Stiffing the lenders is certainly a possibility. They sure seem to make it easy. I don’t think they spend much effort on collections; it’s not like they have much motivation to do so.
But I can see myself doing something “stupid” like that if I had high util and was in any of the following circumstances:
Needing to quickly get above a minumum credit score for employment or security clearance, etc.
Right before I bought a house or refinanced. Paying a few bucks more in interest on $10k of credit card debt is nothing compared to the money I’d save on a $500k mortgage over the life of a 30 year loan with a much better credit score after showing 0% utilization.
Or any other situation where I needed a higher credit score and fast (<30 days) and didn’t have the money to pay off the cards. If I wanted the balance back on the cards afterwards I could just do a balance transfer.
And then there are people who are just generally in trouble and this is the only way to rack up more debt. Nobody will give them more credit cards but they can “consolidate” and run the balances up again. It’s the only way. No more stupid than going into CC debt in the first place.
Thanks for the quick responses to my questions, very illuminating.
Given LC’s stated desire to cater towards more institutional investors, what impact do you think that will have over the next year or so as they ramp up for an IPO? My concern is, again, things getting stacked against retail folks. (My thinking is that the loan quality available to retail will go DOWN.)
Also - I’m not sure I’d have the time and patience to manage hundreds of notes - is there some way for FolioFn traders to take advantage of the “Portfolio” feature availble to those doing direct investments with the notes? (It shows as option from the home page if you’re NOT logged in, under “Build a portfolio”)
I must admit to still being a bit puzzled by some of the notes being sold on Folio. I don’t even see why a negative YTM sale should be allowed, nor why someone would be trying to dump a note with ONE payment left. Seeking the additional liquidity associated with $1.37 just seems pointless when the pay-off is right around the corner.
It’s obvious to me that at least in some cases, they are allowing automated tools to scan and purchase loans. For example the time I accidentally put a 1 instead of a 2 in front of the price, and the loan was snatched up in the split second before I tried to reprice it. They don’t advertise this obviously.
One thing that’s frustrating to me on the resale front: you have no visibility into what loans have already sold. As in, what kinds of parameters are loan purchasers looking for. Both buyers AND sellers could make more educated decisions if that were visible.
As far as selling a loan with a negative yield projection: that puzzles the hell out of me as well. Late last summer, I put basically all my older notes up for sale - often for more than the sum of the remaining payments. And they ALL SOLD. I don’t honestly know what the HELL the buyers were thinking of. I speculated then ( and still do, a bit) that there’s some money-laundering involved though I’ll be darned if I know how it would work.
I’m having trouble thinking of ways they would/could stack things against retail investors. I get the impression that new in-funding notes take over a day to become funded so you have plenty of time to buy in. And I have a hard time believing an institutional investor would start plunking down $10k+ on a single note, thus buying it completely out. Would make more sense to diversify.
If the borrower volume is there, that is. If they attract investor money in volume (retail/institutional it matters not) without a corresponding increase in borrowers, then something’s gotta give. I’m guessing they’d have to start approving some of these 90% of loans that get denied.
If LC started making certain filtering tools available only to big players, then yeah I’d be a bit ticked off. Their site leaves much to be desired and they know it. Using the site’s own limitations to favor institutional guys seems wrong on so many levels. I can’t think of any other ways to stack the deck though, at least none that would fly.
Regarding the IPO, my beef with that is liquidity on the trading platform will not be there when you want to get out. They have said that after the IPO there will no longer be trading-only states so normal investors from formerly trading-only states now won’t need to ever visit the trading site. Until they want out, and then good luck.
I haven’t played with it because I don’t have access, but I highly doubt they’d make such a tool which grabs the notes from the secondary platform. They don’t really make anything from people trading, FolioFN does, and this is just money that could have gone to funding new notes which is what they want.
I was on the phone with Prosper a year ago and when I told the guy I would be doing more trading than anything else, he practically treated me like a leper. “So you won’t be participating in funding any new notes?” Ummm no, sir I won’t. I’m sorry if that offends you.
If they did come out with such a tool, I’d be first in line to use/abuse it. Think of it, if you figured out exactly what criteria the thing uses to buy notes on the platform, you could buy up notes as sellers post them and be guaranteed to be able to sell them at an exact known price the next day. Talk about risk free money.
It does clutter up the listings but I would not want to see them become nannies like Prosper is and try to protect people from themselves. As Mama Zappa said, these notes do sell. If people want to buy them, let them. I certainly don’t mind if they’re laundering money or doing anything else sneaky, because all I see is a bunch of profit for me when I sell one. I hope they’re getting something out of it too.
