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How to automate Note Selling on Lending Club Secondary Market with PeerCube?

What is your Loan Selection Strategy?

Automated Buying of Notes on Lending Club Folio Secondary Market


Over the Memorial Day weekend, we introduced a new feature, automated purchasing of notes on Lending Club secondary market (Folio). With this feature, users are able to automatically buy notes from secondary market based on their note selection criteria. In this post, we provide how-to and guidelines for setting up automated buying of notes.

Why should you buy notes from secondary market?

Returns from Day One: On primary platform, loans can take a few weeks to be funded, approved, and issued. You don’t receive any return during funding and issuance period. After committing your funds to loans for a few weeks, your funds may be returned because loan wasn’t issued. You could have better utilized such funds on secondary market.

No Waiting for Loans to be Issued: The trading settlements on secondary market take a day or two compared to weeks on primary platform; hence your funds work for you quickly on secondary market.

Minimize Early Prepayments: Some borrowers prepay their loans soon after loans were issued on primary platform. Their need for cash may have been a short one. As a lender, all the waiting for loans to be issued and funds tied up during the issue process may be for naught or very little return. You can avoid very early payers by purchasing notes from secondary market that have made one or more monthly payments.

Avoid Straight-Rollers: Some borrowers, colloquially known as Straight-Rollers, make no payment or file for bankruptcy or abscond soon after taking out the loans on primary platform. You can avoid such unscrupulous borrowers by purchasing notes on Folio that have made one or more monthly payments.

Purchase Seasoned Notes: You can purchase notes on Folio that have made payments on-time and regularly. This enables you to avoid habitual late payers. When you lend to loans on primary platform, you are betting that borrower will make payment while you can purchase notes with established payment history.

Buy Notes of Shorter Term: On primary platform, you can only lend to loans with terms of 36 and 60 months. By purchasing notes on Folio, you can create notes of custom duration. For example, if you are interested in lending for only 12 months, you can buy notes with 12 monthly payments remaining. In effect, you are lending to loans of your desired duration.

Pre-requisites for Automated Notes Buying

Before proceeding further with setting up automated purchase of notes, please make sure you meet the following pre-requisites.

Automated Purchase Process

The saved buy filters that are associated with your Lending Club account numbers are triggered to run once PeerCube system updates the notes listed for sale on Folio. Presently, Folio note listings are updated every two hours during the day. There are two restrictions on purchasing notes from Folio in your portfolio.

  • Only notes from loans that are not already in your portfolios are purchased.
  • Only one note from each loan that is listed with lowest Markup (highest discount) and meeting your buy filter is purchased.

Build Automated Notes Buy Filter

The first step in automating purchase of notes on Folio is to determine your note buying criteria. PeerCube provides extensive options to fine tune your buying filter at Build Lending Club FOLIO Automated Buy Order Filter. The saved buy filters are displayed at Your FOLIO Automated Buy Filters.

The following 15 parameters are provided for your notes selection criteria for purchase on Folio.

Credit Grade Loan Length Application Type Loan Status Never Later
Credit Score Trend Interest Rate (%) Amount Lent Originally Outstanding Principal FICO End Range
Days since Last Payment Number of Payments Remaining Ask Price Markup (+ve) / Discount (-ve) Yield to Maturity (YTM)

Because sellers list their notes for sale at wide ranges of premium and discount, we suggest you as buyer focus on fine-tuning and extensively testing your buy filter to make sure undesirable notes are not appearing in the results. A few guidelines in selecting appropriate values for different parameters are explained below.

Develop separate buy filters for loans of different Loan Status. The notes from Late loans tend to be listed on Folio for sale at highest discounts.  If you develop a buy filter that includes both Current and Late loans, you are much more likely to purchase notes from Late loans than Current Loans as system sorts available notes based on highest discount (lowest markup).

Specify maximum limit on Markup/Discount to avoid purchasing notes with very high premium. If you do not specify the upper limit on premium you are willing to pay, you are likely to end up buying notes with high premium if the listed notes meet your other buying criteria. Enter values for Markup (Premium) as positive (+ve) numbers and for Discount as negative (-ve) numbers.

