P2P Lending

[sophie]

I tried it out starting almost two years ago.  I figured it would help me keep my hands off the PP, which it certainly did!

Here are my stats.  I didn't invest everything right away, I threw a bit of money at it each month for a year or so, then recently stopped and I'm just letting it ride.

Total notes 219
3 in funding
171 current/issued
6 in grace period (unusual, I am betting it's because of Christmas)
33 fully paid
1 late
5 charged off
NAR 16.33% (this is LC's slightly unrealistic report)
actual total gain for the past two years:  20.7%

I think all the efforts at filtering are actually self-defeating.  They may have worked initially, but Lending Club's underwriting is now so sophisticated that any advantage is arbitraged away.  The underwriting also changes over time, so backtesting is not really valid.

I decided early on that the best way to play this game is to go for the high risk notes, diversify, and realize that a large percentage of notes are going to default.  The returns are better than with the "safe" notes, and the risk of losing money is practically zero if you've got 200 notes.  My notes average 19% interest.  I figure with 200 notes I should see about 5-6 chargeoffs a year.

Investing in Lending Club definitely means you are financing some idiotic money management habits.  The way I look at it, people who are stupid enough to borrow money for a wedding at 18+% are actually the majority, and their attitudes often end up hurting me (e.g. my debt-happy coop board, the whole subprime crisis).  Lending Club allows the few of us who pay off our credit cards every month and have funds left over to invest to turn the tables and reap some financial benefits from those idiots. 

[MachineGhost]

I tried it out starting almost two years ago.  I figured it would help me keep my hands off the PP, which it certainly did!

Here are my stats.  I didn't invest everything right away, I threw a bit of money at it each month for a year or so, then recently stopped and I'm just letting it ride.

Total notes 219
3 in funding
171 current/issued
6 in grace period (unusual, I am betting it's because of Christmas)
33 fully paid
1 late
5 charged off
NAR 16.33% (this is LC's slightly unrealistic report)
actual total gain for the past two years:  20.7%

I think all the efforts at filtering are actually self-defeating.  They may have worked initially, but Lending Club's underwriting is now so sophisticated that any advantage is arbitraged away.  The underwriting also changes over time, so backtesting is not really valid.

I decided early on that the best way to play this game is to go for the high risk notes, diversify, and realize that a large percentage of notes are going to default.  The returns are better than with the "safe" notes, and the risk of losing money is practically zero if you've got 200 notes.  My notes average 19% interest.  I figure with 200 notes I should see about 5-6 chargeoffs a year.

Investing in Lending Club definitely means you are financing some idiotic money management habits.  The way I look at it, people who are stupid enough to borrow money for a wedding at 18+% are actually the majority, and their attitudes often end up hurting me (e.g. my debt-happy coop board, the whole subprime crisis).  Lending Club allows the few of us who pay off our credit cards every month and have funds left over to invest to turn the tables and reap some financial benefits from those idiots.

I'm glad you think LC has been revising their underwriting model because they really screwed up in the beginning and had to change it.  That's part of the allure of why they are #1...  they underpriced the risk to lenders, so borrowers flocked to it.  I was actually of the mind they still underpriced the risk with that revised model, but I haven't exactly stayed up to date since 2012.  Their rates seem closer to Prosper now which has/had a better underwriting model.

If the default rate for the A (and soon to come AA-rated) loans are just as bad as for the other grades, then I agree it is really is pointless focusing on "quality" except for cash management purposes (which seems crazy but could be pulled off with superior filtering?).  My net return hovered around 6.46% until the second year, then it took a dive near the end.  So overall over 36 months, out of 109 fully paid loans, 5 were charged off.  That cost me 1.65% in net annualized return.  Three A's and two B's.  I laugh at one of the charged-off A-loans that claimed to be working for the "United Nations".  Yeah sure, you and what army???

I don't have much faith in LC's collection ability.  I know the ins and outs of collection all too well and collectors don't have much, if any, of a legal leg to stand on; relying on fear, ignorance and intimidation to get debtors to pay up.  So they better come up with some innovative collection practices to be worthy of the FinTech moniker.

