Earlier this week I began experimenting with the Lending Club note trading platform. I’ve been investing with Lending Club for about 14 months now, and have almost exclusively invested in new loans. Sure, I’ve sold a few sketchy loans, but I still hadn’t bought a note on the secondary market.
I finally decided to take the plunge after: (1) several commenters shared their positive experiences, and (2) I had a hard time finding enough suitable notes through the ‘normal’ investing channel.
What is the note trading platform?
Instead of trying to describe the note trading platform myself, I’ll let Lending Club describe it themselves:
The Note Trading Platform is an electronic marketplace where individuals and organizations can buy and sell Notes that correspond to consumer loans issued through the Lending Club website… The Note Trading Platform is operated by FOLIOfn.
You can access the trading platform from the “Trading Account” link in your Lending Club account. Be forewarned: You have to apply for an account and wait for it to be activated before you can use it.
Why use the note trading platform?
There are several reasons you might want to use the Lending Club note trading platform, including accessibility, speed of investments, risk reduction, and discounts.
Probably the biggest reason to buy notes on the secondary market is that not everyone is eligible to invest directly via Lending Club. In fact, you can only use Lending Club if you live in one of 26 select states. Residents of the other 24 states (and DC) are out of luck.
As for the note trading platform, nearly everyone can participate. In fact, only residents of the District of Columbia, Kansas, Maryland, Ohio, Oregon, Texas, and Vermont are ineligible.
Put your money to work quickly
Another big reason to use the note trading platform is that you can use it to put your money to work much more quickly than via direct investments. While new loans can take 10-12 days to fund, you can buy a note on the secondary market and the transaction will settle within 24 hours.
Of my two notes that have been charged off, neither borrower ever made a single payment. By investing on the secondary market, you can screen these individuals out by only investing in notes that have received at least one (or a few) payment(s).
While an established payment record doesn’t guarantee that a borrower won’t eventually turn into a deadbeat, it does get rid of the outright scammers.
Buying notes at a discount
Finally, it’s possible to pick up decent notes at a slight discount. And yes, this applies to decent looking notes, not just stinkers. Sure, the discounts will be smaller on better notes, but I’ve been able to find plenty of promising notes at a 0.2% to 0.5% discount – not much, but I’ll take it.
How to select notes
So… Now that I’ve convinced you to give it a try, how do you go about selecting notes to buy? I’m still rather new to the game, but I’m always happy to share my strategies.
Unfortunately, FOLIOfn only has rudimentary filtering capabilities. You can filter based on interest rates, payment status, and the number of payments remaining. My primary considerations here are status and number of payments remaining.
I set the status to “Never Late” and the number of payments remaining to “35” – this latter setting guarantees that there’s been at least one payment made. At this point I have a huge number of loans to choose from, so I sort them based on their “Markup/Discount” with the largest discounts at the top.
Another major consideration at this point is the borrower’s credit score change. There’s a column for this in the resulting data table, with an arrow pointing up (increase), down (decrease), or across (no change). From here, I simply look for notes that have had no change or an increase in the borrower’s credit score, and I click to load each of them in a new tab.
Now the fun begins… I simply flip through the tabs and click the “Original Listing” link to load the original loan application. I then quickly check the loan against my loan selection criteria and close tabs that don’t meet my expectations. I then hop back to the list of loans, check off those that I want to buy, and submit my order.
The first time I did this, I managed to identify and order twelve promising loans rather quickly. If you place your order before 2:30 Eastern, your trades will settle that day. Otherwise, they will settle at the end of the next business day.
The downside of the note trading platform
The primary downside of the Lending Club note trading platform is that the interface kind of sucks. As I noted above, the filtering is rather limited, and I was also frustrated by the order submission process.
Instead of being able to add notes to a shopping cart of some sort and continue clicking through the available notes (you can only view up to 60 at a time), you have to submit your order before changing pages. No big deal, right? Wrong, as you can’t easily pick back up where you left off.
Instead, you get dumped back out to the main screen where you have to re-filter, re-sort, and then find your place back in the long list of available notes. Not a deal killer, but their design is definitely lacking.
Another minor issue was that, of the twelve notes that I selected, I only ended up getting ten of them. The other two simply disappeared from my order, and the money was credited back to my account.
Confused, I pinged Rob Garcia of Lending Club. His response was that, if there are payments coming in while a purchase is in progress, the transaction might get cancelled “so the purchase is not mispriced.”
My interpretation of Rob’s explanation is this:
The interest that has been accrued but not yet paid goes to the buyer. If a payment comes in before the sale is completed, the accrued interest plus the principal portion of that note would end up in the seller’s account, thereby reducing its value. Because this has an adverse impact on the buyer, the transaction gets scrubbed and you get your money back.
It seems like it would be easy enough for FOLIOfn to protect against this possibility, but I guess this is just how things work — at least for now.
What do you think?
For those of you who have tried out the note trading platform, I’d love to hear your thoughts. Any tips or tricks for navigating the interface a bit more efficiently? What about tips for finding those “diamond in the rough” notes? Anything else to add?