The New Q&A Rules on Lending Club & Prosper Are …

Awful. Very displeased. Unacceptable change. Canceling my account. These were some of the comments from my post of 10 days ago about the new changes to the question and answer process on Lending Club (Prosper also changed at the same time). I had no idea the passionate responses the post would generate.

Long time Lending Club investor, Matt from Steadfast Finances announced he would be quitting p2p lending for good. Several others indicated they would do the same. Others, like Investor Junkie, thought the change was no big deal. I am in this latter camp.

The main reason I love p2p lending so much is because of the ROI on my investment. I have been averaging about 9% on my money since I started investing almost two years ago now and I continue to add new money on a regular basis. As I have learned more I am confident that my total ROI will continue to move upwards. But if it never gets much past 10% I will still be a happy camper. Where else can I get close to 10% on my money year after year, particularly in this low interest rate environment?

Three Types of Peer to Peer Investors

By reading all the comments from this and other posts, I have ascertained there are really three kinds of investors in p2p lending:

  1. Autopilot investors – these are people who like the concept of p2p lending but don’t want to do any of the work. They signup for an automated plan and then sit back and let the plans do the work.
  2. Quantitative investors – people who want to do some data analysis to see if they can beat the averages by looking at the performances of past loans. I am in this camp.
  3. Qualitative investors – people who might do some data analysis but their primary method for investing would be to read each note (especially the questions and answers) carefully. These are the investors who are hopping mad with this change.

So, how do these qualitative investors adapt to the new rules for questions and answers? They must either change and become an autopilot or quantitative investor or reduce their expectations as to what qualitative knowledge they will be able to use. They can focus on the loan description (or lack thereof) and the answers to the existing questions that are available. I know this is small consolation to the many qualitative investors out there but times have now changed. You can either throw in the towel or adapt.

Does Analyzing Q&A Help Your ROI?

Many of the people who dislike this change are quitting on principal. But the question I have for everyone is this: will this change really impact your ROI that dramatically? Unfortunately we can’t answer this question definitively. I know of no investor who has run a qualitative versus quantitative or autopilot test over an extended time period. But I know for a fact that some notes with wonderful answers in the Q&A have gone into default after just a payment or two. I know people like Matt with Steadfast Finances will be adamant this careful analysis has helped his ROI but we can’t know for sure.

I have always maintained that there will be a small portion of borrowers on the platform who never intend to pay back their loan. I just think there are ways to catch them other than with questions and answers (which may or may not be truthful). Run a few queries on lendstats.com and you can turn up some dramatic differences in default rates for the same loan grade just based on credit data.

I expect p2p lending will go through more dramatic changes in the coming months and years as it matures. But unless someone can show me a similar investment that has the potential to earn 8-10% annually year in year out , I am sticking with it. Will I put 100% of my money into p2p lending? Of course not. But I believe a portion of everyone’s portfolio could benefit from the diversification and the consistent returns.

I have been an active investor in all kinds of investment vehicles for more than two decades and I have never seen an investment with more potential than p2p lending. This change has done nothing to alter my view.

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Matt SF
Apr. 25, 2011 3:52 pm

Well said Peter. I think the common denominator in this entire development is if you used the Q&A…

If so, you’re pissed. If not, who cares.

I used a hybrid of quant (b/c numbers matter) and qualitative (b/c Lending Club has holes in the loan application).

Dan B
Dan B
Apr. 25, 2011 4:56 pm

I can understand why a number of people are pissed off even though I think their outrage is way over the top.

The interest + return of capital + money from any note sales from my 500+ note, $12k portfolio generate enough cash so that I need to buy notes 3-4 times a week, sometimes more, to stay more or less fully invested.

But I don’t choose the loans myself. Instead I take a few minutes every day to make a small tribute to my favorite Goddess, Freyja, & then wait for a sign from her as to which loans to invest in. I’m not sure what to call my approach but I’m guessing that it’s almost as scientific as the Q&A analysis approach. 🙂

Investor Junkie
Apr. 25, 2011 5:16 pm

I think what Matt SF and others alude to is Lending Club needs to improve their application process, customer credit details and possibly better scoring of loans. They are using the comments for things lacking within Lending Club.

