Lending Club Can Be a Better Bank Than the Banks
bloombergview.com
bloombergview.com
Citi advertises "Get a fixed rate ranging from 8.99% APR to 20.74% APR." and my rate with LC has been typically 7.86% APR (forget exact decimal place figure). The 8.99% rate with Citi assumes they give me the best rate - not guaranteed.
Its fast, friendly, and I can repay early at no penalty.
Extremely satisfied.
https://www.lendingclub.com/public/steady-returns.action
I'm a private buyer on Lending Club, their automated investing feature breaks up your deposit into chunks of $25, so a $1,000 gets allocated into 40 loans. Expected returns are listed on that page.
Yes, the source of funding is private investors, both retail and institutional, many of whom are chasing yield.
When the market shifts and investors are forced to reprice risk, lending $10,000 at 13% to someone who has a credit score of 660-665, 55% revolving credit utilization and a gross income of under $2,000/month might be a lot less appealing.
One additional thing to note: there are tons of investors (retail and institutional) snapping up junk in this market, but there are also many savvy people in the debt markets who are playing it cool because they know that you make money by pricing risk appropriately, not by buying the instrument with the most appealing yield.
On a broader note, even the sub-prime business was highly profitable and attractive to investors till the GFC. Only time will tell if these companies have a sustainable business model.
LC is peer to peer lending. I have $47k invested in LC notes. They save money by having fewer brick & mortar offices and mainly relying on credit score to assess borrowers.
Well, for now -- if the higher yields of Prosper/LC-style quasi-P2P loan investments draw investors out of savings accounts into that model, then there'll be a pretty big exodus out of the kind of stable depository accounts that banks most rely on.
Why would they be? The regulations you refer to aren't about banks-as-lenders, they are about banks-as-depository-institutions which provide the service of absorbing default risk between capital providers (depositors) and borrowers. If given an alternative which provides the capital providers with a service which handles management of the details of lending without absorbing default risk (and without charging a premium for absorbing default risk) becomes popular as an alternative to depository accounts for long-term savings (rather than keeping liquidity as one would in a checking account), why would those alternatives be subject to regulations whose only purpose is to make sure that banks actually do perform the function of absorbing default risk for which they are charging depository customers?
Those regulations only make sense in the context of a depository institution.
They eliminate the rather substantial regulatory compliance costs of running a depository institution, because they aren't a depository institution. This means they can use the reduced costs to either (1) increase returns to the providers of lending capital (investors in LC Notes), (2) decrease interest rates to borrowers, (3) increase returns to investors in LC-as-a-company rather than its Notes, (4) do some combination of the prior three.
This is true, but one should recognize that for Lending Club to sustain itself over time, it must be able to acquire borrowers and sell notes. There are a number of events that could put a dent in both supply and demand.
On the demand side, if and when there is a recession, defaults will almost certainly rise and it's likely fewer investors (retail and institutional) will be eager to take on new credit risk. If and when interest rates rise, funding these loans may become a lot less appealing. One must also assume that at least some borrowers, particularly those who are heavily indebted, are themselves vulnerable to interest rate increases, so I wouldn't be surprised to see rising rates negatively affect the repayment performance of certain types of portfolios.
> There's another point that's a flip side of this one, which is: Equity-funded banks are great at lending. Lending Club is perfectly able to make loans, and apparently at cheaper rates than banks.
Lending Club is perfectly able to make loans, and apparently at cheaper rates than banks, because yield-chasing investors are currently willing to misprice risk. What happens when the music stops?
Very much this— I've been a lending club 'lender' for a number of years now, and for the last 9 months or so have had a very hard time obtaining practically any notes.
People are hyper eagerly funding notes which my models suggest have very poor risk adjusted performance. (And, if anything, I'm concerned that my models are too conservative— since they're based on historic LC data and lending club has been reaching out to less and less credit worthy lendees).
As a result I'm slowly reducing my amount in lending club as notes return funds and I'm unable to invest it effectively. It was neat in the beginning, but it's a pain to report taxes on, and the decreasing risk adjusted returns make it much less attractive than it used to be.
The taxes are the biggest issue right now I think. There's no faculty in US tax code for reporting earnings on this kind of investment. If I heard right, I think some people lost all of their returns in 2012 due to written-off notes? I believe all of my returns (over the past four years) were taxed at my normal income rate. People have just been guessing at how to report their earnings in TurboTax. Haven't heard of any audits thus far...
Also, as far as risk-adjusted returns go, it still beats equities, right?
That's not true.
> Also, as far as risk-adjusted returns go, it still beats equities, right?
The S&P 500 was around 1,140 at the beginning of January 2010. It's now above 2,000.
If you had bought SPY in January 2010, you'd be sitting on a gain of around 75% not including dividends. SPY is highly liquid (more than 80 million shares trade hands on any given day) and optionable, so you can exit your position quickly if necessary and easily hedge your position if desired.
Needless to say, comparing the S&P 500 to a pure debt instrument is like comparing apples to oranges, but if your goal is to maximize risk-adjusted returns, you have to compare asset classes.
Obviously, this isn't 2010. The market today is a lot harder to navigate. On the whole, equities look expensive and with a shift in interest rate policy almost certainly coming, the debt markets are tricky. As Sam Zell recently said, "This is the first time I ever remember where having cash isn't such a terrible thing."
The key to their business is in their ability to accurately forecast the default rate of borrowers. The more they can predict the performance of the loans, the more 'fixed' the income seems to investors and the more attractive it is. They do predict default rates for loans and inform investors what those rates are for each loan. Over time, I'd expect their statisticians and big-data analysts will be able to refine the models to be highly accurate.
I've been experimenting with LC as an investor for about a year and a half. So far, my loans are performing about 1% better than Lending Club forecast they would. I attribute that to an improving economy.
Probably just statistical variation.
(I don't understand your numbers though. Forecast return was higher than actual?)
In other words if you have 5 defaults, you're doing better by the smallest possible margin :)
I ditched BofA, signed up with a credit union, and enjoyed fantastic service since. If you don't want to risk these guys in case they get screwed over by regulators, talk to your local CU!
Are the various banking regulatory agencies in agreement with that? (FDIC, Federal Reserve, Comptroller of the Currency, Thrift Supervision, as well as the various and sundry states)
Here is more about that: http://www.lendacademy.com/why-some-states-dont-allow-p2p-le...
No. And not if you live in certain parts of the US, either. And, in the states where it is available, there are additional restrictions.
http://blog.lendingclub.com/is-lending-club-available-in-my-...
http://kb.lendingclub.com/investor/articles/Investor/What-ar...
https://www.wellsfargo.com/personal_credit/
http://www.eloan.com/personal-loans
https://www.discover.com/personal-loans/
My guess is that they constitute such a small revenue stream for the banks, that banks skip on marketing and execution.
But would be the bank's role in a peer-to-peer transaction? Pure servicer?
LC didn't start it, it followed a number of other generally similar "peer-to-peer" lending services (Prosper.com is the first US one I'm aware of -- about two years before LC -- and ISTR there was at least one UK one about the same time as Prosper).
And banks don't get into it because it would involve risking the resources on a new business whose success outcome would be driving customers to account choices where the bank keeps less of the income from lending.
If the quasi-peer-to-peer-model becomes popular, banks will grudgingly get into it because then the choice will be between giving up all of the money to competitors rather than giving some of it up to investors in quasi-P2P loans, but they'd rather not stamp their imprimatur on the model while it still might fail to become a significant factor in how people invest and seek loans.
We are now doing around USD 1M per month, are growing the number of borrowers rapidly - which allows for more diversification and better returns (on average)