Q2 2018 LendingClub Platform Update
LendingClub operates a credit marketplace where borrowers may access capital at competitive rates and investors may potentially earn competitive returns. To maintain marketplace balance, we adapt and recalibrate often based on a changing macroeconomic 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.
Macroeconomic, credit & platform observations
LendingClub studies a diverse set of data points in managing the marketplace. See below for an update on some of the many factors1 that influence returns on the LendingClub platform:
U.S. economic growth remains steady, with an annual GDP growth rate of 4.1% in the second quarter of 2018. A primary driver of GDP growth over the last 10 years has been a historically low unemployment rate, which is down to 3.9% as of July 2018 from its peak of 10% in 2009. Along with solid unemployment figures, corporations continue to report robust earnings despite rising trade tensions.
This quarter we continued to see a similar trend as we have for the past two years: credit performance across the industry has returned to long-term averages.2 From 2009 to 2014, credit supply was tight, so consumer loans experienced better-than-average loss rates and delivered better-than-average returns. Since then, the supply of credit 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 another 25 basis points in June 2018 and is expecting two additional rate raises this year. June’s increase marks the sixth consecutive quarter of rate hikes, as the Federal Reserve has unwound accommodative policies that helped heal the economy after the downturn a decade ago.
LendingClub makes ongoing enhancements to maintain a balanced marketplace where borrower supply meets investor demand. Supply and demand are dynamic, and when we see areas where we have either excess or moderate investor demand, the platform can be balanced using a variety of tools, including interest rates, credit policy and secondary market sales.
In response to and in anticipation of a higher interest rate environment, interest rates on the platform have been increased three times year-to-date for a total increase of 49 to 109 basis points, depending on grade. (As always, we will continue to monitor the interest rate environment to determine whether future rate increases are necessary.) Separately, several steps were taken this quarter to optimize pricing in targeted populations. Observing the credit supply overall, we began to test a feature in the fourth quarter of 2017 where borrowers can utilize their LendingClub loan to directly pay off existing creditors, and performance to date is in line with expectations.
So far, these actions (as well as other actions taken in 2017) appear to be making an impact on both borrower quality and performance; results will become more definitive as the loans season. As always, we will continue to run new tests to better understand and serve borrowers.
These are all parts of our continuous effort to gain insights into the platform, how we are positioned relative to the market, and to continue to deliver a positive experience to both borrowers and investors.
Updated pricing & return forecast
Investor projected returns as of August 7, 2018 are marginally higher for the platform overall relative to last quarter due to interest rate increases. Please see the summary table below.
Platform summary and projections as of August 7, 2018
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.
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 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.
2 Source: Federal Reserve (https://www.federalreserve.gov/releases/chargeoff/) and Bloomberg.
3 “Average Interest Rate” is based on weighted average interest rates using the subgrade and maturity mix for issued loans in April 2018.
5 “Projected Charge-Off Rate” so known as 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 all loans issued under the Prime Program after August 7, 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 Projected Charge-Off Rate, minus Projected 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.
“Projected 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.
“Projected 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.