Mike
Mike
Apr. 25, 2011 5:44 pm

I spoke with Jeff Mignault of LC this afternoon and expressed my dissatisfaction with the new policy. I informed him that I was able to track down identities of several borrowers given information listed in their loan application, without needing any additional info from the q & a section. His response was that LC would need to ensure this couldn’t happen in the future, but he gave no specifics. Remaining investors may be looking at even more restrictions on borrower information in the future.

He also said that there didn’t seem to be any statistically significant difference between your quant investors and your qual investors. This implies that using the q & a section does not improve your return. The logical part of my brain says to ignore this change of policy and continue reinvesting in both of my accounts, but LC’s decision left a bad taste in my mouth. I am considering liquidating my IRA on the folio platform, and transferring the proceeds to my brokerage account via Entrust CAMA. I am in the process of withdrawing funds from my other LC account as loans mature.

KenL
Apr. 25, 2011 8:34 pm

I’m in the quantitative camp for sure, but I do like reading the Q & A. Some people have really good BS detectors, but me, I can be fooled. I have a natural tendency to want to believe what people say, so I force myself to rely first on the numbers and then I check to see if the description and Q&A match the numbers. That way I can’t get suckered so easily. I will miss the free-form Q’s but hopefully LC will keep adding questions to give us the ability to ask mostly whatever we want. This won’t affect my lending too much.

The good side is….. if enough people stop investing, LC will have to get more aggressive to attract investors again and investing bonuses might get even better!!! There’s always a silver lining, lol.

Rhead
Apr. 26, 2011 12:14 am

I am reasonably certain that there is a statistically significant relationship between more thorough loan descriptions and loan performance. I am less sure if Q&A can help identify these better performing loans, or if rather, just the mere fact that some borrowers give good initial descriptions of their loans (instead of leaving the description blank) indicates better loan performance. I suspect that Q&A helps to identify more engaged borrowers, who in turn are less likely to default.

I put up a couple charts on my blog that explore the relationship between loan description and loan return. You can check them out here: https://lendingclubmodeling.wordpress.com/2011/04/25/why-loan-descriptions-and-qa-matter/

In general, I think borrowers need to be more engaged with the investors. Lending Club’s move seems to go in the opposite direction. I would like to see borrowers write coherent summaries of their loan purpose and financial status in advance, so that investors do not have to constantly ask for this information time and again. I get the feeling that, at times, borrowers do not really understand the p2p nature of their loans.

Dan B
Dan B
Apr. 26, 2011 3:03 am

A month or two from now (maybe less) no one will be talking about this issue anymore. The one negative thing though about this episode is that I think going forward you’ll hear more & more people venting here & at other blogs about their unsatisfactory results or below expectation results………………& that venting will be due not only to performance, but also to the leftover “bad taste” that Mike described above & the feeling of “reduced interaction” (for lack of a better term) that some among the vast majority of remaining investors will feel.
My hope is that we who remain will be aware of this & be able to filter out those feelings as we read the posts in the coming months etc.

Aaron
Aaron
Apr. 26, 2011 7:01 am

Interesting list. I’m not sure that #3 is that diffinative though. I’m not sure if this is a different category or not, but here is how I go about it. I use the quantitative analysis (cutting the wheat) and then use qualitative analysis (removing the chaff.) I really don’t think that qualitative analysis is the PRIMARY focus of our investing strategy, but it may get us that extra 1-2%. We are upset because of this. Will I quit on principle? No. I agree with Dan that there will be a lot of grumbling to be had in the near future, but remember that Prosper did the same thing at about the same time. This smells like a regulatory agency applying pressure. P2P, I think, is still seeking it’s legitimacy in the public arena. This makes LC and P have to bend to the will of these agencies for the time being.

I am upset, but not at LC. I can still get some extra return utilizing the qualitative analysis. I’m am just a bit more limited by using only the loan description. A think the statistical analysis made by Rhead goes to show that my efforts are not a complete waste of time.