As payoff time nears your yield becomes negative. So it would make sense that they would not want to hold onto things that are going down in value. Only thing is they’re not taking into account the 1% sell fee. So really it makes no difference math-wise.
But there is a chance that the person won’t make that last payment, so if you can sell it at an ok price it makes some sense. Also there’s the issue of a note being changed to ‘Completely Paid’ status, but you still have like 30 cents that you are owed. You’ll never receive that. (I don’t know if anyone here ever figured out exactly what was up with that.)
Buyers buy up these small notes like crack addicts. I have no clue why. The seller would be much better off selling them for the max 70% markup price rather than being so eager to part with it at par.
I gotta wonder if it might have something to do with taxes, since LC doesn’t really properly track your basis. I’ll be darned if I know how that would work either though.
The most innocent explanation is user error. I know for me, after spending hours pouring over listings it’s easy to get the columns mixed up. Is that “-5%” a discounted note or the yield?
>I certainly don’t mind if they’re laundering money or doing anything else sneaky, because all I see is a bunch of profit for me when I sell one. I hope they’re getting something out of it too.
When the SEC freezes the companies activities for some illegality, and you have money in it, you’ll mind. A lot.
In all seriousness, I don’t think the company is going to get caught up knowingly in some illegality, especially if they’re still trying to set the stage for a blow-out IPO.
My last question, I swear (at least for the week): Who gets the payment if you purchase a note that has a payment due date prior to the date you acquire the note but the payment itself still shows as “Processing” at the time you acquire the note?
There’s a day or so from when you commit to purchasing the note, and the purchase completes. If the payment comes during that time, the purchase is canceled, or so it seems based on a couple of notes I’ve sold (or attempted to).
If the payment completes after the sale, the buyer gets the payment.
Heh yeah I think I would. However yes I think we’re talking about individuals or wise guys taking advantage of a channel, rather than LC being involved whatsoever. Doubt the SEC would tag them for something which isn’t their fault. Errr not that I buy the money laundering thing. I can’t think of what someone would have to gain when they could just set up a front company and not take any losses. Or if you wanted to do carding or ACH fraud rather than laundering then there are much better ways.
The buyer gets the payment, assuming the payment doesn’t complete until after settlement. If, however, the payment completes during the T+1 time then the trade will get busted almost every time. In the few cases where it doesn’t get busted, then I guess that’s when you see the weird things that occasionally happen. Mama Zappa has listed a few examples I think. I don’t pay that close attention to mine so I don’t know how often I get screwed out of a payment.
PRIME accounts
Anyone know what these PRIME accounts are all about? I stumbled across a few random sites discussing them. I guess all it is: They manage your account for you based on a target rate, you can’t do any manual investing or trading. (Meaning their SYSTEM manages it, not a human.) You have to have a $25k account balance. The total ripoff is it costs you a 0.8% setup fee. Which would be a whopping $2000 assuming you’re wise and wait until after setup to deposit the rest of your cash.
Now how is that different from the ‘Build a Portfolio’ thing which is free? Why on earth would someone want to pay $2k and have their account limited when they can get the same thing for free? I don’t understand.
For managers and high-net worth individuals, dealing with thousands of notes is probably not something they want to do, paying <1% is a bargain in that situation if the alternative is parking it in some money market fund earning .1%. While I have the time & interest I’m pretty sure I could outperform prime but there’s no way I’d want to spend time every day selecting new notes once I reach a certain investment ‘mass’.
Yeah but my point is with the automated portfolio builder thing they have, you don’t need to to any of that. Just select what general return you want and it selects them automatically. I suppose the advantage of PRIME is it does this continuously so you never even have to log in. And yeah, $200 is a small price to pay.
But regarding those high net worth individuals, they have an even better option:
I just spent 3 hours reading some SEC filings because I got curious about your earlier statement about LC’s “stated goal” being attracting institutional investors. Turns out LendingClub has a wholly owned subsidiary called LC Advisors, LLC, which is in turn a general partner to two funds for accredited investors. Hedge funds, if you will.
These funds buy notes from LendingClub and those notes are not subject to the 1% servicing fee. The funds themselves though charge a management fee which may be waived. Stacking the deck you say? Maybe they agree. They say this in the prospectus:
And for better or worse, they also say “The funds do not participate in the resale platform.”
I found tons of interesting nuggets buried in there.
For example, while I always knew that you weren’t making a direct loan to the borrower, I had no clue it was set up like a derivative in which it’s a whole separate deal which is just tied to the performance of the borrower. Sounds a lot like those infamous CDO’s, to me.
