You may recall that back in March I wrote about how my returns with Lending Club were below average. I had devised a strategy to improve my Lending Club rate of return that involved buying notes on the secondary market at a discount. I thought it was time for a performance update and to share a few things that I’ve learned.
As a reminder, here is a chart of my Lending Club returns as of March 31, 2011:
After buying several notes on the secondary market, and admittedly with a bit of luck, my returns have increased substantially:
I’m still slightly below average, but moving in the right direction.
Over the past 6 weeks I’ve learned a lot about buying notes on Lending Club’s trading platform that I want to pass along:
A “Current” Loan Can Be a Loser: As you review notes on the trading platform, one column of information will give you the status of the loan (e.g., current, in grace period, Late (16-30 Days)). I stick with loans that are current to reduce risk. However, just because a loan is current doesn’t mean that the borrower has never been late. In fact, some “current” loans have a history of missed payments indicating that the borrower is on the verge of defaulting. To get this information, simply click on the “current” status of the note you are interested in. The status of each loan is linked to a history of that loan, including payment history. For loans that have been late in the past, you’ll even see a history of Lending Club’s attempts to collect on the loan.
For example, I found a “current” loan selling at a 17% discount. That’s a huge discount for a loan in good standing. But when you dig into the loan, you find this history of communication between Lending Club and the borrower:
Reviewing the original listing is a must: When you click on the status of an individual note, the trading platform takes you to a summary page of the note’s performance. The top of the summary page looks like the following:
As you can see from the above image, there is a link to the original listing at the top right. And the original listing can provide extremely helpful information in assessing the risk of the note, even one being resold. The information I find most helpful is the Q & A section.
During the original bidding, potential investors can ask questions of the borrower. The borrower can respond if he or she wants to, and the Q & A is made available for all potential investors to review. Lending Club keeps the Q & A available even when the note is being resold on the trading platform. I found it to be the best insight into the borrower’s finances.
For example, on one note selling at about a 3% discount that was chronically late, I saw the following Q & A from the original listing:
Q: Two delinquencies in last 2 years. Explain why you aren’t a credit risk?
A: (02/21/2011-10:10) – The 2 delinquencies happened about a year and a half ago at the same time on different accounts. It was not lack of funding or liquidity. I had left town and my home on a family emergency across the country. In my rush to get there I had forgotten to mail them. I was away for much longer than I expected to be, and upon returning they were mixed in with my received mail. I paid them immediately, but by then it was already over the 30day mark.
That tells me that the borrower is simply not responsible with his or her finances. And that’s a risk I’m just not willing to take.
Listed notes on the trading platform may not really be available: One hard lesson I learned is that just because a note is listed on the trading platform doesn’t mean it’s really available for sale. I had found a perfect note. It was selling at about a 10% discount because the borrower was late on his payment. The day I saw the note, however, he had actually made payment. He was in the military, and I thought the potential return was worth the risk. So I purchased it.
But the sale never closed. When I called Lending Club, the representative explained that the sale did not go through because I tried to purchase the note on the same day that a payment was made. Now, that makes absolutely no sense to me at all. But that was what I was told. The moral of the story is make sure you get a confirming email of your purchase.
Lending Club’s trading platform needs some work: In theory, you can search notes by status and order the list by discount or yield to maturity. The problem is that the sorting function rarely works. Either it will sort the notes, but not maintain the status you’ve selected, or it won’t even sort the notes. That makes finding the type of note you are interested in buying a lot of work.
If you’d like to become a borrower or investor, you can check out Lending Club here. And with that link, new investors can get a 1% bonus when you invest at least $1,000.