Lend Academy

Teaching the World About Peer to Peer Lending

Five Keys to Success for New Marketplace Lending Platforms

New companies are being launched all the time in the marketplace lending space. Here are five essential areas that startups need to focus on.

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The keys of success

I hear from a lot of entrepreneurs who want to start a marketplace lending platform. They range from ambitious students with an idea through to seasoned entrepreneurs on their third or fourth startup. One of the questions I get asked most often is what are the most important things to focus on as a new platform in order to be successful.

I have learned a great deal from having conversations with the CEOs and co-founders of the most successful platforms in this industry. I also talk with large investors (both debt and equity) and discover what they look for when evaluating new platforms. Through all these conversations I have come up with what I consider to be the five keys to success for new marketplace lending platforms.

1. Credit Risk

We are in the lending business. This is the core of what every platform does. So, if this part of the business is not a primary focus then the platform has a limited chance of long-term success. By this I mean there should be, at the very least, a senior credit person on staff. Someone with not years, but decades of experience. This person should have assessed credit risk in a senior position at a bank or other finance institution. [Read more…]

Partnering with FICO on a Credit Boot Camp Webinar Series

The free four-week summer webinar series will cover all aspects of consumer credit and is presented by FICO, Lend Academy and LendIt.

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FICO_LG_COLOR

We did something new this year at LendIt USA 2015. We hosted a series of pre-conference workshops that went into more depth on a certain topic. The most popular of these workshops was the Credit Boot Camp run by FICO.

The bad news is that these workshops were not recorded. The good news is that we have decided to partner with LendIt and FICO to create a webinar series based on the content presented in these workshops. The series will cover all aspects of consumer credit and is designed for both platforms and investors who want to gain a deeper understanding of credit underwriting.

Starting this week, running for four weeks, is a webinar series that will take you through all the important aspects of consumer credit. Below are the topics covered and the timing for each of these webinars.

Inside the FICO® Score and Alternative Credit Data
Wednesday, July 22, 2015
10:00 am PT/1:00 pm ET
60 minutes

Hot Button Regulatory Trends for Online Lenders
Wednesday, July 29, 2015
10:00 am PT/12:00 pm CT/1:00 pm ET
60 minutes [Read more…]

Two Significant Reports Just Published on P2P Lending

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Yesterday, two major reports were published on the p2p lending industry. First, the Federal Reserve Bank of Cleveland put out a positive report on the future potential growth of this industry and the same day Fitch Ratings published a more sobering report on where the p2p lending industry stands today. Both make for some very interesting reading.

Federal Reserve Bank of Cleveland logo

First let’s take a look at the report from the Cleveland Fed. This is a quick read containing some very interesting graphs. It is focused on interest rates, particularly their comparison with average credit cards rates. I found the chart below interesting.

Credit card vs p2p lending interest rates

So, on average credit card interest rates have been significantly higher than the average rates at Lending Club. It appears that the Cleveland Fed did not use data from Prosper in their analysis. What is even more interesting is the fact that peer to peer loans have been performing slightly better than credit cards when it comes to the percentage that are delinquent.

On average, between 2010:Q2 and 2014:Q1, 3.2 percent of peer-to-peer loans were past due compared to 3.7 percent of standard consumer finance loans. Over this period, peer-to-peer loans had a lower share of poorly performing loans in 10 of 16 quarters.

The conclusion of the report is that p2p lending will continue to grow because borrowers find it an attractive alternative to credit cards and there is strong investor demand.

[Read more…]

Taking a Close Look at Lending Club’s Underwriting Changes

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I was in San Francisco last week visiting Lending Club and Prosper. So I took the opportunity to sit down with the risk management team at Lending Club to delve into the underwriting changes they introduced late last year.

As Anil from Random Thoughts pointed out recently at first glance it seems that Lending Club has moved to a riskier credit profile. Given that Lending Club now allows borrowers with a bankruptcy or a current delinquency it is easy to see how one would get that impression.

But Lending Club said the changes have resulted in a better ranking of risk that should lead to a more conservative credit profile overall. How is that possible given the supposedly more lax underwriting criteria? They went through a whole presentation with me to explain these changes in detail.

A Brief Summary of the Underwriting Changes

Before I get into the detailed explanation let’s first look at some of the changes that were made. Many of the changes were detailed in the Random Thoughts post and you can always read the latest underwriting requirements in the Lending Club prospectus. Here are the five main changes:

  1. Maximum number of credit inquiries is now 6 for all borrowers (before it was maximum of 3 inquiries for FICO scores of less than 740 and up to 8 inquiries for scores of 740 or more).
  2. Current delinquency now allowed.
  3. Revolving credit balance maximum of $150,000 restriction removed.
  4. Major derogatory record (meaning a bankruptcy) now allowed.
  5. Maximum credit utilization of 98% restriction removed.

Swapping in and Swapping Out

According to Lending Club the latest underwriting changes did two things. It removed the highest risk borrowers that were previously being approved and it added back in the best borrowers from previously declined populations. This was obviously not a change that was taken lightly – a huge amount of analysis has gone into this decision.

[Read more…]

A Look Back at Prosper 1.0 – How Relevant are the Numbers?

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Prosper launched with great fanfare back in 2006. For the first time in this country individuals could act like a bank and earn money from lending to their fellow Americans. Little did anyone know what would happen over the next three years.

