A little over a year ago Goldman Sachs launched their consumer lending platform Marcus as part of a digital strategy to move into the retail banking segment. They have since grown faster than any online lending platform with originations approaching $2 billion. Goldman Sachs now believes revenues from online loans will equal that of trading in the near future.
Last week LendingClub held their very first Investor Day in New York. I was lucky enough to be invited along with about 150 others to the Morgan Stanley offices in Times Square. We heard from most of the LendingClub executive team as they laid out their vision for LendingClub and the opportunity they see in front of them.
The Three Most Interesting Announcements
While much was said over the more than three hours of presentations here is what I considered to be the three most interesting announcements from the day.
- A New “Exchange Traded Partnership” is Coming
This is a really big deal in my opinion and I was surprised it was not mentioned until the fourth presentation of the day when Patrick Dunne, their Chief Capital Officer, took the stage. LendingClub will be launching an Exchange Traded Partnership (ETP) that will be traded like a stock (similar to an ETF) on a public exchange but will be backed by LendingClub loans. It will be available to all investors and will be liquid. This could be a game changer as it will provide all investors with a simple and accessible way to get exposure to LendingClub loans. No timetable was given for its implementation and if it launches in 2018 it will likely be late in the year.
- LendingClub Has Been Testing Direct Payoff Loans
One of the criticisms investors have had over the years is that when someone takes out a debt consolidation loan it is not clear whether they really pay off their credit cards or use the money for other purposes. LendingClub has been running a test for some time that pays off a borrower’s credit card balance directly to give some certainty over loan proceeds. LendingClub claims that this will help them increase origination volume by 5% as they will be able to approve more borrowers knowing that their credit card debt will be paid off.
- A New “Snap and Save” Approach to their Auto Finance Product
LendingClub announced a very handy new feature for those borrowers taking out an auto loan. A prospective borrower can simply take a photo of their registration and LendingClub will pre-populate fields eliminating almost all of the data entry. While this feature is not that groundbreaking it was interesting to me because it demonstrated that LendingClub is focused on developing the auto loan segment.
The Opportunity on the Borrower and Investor Side
On Friday of last week, LendingClub announced that it closed a new kind of transaction. It was a whole loan transaction structured as a tradable pass through security called a CLUB Certificate.
So what does this actually mean? I reached out to Lending Club to find out more. While they were very careful not to say anything that could be construed as a forward-looking statement they did provide a little more color than the press release.
This was an initiative that was investor led. Basically, they had a potential investor who did not want to invest in whole loans. They are not for everyone, given they are an illiquid investment that has a duration of several years. What this investor wanted was a security that acted like a whole loan but one that had liquidity.
So, LendingClub created a security with a CUSIP that was cleared by the DTCC and could potentially be traded in OTC markets. It was a $25 million deal that was sold to one investor and in keeping with Dodd-Frank rules LendingClub retained 5% of the deal total on their balance sheet.
While LendingClub would not share details of this deal we did learn that these were both three and five year loans of one particular loan grade. They customized this deal to meet the investors exact requirements. And this is really what makes this vehicle quite appealing. It would be close to impossible to replicate this exact deal inside a traditional securitization structure given those are usually pools of loans with broad criteria.
LendingClub claimed that this was a first of its kind deal in marketplace lending but in my research I discovered this piece on Asset-Backed Alert from April 2016 that talked about a similar structure that Prosper was working on last year. Now, I have not heard whether this planned structure received traction at Prosper so LendingClub may well be right that this is the first ever deal of its kind that has closed in the industry. It just shows that others have been thinking about this for some time.
Every quarter I share my marketplace lending investment returns with the world. I started doing this back in 2011 with just my LendingClub and Prosper accounts. Today, I share my returns from 14 different accounts across a variety of investment vehicles and platforms.
If you have been reading these posts in the past year or so you will have noticed a steady decline in my returns, primarily caused by underperformance in my LendingClub accounts. That trend has continued with my latest results with my worst performance ever since I started investing in LendingClub back in 2009.
From the beginning I have focused my investing primarily in the highest risk notes and this is the segment that has been hit hardest by defaults. Earlier this year I adjusted my strategy and started investing across the entire risk spectrum but it is a bit like steering a battleship. Given my many thousands of notes it takes a while for any changes to show up in my portfolio returns.
The only good news on this front is that recent vintages at LendingClub appear to be performing better so I am hopeful I can turn this battleship around in the next quarter or two.
Overall Marketplace Lending Return at 6.64%
My trailing 12 month returns for the year ended September 30, 2017 across all my accounts was 6.64%. This was my first quarter without the Direct Lending Investments (DLI) fund. As I mentioned in my last update I was redeemed from that fund on June 30. This has been my best performing investment of the last four years and it will be very difficult to replace it with investments of similar yield. This will also provide a drag on my returns going forward.
