When Facts Get In the Way of a Good Story
Bloomberg recently posted a critical article about Lending Club. There are two main points in the article: first, that Lending Club is clandestinely issuing “supposedly” undesirable loans to repeat borrowers, and second, that Lending Club as a company is failing.
First we’ll address repeat borrowers. The article mentions that an investor “discovered” the platform is issuing loans to repeat borrowers through a press release in 2015.
The article states:
“In all, Sims’s model has identified about 30,000 loans that were likely taken out by repeat borrowers—information the company has never disclosed but would be valuable to investors, since it could help show if a borrower is overextended.”
Never disclosed? Not really… Here is some information displayed on Lending Club’s website:
This is not a new policy, and has been shown on Lending Club’s website since 2008:
As for the quality of repeat borrowers, that requires a closer look. The article is correct in saying that Lending Club does not explicitly identify repeat borrowers for investors, which means that investigations and inferences are needed to try and find said repeat borrowers.
Our preliminary analysis focused on 36 month loans issued from platform inception in 2007 to June 30th, 2013. This allows us to capture mostly mature loans and calculate an accurate return-on-investment between the examined timeframe’s population and the repeat borrower subpopulation. A truly complete investigation of repeat borrowers would utilize text analysis methods to extract useful information from the loan description fields, but for our quick use-case we decided to look for loans issued that had matching earliest lines of credit, zip codes, last credit pull dates, and recent FICO scores. Next we did quick checks on employment title and annual income to see if they were close enough for us to deem that the loans were issued to the same borrower. We conducted our search in this manner because we were specifically interested in repeat borrowers that were making payments on two Lending Club loans simultaneously, which we believed would be indicated by a matching last credit pull date.
Here is a snippet of the filtered data set, showing what we think are four loans taken out by two people:
The rest of the repeat borrower data looks similar. The total loan population examined was 116,128 loans, of which 8,134 loans match our criteria to be potential repeat borrowers. This suggests that at least 7% of loan volume from this time period was from repeat borrowers, though this data set undoubtably missed some repeat borrowers as well as included some borrowers by coincidence.
So far, this is consistent with the findings described in the Bloomberg articles: some borrowers had multiple loans at the same time. But while the article gave the idea that this was frightening and bad for investors, loan performance shows otherwise…
We found that in the repeat borrower subpopulation, borrowers were 4% less likely to be delinquent on their loans. This lower charge-off rate is reflected through a 0.9% gain in return-on-investment on loans made to repeat borrowers.
This data jives with repeat borrower data compiled from Prosper, as Peter Renton pointed out in his recent article. The conclusion is that, in aggregate, loans to repeat borrowers are better investments.
The second argument, that Lending Club is on shaky ground as a company, is a non-issue in the near-to-medium future. The article made passing reference to the \$572 million in cash the company has amassed, but ignored the additional \$260 million in sellable securities. This brings Lending Club’s war chest to \$832.4 million, a sizable chunk of change. The article also mentions the CFO resigning while neglecting to mention several key hires, which creates the illusion that employees are jumping ship. While Lending Club has certainly gone through a recent rough patch, the company has the personnel and resources for getting back on track.
While there are merits to a critical piece about Lending Club, it is disconcerting to see the media publish, again, such a one-sided article that doesn’t give a complete account of the situation.
- Justin Hsi
- August 25, 2016
- 1 Comment