Financing idioticy is just ... scary.  No other way to put it.

Did you participate in the IPO?

[sophie]

I wanted to jump into the IPO, but it was annoyingly complicated and I was away/out of the country at the exact wrong time, so I missed the boat.  Shame, that would have been an awesome bit of profit.

The problem with buying the "conservative" notes is that the return, for me, doesn't justify either the risk or the fact that your money is inconveniently tied up.  This is pure VP territory, so the goal is to swing for the hills.  The bulk of my notes are Ds and Es, with a smattering of Fs and Cs.

It is scary to think about the insane decisions nearly all borrowers are making, or have made, but my main focus here is  that I want to able to slurp up some of the free money that previously has all been going to banks.  Lending Club's model is that they are skimming the best credit card borrowers off the top, as they have stricter lending criteria than the banks do.  So their default rates should be lower than the average for unsecured loans.  It's too early to tell whether this is the case because most of the 60 month loans are still active,  but their default rates have definitely gone down compared to their early years.  They also have sharpened up their collection methods.  But an unsecured loan is just that - you have no leverage against the borrower except the threat of a big drop in their credit score.

[MachineGhost]

I was looking for a way to both track the loans in Quicken and have them included as part of the asset allocation pie.  Before, I would just use a cash Asset account and record interest, repayments, etc. for all combined loans as monthly transanctions which doesn't let you set an asset allocation category (it would come up under Cash).  I think this approach may work:

https://web.archive.org/web/20131227112 ... tegration/

This will also track the investment gain properly as well.

[MachineGhost]

How interesting...

Lending Club has policies regarding how frequently a new bank account can be linked to your Lending Club account. These policies are designed to comply with all state and federal Anti-Money Laundering rules and regulations. We are unable to release the exact amount of time until you will be able to link a new bank account. We appreciate your understanding of these policies.

[Xan]

How would one launder money through Lending Club, and in what way would restricting the frequency of new bank accounts prevent it?

[MachineGhost]

[quote=http://www.bloomberg.com/news/articles/ ... oan-market]RiverNorth Capital Management LLC is the latest investment firm to seek yield from peer-to-peer lending, according to a registration filing submitted this month to the U.S. Securities and Exchange Commission.

The $3.5 billion Chicago fund manager is setting up what would be the first closed-end fund in the U.S. to invest primarily in loans, securities and equity tied to lenders such as LendingClub Corp. or Prosper Marketplace Inc. that participate in the so-called P2P market, according to Bill Ullman, a senior adviser for Orchard Platform, on the firm’s website.

The fund will be run by RiverNorth chief investment officer Patrick Galley and Philip Bartow, who was hired recently from Spring Hill Capital Partners, according to the filing. It is designed to provide a “high level of total return” and will offer monthly distributions to shareholders, according to the filing. The firm seeks to register 1,000 shares at a proposed maximum price of $25 per share, another filing shows.[/quote]

[MachineGhost]

Out of 80 loans so far under the new lending criteria, 2 are now 31-120 days left.  Both are D grade.  My adjusted net annualized return is down to 11.71%.  I put a pause on any more lending a few months ago until I see if we're going into another recession or not.

[sophie]

What's the investment grade distribution on your notes?  11.71% is nothing to complain about - compare that to current stock and bond funds!

You do need more notes to provide enough diversification though - at least 200.  And you have to take late/charged-off loans in stride.  The annual return on my 3 year old account is 17.12%.  Over half my notes are E and F grade, and so far I am seeing an annual charge-off rate of ~3.5%.  I do use filters and I'm starting to think they might be accomplishing something after all.  I set mine based on some diddling around with that Nickel Steamroller website.

I still regard this as play money and would absolutely not use this as a core investment, but it is just blowing the socks off everything else out there.  I'm curious to see how this does over the next several years, and through a market downturn.  If it holds up it might be a really neat option for a Roth IRA.

[MachineGhost]

What's the investment grade distribution on your notes?  11.71% is nothing to complain about - compare that to current stock and bond funds!