I have used the proceeds from DLI to increase my positions at a couple of platforms and have started deploying into new investments. With this edition I am sharing three platforms where I have made new investments: AlphaFlow, Money360 and Yieldstreet. You can read more information about these and all my other investments below.
Now on to the details. Click the table below to see it at full size.
A year ago Lending Club launched a deal for new investors with United Airlines. New investors could earn 1 MileagePlus frequent flier mile for every $2 invested in a new Lending Club account.
Well last week Lending Club sweetened the deal. They basically doubled the amount of miles you can receive. So, instead of 1 mile for every $2 invested it is now 1 mile for every $1 invested. And best of all this is not just open to new investors, it is open to existing investors as well but you have to transfer in new funds into a taxable account. This deal is only valid until January 9, 2018 whereas the last deal had a three year expiration date. Here is the landing page for this offer (affiliate link) with more information, I have included some of the fine print from this page below:
Upon the transfer and investment of the first $2,500 of New Funds, an investor will qualify to receive 2,500 miles. For every dollar of New Funds transferred and invested in excess of $2,500, a new investor will qualify to receive 1 mile, up to a maximum aggregate bonus of 100,000 miles during the offer period of October 9, 2017 through January 9, 2018. One bonus per United MileagePlus® account. Offer expires on January 9, 2018. Offer not valid for non-taxable IRA accounts or entity taxable accounts. Notes on LendingClub platform may have limited inventory or availability and Investor ability to invest in Notes is subject to Note inventory and availability on LendingClub platform.
So, if you are thinking about opening or adding to a Lending Club account and you want to collect some frequent flier miles this is a good deal. I am not looking to add to my Lending Club account at this time but if I was I would be all over this offer.
Lending Club and Prosper have both been around over 10 years now. A lot has changed since both companies were founded, including the performance of the loans. In this blog post we’ll share the performance of each platform over the last 10 years. The fact that we have access to this data set is one of the things that makes marketplace lending unique. The screenshots from this post are taken from NSR Invest, a marketplace lending robo advisor that is also a sister company to Lend Academy.
In the early days of this industry, it was relatively easy to earn outsized returns. The early adopters, including Peter Renton, founder of Lend Academy, commonly touted double digit returns with a few simple filters. This was before both Lending Club and Prosper began to really scale with the arrival of institutional investors.
Lending Club Data
For Lending Club investors, most loan grade returns peaked in 2013. Below is a screenshot of platform performance for all loan grades across 36 and 60 month loans. As you look at this chart it is worth noting that the 2017 numbers are somewhat meaningless because the loans there have not seasoned yet. Also, it should be note that these numbers are only for Lending Club’s standard personal loan program, that which is available to individual investors (it does not include auto, small business or other special loan programs).
Looking at the above chart we see that 2013 was the high water mark for returns at Lending Club with 8.24%. While that is impressive, D grade loans performed even better returning 9% to investors that year. The below screenshot shows performance across D grade loans over the years.
Generally speaking, Lending Club investors earned healthy returns if they began investing from 2010 onwards. These solid returns lasted until around the fourth quarter of 2015 when loan performance began to degrade, particularly with the high interest loans. The decreasing returns affected both Lending Club and Prosper and is a topic we have covered extensively. Perhaps the best way to show where investors currently stand is with the below chart taken directly from Lending Club’s statistics page.
Highlighted in red is the filtered selection including those investors with 500 or more notes where the maximum note size is less than 0.5% of the portfolio value. Each dot represents an individual investor. The highlighted range is where portfolios are considered seasoned. As you can see the overall return today for the typical investor is far less than it was back in 2013.
Today, Lending Club announced a new credit model in an email to investors. According to the email, this is the most advanced and predictive credit model ever used on the Lending Club platform. This is Lending Club’s fifth generation model that began to go in effect on September 8, 2017 and will roll out to all borrowers in the coming days. While Lending Club historically has made improvements to their credit models, the new model caught our eye for a few reasons.
The company outlines that the model further leverages machine learning along with the 10 years of data on 1.5 million borrowers they have accumulated. The new model is 24% better at differentiating the likelihood of a borrower charging off compared to the fourth generation model. It also includes more data points, and uses new custom attributes that Lending Club states are predictive in assessing risk. Lending Club provided the two below examples for these custom attributes:
- Instead of using aggregates, the new model uses very granular views of credit data which discern individual borrower actions vs. a simple aggregate (e.g. a borrower’s credit card balance per credit card vs. his total credit card balance).
- The model makes more extensive use of trended data, which provides insight into a borrower’s credit behavior over time rather than a snapshot into a borrower’s credit behavior at a point in time. Dozens of new custom variables like these improve the model’s predictive power and are proprietary to Lending Club.
