P2P Lending / NFT Lending Forum

Lending Club Discussion => Investors - LC => Topic started by: sean3.eth on July 09, 2015, 11:00:00 PM

Title: Grace Period Track Record
Post by: sean3.eth on July 09, 2015, 11:00:00 PM
Is there an easy way to sort all your notes to see which ones have entered into the Grace Period at some point? The amount of notes I have in the Grace Period category at any given moment is appalling. I rarely if ever see my A or B notes in there. It's always C and worse. As of a few weeks ago, I began only buying A and B notes and don't plan to change that any time soon.

I don't mind lending to people with damaged credit but I don't want to lend to people who are so broke that their bank account is empty just a few months in to a long term loan. Considering how many people have overdraft protection, a bounced ACH means that some of these borrowers are so broke that they've already capped out the maximum negative amount the bank will possibly let them hit.

The biggest irony is that in tech-based business lending, the single most important factor during analysis is the applicant's cash flow history. They use api tools to log into the borrower bank accounts and analyze the deposit history and daily ending average balance. If the person is broke, they don't get funded, no matter how good the credit and all the other "thousand data points" look.

In tech-based consumer lending, nobody seems to care whether or not the borrower is already broke. The lenders don't ask and nobody talks about it. Instead we rely on silly assumptions based on incomplete information. Why are we relying on outdated formulas when the technology to find out if a borrower has any money already exists? Why are we making presumptions about what someone could afford when we can just easily find out? This can easily be scaled. The first thing business lender Kabbage does when an applicant applies is log into their online banking through an API and download every transaction and balance for the last 90 days. And if they're not broke, then they ask what the borrower's name is. I'm not kidding. They log into your bank account before they even ask what your first and last name is. Because if you're broke, the rest doesn't matter...

Consumer lenders
Does the borrower have great credit? Yes
Is the borrower dead broke with -$10,000 in the bank and about to blow up and file bankruptcy? Meh, who cares
Approved!

We laugh at these pseudo calculations in business lending. Lend to people with money, decline people who are broke.
Title: Grace Period Track Record
Post by: lascott on July 09, 2015, 11:00:00 PM
That was a very interesting read. Thanks.

I've only been lending for 1.4 years and am still investing a fair amount each month so it seems most of notes in grace are brand new and I assumed it was something to do with the automatic bank payment not being correct right at the beginning. I'm about out of my discretionary Lending Club investment money so I will see how graces and lates work by the end of the year.

I think the altruistic view is these consumers are paying so much in variable interest rates that we are hoping a fixed interest rate and payment will let them get ahead / back-on-their-feet.

I definitely have gotten more conservative since I started.  See my ABCs vs DEFGs.
1.4 yr old -- Taxable account




2 mo old -- Roth account

Title: Grace Period Track Record
Post by: TravelingPennies on July 09, 2015, 11:00:00 PM
from: SeanMCA on July 10, 2015, 12:09:22 AM
Title: Grace Period Track Record
Post by: thezfunk on July 09, 2015, 11:00:00 PM
Yeah, exactly.  I am guessing that consumer lending doesn't attempt that because of the competition.  Nobody would subject themselves to that when there are opportunities everywhere to not have to do that.  Business lending is much tougher and businesses are used to subjecting themselves to those types of requirements.

I remember the Prosper CEO talking about how their volume went up by a huge amount by just streamlining the application process on their website.  We can't have anything getting in the way of people getting your money.  Another point that I see brought up over and over again is if the originators had an incentive to not have these notes default, then we would start seeing some common sense changes.  Right now they don't care you lose your money.  The only reason they have to care right now is if people stopped investing and they had problems getting sucke...er...investors to give up their money.  The platforms in this country make money on originations not whether or not you get paid back.
Title: Grace Period Track Record
Post by: TravelingPennies on July 09, 2015, 11:00:00 PM
from: thezfunk on July 10, 2015, 03:11:03 PM
Title: Grace Period Track Record
Post by: TravelingPennies on July 09, 2015, 11:00:00 PM
from: thezfunk on July 10, 2015, 03:11:03 PM
Title: Grace Period Track Record
Post by: bobeubanks on July 10, 2015, 11:00:00 PM
from: SeanMCA on July 10, 2015, 11:40:10 PM
Title: Grace Period Track Record
Post by: TravelingPennies on July 10, 2015, 11:00:00 PM
Don't get me wrong Sean, I don't disagree with you.  Unfortunately, LC and Prosper have no incentive right now to verify accounts as you describe.  We, as lenders, would love that but the originators have no incentive. 