You do need more notes to provide enough diversification though - at least 200.  And you have to take late/charged-off loans in stride.  The annual return on my 3 year old account is 17.12%.  Over half my notes are E and F grade, and so far I am seeing an annual charge-off rate of ~3.5%.  I do use filters and I'm starting to think they might be accomplishing something after all.  I set mine based on some diddling around with that Nickel Steamroller website.

I still regard this as play money and would absolutely not use this as a core investment, but it is just blowing the socks off everything else out there.  I'm curious to see how this does over the next several years, and through a market downturn.  If it holds up it might be a really neat option for a Roth IRA.

I can't find a weighted pie graph, but the distribution ranges from B3 to E4.  The weighted average rate is 14.77%.  Some roboinvest site thinks A's and B's are bond equivalents and the rest are equity equivalents in terms of risk.

It sure gives me the willies with this being unsecured.  Everything relies on pricing the credit risk accurately.  I know I need more notes, 100 at an absolute rock bottom minimum, 400 minimum ideally which is my goal.  It would be stupid to get killed over what I fear because I wasn't diversified enough.  Historically, I should be at least a 0% net return with my moderate risk strategy in another subprime scenario.  Wouldn't be fun, but I could live with that over net principal losses.

I do wonder how hard the rejections try, try and try again...  crazy business.

[sophie]

Sounds to me like you're on the right track.  You could try the set autoinvest instructions, ignore, and check back once a month approach.

These aren't bond or equity "equivalents" - what an odd thought.  They're the junkiest of junk bonds, which is the whole point.  Yes you are right it's completely dependent on how many people will actually pay these loans back in a situation where they lose almost nothing by defaulting.  Amazingly, it seems that most people are honest.

I saw a Shark Tank episode once where an applicant admitted to having declared bankruptcy more than 7 years prior.  All the sharks immediately bowed out, which stunned the applicant.  Excellent message for him and the viewers.  There should be consequences that matter for walking away from a debt - but if that were the case, I doubt Lending Club would exist as personal loans would be a lot cheaper to begin with.

[flagator]

Sounds to me like you're on the right track.  You could try the set autoinvest instructions, ignore, and check back once a month approach.

These aren't bond or equity "equivalents" - what an odd thought.  They're the junkiest of junk bonds, which is the whole point.  Yes you are right it's completely dependent on how many people will actually pay these loans back in a situation where they lose almost nothing by defaulting.  Amazingly, it seems that most people are honest.

I saw a Shark Tank episode once where an applicant admitted to having declared bankruptcy more than 7 years prior.  All the sharks immediately bowed out, which stunned the applicant.  Excellent message for him and the viewers.  There should be consequences that matter for walking away from a debt - but if that were the case, I doubt Lending Club would exist as personal loans would be a lot cheaper to begin with.

There are plenty of consequences available to the lender such as wage garnishment, as well as civil suits with confiscation of personal property. Someone can file for bankruptcy but most people are aware of the consequences of doing so. Ultimately though most lenders make up the difference of those losses by charging higher interest rates. It seems that it is all priced into the model of financing these people.

[mathjak107]

i have found that because the lending risks can be high folks devote very little money to this , certainly far less then many of those folks would invest in an actual high yield fund  . so it ends up  they get a  pretty decent return on such little money invested  that it amounts to very little ccompared to  just buying a high yield fund and getting 6% on a much greater percentage of  their money .

kind of like some of those that buy individual stocks and are so proud of their returns but they have 90% of the rest of their money in a low return getting 1%  because they are afraid to commit it ,

they would be far better off forgetting the individual issues and just invest more of their money in a  diversified mix of funds .

i think i would sooner commit more money to a high yield fund  then such little money to pp lending  if i really wanted to add some more risk  but didn't have the stomach to commit more to pp lending .

i think pp lending can be a very decent return , but usually folks devote so little to it the return does not really influence much total asset wise ..

i usually speculate once a month with a little fun money in something . but it is really just for fun and influences little .