It also appears that Lending Club is continuing to tighten their credit criteria for higher risk borrowers with a shift to higher quality loans:
We expect loan volume to shift toward higher quality grades (grades A and B) because some borrowers will qualify for lower interest rates under the new model, and other higher-risk borrowers, who may have received an offer previously, will be screened out.
Lending Club has made a lot of changes to both credit criteria and interest rates over the last couple of years. We shared the trend of increasing interest rates in a blog post earlier this year. Following poor loan performance that started late 2015, the company began increasing interest rates. They also publicly announced that they identified pockets of loans that were underperforming last year. Lending Club is now tightening credit even more with the reduction of higher-risk borrowers.
LendingClub also noted that they are seeing lower delinquency rates across grades and terms in the existing loan portfolio than in the second and third quarters of 2016. This is good news for investors.
In a blog post, Lending Club provided updated projected returns based on the changes. Returns range from 4-9% and expected charge-offs platform wide have decreased from 6.2% to 6.0%.
One of the main advantages that Lending Club has over their competitors is the amount of data that their 10 year history provides. It appears they have taken a closer look at their underwriting models which now is leveraging machine learning even more. We’ll have to wait and see whether these recent changes provide a meaningful increase in returns for investors. It will also be interesting to see how the platform mix changes and how originations are affected in the coming quarters.
Hurricane Harvey has already had a tremendous impact on Texas. Part of the impact is the financial stress it has put on families as businesses struggle to restore normalcy. During these difficult times many companies are stepping up to serve customers in this time of need.
To ease the financial burden on borrowers, Lending Club and Prosper have announced special programs to help those affected. Lending Club stated in the below email that approximately 30,000 of their borrowers reside in affected areas. Here is the email that Lending Club investors received on Friday:
Hurricane Harvey is an unprecedented tragedy and our hearts go out to those whose lives have been turned upside down. We wanted to provide you with an estimate on how many LendingClub borrowers could be impacted and let you know what we’re doing to provide relief for them.
Estimated Scope of Impact
We estimate approximately 30,000 LendingClub borrowers are potentially affected by Harvey (based on zip codes identified by FEMA and on the counties declared as in a state of emergency by respective state governors as of August 31, 2017), which amounts to about 2% of LendingClub’s total borrower population. Of potentially affected borrowers, about 2,000 are currently delinquent as of August 31, 2017.
For the vast majority of investors who have diversified portfolios, we expect little to no impact to returns. The affected population is a small portion of our total borrower base of 1.5 million, and we’re committed to keeping borrowers on track.
What We’re Doing for Borrowers
LendingClub believes in doing the right thing for both borrowers and investors. Given the scope of the disaster, we’ve taken several steps in line with guidance from the FDIC to treat borrowers with respect, provide resources, and help them stay on track:
- Collections call adjustments. Starting on August 26 and through September 5, internal and agency collections teams stopped making calls to delinquent borrowers in Texas and Louisiana (approximately 6,000 borrowers) as the storm made its way through the area. We will resume calling delinquent borrowers who live outside of affected zip codes in Texas and Louisiana on September 5. We will not resume calling borrowers who live in affected zip codes until September 15. Likewise, we are suppressing direct mail and email collections communications to those same borrowers until September 30.
- Late fees. We are not charging late fees for borrowers in affected zip codes starting on August 23 through September 30.
- Credit bureau reporting. For borrowers who live in affected zip codes and who become delinquent, we will append a note to our report to credit bureaus that they have been affected by a natural disaster.
- Hardship plans. We typically offer hardship plans (where borrowers are allowed to temporarily make interest-only payments to accommodate an unexpected life event) to borrowers when they meet certain eligibility criteria. In response to Harvey, we are relaxing our eligibility criteria for borrowers in affected zip codes. Hardship plans work to protect investor returns as borrowers whose loans may otherwise progress to charge-off status have the opportunity to make interim payments and some portion may revert to current status. Importantly, our teams will follow our standard process, where we offer progressively more relief to borrowers who ask for help, with hardship plans made available only after other options are exhausted.
This is a difficult time for many Americans, and we’re committed to doing what’s necessary to help our customers stay on track while protecting investor returns.
If you have any questions or concerns, feel free to reach out to us at 888-596-3159, Monday through Friday 7 a.m. through 5 p.m. PT, or firstname.lastname@example.org.
Prosper, like Lending Club, have also been communicating with investors and are including some similar help for borrowers impacted by Hurricane Harvey. They are waiving late fees and NSF fees including unpaid fees that may have already been applied. They are adjusting payment schedules so borrowers don’t accrue late fees for one month.
Prosper noted that the programs they are putting in place will not have any effect on the total principal and interest payments due to investors, but payments may be delayed. Their team is still monitoring the scope of the impact and will make any necessary changes to the scope and duration of the programs they have put in place.
