8 months in and I've finally had my first default,
https://www.lendingclub.com/foliofn/loanPerf.action?loan_id=1593902&order_id=3468742¬e_id=14464818Beyond the high revolving utilization are there any obvious red-flags there that I was missing?
I don't think I would have made that loan now simply because in later stats I ran it looked like CC consolidation loans where the loan amount was so off the the reported revolving did less well. But I always try to learn more...
Some defaults are just a random process. You're going to get a few.
it does say processing $.92 on 4/15/13 thats odd....
The monthly payment is quite high compared to the salary, especially when you consider that after using the $16k to pay down debt, he'll still have another ~$20k worth of debt to make payments on. He could well be owing more than half his take home pay in debt payments, which is going to be unsustainable for most people. That is a pretty huge red flag to me.
High DTI and revolving line utilization, along with the low FICO, are also not a good sign.
"8 months in and I've finally had my first default,"
Here's my first clue:
Revolving Credit Balance $35,937.00
Revolving Line Utilization 95.80%
And I got to agree with Fred and Sarah. He was carrying way too much debt vs. income when you consider other things like mortgage and day-to-day cost of living.
There are a few problems with the loan that would keep me from investing, but I wouldn't have expected only one payment. Sounds like someone may have tried to game the system or there was some extraordinary event..
Two inquiries, high payment relative to income, loan doesn't cover half the revolving debt, high DTI and it is FL.
This loan would not have made my revised filters. DTI=30.64% I try to loan only to DTI < or = 20%
Inquiries in last six months=2. I try and keep inquiries to 0, learned this from Peter's advice. Monthly income= $3453 per month. I loan only for monthly income> $5000/month Revolving credit balance= $35,937. I avoid loans with revolving credit balance > $30,000 even if they have high income.
Thanks Randawl & AnilG,
This question intrigues me quite a bit, so I decided to use LC loanstats data to see it myself.
A table showing charged-off rates by states is attached.
It seems like NE is now (mid-April 2013) the worst offending state: 3 out 11 (27%) loans from NE are charged off.
The top 10 worst charged-off states are highlighted; FL is on the 5th. WY is the best.
I didn't use Default status, since default is a transient state & since default rates are universally smaller than those of charged-off.
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Looks like the states with the highest default rates really aren't significant in their number of loans, and of course, as you remove states from your list, you lower the number of loans available to pick from. Actually, it's not all that bad since the vast majority of states are under 4%. Not that 4% default is good, but it seems state selection, in my humble opinion, really doesn't matter as much as does borrower credit characteristics. But it's a great discussion regardless.
This project's DTI is too high and the global DTI is too high.
They made $3400/mo and their payment was $608. That is 18% of their income. I keep that ratio at less than 10%.
Earlier in this thread, Fred said:
The progression of LC loan statuses: Current --> Late 15-30 --> Late 30-120 --> Default --> Charged Off.
Has anyone done any research on the percentages of loans that follow this specific pattern, versus those that move, say, directly from Current to Charged Off (as in filed bankruptcy)?
A couple of things I notice that wouldn't pass my filters:
1) Debt / income > 100% - automatic disqualify
2) Amount requested < 50% of total debt - would never do such a loan if the stated purpose is for refinancing. To me this signifies a desperation loan - no intent to pay off the original debt just trying to keep their head above water.
3) credit card utilization > 95% - I've done a few of these but usually only at higher rates (E,F,G). Not worth the risk at 19% interest rate. In general I would pass regardless of the interest rate though.
4) DTI ratio > 30% - automatic disqualify
Also the income is pretty low, not below my cutoff but I'd be looking for a higher quality loan at that income level.
"What's the difference between "Debt / income" in 1) and "DTI ratio" in 4) ?"
I think he is multiplying the monthly income by 12 ( Total Income), then comparing the revolving debt balance number. DTI is (monthly debt payment)/(monthly income). The debt payment could be pretty low, since it could be minimum payments on credit cards.
But when total # of loans is only 10 - 30, there is no statistical significance. So you'll eliminate the top 3. That's leave FL as #2 high charge-off (default) state.
I have a lot of questions while trying to understand what happened with this note. How can the borrower just simply walk away with $16k of our money? It's kind of infuriating.
Why would Lending Club write this off after only five months and no bankruptcy filing? What happens to the borrower's credit in this scenario?
Imagine for a moment that the borrower does the right thing and starts paying on this note again in a year or so, would the investors receive the payments?
LC will accept payments on charged off loans. In early 2013 I saw a loan from 2007 become "Fully Paid" from "Charged Off."
Isn't it common practice to sell defaulted loans in bulk to debt collectors for pennies on the dollar? I remember reading that some lenders got a small bulk payments for several defaulted notes a few weeks ago. I suppose that could have been LC dividing up proceeds from a bulk sale rather than defaulters actually paying.
Seeing this borrower not only succeed at gaming the system but effectively steal from his/her fellow peers is very upsetting to me. Investors should join together after the charge off and offer the russian mafia 25% of all collections
I'd assume that collection agency will sue the borrower (if borrower did not file bankruptcy) and then garnish the wage. But LC collection logs do not say any of those. That's too bad.
Fred,
Are you saying all those LC borrowers do not sign anything when they get money from us? That's scaring. Lend someone $35K without any signed document. Scaring.
Fred,
Are you saying whatever paper Borrowers signed is not sufficient for lawsuit? I want to know whether LC/collection agency can file lawsuit and garnish wage. Most likely Borrowers will not show up at the court since they know they owe money. So lawsuit shall be automatically win. Wonder why we don't see any lawsuit and wage garnish.
What I tried to say is that legal action for debt collection is complicated and costly.
1. There is Fair Debt Collection Practices Act and state laws -- any violation of these can be costly to the debt collector or LC
2. Where to file the lawsuit -- borrower lives all over the 50 states
3. It takes time, maybe months, per loan
4. It might cost more than $35K for lawyers alone
I think the conventional ways of doing debt collection (i.e., calling, emailing, tracing) are more effective than legal actions. The considerable negative impact on credit history is another cost to bear by borrower, making it difficult to borrow money for a car or home, or to receive credit cards. The default status remains on the credit report for many years.
Of course, legal actions are always available to purse if considerations on regulations, time, and money have been taken into account.