
How Lending Club’s Biggest Fanboy Uncovered Shady Loans - petethomas
http://www.bloomberg.com/news/features/2016-08-18/how-lending-club-s-biggest-fanboy-uncovered-shady-loans
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paganel
Interesting article, just wanted to comment on this:

> For instance, in June 2011, a user from the Phoenix area requested $25,000
> for debt consolidation. The user was relatively risky, with a FICO score in
> the low 700s. Lending Club rated the loan “E2”—one of its riskier
> categories—offering it at an interest rate of about 18 percent. But
> investors were skeptical, and only $20,525 worth of the loan’s notes were
> sold. Later that month the same person, according to Sims, borrowed the
> difference, $4,475, at an interest rate of just 7.5 percent. (Sims guessed
> that Lending Club’s algorithms gave the second loan a higher rating because
> it was smaller and thus less risky.) To the outside, it looks like one
> reliable loan and one risky loan; in fact they were both risky. “We evaluate
> each borrower’s creditworthiness based on the most up-to-date data,” the
> company says in a statement. It adds that users can exclude “relisted” loans
> from their searches.

The exact same thing happened (may be still happening, AFAIK, I've been out of
that industry for ~7 years) in the mortgage business, and it was a legal and
well-known practice. At least Lending Club was considering the higher loan as
being more risky (i.e. assigning it a higher interest rate), but what I saw
happening in the mortgage business was that let's say that you needed $100,000
to buy a house and you had almost nothing, a credit officer will help you get
a "personal needs" credit worth $20,000 with an interest of 7-8% that would
show the bank that you were now in the possession of at least 20% of the value
of house, so that the bank was now able to lend you the rest of the money
($80,000) to actually buy said house, at 3-4%. Often times the two loans were
taken from the same bank, so there was no foul-play from the client.

~~~
pc86
700 seems an odd bar for "relatively risky," perhaps they mean in relation to
the entire platform (minimum 660 to borrow)? I know these are personal
unsecured loans but for example if you're car shopping 700 is generally the
line above which you can get qualified for the best rate on any vehicle your
income supports.

I've had bad credit in the past and unless you have such a high income you can
pay down debt without really trying, it takes effort to get into the 700's. I
actually took out a LendingClub loan with a high 600's score in 2013 or so and
I got the best rate they offered at the time (around 14% on a 36 month note
that I ended up paying off in ~18). Granted that was about $7k not $20k but
there does seem to be a small disconnect between the numbers in the FA and my
experience both in life generally and with LendingClub specifically.

~~~
douche
That seems awfully high for an interest rate. My credit wasn't much better in
2014 when I took out a similar-sized personal loan, and I only had 6% interest
on it.

~~~
pc86
It is, but remember these are all unsecured loans without income verification,
and both LendingClub and the investors are taking a piece of the profit. Both
LC and Prosper now offer 6% loans to 720+ FICOs with the (unverified, as the
FA states) income to support it. The lowest may have been 10-12 back then but
I remember being surprised because it was less than half my CC rate and I was
expecting high teens. I was using it for CC consolidation so really anything
below the ~28.99% I was paying was a pretty big win.

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zby
Not much substance in this one - the summary would be something like:

\- LendingClub inflates figures by encouraging employees to use the service

\- there was an affair with mis-dated loans - but this is not covered in any
detail

\- LendingClub data does not include information about repeat borrowers (one
example given was about someone who tried to take a 25K loan - but got
financing for only 20K - then it borrowed the rest, apparently with better
rates, because smaller loans are less risky) - this might be a big thing
actually - but it needs more data

\- there are privacy issues for borrowers (obviously)

~~~
dforrestwilson1
Yeah I'm an LC loan investor and this doesn't move the needle for me.

What other bank or lending institution publishes this amount of loan data?
Does this imply that LC is more transparent or less than most lenders?

Investors in the stock may be hurting, but my loans are still in the black,
and have been for the past 4 years since I started.

~~~
pc86
Does the article's statement about investor demand outpacing borrower demand
jive with your experience? I've been thinking about putting some money into
LendingClub (was a borrower several years ago and had a good experience) but
I've been hearing for a while that it's very difficult to get the good loans
because they get snapped up quickly, often by large lending institutions.
Often what is left are very risky and/or very far from being funded.

~~~
kbob
I put money into LC's automated investing system 25 days ago. The money has
been gradually lent out, and I expect the last loan to close today or Monday.
There were plenty of borrowers at the low-risk, low-interest end of the scale,
but it took a long time to lend out the money in my high-risk pools. It's too
early to extrapolate, but I expect a noticeable fraction of my money to be
uninvested most of the time.

LC's documentation says lenders with a large uninvested percentage get
priority over lenders who are almost fully invested. That matches my
experience. I hit 80% invested in four or five days and waited until now for
the last 20%.

~~~
pc86
So the moral of the story is to put in ~20% more than you want to invest then
pull the remainder out once you hit about 80% allocation? :)

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seibelj
How to pick good Lending Club loans: C or B only. 3 years only. Minimum income
70k. No defaults, late payments, public records, collections, etc. (not a
single one! even from 5 years ago!). DTI no higher than 70. Do not lend for
medical, business, or wedding. No monthly payment higher than $500. No one
with less than 2 years at current job.

If you want to do the machine learning analysis, go ahead, you'll come to the
same result I did. This is optimized for minimal defaults while still getting
a solid return (~10%).

I keep LC as a small amount of total investment portfolio, but there is
certainly money to be made.

~~~
bryanbuckley
Past performance is not indicative of future results.

Also, to increase your chances of making a profitable loan (same as insurance
underwriting) you need to gather more information than what is commonly
available and being acted upon.

