave Girouard June 26, 2014 at 9:53 am

Hi Chris,

I’m founder/CEO of Upstart.

We have first repayments happening this month (100% on time payments thus far), and investors will get their first monthly statements within 2-3 weeks. We’ll begin to publish loan performance broadly in August or September latest.

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Dave Girouard June 26, 2014 at 10:00 am

Hi Anil,

See my answer below. We will be very transparent about performance on our platform. Timing described below.

Thanks,
Dave

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Joe B June 25, 2014 at 7:54 am

I reviewed this site and quite frankly, I don’t agree with their model. It appears that they put too much stock in education. Is this to mean that graduates from Harvard will perform better than graduates from FSU? Are we to think that a plumber is less credit worthy than a political science major? What about a truck driver? Would he be relegated to the bottom of the pile? I seriously don’t think a college education makes anyone more credit worthy. In fact, many of them carry too much debt. And that’s my two cents.

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Peter Renton June 25, 2014 at 9:02 pm

Joe, I think you will find that all of Upstarts underwriting is based on a deep analysis of data. They specialize in loaning money to what is called “thin file” people – typically young people who are just getting started in their careers. They have developed an underwriting system based on millions of data points that helps them determine who is likely to pay.

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Ryan Lichtenwald June 25, 2014 at 9:07 pm

Hi Joe, I think education is just one aspect that is included in their underwriting. As a relatively new graduate, I have seen several instances of individuals who struggle to get access to credit, even though they are highly educated with fairly large salaries. To me their model makes a lot of sense and they are definitely targeting different borrowers than Prosper/Lending Club. I agree that many students have too much debt, but this is not always the case either. If I hadn’t signed up for a credit card at 18 and used it responsibly I would definitely have had some issues when it came to getting a mortgage. You may be interested in this paper regarding us youngins’ as borrowers:
http://www.richmondfed.org/publications/research/working_papers/2013/pdf/wp13-09.pdf

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Dave Girouard June 26, 2014 at 9:57 am

Joe,

Thanks for your comments. Education is only one part of how we assess creditworthiness. It’s a strong signal for people who have relatively little credit and work history – thin file borrowers. Even in this case, we carefully consider all available credit and income/expense information to ensure the loan is easily affordable.

For those with much more credit & work experience (non-thin file), the education variables matter far less and are weighed far less. We do require a college degree for most of our borrowers, but this is rooted in our underwriting. We would expect to expand on that over time. For those with very little credit history, our data model uses these education-related variables to better understand the borrower’s fundamental employability and earning potential.

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Carl Saperstein June 26, 2014 at 6:13 am

Looking deeper into Upstart I note that borrowers can defer payments for six months. Borrowers get into trouble during the initial phase of their loan. Deferring the start of repayment for half a year is cause for concern.

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Dave Girouard June 26, 2014 at 9:59 am

Hi Carl,

This is an important feature because some small fraction of our borrowers are taking full-time coding courses or finishing school before they start a job.

We understand that delaying the first payment introduces risk to the loan – that is compensated for both by a higher interest rate for that borrower and interest which accrues during that period. We believe the premium paid more than offsets the additional risk added by the 3 or 6 month deferral of 1st payment.

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Joe B June 27, 2014 at 9:08 am

I understand that the underwriting is based on a deep understanding of data, etc but… you can have all the data that you want; it does not make for a quality loan nor replace common sense and human nature. Giving a student access to $10k or $30k at 25 years of age is reckless, IMHO of course. Just because someone graduates and secures a $100k a year job doesn’t prove anything other than they have been employed. Can they maintain that employment? Can they maintain monthly payments? Credit history and payment history need time and it certainly does not need to start someone off with a $15k loan. Credit needs to be earned; it’s not a right.

“Highly educated” with “fairly large salaries” does not qualify anyone. Past payment history does. I know many “highly educated” people who can’t balance their finances. It’s not hard to get credit at 18. Use it responsibility and earn a good credit history. Failure to obtain that credit at an early age does not make it my responsibility to fund someone who has not taken it upon themselves to gather that credit history.

Seeing this as a description does not make me excited to invest: “Active Lifestyle Events Manager and Johnson & Wales University graduate in Greenwood Lake, New York”. I just fail to see the significance of it. And yes, I read the richmondfed.org report. I like to invest with a little common sense too. What would make me more excited would be so see a description: credit score of 700 with 1 delinquency, bla, bla, bla.

Furthermore, allowing someone to defer a payment for up to 6 months is setting them up for failure. This is not ‘Rooms To Go’ nor should that approach be taken with online lending. It is very important for the 1st payment to be on time and within a 30 day period of obtaining the loan. It sets the person up for good payment planning. Additionally, allowing someone to ‘buy now’, ‘pay later’ also causes a negative impact to their credit history. So, in reality you’re hurting the very people you’re trying to help.

And lastly, “taking full-time coding courses or finishing school before they start a job”; well then perhaps they need to finish what they are doing before taking on debt that they may or may not be able to repay. Paying new debt on possible future earnings is ass backwards; pardon my language but I’m calling it what it is.

If I want to gamble, I have Vegas which is a lot more entertaining than funding people for their possible future earnings potential, deferred payment or credit worthiness based on being a rocket scientist. Call me just silly but tried and true works better for me. People need to earn their place in society; it’s not a given because they have a degree or did not have time to build their credit while attending college.

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Peter Renton June 29, 2014 at 5:41 am

Hi Joe,

Thanks for your comments. Clearly an Upstart investment is not a good fit for you. Despite all the things you have said I am comfortable making an investment based on their track record and several meetings with their management team. It all comes down to data. What Dave and the team at Upstart have done is introduce data for young people with little credit history where before there was none. By identifying prime borrowers before others Upstart is expanding the market for investors like me.

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Jacob June 29, 2014 at 9:15 pm

Just wondering, is Upstart investing still only limited to qualified investors? I’ve been investing in Lending Club and Prosper for several years and would like to dip my toe in the water at Upstart, but do not fit the category of qualified investor.

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Peter Renton June 30, 2014 at 12:10 pm

Yes Jacob, Upstart is still only limited to accredited investors – you need a net worth of $1 million or an annual income of at least $200,000 a year to be eligible to invest.

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