Or how about this one: On a 5 year note, say if the borrower gets behind and temporarily stops paying say around the 4.5 year mark, any funds recovered by LC after the 5 year mark they keep for themselves.
Yeah I’ll say. The reason they give elsewhere is that some of that interest money paid out to us wouldn’t be tax deductible to them.
On a different note (hah): I had one loan that was trying to go south. Due 4/2, hadn’t paid, I decided to list it, and finally sold it for a discount - 15 dollars on nearly 21 in principal. The borrower’s score had dropped 30ish points in recent months, and another 60 this month. As of 2 days ago, no payment, but I just looked now and it’s been brought current. Oh well; another buyer may have gotten a bargain. At least this one was intentional on my part (not like the twice last year where I listed something for 10 dollars cheaper than I meant to :smack:). The other bad loan from a few months ago, that I sold for 3 dollars (on a similar principal figure) was recently classified as defaulted.
I’ve decided to make a concerted effort to review and offer for sale all my notes where the score has dropped. Where it’s a few points, I’ll usually list for current P+I plus 1 month’s interest - say the principal is 19.00, 15 cents in interest has accrued, and last month’s interest was 18 cents, I’ll go with 19.33 plus enough to cover the sales fee (20 cents), and list it at 19.53. A loan where the score has gone down more than that, I might list at the P+I plus the fee (19.34 in that example); if I’m really twitchy I’ll even bump it down a little. I haven’t offered any of those at a discount yet.
This has the interesting side effect of making it hard to reinvest my money fast enough!! I filter for rates from A-D, must have verified income, must not be relisted, and no delinquencies in the past 2 years. And there’ve been numerous times lately where that has brought up 2 loans at most, sometimes less.
I still review every loan I pick - must pass the smell test (like those wacked-out loans where the rate and payment would increase), and I won’t select anything where the payment is > 10% of their income.
LC claims that my net annualized return is 10.13% right now (though of course that doesn’t take into account the sold notes). Quicken says 8.47% overall (8.38% this year) which is probably more accurate, though of course its figures are skewed by the fact that I aggregate the normal repayment/interest/loan figures on the last day of the month. My net profit in 3.5 years is slightly under 300 dollars - which doesn’t sound like much until you bear in mind that I haven’t put a huge amount of cash in. 20 dollars here and there takes a while to add up.
I have commented before about how difficult it has become for me to find loans that match my saved criteria, but it has recently become impossible. More often than not, I get zero matching loans. The reason is that Lending Club seems not to be doing its job of approving loans and verifying income.
I just looked at the site and there are 143 loans awaiting funding. Of these NONE have a review status of “approved” and only 3 have income verified.
I think part of it is that the ones that are approved / verified are snatched up so quickly. Now, I’m small-potatoes enough that it’s not that huge of a deal if I have to wait a day or so, but if I had a lot of money that needed to get to work it would be a problem.
I wonder if part of it is the institutional investors grabbing stuff up.
I have also had a very small handful of E-class loans - two, I think. I wound up selling them after a few months, interestingly both had a significant improvement in their credit scores.
You could be right. In general, loans go quickly now. The 143 of a few minutes ago is now 140. The oldest still has 11 days to run, and all the others are 12 or 13 days, suggesting that all loans get filled within a day or two.
At 4:45 there were only 76 loans open. There are now 139, 6 of which have verified income, 2 have approved status. Two have both (but would fail my other filters).
In fact, the number of loans keeps going up and down. It rapidly went down to 136, up to 137 back to 136.
Wow, being in a trading-only state I had no idea new notes were in such short supply. Sounds like there may be some money to be made lately by snagging new loans right after they’re issued and reselling them?
By the way the LC hedge funds only gobble up about 10-30% on average (from memory) of a given member loan. And that’s including what they grabbed after their self-imposed 3 day waiting algorithm. However that might work. Plenty of other institutional investors though I guess. How long before we see an ETF on the market which only invests in LC notes? That might be interesting, especially if it was optionable.
That could be just noise. I believe it might have something to do with their load balancing or some other technical issue. There is stale data all over the site at certain times of the day. The same thing often happens with data on notes. Will go from 35 payments remaining to 34, back up to 35… for 24 hours plus.
It’s in the current Prospectus, dated November 28th 2012. There’s a link to SEC Filings at the bottom of LC’s site. The details of this issue are sprinkled throughout the document but they sum it up fairly clearly way up on page 6:
301 36-month loans available. Of that 301 - zero have been approved and zero have had their income verified. Is LC just stopping the approval and verification steps?