last month was exxon which i sold two weeks ago for a 15%  gain  in 4 weeks but i only use 10k for this so in the scheme of things it is only for fun .

if gold dips below 1100 that may be the next months speculation .  even  tlt may be if it gets beat up enough , i just hold it until a quick flash and gone .

been doing this for years with far more winners then losers since the most i will allow it to fall is 5% if i am wrong . i can't do that with pp lending .

the month before exxon was a brokerage stock  LTS  which i got at 2.00 bucks an sold  a few weeks later at a 20% profit .

i always found this fun and most of the time the positions do run up a lot higher like LTS  did  but it is just for fun .

[flagator]

So are you saying that P2P lending is underutilized as an investment tool? If so, I would agree with you.

Certainly in this abysmally low interest rate environment, it is very tempting to heave steady real returns ranging from 7-9% via P2P.

Is it anymore of a risk than being fully invested in stocks and bonds? I do not think so.  Corporate bonds especially nowadays can be very tricky.

So when people say that they "get the willies" because P2P lending is unsecured debt, I say, so is the rest of your market investments. They are unsecured obligations of whoever receives your money, and there is no guarantee that your stocks will go up, or that the bonds you hold will not default ( except treasuries), or that you will get your capital back!

Just saying...

[mathjak107]

yep , far to under-utilized to the point of being quite ineffective as any kind of investment income for most folks except as perhaps lunch money .

[sophie]

Yes, exactly.  The returns are there because the investment is risky, and the same goes for stocks and bonds though that risk is better understood. You can reduce the risk by diversifying across a large number of loans, but if you could eliminate it, why would you expect more than the rate of return on a Treasury note?

I also think P2P lending has been underutilized, but that's changing as large fund managers are starting to invest in it:

http://www.forbes.com/sites/stevenberto ... -club-ceo/

So if you have a pension, say, you may be invested in P2P even if you don't know about it.  I would prefer to see a bit more history before putting in a large personal investment, though in any case it's great fun as a VP play.

[MachineGhost]

Having gone through debt collections myself for over a decade, I can tell you that the debtor has all the power and the collectors only have intimidation and threats.  It's not worth the time and expense to go to court and get a judgement unless the amounts are large enough to bother, usually only for collateralized loans.  And that's assuming the debt collector actually has a legal leg to stand on in terms of collecting the debt which is not the case if they are [re]purchasers of charged off debt rather than contracted inhouse by the original creditors (that you would have contractually agreed to, in theory).  Lots of illegality and immorality goes on in debt collections.

So, nothing is stopping these P2P borrowers from just walking away other than a hit to their credit report which I'm not so sure they care about if they're that financially unintelligent enough to be needing debt consolidation or wedding loans at 20% APR in the first place.  LendingClub will do inhouse collections but after they charge it off and you write it off your taxes, it's all a mirage after that point.

And bonds are a legal obligation in a corporate capital structure.  By law they must be paid, before equity holders receive any dividends.  Junk bond bankruptcies happen at a rate of 4% on average and recoveries average .40 on the dollar.  P2P promissory notes are not even remotely the same thing as a bond.

I'm on my way to the magical 400. <wipes sweat>  Massive diversification is your only real recourse to minimize the damage.  To smooth the returns out, I'm going to do it over the average maturity of the loans, which is about 4 years I think.  Lumpiness seems bad also.

[MachineGhost]

Speak of the devil:

[quote=Americans for Financial Reform]Congress's newly-passed budget deal included a provision – Section 301 – that allows debt collectors to robocall you about federal student loans, mortgages, or other debt backed by the federal government. Thankfully, Senator Ed Markey (D-MA) has introduced a bill to prevent this. It's called HANG UP – the “Help Americans Never Get Unwanted Phone calls” Act.

The language in the budget deal will affect millions of consumers, including graduates who can't pay their school loans due to a terrible job market, homeowners who are behind on their mortgages, and people who owe money to the Internal Revenue Service. Families who have already lost their homes to foreclosure could be exposed to robocalls about delinquent mortgage payments for years on end. And many debt collectors won’t be content to call the debtors themselves – they’ll also use this license to harass people’s relatives and references, and even those who just get their reassigned cell phone numbers.

