Tuesday, May 15, 2012

Ten Months on Lending Club, Brutal Reality Hits

I missed a month on reporting how my Lending Club experience was going. I could say I was extremely busy (I was) but it was probably more coming to grips with brutal reality. Right after I posted on my Eight Month Results, my NAR dropped to 6.0%. I think that was the result of my Defaults finally all going to Charge Off status.

I'm slowly climbing my way out of those Charge Offs. I've learned how to avoid them by avoiding any Note that even smells of a Late payment. I check the Loan Performance page for every Note that is Processing payment (sort my Notes by Payment Due Date and open each in a new Tab in Chrome). I don't buy Notes that are more than 20 days since last payment (saves me having to look at the Loan Performance page).

My portfolio has also changed quite a bit, not so much from trying to avoid Defaults, but due to a shift in strategy caused by using Lending Club Chrome Extension. Until I can bake into the Sale Price my risk factors (feature yet to be added), I don't buy as risky of Notes. Instead I look for discounted Notes. It turns out that the most discounted Notes tend to be Grades D, E and F (although F not quite as much).

When I buy Notes, I look for Notes that meet the following criteria:

  • have a Yield to Maturity of 16+%
  • no more than $25 Outstanding Principal
  • no more than 20 Days Since Payment
  • I don't already own a Note of that Loan

I then get the most steeply discounted (or least marked up) Notes that meet that criteria. The Chrome Extension makes this really easy to filter for (even if there is a lot of clicking "Next").

Once I have my Notes, I immediately offer them up for a price that gives me (after taxes and fees) 18% annualized gain, unless the Note is in pre-Grace Period or Grace Period, in which case I discount it to sell. I was offering my Notes at 16%, but they were selling too quickly. At 18% I tend to offer my Notes at 1.5% to 3% markup (depending on what kind of Discount/Markup I had).

I divide my Notes into two main Portfolios (four actually, but most Notes are in two). My newly acquired Notes that have not made more than one payment (I call them Buttercup) grew tremendously when I offered my Notes to get 16% annualized return. Since raising my expected annualized return to 18%, the two portfolios have balanced out and are now about half each.

My Buttercup portfolio is mainly split between D and E Notes. It looks like before the D Notes hit their second payment, they have a 50/50 chance of selling at those discounts.

The other half of my portfolio (Wesley) contains Notes that have made at least two payments. These are mainly F Notes, followed by D and E Notes. I'm happy to see that the higher yield Notes are sticking around longer (they don't sell). To recover from those Charge Offs, I need an accelerated return, like the 19.41% Wesley brings in.

So in two months I raised my NAR from 6.0% to 9.36%. I've heard rumblings that NAR is pretty much meaningless. I think it is an easy way to measure the direction you are going in, but I agree it has no real world value. I wanted to find a better overall metric for myself. I settled on Annualized Cash on Cash Return. The way I calculate it is treat my account as a closed box bank account. If I put my deposits in a bank (and taking into account withdrawals) what APR would that account have to have the balance I have now.

The cash equivalent balance I have right now is an interesting thing to figure out. You can start with your Account Total (on your main Account page), but that doesn't take into account Notes you've purchased today (I tend to have a half dozen to two dozen purchases pending). The cash for those was transferred from Lending Club to FolioFN to purchase the Notes, but FolioFN hasn't reported the Notes back to Lending Club yet. So I add in the purchase price of pending purchase Notes.

This CCR calculation really opened my eyes as to how bad the NAR calculation is. My annualized CCR after ten months is -2.45%. If I were to sell my Notes for their Outstanding Principal + Accrued Interest and cashed out my account, I would have less money than I put in. Now 8 Charge Offs and dumping a bunch In Grace Period Notes to clean out your portfolio can have a devastating affect, but I was not expecting that. Now that I have a way to track my CCR, I'll be watching that. It does get better daily, so I like the direction it's heading in. What scares me is what it would have looked like two months ago.

So bottom line is I am digging myself out from the Late Notes that went to Default and clearing out a bunch of In Grace Period Notes at steep discounts. Things are getting better (noted by the NAR rising and the daily improvement in my CCR). I've got two months until my one year anniversary. We'll see what kind of CCR I can come up with in the meantime.


  1. Marc I went through the same thing towards the end of 2011, though my peak wasn't as high. I was coasting for over a year on notes invested with little research or forethought and was getting returns around 13%. Then within a two month period was hit with a wave of defaults that brought my returns down to under 7%. Since then I've gotten a bit more serious about researching notes and have gotten my rates up to 9%, and should be on track to get over the 10-12% mark by year end.

    Good to hear you're bouncing back. If you haven't already done so, start massively discounting late loans to get rid of them before the whole note is charged off.

  2. @jerry Batorski,

    I don't let Notes go to Late anymore. I heavily discount Grace Period Notes, and I discount pre-Grace Period Notes (payment failed but hasn't been marked for Grace Period yet). I haven't had any Late Notes this year, let alone Defaults.

    Glad to hear you're climbing back also.

  3. Hi Marc,

    Very interesting to read on your progress and thanks for taking the time to provide so much info. I have been investing with Lending Club for about 6 months. I have just over 100 notes and haven't had any defaults or late notes yet. I am very picky about which notes I will buy, perhaps spending more time per note than is really worthwhile. According to Lending Club, by annualized return is 22.18% but as you mentioned, this is inaccurate. My CCR is negative also, mostly because of paying ridiculous markup fees on notes that I bought starting out before i realized how bad this was. Like you, I am in a state where I can't fund notes so need to buy on the secondary market. I'm still trying to figure out how much is too much to be paying for markup on notes. I have a bit of a different strategy than you I think. I don't mind paying a few percent for notes that have a good payment history and where the buyer meets certain criteria.

  4. @Zopito,

    Thanks for sharing how you're doing. Great job on getting started and learning from your mistakes (high markups).

    I think there are several strategies that work. Peter Renton has a very different strategy than I do, but we both are doing pretty well (for me if you take out the Default Notes).

    I look forward to hear how you are faring.

  5. Marc,

    I have enjoyed reading your blog. Thanks for providing so much great information. I suspect that the answer is no, but have you been able to find historic note transactions for the foliofn? I'd like to review what other notes have been trading at, for before starting on my own.


    1. @Kevin Kinnett,

      I haven't found a way to get actual historical trades for people other than myself. I would suggest start small and once you get comfortable start scaling up.

  6. I just wrote a blog post about LendingClub's Default 'problem'. It seems to be something that most investors discover about 1 year into investing in the service.

    You can find my post here:



    1. Thanks Jason. You make a great point in your post about the growth deflating the reported default rates.