Q1 2018: LendingClub Platform Update
LendingClub operates a credit marketplace where borrowers can access capital at competitive rates and investors can earn competitive returns. To maintain marketplace balance, we adapt and recalibrate often based on a changing macro environment, competitive insights, supply and demand dynamics, credit performance, investor feedback and more. Please see below for our quarterly update on the credit environment and platform performance.
Q1 2018 summary
During the first quarter of 2018, we continued to observe that credit performance across the industry is returning to long-term averages and interest rates are rising across fixed income assets.1 On the platform, we continue to see both of these trends in action: investors show higher demand for higher quality assets and are looking for higher interest rates overall.
In response to the changing environment and investor feedback, we are first and foremost increasing interest rates for grades A-C effective today (May 8). (As always, we will continue to monitor the interest rate environment to determine whether future increases are necessary.) We are also taking two additional steps effective today as part of our ongoing optimization of the platform: 1) eliminating some higher risk borrower populations primarily in grades D-E to match investor demand; and 2) capping loan sizes at the borrower’s requested amount in certain D and E loans.
Macroeconomic, credit & platform observations
LendingClub studies a diverse set of data points in managing the marketplace. We look at macroeconomic data, competitive indicators, marketplace supply and demand dynamics, credit performance, and investor feedback, among other factors. See below for an update on some of the many factors2 that influence returns on the LendingClub platform:
U.S. economic growth remains slow but steady, with annual GDP growth rate of 2.3% in the first quarter of 2018. A primary driver of GDP growth since the financial crisis has been a historically low unemployment rate, which is down to 3.9% as of April 2018 from its peak of 10% in 2009.
This quarter we continued to see a similar trend as we have for the past two years: credit performance across the industry is returning to long-term averages.1 From 2009 to 2014, credit supply was tight, so consumer loans experienced better-than-average loss rates. Since then, credit supply has increased, and the industry has seen a return to long-term average delinquency rates.
The overall interest rate environment is clearly shifting from historic lows. The Federal Reserve increased interest rates by 25 bps in March 2018 and is expecting two additional rate hikes this year. March’s increase brings the total number of increases over the last 12 months to four, as the bank has gradually unwound accommodative policies that helped heal the economy after the Great Recession a decade ago.
On the platform itself, we have observed the effect of these trends in action:
- Across the credit industry we’ve seen a return to long term average loss levels—this trend has been echoed on the platform as well. We updated our credit model in fall 2017 in part to address changes in the credit environment and we continue to optimize the model regularly. It’s too early to make conclusions, but we’re seeing better borrower profiles at the portfolio level on the platform.
- In part due to credit normalization, we are seeing higher investor demand for lower risk (i.e. higher quality) grades on LendingClub’s platform. We also see investors seeking higher interest rates given the increasing interest rate environment.
LendingClub makes ongoing enhancements to maintain a balanced marketplace where borrower supply meets investor demand. For investors, our aim is to deliver access to high-quality borrowers at a competitive yield.
This quarter we continue our ongoing platform enhancements by doing the following effective May 8, 2018:
- Increasing interest rates by a weighted average of 10-45 basis points for grades A-C3;
- Capping loan sizes at the borrower’s requested amount in certain D and E loans; and
- Eliminating some higher risk borrower populations primarily in grades D-E to match investor demand.
Updated pricing & return forecast
Loss forecasts as of May 8, 2018 are marginally higher for the platform overall relative to last quarter. Projected weighted average return for the platform overall is substantially similar for new vintages. Updated forecasts also include the impact of interest rate and credit policy adjustments described above. Please see the summary table below.
Platform summary and projections as of May 8, 2018
As always, we will continue to keep our investors apprised of changes on the platform. Please feel free to reach out to firstname.lastname@example.org with any questions. We look forward to continuing to serve you as an investor for years to come.
