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Lending Club Loan Listings, Issuance, and Impact on Yield from Non-performing Period

Early Repayment of Loans and Impact on Lenders' Yield at Lending Club

Posted by Anil Gupta | Monday April 28, 2014, 12:00 am | Categories: Lending Club

Introduction

A PeerCube user who is also a borrower on Lending Club mentioned that he has been receiving requests from Lending Club to refinance his loan. Such offers are very attractive to borrowers whose FICO score may have gone up since taking the first loan. In this case, the second loan may come with lower interest rate due to improved credit score. Moreover, there is no deterrent in the form of pre-payment penalty for borrowers to refinance the loan. Lending Club benefits from a borrower refinancing an existing loan by charging additional origination fee from the second loan, i.e. more revenue. Also, Lending Club gets to pad up its numbers for total loans originated and fully repaid.

The only loser in this refinancing strategy appears to be lenders. Not only lenders lose the interest that was expected during the remaining term, but also land up paying 1% of repaid principal to Lending Club as service fee. In some instances, lenders don't even receive the full original principal back. So, is the early full repayment of loans bad for lenders’ yield?

Recently, as part of an ongoing research, we are looking into prepayment trends at Lending Club. This abstract is an excerpt from some of the analysis that we performed.

Prepayment Month, Loan Volume and Actual Yield

This analysis only considers Fully paid 36 month loans. The historical data file was downloaded on March 26, 2014. It has 35,968 fully paid 36 month loans.

The prepayment month was estimated from the loan issue date and last payment date. Table 1 shows the loans volume and original principal for Fully Paid loans with prepayment month. 80.6% (28,989) of all Fully Paid loans were pre-paid in full before reaching their term.

Table 1: Fully Paid 36 month Loans with Repayment Length
Repayment Length Loan Count % of Total Funded Amount % of Total
0 - 11 months 13,448 37.39% $148,526,125 39.43%
12 - 23 months 10,157 28.24% $110,769,825 29.41%
24 - 35 months 5,384 14.97% $52,833,900 14.03%
36 - months 6,979 19.40% $64,568,250 17.14%
TOTAL 35,968 100% $376,698,100 100%

Figure 1 shows the Fully paid loan count and actual yield with repayment length. The loan volume is plotted as Blue Bars with axis on left side and actual yield is plotted as Orange and Pink lines with axis on right side. The actual yield represents the net yield a lender would have received if all her loans repaid in same month. The Red color on a few Blue Bars may appear ominous and it should be. The red portion on blue bars indicate the loans where total payments after service fee amounted to less than the original principal lent, i.e. lenders lost money on those loans. The Pink line represents the actual yield on such loans. The Orange line represents the actual yield on loans that didn’t result in loss for the lender.

Figure 1: Lending Club Fully Paid Loan Volume and Yield with Repayment Length

Based on historical data, the lenders could potentially lose money on a few loans that get repaid in full by seventh month. But the most occurrences for loss happened for loans that were repaid back during the first couple of months. Lenders lost money on 38.88% loans repaid in full during the first month and 17.82% loans repaid in full during the second month. The actual yield curve (pink line) also confirms that such loans had negative yield. The lowest negative yield is –5.88% for such loans. The peak full repayments seems to have occurred in 1st month followed by 8th and 9th months.

Another interesting finding is the rise in actual yield for the first year followed by steady decline. This behavior is result of amortized nature of the loans, i.e. a large fraction of monthly payments goes toward the interest during early stages of loans. So, the loans that repay early tend to generate higher actual yield.

Figure 2 shows the loan count and actual yield with repayment length for fully paid loans issued in 2013. The results are no different than previous figure. Lenders lost money on 31.78% loans repaid in full during the first month and 8.06% loans repaid in full in second month. The actual yield (Pink line) for those loans are negative, lowest being –5.59%. The peak full repayments occurred during the first month and then steadily declined during the rest of the year.

Figure 2: Lending Club Fully Paid 2013 Loan Volume and Yield with Repayment Length

As this research is focusing on highest quality borrowers, we also investigated the prepayment trend with Grade A and B loans.

Figure 3 shows the loan count and actual yield with repayment length for fully paid Grade A loans. Lenders lost money on 100% of Grade A loans repaid in full during the first month and 46.34% of Grade A loans repaid in full during second month. The actual yield (Pink line) for such loans are negative, lowest being –8.98%. The peak full repayments occurred in 11th month followed by 10th and 7th months.

Figure 3: Lending Club Fully Paid Grade A Loan Volume and Yield with Repayment Length

Figure 4 shows the loan count and total funded amount with repayment length for fully paid Grade B loans. Lenders lost money on 54.23% of Grade B loans repaid in full during the first month and 22.32% loans repaid in full during the second month. The actual yield for such loans are negative, lowest being –2.44%. The peak full repayments occurred in 1st month, followed by 8th and 9th month.

Figure 4: Lending Club Fully Paid Grade B Loan Volume and Yield with Repayment Length

Even though not discussed here, loans with grade C through G are unlikely to result in loss even if loans are repaid in full within a month. The interest rate on such low quality loans is high enough that interest payment in first month easily covers service fee charged by Lending Club on principal returned.

Key Takeaways

  • Most early full repayments of loans appear to occur during the first 12 months of the 36 month loans.
  • High quality loans that repay in full within a couple of months more likely result in net loss for the lenders.
  • Overall, early full repayments are a good thing for lenders from yield perspective as long as full repayments don’t occur within a month or two.

Despite the positive findings, a refinancing marketing strategy targeted at existing borrowers impacts the assumption of independence between borrowers of two loans. For example, let’s assume that a borrower whose first loan carried G credit grade, refinances this loan after 6–12 months for a C credit grade loan. Should this borrower have the same risk rating as another borrower whose first and only loan carried C credit grade? We don’t think so and neither should you.

We would like to request Lending Club to start disclosing repeat borrowers if they are going to employ marketing strategies that target existing borrowers on the platform to refinance.

Download Abstract (PDF)

PeerCube provides custom analytics services in peer to peer lending domain. Please contact us to discuss how we can help meet your needs.

Comments: (3)

JJ Hendricks | Friday August 1, 2014, 1:28 pm
Thank you for this indepth article on pre-payment. I hadn't even considered the service fees in the equation. Luckily I don't invest in any A or B notes, so I won't be at a loss. Why do you think there are so many loans that pay in full the 1st month? Besides the last month, the 1st month is the most popular month to pay off the loan. It seems strange to me that circumstances would change so much in first month that borrower decides to pay it all back.
K Miller | Wednesday February 25, 2015, 4:05 pm

I seriously have to question the ethics of Lending Club in targeting existing borrowers for refinancing without compensating - in fact penalizing - the lending base that makes this refinance possible.  Sounds like something the SEC would be interested in.

Martin | Wednesday June 3, 2015, 10:01 am

Their policy might have changed to address this:

When a borrower prepays their oan (pays off all or part of their loan earlier than the contractual due date) during the first 12 months after a Note is issued, we limit the size of the service fee charged to investors in Notes corresponding to that loan in order to protect their returns. For those first 12 months, an investor will never pay a monthly service fee greater than 1% of the contractual monthly payment amount due to such investor. For example, if the contractual monthly payment amount due to an investor is $300 and a prepayment of $4,000 is distributed to the investor's account, he or she would only be charged a service fee of $3 (1% of $300) that month.

 

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