It sounded like a great idea at the time I am sure – let the crowd decide what interest rates to charge and allow subprime borrowers to take out loans. But with hindsight we now realize it was a shaky premise. Even before the financial crisis hit Prosper was dealing with default rates well above their expectations. When Prosper closed down for their quiet period in October 2008 most investors were losing money on their investments. This first iteration of Prosper from 2006 until 2008 is what we call Prosper 1.0.

All Prosper 1.0 P2P Loans Have Matured

The last loan issued in Prosper 1.0 was in October 2008 so all of those loans have now reached maturity (they only issued three year loans). When we look at all Prosper 1.0 loans on Lendstats we see that Prosper issued 28,936 loans with 18,480 fully paid off and 10,456 loans that defaulted. This represents a default rate of 36.1%. In absolute dollar terms the performance was a little better (because most borrowers made some payments) – total dollars loaned out was $178,560,222 and total dollars written off was $46,671,123 – a loss rate of 26.1%. [Read more…]

How Lending Club and Prosper Set Interest Rates

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When borrowers apply for a loan at Lending Club or Prosper there are probably two main things they want to know. Will they be approved for the loan and if so, what will the interest rate be.

It may seem like a bit of a mystery as to how interest rates are calculated but a lot of this information is readily available for borrowers.

Interest Rates at Lending Club

Lending Club is completely transparent when it comes to how they set rates. Everything a borrower would ever want to know is on Lending Club’s page titled Interest Rates and How We Set Them.  So if you know your credit report intimately you should even be able to work out your interest rate in advance. [Read more…]

Why Many People are Still Hesitant About P2P Lending

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Hesitant to take the plunge into p2p lendingI have been following the conversations about p2p lending on a few popular personal finance blogs in the last month or so. In the comments section I have noticed that many people claim to like the idea of investing in p2p lending but still haven’t taken the plunge.

Lazy Man and Money gave an update on his Lending Club investments that brought in several comments from prospective investors. Sam from Financial Samurai wrote this article on the Yakezie blog that also garnered many comments. Other recent blog posts that have prompted some discussion include Beating Broke, Sweating the Big Stuff and Bible Money Matters.

What is holding prospective investors back from opening an account with Lending Club or Prosper? The objections from potential investors on these blogs typically fall into one of these five categories. [Read more…]

What Percentage of Your Investments Should be in P2P Lending?

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Even though I am very passionate about peer to peer lending I never recommend people invest all their money with Prosper or Lending Club. Peer to peer lending should be part of an overall investment strategy that covers a range of asset classes.

What is an Asset Class?

Before I go any further we need to have a basic understanding of asset classes. An asset class is like an investment category – for example the equities that make up the stock market are an asset class. Bonds are another asset class. Cash and cash equivalents (CD’s, money market funds, savings accounts, etc) are another. You could consider real estate another as well as commodities such as gold and oil.

Where Does Peer to Peer Lending Fit?

Peer to peer lending doesn’t fit easily into any asset class – it would be what many investment advisors call an “alternative investment”. It is thrown in with more exotic investments such as futures, currencies, private equity and venture capital. Many of these investments are very high risk, often require a large minimum investment and are subject to wild fluctuations in value. These are not true of peer to peer lending but this is where most people lump it. [Read more…]

Four Filters to Increase Your P2P Lending ROI

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When you look at the spread of late payments from the post I published earlier this week it is obvious that some people get a loan from Lending Club or Prosper with no intention of ever paying it off. Wouldn’t it be nice if we could recognize these people before committing our investment dollars to their loan. Well I believe with some simple filtering you can eliminate most of them.

While p2p lending is still new, there are thousands of loans that have reached or are close to maturity and we can do some statistical analysis on these loans. Ken at Lendstats.com has been busy this month upgrading his filtering options for his Prosper and Lending Club loan statistics. I have spent several hours this week poring over his changes to work out which criteria have the most impact on p2p investors ROI.

After looking at all the filters available on Lendstats I decided on four filters that I think will make the most impact while still leaving the investor with plenty of loans to choose from. I chose filters that take data from the borrowers credit report because I didn’t want to rely on unverified information. People who are scammers, with no intention of repaying the loan, will likely provide misleading or incorrect information on their loan application. So I didn’t want to rely on any inputted data from the borrower. These filters obviously don’t catch all defaults but I was able to reduce the number of defaults by well over 50%. [Read more…]

Social Lending Arbitrage: Good or Bad Idea?

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Investment arbitrage has been around for centuries and it has been applied to virtually every investment vehicle from the Dutch tulip mania of the 1600’s through to the complicated currency arbitrage of today. So, it is little wonder that a new investment vehicle such as peer to peer lending has also attracted those looking to use arbitrage in order to make money.

But first let’s explain what we mean by arbitrage. A simple definition is the simultaneous purchase and sale of an asset in order to profit from a difference in price. With social lending arbitrage someone takes out a loan from a social lending site, presumably at a low interest rate and then reinvests that money to earn a higher rate of interest. The borrower/investor gets to pocket the difference. [Read more…]

About Lend Academy

Lend Academy has been bringing you all the news and information about peer to peer lending since 2010. Founded by Peter Renton, Lend Academy not only has the most active news site, but also the largest online forum and the first and most popular podcast in the industry.

The Lend Academy team loves peer to peer lending and our staff have all invested their own personal money in one or more of the platforms. Lend Academy Media is part of Cardinal Rose Group which also owns LendIt, the leading industry conference, and has a majority interest in NSR Invest.

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