Senator Markey’s HANG UP Act will undo the damage done in the budget deal, and restore key protections to American cell phone users. Your support of the HANG UP Act will send a strong message to Congress and to the Federal Communications Commission (which is charged with writing rules to implement this provision) that passing this gift to debt collectors was wrong and something must be done to fix it.
[/quote]

[mathjak107]

i went on line yesterday to take another look .

i could never imagine  going one by one looking at hundreds of profiles to invest 25 to 50 bucks in each .


i would have to see how good you can refine some kind of auto  invest . i wouldn't want to loan those with no jobs listed or bankruptcy and judgments  . no student loans either or weddings

basically just debt consolidation and home improvements in  D,E,F category's .

[MachineGhost]

I didn't know there were F and G grades now, so I'm definitely avoiding that fat tail!!!  28.99% is insane.  OTOH, these are amortized loans so its not like you're compounding what you owe at 28.99% a year, right?!!  This could help people escape the clutches of the loan sharks.

So basically the trick is to get lower than the expected default rate than calculated by LendingClub.  That's the arbitrage.

As of September 30, 2015, the average Lending Club borrower shows the following characteristics:

    699 FICO score
    17.9% debt-to-income ratio (excluding mortgage)
    16.2 years of credit history
    $74,414 personal income (top 10% of US population)4
    Average Loan Size: $14,677

When borrowers miss payments and loans become late, Lending Club uses best practices from the banking industry to bring delinquent loans back to "current" status. Currently, Lending Club charges investors one of the following collection fees, which is deducted from any amount recovered: 1) 18% of the amount recovered if a collection action must be taken with respect to a loan and no litigation is involved, or 2) 30% of hourly attorneys' fees, plus costs, if litigation is involved. Lending Club does not charge a collection fee if no payments are collected, and no collection fee will be charged in excess of the amount recovered.

Please note that Lending Club currently charges investors a reduced collection fee, which may be discontinued at any time. The normal collection fee is a percentage of the amount recovered: up to 35% if a collection action must be taken in respect of a loan and no litigation is involved; or 30% of hourly attorneys' fees in the event of litigation, plus costs.

[MachineGhost]

My two loans that are currently 31-120 days late are rated D1 and D2 and are for 36 months.

D1 (Other) is now on an automatic payment plan.  Earns $6222 a month, claims to be a Principal and has an amazing 78 total credit lines, with just 6 open.  Must be a money moron.

D2 (Home Improvement Loan) is still in collections.  Earns $4333 a month, claims to be a Service Technician and has a 78.80% revolving line utilization for a $2,363.00 revolving credit balance.  That is tight!

I feel ill.

[sophie]

My two loans that are currently 31-120 days late are rated D1 and D2 and are for 36 months.

I feel ill.

Put up a sign on your wall:  "Chargeoffs are part of the game.  Don't let that stop you, if you don't bet, you can't win"  Robert Heinlein, paraphrased.

The higher the grade, the more of those there will be - but the higher interest rate more than makes up for it.  I buy only higher grade D's, F's and E's.  Diversify, set up automatic investing, and quit worrying about it.  Our personal assessment of the financial intelligence of borrowers is irrelevant.  Think P.T. Barnum.  I only hope that the one-fool-born-per-minute rate is enough to keep us loansharks rolling in dough. :-)

[Xan]

Our personal assessment of the financial intelligence of borrowers is irrelevant.  Think P.T. Barnum.  I only hope that the one-fool-born-per-minute rate is enough to keep us loansharks rolling in dough. :-)

That actually is what gives me pause about giving P2P lending a try.  If I'm actually helping people, then okay.  (Maybe debt consolidation?)  But it seems it's awfully easy to become a usurer.

[bedraggled]

My concerns are Xan's.

Time to revisit [?] the usury topic?

[mathjak107]

It is still a notch above the pay day  loan