Analysis of Charged Off (Defaulted) Lending Club Notes

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Since joining Lending Club in February 2011, I've had five loans get charged off. You can see them below.

As you can see, they all started as $25 investments, cover 5 out of the 7 investment grades, 2/5 are 36 month, and 3/5 are 60 month. Four out of five of the notes still had more than 80% of the principle remaining to be paid off.

They don't appear to have a whole lot in common at first. Let's dig a little deeper.
charged off lending club notes

What Makes a Lending Club Note Default or Charge Off?

Let's start with the A grade note. Specifically, this was an A4 grade note for $12,000 issued at 7.29%, for 36 months. The intended purpose of the loan was debt consolidation. 179 people funded the note, for an average investment of $67. The borrower also had confirmed income of $10,417 / month. Here's the borrower's stats:

Credit Score Range: 720-724
Earliest Credit Line 01/1998
Open Credit Lines 16
Total Credit Lines 36
Revolving Credit Balance $9,185.00
Revolving Line Utilization 19.40%
Inquiries in the Last 6 Months 0
Accounts Now Delinquent 0
Delinquent Amount $0.00
Delinquencies (Last 2 yrs) 0
Months Since Last Delinquency 44
Public Records On File 0
Months Since Last Record n/a
Months Since Last Major Derogatory n/a

Really no red flags here. The first loan payment was collected on 4/7/11. I received $0.77. Payments continued as agreed until October 2011. Here's the log (from most recent to oldest) of what happened next:

2/17/12 (Friday) Charged off. PAYMENT 120+ past due. Collections efforts exhausted. Recovery unlikely
2/2/12 (Thursday) Collections Agency attempted to contact borrower
12/19/11 (Monday) Collections Agency attempted to contact borrower
11/22/11 (Tuesday) Collections Agency attempted to contact borrower
11/10/11 (Thursday) PAYMENT Failed
11/10/11 (Thursday) Collections Agency attempted to contact borrower
11/1/11 (Tuesday) Collections Agency attempted to contact borrower
10/26/11 (Wednesday) Collections Agency attempted to contact borrower
10/24/11 (Monday) PAYMENT Failed
10/24/11 (Monday) Collections Agency attempted to contact borrower
10/20/11 (Thursday) Engaged external collections agency
10/19/11 (Wednesday) Attempted to collect payment
10/17/11 (Monday) Attempted to contact borrower (left voicemail)
10/17/11 (Monday) Attempted to contact borrower (left voicemail)
10/13/11 (Thursday) PAYMENT Failed
10/13/11 (Thursday) Notified borrower of failed payment (e-mail)

Again, no real red flags. I guess he just stopped making payments. Not cool man. I lost $21.20 in principle on the loan. In total, he cleared over $10,000 by not making his payments. Here's what happened to his credit score after defaulting on his Lending Club loan:

what happens to your credit score if you default on a lending club loan

His credit score dropped 140 points from 720 to 580 by defaulting on his Lending Club loan. I hope that was worth it, buddy.

Looking at the other 4 charged off loans in my portfolio, there are no really obvious common traits. Some people utilize 98% of the credit, some use 0%. Some rent, some have do business with Northpoint mortgage whereas most use the main banks . However, my sample size is really small, so lets look at a much larger sample size…

Common Traits of Charged Off Lending Club Loans Versus Fully Paid Loans

Lending Club has released a massive 50 mb data dump of their loan data. So let's dig into that a bit. Here's my analysis of charged off and defaulted Lending Club loans versus loans that were fully paid off. These are all arithmetic averages.

,Charged Off/Default,Fully Paid
Debt-to-Income Ratio >10%,70%,44%
Revolving Line Utilization,54%,44%
Inquiries in the Last 6 Months,>1,<1 Monthly Income,$5179,$5958 [/table] While this is interesting, it doesn't help us too much when it comes to selecting loans to invest in. Check back soon as I'm going to look into using a genetic algorithm on the Lending Club stats. Hopefully I'll be able to find the best filters for 2013 Lending Club notes to maximize return and minimize default risk.

