When we invest in a portfolio of p2p loans, we expect that the loans will pay off, the borrowers will use the money responsibly, everyone makes money and its a win/win situation for all. Thankfully, most of the time, that is what happens. However, it doesn't always happen. Sometimes we get some non-payers or late payers. How are these accounts handled? Let's look at the Collections process at Lending Club.
If you have ever asked or had a friend or family member ask you 'Are these loans safe?' then you can show them that the few times a loan starts paying late, this is what Lending Club does about it.
Before we get to the stages, its important to know and understand that the personal credit report that Lending Club uses and is listed on the loan listings is from TransUnion. However, like many banks, mortgage companies and credit card companies, they report to all 3 major bureaus. This is good for us.
Grace Period 1-15 Days Late
The first period when a payment is late is the Grace Period. This is the period where it is between 1 and 15 days late. LC initiates the process here with calls and daily emails. They do additional attempts to run the ACH after it turns up as an NSF (Not Sufficient Funds) the first time and they do some general Skip Tracing work to verify that the borrower didn't suddenly move in the middle of the night and is unable to be found. This is the stage that is MOST likely of all to get back to Current On time pay status as sometimes a single payment is late or a borrower changes bank accounts so the ACH does not go through.
Per our account statements, we don't really get to see the difference between Grace and the next stage as it is all lumped together. The only place where we see Grace Period is online when we log in to our accounts.
Early Late Period 16-30 days Late
This next period includes the daily calls and emails again and here the emphasis is made on credit rating/score where they remind the borrower that they can maintain their good credit by paying now before they report this missed payment to the credit bureaus.
Remember that based on LC's own criteria and our own filters, most all borrowers have pretty good, very good or excellent personal credit. As many as 90% of loan applications do NOT pass front end underwriting at LC. Those that already have good credit are the most likely to understand the importance and value of keeping good credit.
At this stage, Lending Club brings in one of 6 collection agencies that they work with to help get the payment in before having to report it to the credit bureaus. So aside from leveraging the maintenance of good credit, LC brings in professionals to help get the payment in at this stage. This is part of what we pay our lender servicing fee to do since LC has no expertise in collections but these companies do.
Tip #1: According to Lending Club's own reported information to investors, in the 6 month period of April to October 2012, the 6 month average (6 months into the loan term) is 98.4% of loans still being Current. This means going the first 6 months without a late payment. This is important since early payment default hits us the hardest financially as investors. Watch your first 6 months pay history on your loans. It tells us alot about what is likely to happen over the entire loan term.
Of the 1.6% of loans remaining, more than half or 0.9% are actually fully paid off within this first 6 months of the loan term (this happened to one of my loans as well) and only 0.7% fall within one of these two stages of Grace Period or Early Late. 0.7% is a pretty low number for that 'Is this safe' question.
Per Lending Club's own reported information to investors, if a loan is in 0-30 days late or Early Late period, between April and October 2012 there was still only a 0.1% default rate and a 0.4% chargeoff rate from these loans. This 0.1% default rate applies if, and this is a BIG IF, the loan NEVER gets past 31 days late. In other words, having multiple payments late between 0-30 days is better for us than having even 1 31-60 day late pay. This is extremely helpful for us and our loan portfolio management when we get some late pays.
Tip #2: Watch your late pay history diligently to see if you stay in Early Late stage, go back to Current, or move to a later Collection stage. Remember even five 0-30 day lates is better than just one 31-60 day late pay in terms of the likelihood of our loan going to term and paying us out.
In Part 2, I will examine the remaining Collection stages that Lending Club uses, and show you the magic number to avoid. This number is the place where more than 50% of the loans that reach this point go to Default or Chargeoff.