P2P Lending: Experimenting with Lending Club

I’ve decided to dabble with Lending Club’s Note Trading platform.  I am skeptical that the secondary market will provide returns as good as those available to accredited investors who are able to originate the loans.  In fact, I think that the secondary market is going to be rife with bad deals; so this endeavor will be to test my hypothesis, so to speak.

Hο = the median return from notes purchased in the secondary market is less than the median return from notes originated in the primary market.

Now this is not going to be an all out statistical or scientific exercise, I forgot most of that anyway.  This is merely my way of documenting my observations, methods, transactions and results.

Browse Notes

Lending Club has a less than adequate portal (more on that later) to view the available notes for sale.  As of this writing there were a total of 29,594 notes to buy.  That is more than enough to warrant some pre-determined criteria to whittle that down to a more reasonable number.  Lets keep it simple for now, my initial screening criteria will be the following:

Filter Criteria Pre-Filter Count Post-Filter Count
Notes must never have been late 29,594 Notes 18,720 Notes
No notes with more than 36 months left 18,720 Notes 7,875 Notes
Interest rate must be more than or equal 5% and less than or equal to 15% 7,875 Notes 5,433 Notes

 

These 3 simple criteria brought the number of notes down from 29,594 to 5,433 – 18% of the loans.  Now I have a more manageable universe of notes to go through to find the “right one”.

Unecessary Work Involved

Lending Club has not made much of an effort to provide secondary market investors a useful tool to browse notes; a bad sign in my opinion.  Remember, I am approaching this from the point of view that Lending Club is more concerned about the primary market than the secondary and therefore the tools, information, support and returns for buying notes will be fewer, less and lower than what is available for originating.  I want to be proven otherwise, but right out of the gates I have concerns:

1.  Poor documentation

If you spend any measurable amount of time on Lending Club’s note trading site you will notice that there is a considerable lack of comprehensive documentation.  For example, I have tried to calculate the ‘Yield to Maturity’ column from the respective notes with no success.  I have seen other discussions on the net attempting the same with no luck.  This is such an important number for investors that I cannot accept a black box calculation and it bothers me that they have not/will not disclose the math behind that number, which leads to my next concern.

2.  Poor Customer Support

I have sent an email to Lending Club’s support asking them to explain how they arrive at the ‘Yield to Maturity’ for each note and to provide the formula that they use.  That was several days ago and I have heard nothing back.

3.  Inadequate Tools to Purchase Notes

This is where I have seen the most complaints around the net about Lending Club’s note browsing capabilities.  After spending  some time myslelf trying to browse notes I have the same complaints.  Here are some obvious problems:

a)  Inability to Browse Notes without visiting multiple pages

There are a total of FOUR different pages one must visit to view all of the relevant information on a note.

1.  Browse Notes page – first page you access

2.  Loan Performance page – provides information about loan’s hisotry including payments

3.  Loan Summary page – provides information about the loan, borrower and explanation for the loan

4.  Loan Prospectus page – provides information about the relevant prospectus filed with the SEC

Here is the problem, you have all of these pages to visit with no ability to get back to where you started, thus by the time you finish researching the loan you have to browse back to the ‘Browse Notes’ page, run your filter criteria to narrow the 29,000+ loans down and then manually look for the note you where researching.

b)  No ‘shopping cart’ type of functionality

This is truly the most inconvenient and frustrating.  There is no way to browse thousands of notes while individually flagging, marking or saving notes for further review.  There really is no excuse for this, horrendous design flaw.

c)  No search or advanced filtering functionality

If you know a specific note that you want to review or purchase you can forget about saving time to jump directly to it.  You will have to use the existing and inadequate sorting functionality to find that note.  Filtering capabilities do not exist.

Beer Goggles Included

Again, I am being the skeptic here but is Lending Club promoting the secondary market with little regard for its performance independent of the primary market?  I cannot find any data that shows how investors are doing outside of the primary market? Why not show returns for each seperately?   These are two different markets and each has their own risk profiles.

The secondary market is more important to primary investors than it is to those that want to buy and sell notes on the secondary market.  The secondary market is how primary investors get liquidity, so I am willing to argue that the secondary market is designed for and tailored to attrack originating investors.

If that is the case then where does that leave the folks that cannot originate loans but can purchase on the secondary market?  Are we getting scraps?  What is Lending Club doing to protect secondary market participants from purchasing notes that could be bad investments like ones with a ‘Yield to Maturity’ of -269.54% (yes, that is a real example) or an asking price that is 278.95% above PAR value (same real example)? Why does Lending Club not institute controls on what is an acceptable asking price and Yield to Maturity?

I know some may argue that free markets work best when left alone but I don’t beleive that folks should be left to their own devices when information is indefensibly scarce and difficult, if not impossible, to obtain.

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