LendingClub Files for $500M IPO | Hacker News Reader

LendingClub Files for $500M IPO

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55 pointsjuneyham43 comments

I have had a LC account for about 4 years. The returns aren't that great, around 6%. I did some random loans of mixed interest rates, but have also applied my own set of filters which brought the rate up a little bit over the last year.

The notes are also not liquid. You will suffer huge losses if you need to sell. I thought this would mean that I could get other people's notes at deep discounts...typically sellers want to offload late notes to avoid a full loss. However, in my test of buying about 30 late notes, I discovered the real problem - if a borrower makes a payment on your note while the transaction is still "settling" (typically 24-48 hours after you purchase the note), the transaction is cancelled. You can't cancel the transaction during the settling period if no payment is made though. So, what ended up happening was I was building a portfolio of junk notes that defaulted 98% of the time - the advantage is definitely with the seller and I suspect that is why there is a huge lack of buyers on their platform.

6% returns in a ZIRP environment are actually quite fantastic. Even junk bonds yield less than that.

But there is a market for junk bonds. You could exit your position today if you want.

> 6% returns in a ZIRP environment are actually quite fantastic.

You can find yields substantially higher than 6%. There are mortgage REITs that have yields well above 10%, and there are plenty of closed end funds and MLPs that yield better than 6%. Ditto for preferred shares.

Really want yield? MORL, a leveraged ETN that tracks the Market Vectors Global Mortgage REITs Index, has a current yield of around 20%, and CEFL, a leveraged ETN that tracks the ISE High Income Index, sports a similar yield.

Investors today are not challenged by a lack of yield but rather appropriately priced risk. In most cases, today's yields do not adequately compensate for risk. The "6% returns in a ZIRP environment are actually quite fantastic" mentality is going to cause a lot of investors a lot of pain. Chasing yield and ignoring risk is a game very few people win.

For comparison: I put $1000 into Prosper around 2007 as an experiment. My average annual return is 4.19% (just logged in for the first time in... forever).

However, the return has been rising. Through 2008 my annualized return was negative (-4%) and has since been closer to 8%, with double the returns coming from lower credit scores.

Given the crash in 2009 and how hard-hit most public lending institutions have been, you've probably done very well.

Buying the defaulted discounted notes sounds like a good idea but usually the discount rate I've found on FolioFn to be not that great and will thus make it difficult to drive returns. On top of it to make it worse, Lending Club charges collection fees which makes getting a return even more difficult.

A part of this article is false.

"LendingClub doesn't loan out its own capital and collects fees of loans that are originated on its platform from both individuals and more sophisticated investors alike."

Lending Club owns a subsidiary fund that invests in the platform as well.

Investors should be aware that LC is both a platform, and an investor in it's own platform which, if not monitored closely, can be potentially dangerous.

[Source] http://www.prnewswire.com/news-releases/lending-club-announc...

I don't think it is. The subsidiary you are talking about LC Advisers isn't using LC's own capital. It is a vehicle that manages investments from institutional investors.

As LendingClub has grown it has transitioned from a purely P2P model where individuals made the majority of the loans to a whole loan model where banks and other accredited institutional investors make up the majority of the loaned capital. They still have the original platform but their growth isn't coming from Joe off the street it's coming from big banks etc... who see this as a cheaper way to do underwriting.

Agreed on the institutional side. However LC also invests in their own loans from time to time, both directly or through LC Advisers.

In the early days LC invested their own capital more heavily to make sure loans were fully funded, and to ensure the community was active enough.

This is why they have "funded_amnt" and "funded_amnt_inv" to denote how much of the loan was funded by investors vs. internally.

LC no longer invests any significant amount of own money in loans. See https://www.peercube.com/blog/post/11 for the analysis. IMO, it is negative that LC no longer has their own skin in the game as their interests are no longer aligned with lenders on their platform. Most of the recent policy changes, for example loosening the credit quality and charging lenders to pay for collection and charging lenders for first few days of interest to LC's loan originator, seem to reflect this dissociation.

Everyone I talk to has had good experiences with lending on lending club. Has anyone here had a bad experience?

As with any higher-risk higher-reward investment, there are almost certainly people who dove into it far too enthusiastically and lost more than they could afford to lose.

Most such reports probably won't end up in the comments here.

Technically, I believe one is only supposed to invest up to 10% of their net worth in Lending Club, and must meet some other financial suitability standards: https://www.lendingclub.com/info/state-financial-suitability....

Of course, as far as I can see this is just a checkbox saying "I agree and meet these standards." No way for them to verify.

http://www.mrmoneymustache.com/2013/02/03/the-lending-club-e... Might be of interest to you.

It's not bad, but not exceptionally good in terms of returns. I have had my account for 5yrs, and haven't added any more money in the last two.

