Back in October, Lending Club hosted a webinar on “Credit & Collections.” Having had a couple of loans go late, and one actually wind up being charged off, I was naturally interested.
While you’re more than welcome to view the webinar itself, it’s about 35 minutes long. Thus, I thought I’d put together an executive summary for you.
The webinar was presented by a couple of Lending Club execs (John Donovan [COO] Jack Cohen [SVP, Legal & Collections]) and they presented a ton of statistics.
Lending Club borrower requirements
For starters, Donovan and Cohen noted that fewer than 9% of loan requests are accepted by Lending Club. They require a minimum FICO score of 660, though the average score of approved borrowers is 713.
They further require a debt-to-income (DTI) ratio of less than 25%, though I think they exclude mortgage payments from this calculation. Beyond this, they require a credit history of at least three years, no current delinquencies, and no bankruptcies in the past seven years.
Finally, they won’t approve a borrower who has has more than ten recent credit inquiries.
How does Lending Club set rates?
Rates are set based on the perceived level of risk. Overall, the average rate paid to investors on Lending Club loans is 13.4%. However, this ignores fees and losses due to borrowers who fail to repay the loan.
Thus, here’s how it breaks down:
Average rate: 13.4%
Servicing fee: 0.7%
Expected losses: 3%
Average return: 9.7%
Late payments, delinquencies, and defaults
Donovan and Cohen then turned their attention to ‘deadbeat borrowers’ (my term, not theirs). The following image depicts the different degrees of lateness on a Lending Club loan.
Of the loans that first enter the grace period (1-15 days late), the majority are due to things like failed ACH transfers. For those that are unaware, Lending Club loans are all set up to auto-debit the borrowers bank account. Thus, if a borrower changes banks and fails to update their banking info, the loan will slip into the grace period.
Two-thirds of all loans that enter the grace period are brought back to current within 15 days. Of those that slip beyond 15 days, they are re-categorized as being “Early Late,” and about 10% of these will be brought back to “Current” status before going more than 30 days late.
Loans that are 31-120 days late are considered to be “Late,” though between one-third and one-half of these are successfully brought back to being “Current” status before default. The most common causes of “Late” loans are job loss, reduced salary, unforeseen medical expenses, or family situations such as divorce.
After 120 days, a loan goes into “Default.” Once a loan reaches this stage, there is a 10% chance of the funds being recovered. Turning that around, there’s a 90% chance that you’ll never see your money again once a loan reaches default.
Finally, if Lending Club loses hope of recovery, a loan is re-categorized as “Charged Off.” This isn’t to say that the money is definitely lost. There’s a slight chance of this money being recovered, and if is you’ll get it back. But don’t hold your breath…
One final note is that, in the case of a deceased borrower, Lending Club will pursue a creditor’s claim against the estate (just as any other creditor would do).
Of course, throughout this entire process, Lending Club is working to get borrowers to live up to their obligations. What follows is a graphic that shows the steps that they take at each stage.
What about payment plans?
During the collection process, Lending Club will sometimes place borrowers on a payment plan. In fact, one of my borrowers is on just such a plan. The graphic below illustrates how this works.
In short, the borrower’s payment is temporarily reduced to allow them to get through a rough patch, after which the base payment is increased such that the loan will still be paid off on time. Not an ideal situation from an investor’s perspective, but certainly better than allowing the borrower to default on the loan.