Aaron
Aaron
Apr. 26, 2011 7:07 am

Oh geez, I can’t believe I misspelled definitive. 😛

Lou
Lou
Apr. 26, 2011 9:15 pm

When I have money to invest, I’d download 500+ In-Funding Loans, slice and dice using my filters, and I’d be able to winnow it down to about 25 loans. I can’t invest in them all. I can’t start at the high interest rate and work my way to the lowest rate until I run out of money. I can’t start at the bottom and work my way up. Choose 1 from each grade? which one?

That’s when I’d dive into the Q&A.
Angry borrower? skip. underwater homeowner? skip. Borrower digging themselves deeper into debt? skip. Borrower who has no clue how much they owe? Skip. Mis-categorized loan? skip. App says they OWN their home, but they actually live with parents? Skip. Mspellyngs? Skip. Borrower evasive or outright lies (Never late? Your credit report says twice in the past 2 years)? Skip. Borrower insists loan is approved and he doesn’t need to answer questions? skip. Borrower doesn’t answer any questions? Skip. Borrower doesn’t follow directions? skip. Borrower insults a lender? skip.

Serious equity in their home? fund it. Active duty military? fund. Follows Dave Ramsey*? fund. USMC Retired asks about payback in years. If borrower is looking to repay the loan two years or more early. fund. Borrower describes cost cutting measures taken (canceled TV, moved back in with parents, etc)? fund.

After the Q&A I’d winnowed my 25 loans down to 4 that I’d fund. I haven’t done any analysis that shows these factors produce higher returns, but they made a long list of possible loans much more manageable, help me sleep better at night, and they usually spaced out my loans within my interest rate range reducing my risk from having too many in one grade at one time.

LC has been advertised as cheaper for borrowers, not easier.

-LL

*I’m not a fan of Dave Ramsey’s (his advice to pay off smallest debt first is stupid), but it shows the borrower is trying to get out of debt.

Aaron
Aaron
Apr. 26, 2011 9:44 pm

Bravo Lou! That’s exactly how a quantitative then qualitative investor does it.

Dan B
Dan B
Apr. 26, 2011 10:19 pm

@Lou…………I understand where your intent is & I also understand that you can’t put a price on peace of mind.

As I’ve mentioned before I don’t read through the Q&A anymore. But from having read most of the comments from Q&A users in the past week it appears that the utility of the Q&A is minimal IF a borrower just answers promptly, politely, doesn’t misspell chronically, makes sure his responses appear consistent with his application & puts a favorable face on everything that can’t be verified (like equity. mortgage balance etc) And if the borrower is uncomfortable with a specific question then he need only skip it & no one will even know he was being evasive except the one lender who asked the question. Quite simple really.

So it seems to me that the whole Q&A process is nothing more than just amateur attempts at tripping up the borrowers who are real amateurs themselves. The pro scammers or borrowers with even a little bit of common sense would breeze through the Q&A gauntlet.

Lou
Lou
Apr. 27, 2011 6:44 am

@DanB If it was so simple to be polite, answer questions promptly, fully, consistently, and accurately, then everyone would be doing it and I wouldn’t be dismissing 80% of the listings. Yes, I’m tripping up the amateurs. I’m ok with that. I need some way to narrow the listings.

I’m not looking for professional scammers, I’m looking for borrowers who take this seriously, have done their research, and will honor their commitments. I eliminate those just looking for cash because they think it will solve their problems. They haven’t set a budget, they don’t know how to get out of debt, they are unwilling to cut back on their lifestyle, and they have shown poor judgement in the past. As Lenders, we see hundreds of loans, a borrower may have one or two on lending club (essentially, we have experience and they don’t). Some listings you can look at and know that they are going right to default. (Early on I saw an App where the borrower wanted to buy used school buses in Texas and ship them to Africa-That one screamed DEFAULT)

When I was hiring at my last business, I would get hundreds of resumes for a single position. Guess what, Misspellings? Trashcan. bad formatting? Trashcan. Angry during the interview? didn’t get hired. If I smelled smoke during the interview they didn’t get hired.

-LL

Dan B
Dan B
Apr. 27, 2011 1:59 pm

Look we all have our pet peeves, & strong opinions………….but saying things like “Some listings you can look at and know that they are going right to default”, as Lou claims above is just nonsense, given the tiny percentage of loans that actually do default. One can only hope that it was stated in jest.