Always specify a minimum limit for Yield to Maturity (YTM) parameter to avoid purchasing notes with very low YTM. For example, notes can be listed for sale at 0.1% YTM. You do not want to buy notes that generate no return or very small returns.

To purchase notes of small amount, appropriately set the maximum limit for Amount Lent Originally. For example to purchase notes that were originally issued for amount less than $50, enter $50 in maximum field for Amount Lent Originally. Notes originally issued for large amount typically are listed at higher discount (lower markup)  on Folio. As system by design selects the note with highest discount (lowest markup), you may land up with a note of high amount if Amount Lent Originally parameter is not narrowly specified. The narrow range of the Outstanding Principal parameter alone will not prevent purchase of notes originally issued for large amount, as sooner or later all such notes will have outstanding principal in your desired range but large amount notes may be closer to end of their maturity.

Appropriately set minimum limit for both Number of Payments Remaining and Yield to Maturity (YTM) to avoid notes that are closer to being paid off with negligible return. When a borrower makes a large prepayment on a loan early, the number of payments remaining may still be a large number but the amount remaining is quite small. Such loans are likely to be paid off much sooner than the remaining term of the loan. Some sellers have tendency to list such notes for lowest possible YTM of 0.1%. As a buyer of such notes, you will not receive sufficient return because last few payments on these notes primarily includes very little interest.

Enable Automated Folio Buy Filter for Your Lending Club Account

Once you have customized and saved your automated buy filter, you will need to associate the filters with specific Lending Club accounts in FOLIO Automated Buy Settings section of Lending Club Folio Secondary Market Order Management page.

 

In addition to associating a Lending Club Account Number with a FOLIO Automated Buy Filter, you can also specify the Minimum Cash Balance to Maintain in the account. If you also lend to loans on primary platform automatically using PeerCube, you must have the same value for minimum cash balance else the lower of the two values will prevail.

 

We also provide another parameter Maximum Cash to Invest to control how much of the cash is used to buy notes each time system runs your filter for the specified Lending Club account. We recommend you start with a small value for this parameter to make sure your buy filter is purchasing notes to your liking before increasing this limit. A smaller value will also help you spread out note buying across multiple runs of the filter during the day.

 

Once a notes buy filter is associated with a Lending Club account, the system will automatically run the filter when the secondary market notes listings are updated. The system will not run a buy filter until it is associated with a Lending Club account. The Last 30 Day Order Activity section on the same page shows the Buy and Sell orders placed on secondary market.

We have displayed a series of screenshots for your reference. We hope this how-to helps you set up automated buying of notes on Lending Club Folio secondary market. Please comment below or contact us with your feedback and requests for clarifications.

Folio Automated Buy Step 01

Folio Automated Buy Step 02

Folio Automated Buy Step 03

Folio Automated Buy Step 04

Folio Automated Buy Step 05

Comments: (6)

H | Monday June 20, 2016, 1:27 pm

Any plans to add 3 or 6 month fico trend. Often see notes +100 points since origination then 50 point drop last month but still shows up with fico up filter

Anil Gupta | Monday June 20, 2016, 3:46 pm

@H, Interesting idea. The FICO score change data is not provide timely and often delayed by 1 to 5 months. We will need to look into the feasibility of it for automated Folio buy. In the mean time, you can use FICO trend and FICO End range to tighten your automated Folio buy criteria.

Holly | Saturday August 6, 2016, 12:32 pm

Any chance of adding a feature that would allow one to filter by Risk Index and/or Expected Return?

Anil Gupta | Wednesday August 10, 2016, 9:38 am

@Holly, stay tuned. We are working on few projects in the area of Risk.

Kupta Jean | Wednesday September 28, 2016, 10:07 am

Any chance of increasing how often orders are submitted? My current problem with your platform is that it submits orders for loans on Foliofn once per hour. If this was more in the every 5 to 10 minute range. It would be a much more useful platform.

Anil Gupta | Wednesday September 28, 2016, 2:34 pm

@Kupta Jean, Folio list large volume of notes for sale. It is not practical to update such a large volume of listings very frequently. It is not feasible to update and place orders every 5 to 10 minutes.

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