- The default rate is higher than I expected. In the early years, the A credit rating was reported as nearly 0 defaults, and B had few. But now that is not the case. 5-6% of my loans have defaulted. Most are A/B rated Some not even making a single payment.

- The credit standards seem to move a lot

- The quality of borrower is worse than it used to be. When I started I used to scrutinize every loan, I'd be impressed to see how much detail the borrowers would share. I liked to read their stories and learn to trust that they would repay me. Now you don't see much. It's all button mashing. There are enough lenders to fund all the loans, nobody puts the effort in. I don't even bother doing the manual search anymore either.

- The dashboard says my net annualized returns are around 5%. I guess that is about right. But it's not liquid. If I liquidated all the notes today, I'd probably lose all of the gains. If I stopped reinvesting, I'd probably see a bunch more defaults bring my returns down before i got all the principal back

I haven't had a bad experience, per se, but after running through almost all of my initial loans and not opting to reinvest in more, it seems like a relatively decent but not great way of investing your money. I think if I were willing to carefully vet the loans, or focus on a particular vertical, I could have done better.

So, in my case, I did three portfolios - a fully manual hand-picked small portfolio, a blended approach with a higher risk, and then a portfolio of all high-interest, high-risk loans.

The hand-picked ones did extremely well, netting me 8.5%. The very high-risk ones got around 5-6%, and the blended around 4%.

It wasn't bad returns, but the interest income (iirc) is taxed as income, and that wasn't ideal for me.

EDIT: because I opted not to reinvest, all the numbers above are what my return is as my portfolios all wind down. At the beginning the returns were much better, 13-15%, but a significant percentage of people get about 75% of the way through paying off their loans and then get behind and default.

The tax issue can be worked around to some extent by using an IRA. Lending Club will also open trust accounts so it should be possible to open one in the name of a solo 401(k) (only an option if you're self-employed). I'm going to try this in a bit.

I opened my LendingClub account in a roth IRA for the same reason. Its not a very tax efficient investment, and I don't want to deal with it at tax time.

Be forewarned, though, that you can't buy or sell loans on the 3rd party exchange with a tax advantaged account.

I spent a lot of time handpicking my 200 investments and I'm sitting on a 12.23% (adjusted) return right now. I think by most measures, this would qualify as a good experience. For me though, it's not. When someone defaults on me (I've had 1 officially and 2 more that will likely get charged off soon) I feel bad about it. Yes, it's expected and yes, LC makes a reasonable amount of effort to collect but it doesn't help how I feel. Especially when the people filling out the loan application write things like, "I'm a hard worker. I always pay my loans back, etc, etc" As someone, that would never short change someone on money owed I feel very let down when it happens to me and I take it a little too personally. It also doesn't sit right with me that LC takes a cut of every payment but doesn't share the pain of losses in any way. What it boils down to, I suppose, is that LC is just not the right investment vehicle for me.

edit: correcting default stats.

Sometimes shit happens and people really just don't have the money to pay back their loans. I'm sure they feel even worse about it.

I'm sure they do and I hold no ill will toward them. I still feel bad about it though which takes away from how I feel about lending club.

What was your mix of loan grades? Did you have any grade A loans default?

I went with mostly B/C since they seemed to yield the best return for the risk. Here's the actual breakdown: http://i.imgur.com/egbkFfh.png My charged off one is B and I have an A and a C that are 31-120 days late now.

edit: updated with actual chart and data (i guessed the first time)

How long have you held these notes? That seems like an exceptionally high return, and low default rate, unless this is like your first year.

I started in January of this year. It does seem high for sure. I'd like to think I spent a lot of time finding people that had the most to lose when making a decision (mortgage, relatively high income, stable job, etc) to lower my risk. But who knows.

edit: so i just checked for real. looks like it's been over a year (time flies). for the record, it shows 199 (instead of my stated 200) because i put $50 into one investment instead of the standard $25. http://i.imgur.com/o2DdDLU.png

> i put $50 into one investment instead of the standard $25

It's funny you mention that. I went through a phase where I started doing $50 and $100, becuase I couldn't find enough high quality borrowers. I figured that since I trusted these people with $25, why not a little more. It just hurts more when they default. When I see a high value note charged-off, I just feel more betrayed than usual.

I think that's one of the mistakes people make when investing in LC. The safety of the investment comes from having a small amount invested in a large number of notes. Until you are invested in 800+ notes you shouldn't be investing more than the minimum in any one note. If you look at LC's statistics on investor returns 800 notes seems to be the magic number to amortize the default risk.

It was hard sticking to $25 but other than that one investment I was able to remain patient even though it took me almost 6 weeks to invest my full amount. There was just one person I really felt like I could take the extra risk. Incidentally that person paid off the entire loan in the first payment.

