We often get emails from readers asking about the current state of investing with Lending Club or Prosper. Many investors ask about current performance trends and whether it is a good time to invest. While there has been some news of underperformance recently, many generalizations are made and news stories often lack data points to back up claims. This has left many investors wondering what is really going on with this asset class.

For new investors, they lack the historical perspective of what has happened since the early days of the industry. Not only that, but before looking at performance for 2015 vintages it is useful to know what has changed in the meantime. In this post we’ll provide a timeline of recent events related to interest rate changes at Lending Club (Prosper doesn’t share as much detail here) and then dig into the most recent loan data available at Lending Club and Prosper in part two of this series.

Timeline of Interest Rate Changes and Trends Since 2010

2010 – 2014: From 2010-2014 returns had been relatively stable at both Lending Club and Prosper. Some investors were able to achieve returns in the double digits. For a first hand look at what a typical investor could expect since Q4 2011 you can read Peter Renton’s returns. Up until 2015, Lending Club decreased interest rates to balance the supply and demand of the marketplace. Well into 2015, investor demand was very strong for this asset class.

2015: Coupled with previous decreases in interest rates, Lending Club and Prosper expanded their underwriting to match loan supply with investor demand. Some people would say they go ahead of themselves here and expanded too much but more on that in part 2 of this series. At the end of 2015, we experienced our first fed rate increase in many years. Almost immediately after the fed rate increase, Lending Club announced they were too increasing interest rates on December 22, 2015. The increase of rates was most apparent in the higher risk loans.

Q1 2016: While some investors saw early signs of lackluster performance and scaled back investments late in 2015, the shift in capital markets was most apparent in the first quarter of 2016. Lending Club subsequently changed rates again on January 28, 2016. Again, the rate increases were seen mostly in the higher risk loans (Grades C3 and above).

Q2 2016: Lending Club changed rates on April 20, 2016. With this increase, loan grades D5 and above were most affected. Then we had big news that had far reaching impact across the online industry with the unexpected resignation of former Lending Club CEO Renaud Laplanche. Although the capital markets had tightened in Q1 2016, this news had many more investors pulling out or pausing investments. In Lending Club’s Q2 earnings report, they cite actions taken to “improve future returns driven by macro uncertainty and pockets of underperformance”. Below are the actions taken directly from their slide deck:

• (April): Tightened approvals based on DTI and higher propensity to take on additional debt
  
• (June): DTI max criteria lowered from 40% to 35%
  
• Reduced approval rates to eliminate roughly 9% of the higher risk personal loan population

You can dig into additional details in our Q2 review of Lending Club’s quarterly results. In order to help bring investors back, Lending Club introduces investor incentives.

Q3 2016: Rates were again changed on June 7, 2016 with increases in rates from grades A2 through E5. In Q3, Lending Club provided an update on their incentive program which came to an end and announced a new bank funding partner. On the retail side we continue to see incentives with Lending Club’s partnership with United to award miles that ends in January, 2016. Similar to previous years, Lending Club is also now offering a bonus of up to 3% for new and existing IRA accounts.

Q4 2016: The last interest rate changes occurred on October 14, 2016. Some loan grades received interest decreases but there were significant increases again in the lower loan grades.

Conclusion

In total Lending Club made interest rate changes 5 times since December, 2015. Generally these were all interest rate increases to help offset the degradation in recent loan vintages. The question now is whether these interest rate increases will be enough to increase performance in more recent vintages. In our second post in this series we’ll share performance from 2015 as well as share how 2016 vintages are trending.