It’s great to see both Lending Club and Prosper step up to support their borrowers during this difficult time. They have struck a good balance between supporting borrowers and protecting investors. The dedication to better serve their customers will ultimately lead to better customer satisfaction and better payment outcomes for the investors.
Every quarter around this time I get emails from readers asking when I will be publishing my quarterly returns post. For many years now it has been one of the most popular features on Lend Academy. People like to know how others are doing so I have been sharing my returns here every quarter since Q4 2011. Over the years I have diversified beyond my initial investments in Lending Club and Prosper into the three major asset classes within marketplace lending: consumer, small business and real estate.
Overall Marketplace Lending Return at 7.28%
One could almost say my returns are in a downward spiral. Since peaking in Q1 2014 at 12.44% my returns have decreased pretty much every quarter and for the last two years that decrease has averaged around 0.5% per quarter. Two years ago I stood at 11.3% and my weakest Lending Club account earned a respectable 8.19% and the average return of my original six accounts was 9.51%. Times have indeed changed since then.
This past quarter my overall returns stood at 7.28% and the returns for my original six accounts were 5.07%. My worst Lending Club account was my original account there and it came in at 1.95% for the year. The only good news, if there was any, was that I did not have a negative quarter in any of my accounts this quarter unlike in Q1.
For those readers who may be new to my quarterly returns post the reason for the drop in my returns are issues, primarily at Lending Club, in the D and E grade loans issued in late 2015 and early 2016. These have underperformed significantly, particular the 36-month loans, and these are the loans I have made the bulk of my portfolio. Now, I made some adjustments at the start of this year but these loans are still defaulting at higher than expected rate and it will be the end of the year I expect before I will see things begin to improve.
Now on to the numbers. Click the table below to see it at full size.
As you look at the above table you should take note of the following points:
- All the account totals and interest numbers are taken from my monthly statements that I download each month.
- The Net Interest column is the total interest earned plus late fees and recoveries less charge-offs.
- The Average Rate column shows the weighted average interest rate taken directly from Lending Club or Prosper.
- The XIRR ROI column shows my real world return for the trailing 12 months (TTM). I believe the XIRR method is the best way for individual investors to determine their actual return.
- The six older accounts have been separated out to provide a level of continuity with my earlier updates.
- I do not take into account the impact of taxes.
Now, I will break down each of my investments from the above table grouped by company. [Read more…]
Lending Club’s second quarter earnings marked an important milestone for the company – a return to growth. It seemed as though there was a general consensus that this was a make or break quarter for the company. Originations have been hovering around $1.9 billion since Q2 of last year. This quarter Lending Club announced originations of $2.15 billion for the quarter, up 10% from the prior quarter of $1.96 billion. While this is still down from their previous highs, it shows that the company is back on a growth trajectory.
Also of significance was net revenue of $139 million, up 35% year over year. The second quarter marked the second highest revenue generating quarter for the company. Lending Club anticipates that the third quarter will be their best quarter yet from a revenue perspective. Below are the other financial highlights for the company.
The earnings call focused on a couple of initiatives for the quarter. One was Lending Club’s first sponsored securitization of near prime loans. This brought in 20 new investors and is an additional revenue source for the company. Many of the analysts on the earnings call were interested in learning more about the financial impact of the securitization program. Lending Club anticipates they will do one securitization per quarter with the next one being a prime securitization.
The other initiative was focused on borrower take rates. Lending Club redesigned their website and developed testing infrastructure to better understand what prompts borrowers to say ‘yes’ to a loan. This included analysis on many different factors including testing pricing sensitivity as well as experience tests.
Bank participation has been an important part of the turnaround story for Lending Club. Last quarter the company announced banks were funding 40% of loans, but that reached higher in the second quarter to 44%. Lending Club was able to land new banks in the quarter and cited that the asset class continues to be attractive in the low interest rate environment. With bank funding stable, Sanborn stated that they would be increasing their efforts on the retail investor.
On loan performance the company continues to be vigilant due to high debt levels of consumers. However, early signs of delinquencies on recent vintages are in line with expectations which has resulted in no significant changes to pricing. With respect to auto loan refinancing, Lending Club is still working on ramping that business up and it is not making up a meaningful part of originations.
Given that Lending Club beat expectations the company adjusted their earnings outlook upwards.
What struck me the most in the earnings call was that this was the second highest revenue generating quarter. To close out 2017 the company expects to generate between $585 and $600 million. That is substantial revenue. Now, the company is not profitable yet, they generated a GAAP net loss of $25.4 million but they are making progress and they have come a long way since last year. Lending Club CFO, Tom Casey and CEO Scott Sanborn believe Lending Club will be able to deliver on margins while also investing in the business for further growth. It seems as though the new securitization program could be a big driver of additional revenue in quarters to come.
Disclosure: Peter Renton, the founder and CEO of Lend Academy, and Ryan Lichtenwald, the author of this article both own LC stock.