Lou
Lou
Apr. 28, 2011 9:36 am

Check out this one Loan ID 490180. If there was some way to short loans, I would have done that on this loan. You can see from the description it looks like they’ve done their homework, but there are also tons of holes in the story.

My thought at the time was this was a scam, but let’s give the borrower the benefit of the doubt. Shipping buses to Africa takes months. Getting up and running anywhere takes time and money. Finding trustworthy workers anywhere takes time and money. This was a long distance owner in a cash business (a friend of mine once explained to me why he owned a self serve car wash: nobody but him and God knew how many quarters went into those machines). The loan was at a 20% interest rate. The monthly payment was 20% of the borrowers gross.

There’s another one I blogged about:
https://transplant.transplantathlete.com/2011/02/soldier-credit-card-and-bill-bartmann.html
In the Q&A, I begged the borrower to avoid investing with Bill Bartmann and instead to use the proceeds of the loan to consolidate his debt. I firmly believe if the borrower had gone through with his original plan, he would have lost his entire ‘investment’. Since this was a soldier he probably wouldn’t have defaulted on this loan and jeopardized his retirement, but he would have been in serious financial trouble.

Yes, I know 2 anecdotes doesn’t prove my point, but I never thought I’d have to prove that the Q&A was helpful or I would have kept better track of what I felt were bad loans.

-LL

Bilgefisher
Apr. 28, 2011 10:03 am

I use lendstats to narrow down my desired criteria. I continue to play with the numbers to tweak my strategy. That said, I have chosen not to invest with some folks by answers they inadvertently have given. Its usually something they have said when answering a totally different question.

Will there be any significant changes for me? Not likely, but I do hope they have at least drop down questions in the future.

Jason

Dan B
Dan B
Apr. 28, 2011 10:58 am

@Lou……….I don’t think that anyone is saying that the old Q&A was not useful. I personally stopped looking at it because I was just tired of reading the “stories”, was tired of reading the repetitive questions & didn’t think that the time spent improved performance to a measurable extent.

There are other reasons as well. When I first started using LC I read everything I could……………but the novelty wore off. More importantly though when a loan would go late, I’d go back & reread the loan all over again. Every “late” or God forbid “default” became a personal thing. And the worst part is that all this was for a $25-50 investment.
I have no idea how many notes you have now, Lou, or how many you’re adding a month etc. etc. but I know that I used to spend 20-25 minutes daily looking at filtered loans when I was reading Q&A. For all that time I’d end up picking 1 or 2 notes on any given day. To me that’s way too much time to be spending on a $25-50 daily addition to an investment. And for what?

Here’s the bottom line truth on all this………….as I see it. You can look at every single bit of info, read & reread the Q&A, ask questions etc etc & spend inordinate amounts of time doing all this BUT would you have the confidence to put $500, $1k, or $5k on 1 note?? I’m guessing you don’t. Why not?
How much time did you spend picking out the last stock you bought & how much did you invest in it? Or the last mutual fund you invested in? Sure you may have spent hours researching a stock or mutual fund but once you made up your mind it was done & you invested at least 50 times, maybe 100-200 times what you’re investing here. Why is that? Are you that much more confident of your stock/mutual funds picks? Or are you spending too much time doing this?

My answer to the above questions are that I’m not confident enough in the entire p2p investment scenario to take more than a $25 or $50 shot on each loan. So I spread out my risk over an ever increasing number of loans now at 500…………..but at one time as high as 700. Spreading out the risk is a wise thing to do……………..but the more one does that the more one’s returns are likely to revert closer & closer to the mean. This fact isn’t up for debate. It can be clearly seen by the 100 loans, 400 & 800 loans graph on LC’s stats page. Ultimately……………it’s not unusual to get lucky & outperform the averages when you have say 50-100 notes, or even 200-400 notes. But once you get up to the 700-800 or over range it’s less & less likely. At 2000 notes, it’s just not going to happen. So what do you have to show for then, for all the extra time spent?