What I don't get are the people borrowing some of my money at ~30% interest.  It is never a ton of money.  I never see a $20k or $30k loan at ~30%.  It is always only a few thousand.  I know what the borrowing is thinking...hey, I can make that monthly payment and the interest rate is secondary or of little concern to them.  In my experience, that is how poor people think.  Those type of people will never get out of situations where they feel they need to borrow at ~30% because they don't know any better.  It is ignorance and somehow those people need a better financial education.  You couldn't get me to borrow money at ~30% no matter what the circumstances were.  I know it is a rip off and I would never do it.  Maybe they do know and they just plan on running off with my $25.  In that case, the interest rate is totally irrelevant. 
Title: Grace Period Track Record
Post by: TravelingPennies on July 10, 2015, 11:00:00 PM
As of a few months ago, I stopped buying notes of anyone making less than $85,000 a year. You can make that amount or much more and still be broke, but at least it reduces the odds that the borrower will be poor.

I don't want to lend to people whose bank balance is always zero or just enough to make the payment and it's not just for moral reasons, it's because as soon as there's a blip in the economy, these accounts will be the first to fall. As helpful as all the ratios and statistics that Lending Club provides are, I really think it's kind of reckless that we don't know how much money these people actually have in the bank when the loan is issued.
Title: Grace Period Track Record
Post by: TravelingPennies on July 10, 2015, 11:00:00 PM
from: SeanMCA on July 11, 2015, 11:44:43 AM
Title: Grace Period Track Record
Post by: rawraw on July 10, 2015, 11:00:00 PM
You try getting a prime borrower to jump through hoops to get a loan.  You'll start seeing a much much lower pull through rate.  There used to be a service that people would post in the questions that the borrowers could link their debts, to confirm their debt repayment loan was paying off debts at a lower rate and payment level.  But that was back when you had leverage because loans didn't always fund so the borrowers were more likely to jump through your hoop.

Now doing this for D/E/F/G borrowers may be a good idea.  But terrible idea for a blanket use of all LC borrowers.  But I have a feeling if you ask to crawl someone's bank account, they'll just go elsewhere.  Seems that'd only work on subprime borrowers who have limited bargaining power

I'm assuming you may be new to lending.  Making a loan based on deposit balances is rarely a good idea.  Deposits magically disappear when you need them most.  Only deposits that are any protection are CD's with a hold against them.  Just beacuse someone has had money for 90 days doesn't mean they'll have any moving forward

On a related note, I've heard from colleagues I trust that high income borrowers performed worse on their consumer credit (like auto loans) than subprime in the prior crisis (ignoring thsoe who were making liar loans and stuff), in terms of returns to the lender.  This lender was one of the biggest banks in the country.  High income people have high income expenses and it doesn't take long after losing a job for it to bring down their "large" bank accounts
Title: Grace Period Track Record
Post by: kya on July 11, 2015, 11:00:00 PM
the "flaw" in p2p lending to me was that lc prosper etc. dont have the incentive to collect like a normal un-secured creditor would..... the collection effort is very poor and spotty. It looks to me like collectors almost breathe a sigh of relief when the customer doesnt answer the phone. When they do by chance get a customer on the phone many times nothing is resolved. It seems like accounts just for the most part work there way through the various stages of delinq and then are charged off with nothing more than a "oh well".......i worked in collections through out my 30 years in consumer lending and have never seen anything like the lack of effort to collect accounts. I will continue to buy notes on lc and prosper but will never get carried away with the amount invested ie ( hobby $)
Title: Grace Period Track Record
Post by: TravelingPennies on July 11, 2015, 11:00:00 PM
from: kya on July 12, 2015, 02:06:49 PM
Title: Grace Period Track Record
Post by: TravelingPennies on July 11, 2015, 11:00:00 PM
Collecting on an unsecured debt isn't normally cost effective.  There is almost always more senior claims against the assets and you have no leverage (i.e. take back their car, or home, or whatever other asset other loans have).  Collection efforts may be lax, but I am doubtful it is very material.  But maybe my suspicion is wrong -- if its material, it leaves room for another platform to do it differently.
Title: Grace Period Track Record
Post by: Rob L on July 11, 2015, 11:00:00 PM
If collection efforts are lax and the "market" knows it then the loans will sell for more to collection agencies.
It may be more cost effective to sell the loans to collection agencies (so long as there are enough of them to make the bidding efficient), than to spend more of your own resources doing it.
When a collection agency buys the loan they have skin in the game, and they bring resources and expertise that P2P lenders may not have and are costly to duplicate.
I have no experience in collections, but this seems to make sense.
Title: Grace Period Track Record
Post by: Lovinglifestyle on July 11, 2015, 11:00:00 PM
The last time one of my sale-eligible notes changed from late to current was July 7 and that is the only one on a long list to go positive. 
Seems odd to me.  Last month a fourth of the lates for sale went current. There must be quite a few costly to me/profitable to them collection fees to be had in the bunch.
It does make sense to raise the price the way you say, Rob.
Title: Grace Period Track Record
Post by: sean3.eth on July 13, 2015, 11:00:00 PM
Quote"> from: rawraw on July 11, 2015, 04:48:45 PM
Title: Grace Period Track Record
Post by: AnilG on July 13, 2015, 11:00:00 PM
Not verifying bank account transactions may have to do with consumer protection or consumer lending laws. Recently, I financed a new car through Chase Bank. The bank also didn't check the bank account history or verified income. There seems to be lot of trust on FICO Score and Credit Report when it comes to consumer lending.
Title: Grace Period Track Record
Post by: Fred93 on July 13, 2015, 11:00:00 PM
There is information about a bank account beyond just how much money is in the account at this instant.

