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Lending Club Secondary Market: Profitability of Trade and Recovery Rate with Loan Status at Listing

Lending Club FOLIOfn Secondary Market: Penny Note Strategy based on Lowest Ask Price

Lending Club FOLIOfn Secondary Market: Distribution of Available Attributes for Listed Notes

Posted by Anil Gupta | Monday February 23, 2015, 10:39 am | Categories: Lending Club

In this post, we step back from the in-depth analysis we performed in previous posts Lending Club Secondary Market: Loan Vintage and Loan Status at Listing and Lending Club Secondary Market: Profitability of Trade and Recovery Rate with Loan Status at Listing and explore our secondary market dataset. We review the distribution of major attributes available at note listing on secondary platform.

Amount Lent

The chart below shows the distribution of notes with the amount lent (denomination) on each note.


Chart 1: Lending Club Secondary Market: Distribution of Notes by Amount Lent
Chart 1: Lending Club Secondary Market: Distribution of Notes by Amount Lent

As we might expect, almost 95% of the notes listed on secondary platform were originally issued for $100 or less. On dollar amount basis, such notes accounted for only 66.34% of total amount lent by all notes listed on secondary platform. Similarly, 76.98% of the notes were originally issued at $25. But on dollar amount basis, these notes only accounted for 40.84% of total amount lent. The high percentage of small denomination notes count while smaller total amount lent appears to indicate that secondary platform is primarily the playground for the small lenders.

The denomination on listed notes varied from $25 to $12,000. The presence of notes of denomination of $1,000 and more (0.22% by count and 11% by total amount lent) on the secondary market was a surprise. Considering a well-diversified portfolio may have 200+ notes, it seems to indicate some lenders who lend large amount to each loan and have high portfolio value are also present on the secondary market.

Number of Payments Remaining

The chart below shows the distribution of notes with the number of payments remaining for 36 and 60 month loan terms. The X-axis scale for number of payments remaining is reversed, i.e. the greater the number of payments remaining, the newer the loan. The loan age increases from left to right.


Chart 2: Lending Club Secondary Market: Distribution of Notes by Number of Payments Remaining
Chart 2: Lending Club Secondary Market: Distribution of Notes by Number of Payments Remaining

48.23% of notes for loans with 36 month term had 26 or more payments remaining and 48.86% of notes for loans with 60 month term had 51 or more payments remaining at the time of being listed on the secondary market. Almost half of the notes for loans with 36 and 60 month terms made less than 10 payments at the time of listing on the secondary market. This 10 payment cliff appears to coincide with the findings from previous studies such as Lending Club Loans Issued Since 2010 - Principal Paid Back and Months of Payment that indicated half of charge offs occur within 10 months of being issued.

Another segment of notes that may be worthwhile to study is the 20% of notes that made 4 or less payments at the time of listing on the secondary market. Buyers of this segment of notes are most likely the lenders who are not fond of long delays between loan becoming fully funded and being issued on primary platform. Some of the buyers of such notes may also be willing to pay premium to buy notes on which borrowers have shown a track record of payments.

Credit Grade

The chart below shows the distribution of notes with the Credit Grade and Loan Term. The chart also shows the Average amount lent, average outstanding principal at listing, average ask price and average number of remaining payments on the right-side axis.


Chart 3: Lending Club Secondary Market: Distribution of Notes by Credit Grade
Chart 3: Lending Club Secondary Market: Distribution of Notes by Credit Grade

Notes with credit grades B, C, D and E account for more than three quarters of all notes listed on secondary platform. Notes with credit grades E, F and G appear to be with the highest average amount lent and average outstanding principal at listing. This may appear to indicate that larger denomination notes listed on the secondary market tend to be of poor quality grades.

The gap between average amount lent and average outstanding principal at listing is greatest for Grade A notes and narrows as quality of notes deteriorates. It appears that the Grade A notes are listed much later after being issued compared to Grade G notes. This observation is also confirmed with lower average number of remaining payments for Grade A notes versus Grade G notes. This trend is most likely driven by the stage at which deterioration of loan status occurs. Recently issued notes make up a higher fraction of Grade E, F, and G notes.

Loan Term

The chart below shows the distribution of notes with loan term. The upper X-axis shows the average amount lent, average outstanding principal, and average number of remaining payments.


Chart 4: Lending Club Secondary Market: Distribution of Notes by Loan Term
Chart 4: Lending Club Secondary Market: Distribution of Notes by Loan Term

The dataset contains 48.6% notes for loans with 36 month term and 51.4% with 60 month term. Notes for loans with 36 month term accounted for 44.4% of amount originally lent. The average amount lent is 18.8% higher for 60 month loans compared to 36 month loans. Both notes from 36 as well as 60 month loans on average are listed on the secondary market after making 12 payments. There is not a significant difference between average ask price and average outstanding principal with loan term indicating that the loan term is not a consideration in pricing by sellers.

FICO End Range

The chart below shows the distribution of notes with the FICO End Range at Listing. The composition of notes with different loan status for each FICO End Range is shown with the scale on left axis. The average amount lent, outstanding principal and ask price are also listed with the scale on right axis.


Chart 5: Lending Club Secondary Market: Distribution of Notes with FICO End Range at Listing
Chart 5: Lending Club Secondary Market: Distribution of Notes with FICO End Range at Listing

It appears quite a few recently issued notes are listed on secondary platform. There are two distinct groups of FICO End Range for which such loans represent more than 5% of all notes: ones with FICO between 660 and 709 and the others with FICO between 835 and 850. The sellers of these notes most likely cater to the buyers of high yielding or high quality notes who can’t or don’t want to purchase the notes on primary platform either due to residing in an ineligible state or unwilling to wait for long time period between loans being fully funded and being issued or lender investment being returned.

More than 50% of notes with any of the late status have FICO score of 579 and less. This is also reflected by the average ask price being less than the average outstanding principal, i.e. notes listed at discount. Most notes with FICO score of 650 and less are listed on secondary market on average at discount.

Key Takeaways

  • The secondary market is primarily the playground for small lenders, but the presence of large lenders is intriguing. We may need to review the performance of loans for notes of small denomination versus notes of large denomination to see if we can gain further insights.
  • Half of the notes listed on secondary platform had made 10 or less payments at the time of listing. On average notes are listed on secondary platform after making 12 payments. The lower quality notes appear to be listed with most number of payments remaining, i.e. listed earlier after being issued.
  • Most notes with FICO score of 650 and less are listed on average at discount.

We are ready to start reviewing specific buying and selling strategies for notes on the secondary market in future posts. If you would like us to review any specific strategy using secondary market dataset, please let us know using comments on this post or through our Contact Us page.

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