I found this data the most informative: https://www.lendingclub.com/info/statistics-performance.acti...

It gives you a model for 3-30 month returns, adjusted for losses. I have an experimental amount invested in LendingClub, about 85% loaned out at the moment, and have been in for only a quarter year so far. I've been hand picking loans in small increments, but it's too early to say anything about the quality of my pick criteria because so far there hasn't been so much as a late payment yet.

Besides what others have mentioned, it's worth noting that at this point is almost impossible to hand pick most of your loans. They get dumped onto the market at set times, and most of the "good" looking low grade loans are snapped up almost immediately, so it can be difficult to build a portfolio with exposure to those grades.

What I ultimately ended up doing, and maybe this was their goal, is just to sign-up with their auto-invest system. They lowered the minimum down to something small like $5000, and you can twiddle a few pretty coarse knobs to say what kind of risk exposure you want. At that point it's completely hands-off for me, and I just track the progress - every time I accrue $25 worth of cash from the existing investments, they buy another note on my behalf.

I'd definitely be careful how much cash you throw at this, I thought it'd be an interesting experiment and my portfolio has done fine, but it's hard to quantify the risks. If the economy tanks, how much will the default rate increase? Also as others have mentioned, the secondary market for these notes is really poor - you'd take a huge loss to liquidate your position.

I've been meaning to finish my LendingClub machine learning underwriter. There's a lot of data to train on since all historical loan data is available.

The exact model to use is tricky though. You could train a classifier to detect whether a loan will default or not, but this doesn't weigh the chance of default with the interest rate. I then thought of doing a regression on the expected return, which would properly balance between interest rate and default rate. At some point, though, you need to make the binary decision of whether to invest in the loan or not, again classification.

Another complication is that since LendingClub has been growing exponentially, the majority of the loans they've issued haven't matured yet. Utilizing this partially complete data is even more tricky. You could ignore non-mature loans, but that would reduce your training data significantly and make your data at least 3 years old.

I've been investing in lending club for 4 years. Returns on different loan filters vary from 6%-13% on the high end. You're going to have defaults. When I try to explain this investment vehicle they look at me skeptically. Its a great place to invest risk capital as you'll get a semi decent return on your cash but I definitely wouldn't invest anything you can't stand losing. It will be interesting to see how the IPO turns out.

Check out lendingmemo.com and lendacademy.com for more insight on how to invest properly in the platform.

I opened Lending Club account little less than 3 years ago. Lending Club reports my adjusted returns to be 9.91%. I currently have 300+ notes in my account though I usually sell notes that are underperforming on the secondary market typically at loss. I wouldn't invest any serious amount in LC as it is very new and unproven. Once LC becomes public, they most likely will start fleecing both borrowers and lenders to make its earnings/revenue numbers. The changes made this year are pretty indicative of this trend.

I really like LendingClub. I was a bit mad at my default rate, as I followed stringent criteria, but I'm still sitting at 6.5%. I actually had someone die that I lended to and it really hit home with me for some reason.

The return isn't amazing, but I'm not doing anything else with that capital right now, and don't care to toss it in a different vehicle right now. It's fun to use for me.

Same here. I'm getting a 6.03% return. Low, for sure, but at least I get the feeling that I'm helping a few folks to borrow money, at rates and conditions that are more reasonable than with traditional banks.

I believe once they IPO, they can accept lenders in all states (currently they only accept lenders in certain states).

LendingClub reported $86.9 million of revenue in the first six months of the 2014, up 134 percent.

P2P is fundamentally shifting how people gets loans- banks should definitely be paying attention.

The paragraph after gives more context:

"The cost of that revenue growth swung LendingClub from profit to loss. In The first half of 2013, LendingClub had net income of $1.74 million. In the same period this year, the company lost $16.49 million.

The company’s sales and marketing costs jumped from $16.12 million to $39.81 million when comparing the first half of 2013 and the first half of 2014."

Banks don't really care about these types of loans. They do their unsecured individual lending through credit cards. At the retail level they are more concerned with mortgages, HELOC, high net worth individuals, and collateralized business lending.

Banks and institutional investors make up the majority of the money being loaned out. If you look at the S1 filing you will see that something like 80% of the money being loaned out isn't coming for individuals. It's coming from banks and institutions.

http://www.lendacademy.com/forum/index.php?topic=2612.msg225...

I agree - the notion that LendingClub is P2P is mostly PR hype. Sure an individual can put some capital to work. But most of their capital as pointed out above comes from institutions (mostly hedge funds). I had heard that 95% of their capital was institutional but I can't find a quote on that. P2P gets fantastic press tho and which in turn drives down new borrower acquisition cost.

agreed here. it will be interested to see how this market plays out.

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