Some of the statements above are “forward-looking statements.” The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “outlook,” “plan,” “predict,” “project,” “will,” “would” and similar expressions may identify forward-looking statements, although not all forward-looking statements contain these identifying words. Actual performance of the overall platform has differed from projected performance in the past, and could differ in the future. Factors that could cause actual results to differ materially from those contemplated by these forward statements include: increases to unemployment rates, particularly if such increases are concentrated in populations with a greater propensity to take loans facilitated by our platform; changes to consumer credit behaviors; stagnation or reduction in the growth of the nation’s gross domestic product or uncertainties created by political changes associated with a change in presidential administrations, the Company’s ability to continue to attract and retain new and existing retail and institutional investors; competition; and demand for the types of loans facilitated by the Company and those factors set forth in the section titled “Risk Factors” in the Annual Report on Form 10-K, filed with the SEC. LendingClub may not actually achieve the plans, intentions or expectations disclosed in forward-looking statements, and you should not place undue reliance on forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in forward-looking statements. LendingClub does not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
1 Source: Federal Reserve (https://www.federalreserve.gov/releases/chargeoff/) and Bloomberg.
2 Investor returns are also impacted by other factors, such as prepayment rates, the size and diversity of a portfolio, the exposure to any single Note or loan, borrower or group of Notes, loans, or borrowers, as well as other externalities and macroeconomic conditions.
3 Interest rates are increasing by 0.10% for grade A, 0.15% for grade B, and 0.45% for grade C, respectively, based on the weighted average interest rates using the subgrade and maturity mix for issued loans in Q1 2018.
4 “Average Interest Rate” is based on weighted average interest rates using the subgrade and maturity mix for issued loans in March 2018.
5 “Projected Charge-Off Rate” also known as Expected Charge-Off Rate, is LendingClub’s projection of the aggregate dollar amount of loan principal charged-off, net of any amounts recovered and accounting for the impact of amounts prepaid, as an annualized percentage of the aggregate dollar amount of loan principal for all loans issued under the Prime Program after May 8, 2018. Projected Charge-Off Rate is not a promise of future results and may not accurately reflect actual charge-off or prepayment rates. Actual charge-off and prepayment rates experienced by any individual portfolio may be impacted by, among other things, the size and diversity of the portfolio, the exposure to any single loan, borrower or group of loans or borrowers, as well as macroeconomic conditions.
6 “Projected Return” is a measure of the estimated annualized return rate on invested principal (meaning for all funds then invested in Notes or loans) using an internal rate of return (IRR) methodology using a monthly term. Monthly cash flow projections are calculated as follows: the scheduled principal and interest payments based on the Interest Rate, minus the amount of such principal and interest payments lost due to the Expected Charge-Off Rate, minus Expected Fees. Monthly IRR figures are annualized by multiplying the monthly IRR figure by 12. Projected Returns are calculated based on grade and maturity mix described in the “Average Interest Rate” disclaimer above. Projected Return is not a promise of future results and may not accurately reflect actual returns. Actual returns experienced by any individual portfolio may be impacted by, among other things, the size and diversity of the portfolio, the exposure to any single Note or loan, borrower or group of Notes, loans or borrowers, as well as macroeconomic conditions. Individual results may vary and projections are subject to change. The information presented is not intended to be investment advice, guidance, or a guarantee of the performance of any Note or loan. Notes are offered by prospectus filed with the SEC and investors should review the risks and uncertainties described in the prospectus prior to investing. Actual results may vary.
“Interest Rate” is equal to the weighted average stated borrower interest rate for the loan grade or mix of loan grades (whichever is applicable) using the grade and maturity mix described in the “Average Interest Rate” disclaimer.
“Expected Charge-Off Rate” is defined above as “Projected Charge-Off Rate.”
“Expected Fees” for loan purchasers means the aggregate estimated impact of LendingClub’s then-applicable: servicing fee (1%), collection fee (18%), recovery fee (18%), and an administrative fee (0.10%), each as of the date above.
“Expected Fees” for Note investors means the estimated impact of all applicable fees as well as the impact of interest not earned during the administrative holding period in the first month (2 business days). Applicable fees are LendingClub’s service fee and collections fee (if applicable). LendingClub charges an investor service fee of 1% of the amount of any borrower payments received by the payment due date or during applicable grace periods. The service fee is not an annual fee and may therefore reduce annual investor returns by more or less than 1%. We estimate the collection fee based on expected charge-off rates and the expected number of late payments that will be collected on past due loans with a given grade and term. For more detail on LendingClub fees for Note investors, please click here. Individual results may vary and projections can change. Past performance is no guarantee of future results.