To ensure balance in our marketplace, we make periodic adjustments based on investor feedback, marketplace demand, loan performance, and the general interest rate environment. Please see this quarter’s commentary below.
Even with lingering recession concerns, economic indicators including GDP suggest continued stability.1, 2 While there is softness in some regions overall, consumers still appear healthy, with the unemployment rate broadly stable, and payrolls and disposable personal income still rising, albeit more slowly.3
Despite the benign trends in broad measures of consumer financial health, lenders as a group continue to tighten credit.4 The moves reflect efforts to trim exposure to certain pockets of consumer credit, such as credit cards and mortgage loans, and to riskier borrower segments.
The Federal Reserve left interest rates unchanged at its meeting this month, referencing the strong labor market and continued economic expansion, against a backdrop of “muted inflation pressures.5”
LendingClub’s test and learn ethos is core to our DNA. It enables us to prepare for a variety of environments, including the next potential economic downturn. For example, one of our recently added tools has enhanced our ability to detect borrowers who are more likely to default earlier in the loan cycle; we are encouraged by the early results and will undertake similar tests in the future.
We periodically adjust platform products to reflect changes in investor demand and other marketplace factors. As a result, this quarter we are retiring Grade E loans. As of May 7, 2019, we will no longer facilitate new Grade E loans except for certain previously qualified or approved loans; effective July 1, 2019, no grade E loans will be available on the platform. (LendingClub Note investors with allocations to Grade E Notes that correspond to fractions of Grade E loans might consider adjusting their strategy to avoid cash drag.) We view this change as a natural evolution of our dynamic platform that seeks to match consumer demand with investor risk appetite. Grade E loans have historically accounted for a small percentage of volume on the platform.
While there are no interest rate changes now, we continue to actively monitor the interest rate environment to inform potential future changes.
We are comfortable with our overall portfolio position, as we continue to selectively tighten certain higher risk segments, while growing lower risk segments which are in higher demand.
Please see the updated return forecast below. While it is too early to draw definitive conclusions, we are seeing encouraging loss trends in certain loan grades/segments of the portfolio post Q3 2018’s tightening.
Platform summary and projections as of May 7, 20196, 7, 8
We will continue to keep you informed as we make changes to the platform.
Safe Harbor Statement
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: The Conference Board, “Global Business Cycle Indicators,”https://www.conference-board.org/data/bcicountry.cfm?cid=1, 4/18/19.
2. Source: Bureau of Economic Analysis, “Gross Domestic Product, 4th quarter and annual 2018 (third estimate); Corporate Profits, 4th quarter and annual 2018,” https://www.bea.gov/news/2019/gross-domestic-product-4th-quarter-and-annual-2018-third-estimate-corporate-profits-4th, 3/28/19.
3. Source: U.S. Bureau of Labor Statistics, “State Employment and Unemployment Summary,” https://www.bls.gov/news.release/laus.nr0.htm, 4/19/19; Ibid, “Employment Situation Situation-March 2019,” https://www.bls.gov/news.release/pdf/empsit.pdf, 4/5/19; Ibid, “Personal Income, February 2019; Personal Outlays, January 2019,” https://www.bea.gov/news/2019/personal-income-february-2019-personal-outlays-january-2019, 3/29/19.
4. Source: Moody’s Analytics.
5. Source: Board of Governors of the Federal Reserve System, “Federal Reserve issues FOMC statement,” https://www.federalreserve.gov/newsevents/pressreleases/monetary20190501a.htm, 5/1/2019.
6. “Average Interest Rate” is the hypothetical weighted average interest rates we obtained by using the subgrade and maturity mix for issued Prime Program loans in March 2019 and calculating the interest rate that would have applied had such loans been issued following the rate and/or credit policy changes going into effect on May 7, 2019.
7. “Projected 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 Prime Program loans issued following the rate and/or credit policy changes going into effect on May 7, 2019. 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.
8. “Projected Return” is a measure of the estimated annualized return rate on invested principal 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 Expected Charge-Off Rate (w/ Prepayment) minus fees (see “Maximum Expected Fees” for a summary of applicable 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” section of this disclaimer. 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 loan, borrower or group of 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 loan. Past performance is no guarantee of future results.
“Interest Rate” is equal to the weighted average stated borrower interest rate for the loan grade or mix of loan grades (whichever is applicable).
“Projected Fees” for loan purchasers means the aggregate estimated impact of LendingClub’s applicable: servicing fee (1%), collection fee (18%), recovery fee (18%), and administrative fee (0.10%), each as of the date above as well as the impact of interest not earned during the administrative holding period in the first month (2 business days).
“Projected Fees” for Note investors means the aggregate estimated impact of LendingClub’s applicable fees including: investor servicing fee of 1% of the amount of any borrower payments received by the payment due date or during applicable grace periods, and collection fee if applicable as well as the impact of interest not earned during the administrative holding period in the first month (2 business days). 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.