Account age for example ... It would be nice to know if they account had been created only recently, and never had any money to speak of in it.  Such an account is probably created just for the P2P loan.  Automated withdrawals from such an account may easily retrieve nothing.  At the other extreme, an account that had existed for years, and which has regular direct deposits into  it, in amounts consistent with stated income, would give some comfort.

I've learned that in underwriting, my intuition isn't excellent.  Better to look at historical data to build a case for using some metric when making new loans.  Where would we get the historical data re bank account metrics?  Might need to gather the info for a year or two just to build the database from which to learn how to use the data!

AnilG raises an interesting question re how this sort of thing intersects with consumer protection/lending/credit laws.   I have no idea.
Title: Grace Period Track Record
Post by: rawraw on July 13, 2015, 11:00:00 PM
Besides consumer protection laws, the credit quality of ondeck borrowers is nothing like most Lendingclub borrowers.  Business lending and consumer lending are extremely different. Consumer lending is about managing a pool of homogeneous credit and less about the underwriting of any particular credit
Title: Grace Period Track Record
Post by: lascott on July 13, 2015, 11:00:00 PM
from: SeanMCA on July 14, 2015, 12:21:15 AM
Title: Grace Period Track Record
Post by: TravelingPennies on July 13, 2015, 11:00:00 PM
Now that I know he has business lending background, I understand where his points of view are coming from.  It's just different when dealing with consumers vs a business.  For one, businesses have much harder time getting loans (and as a result, bank has more leverage).
Title: Grace Period Track Record
Post by: TravelingPennies on July 14, 2015, 11:00:00 PM
Thanks to everyone that has shared their thoughts.

Coming from B2B where the modern adage has basically been FICO and credit reports are worthless, and then coming here where FICO and credit report data are believed to very important, I have just struggled to figure out why there is such a difference between business and consumer.

I had not considered that there might be consumer protection laws that prevent a creditor from using that information. I will have to look into that. I understand the competitive advantage aspect that lenders are up against. If Lending Club required bank data to be crawled but Avant and Prosper didn't, they would use that as a marketing tool to steal borrowers from Lending Club.

I guess why it's a moot point and this feeds into what some of you have said, is that collections is not the highest priority on the Lending Club checklist, growth is. Their system works good enough in the current economic environment, so why do anything drastic like require banking data and potentially stymie growth?

I am not a shareholder in the company so I don't care that much about growth, so long as there are enough notes for me to acquire. I care about the performance of my loans to Lending Club, not how many loans they can make. But shareholders like growth, especially with new age tech companies. I guess we have an old fashioned bondholder/shareholder conflict.

I want my investment to be as risk-free as possible and shareholders want to do new and crazy things to fund more loans and acquire more market share.
Title: Grace Period Track Record
Post by: TravelingPennies on July 14, 2015, 11:00:00 PM
Well, I just talked to my friend who is an underwriter for a credit card issuer. He manages a department that approves consumers for credit cards. They regularly ask for bank statements from applicants to prove income and it is required for any line of 25k and over. That combined with proof of address he says is necessary for them to stay compliant with the Bank Secrecy Act.

It is also relatively normal to submit bank statements for a home mortgage.

Karrot, a consumer lender affiliated with business lender Kabbage, and direct competitor to Lending Club and Prosper, already requires applicants to have their bank accounts crawled in the manner that I described previously (through an API).

There are no consumer protection laws in play here, at least none that don't allow a lender to require banking data. In the case of my friend working for a credit card issuer, asking for bank statements from consumer applicants is part of BSA compliance...
Title: Grace Period Track Record
Post by: TravelingPennies on July 14, 2015, 11:00:00 PM
Good info.

I didn't know about karrot before, so I went to their web site to check it out.  You click on "personal loans" and right there on the 1st page they show you that they're gonna ask for bank account info.  They even say "Please choose the account that would show income deposits." which makes their intent pretty clear.

They even have a loan application API.  I would imagine this is for affiliates or partners or whatever they call them to forward loan application info.
Title: Grace Period Track Record
Post by: TravelingPennies on July 14, 2015, 11:00:00 PM
from: SeanMCA on July 15, 2015, 01:03:04 AM
Title: Grace Period Track Record
Post by: TravelingPennies on July 14, 2015, 11:00:00 PM
from: rawraw on July 15, 2015, 09:08:42 AM