6 thoughts on “Analysis of Charged Off (Defaulted) Lending Club Notes”

  1. I tried LendingClub with a 1000$ test. I used the recommended automatically selected portfolio of 50 notes. So far, a little over a year later, I’m at 2.04% rate of return. That’s pretty awful if you ask me. There are 5 charged off notes, and another at 120 days which no doubt will be charged off too. So yeah, let me get this straight: I’m tying up my money for 5 years, and get an abysmal 2% return? No thanks. I turned off the auto investment option and am taking my repayments out.

    I contacted LendingClub and they gave me some canned response and advised me to invest even more so it’s “better diversified.” Hah, no thanks.

    If you want to give some piece of trash 10 grand in free money, by all means, try LendingClub and give them your hard-earned $$.

  2. Just started with LendingClub, and am already figuring I’m going to be in for some hard lessons due to the way I set-up the Automatic Investing filter/allocation the first time. However, I did work for a company a while ago that sold to the sub-prime credit market back in the 1990’s and am probably a little more familiar with how this works than the average noobie investor.

    In any regard, the one example posted above, it’s a risk that we all take, there’s no way to get a 100% perfect 0 charge off portfolio. With the one A note listed above, there could be any number of reasons why this one borrower defaulted, some insidious, some under the “Life happens”. A medical condition, or a loss of a job, a divorce, or identity theft could have played a role in this one borrower’s situation. The fact that his credit score remains in the <600 range and was sliding down even more indicates to me that something chronic occurred, where something probably really hit this borrower hard. It could also be that they were planning to do this all along, even closing their bank account to stop the payments.

    With that said, with the "debt consolidation" and the like notes, I wish that Lending Club would set those notes up so that the funds get disbursed directly from LC to the other notes, by-passing the borrower who may be tempted to keep some/all of the cash themselves. Same thing goes for "Auto" and other notes, that the money never sees the light of day in the borrower's account, but moves directly to the auto seller. Maybe they are already doing this, but I haven't seen anything like it and it would at least provide some assurance that the money isn't going for another unstated purpose.

  3. Thanks for your analysis.

    After reviewing my 2012 year-end statement, I found that I earned $973 in interest but also had $876 in charged-off loans. After $56 in service fees, I had a net profit of $42.

    I invest $50 per loan and have been currently selecting mainly A & B graded loans (although half of the charge-offs last year were lower grades). It’s amazing how many people stop paying very soon after they receive a loan.

    I’ll give them another year but if this keeps up I think I am going to bail out and put my money elsewhere.

    Maybe there’s a good reason that banks aren’t lending money to people…

  4. I have only been doing the Lending Club investment now for 2 years. I am doing fairly well with it. I say this with a big * . Currently my NAR is 13.5, with a fair number in the 31-120 day late range if all those default I anticipate being near 10.5. So my track record is only slightly above the “average” investor. My first year was a variety of loans, I went with what looked good, I tried to read descriptions and see if load applicants were giving good reasons…End result, big mistake. Second year I got more serious, I have also downloaded the Data dump on a regular basis and have run a mountain of queries against the data. As stated in the article a lot of data seems to be wildly diverse for figuring out if a loan will default or not. I will not get into an entire analysis of all the data as that would take an entire article worth of writing myself. However I will point out two of the worst culprits statistically for defaulting loans. 5 year (60 month) loans default at a rate of %6.97 to 3 year (36 month) loans at %4.37. And unfortunately I lost the numbers on this one, But loans $25,000+ default at a horrible rate to those of lesser amounts requested. (Which is not to say less is better $10,000- actually start to swing up in defaults again.

    Good luck with the number crunching. Every percentage point goes a long way.

    • Thanks for the input, Jason! It’s definitely not easy to find the perfect loan that offers a fair return and low risk of default. Like you, I spent a lot of time researching and analyzing why they wanted the loans at first. Now I realize that it’s all just a numbers game and the numbers tell a better story than reading individual reasons for loans. I have been putting my money into C and D rated notes for the past few months and haven’t spent much time coming up with a lending club investment strategy. Definitely on my 2013 to do list!


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