So I no longer do any of that & instead used some of the saved time to figure out the ONLY important thing in all of this & that is how to reduce/avoid defaults…………& I have. Maybe one day you will too & you’ll realize as I have, how much of a ridiculous waste of time it was to pour over all the derails & Q&A minutia………….. that, at least for me, became nothing more than an unnecessary stress for a pocket change sized investment.

Lou
Lou
Apr. 29, 2011 8:15 am

@DanB
Currently (388 total average note amount $34)
5 in Funding (just reinvesting, I pulled out most of a recent cash infusion)
358 issued & Current
16 fully paid
3 Late (31-120) all performing payment plans
1 default
5 charged off

I was actually feeling a lot more confident and was starting to transition from $25 per note to $50 per note.

I just started using Foliofn recently and sold 1 note that was in grace, but borrower informed LC they were filing for Bankruptcy. Remaining principal was around 23 or 24 and I sold for 10. That loss doesn’t seem to affect the NAR. Anybody know how to figure true returns that account for this loss and idle cash?
Lou

Dan B
Dan B
Apr. 29, 2011 6:28 pm

@Lou………I’m guessing the AVERAGE age of your portfolio is around 8- 9 months. Am I right? If that is the case then I’d say that you’re doing well. If the average age is a year, like Peter said, then I’d agree with him & say you’re doing pretty well.

I started at LC in Nov 2009
Current average age of notes……approx. 13 months
Total notes…..570
In funding……1
Current…501
Total Late…….1 (on payment plan since Sept 2010)
Fully Paid……….61
Defaulted/Charged Off…..6

You’re right, Folio transactions both positive & negative don’t affect NAR calculations for some reason. Idle cash/in funding time seems to reduce the “real world” rate of return by 0.4-0.7% off of the NAR, depending on how diligent you are in reinvesting your cash. I’ve heard that Excel has a program that lets you take all of this into account & gives you a “real world”, return though I’m not that familiar with it. Perhaps someone else can give you more details on that.

Circle
Circle
Jun. 3, 2011 11:09 pm

Old thread I know.

I am in the Qualitative camp on Prosper. I use (or at least I used to use) Q&A features to tease out additional information that was needed, like second job salary not included. Mistakes or to challenge or ask about other discrepancies. And ask other basic questions to understand the listings which are of an increasingly low standard. For example, whether the loan repayments amount each month includes the new Prosper loan being factored in or not. Or find out other things like they are paying off an interest free loan from family and are planning to borrow at 30%+; in which case I would tell them I thought they were nuts (maybe more politely than that but you get the gist, I am sure.) There are other investors running over $500M on Prosper who are asking questions.

So go look up my stats on Ericscc and tell me that my method doesn’t make sense for me.

Now, if your happy with 9% return go buy some nice preferred stock ADRs for the Royal Bank of Scotland. For example series G yielding a touch over 8% with further capital appreciation a possibility. Or for better yield look at mortgage reits both commercial and residential. Or even, National Bank of Greece preferreds I bet they’re on sale today, not that I would seriously suggest them as an investment(And I do not).

This country also has a second amendment allowing freedom of speech. On Prosper I simply can not contact a borrower now. Class action anyone? This is ridiculous for a system that is meant to be peer to peer. If I can not ask them questions then I am not a peer to them. They are not going to a bank. The reason I was given when prosper removed this feature was that it was due to banking partners having issues with this feature from a regulatory perspective.

Further we have just been through several significant events and changes in the past 11 years or so. It has resulted in a culture of people and institutions saying know your customer. Ultimately they typically rely on a credit score. Qualitative investing is arbitrage what the other puts in a score, I ignore and ask questions.

Now imagine institutional investors Warren Buffet included being prevented from asking questions of a companies management about the future direction of the company and the accounts and all the other questions they ask on analysts calls. Some investors would have to leave the market with those restrictions. Their methods rely on the communication and the published information.

That’s why this situation is a joke, borrower listings will continue to get worse in quality. The default rate will climb again because Prosper has essentially improved the money supply to lenders by introducing banking partners.

I will probably withdraw from peer to peer if there are no remedies to this situation because there are better investments out there for me if I can not keep my advantage. I was told that something would be arranged but boy if it ever happens it is slow in coming.