Q3 2017: An Update from our CIO
A core strength of LendingClub’s marketplace model is the ability to incorporate data insights quickly in order to responsibly adapt for the benefit of borrowers and investors. We share insights into platform performance regularly to give investors a sense of what we are observing on the platform and what they can expect.
A range of factors influence returns on the LendingClub platform, including the overall U.S. economy, borrower performance, and prevailing interest rates. Key factors1 that influenced third quarter performance, among others, include:
- Economic Backdrop. The American economy remains robust, but growth continues to be relatively modest. The unemployment rate has changed little over the past year, measuring at 4.2% as of September 2017. Meanwhile, the annual GDP growth rate increased to 3.0% in the third quarter of 2017.
- Supply of Credit. After the Great Recession supply of credit was very tight for a number of years as institutions were making fewer loans to borrowers, and the amount of those loans was smaller. The consumer credit market experienced better-than-average loss rates during this period. In the past two years we have seen a significant increase in the availability of credit and U.S. consumers have taken on increased amounts of debt. As a result, loss rates for the past two years for consumer credit have increased to more average long-term levels, as seen in recent comments from credit card issuers.
- Borrower Performance. As we have noted several times over the past year and half, and consistent with industry trends, we saw an increase in charge-off rates on our platform starting in early 2016, with the increase more concentrated in the higher risk grades. We proactively implemented a series of credit tightening measures to address that trend starting in 2016 and have continued to do so into 2017. In addition to credit tightening, in September 2017, we rolled out the fifth-generation credit model and revamped the criteria for underwriting and pricing loans facilitated on our platform in order to bring even more predictive power to credit decisioning.
- Natural Disasters During the quarter, in line with guidance from the FDIC, we took swift action to help borrowers affected by hurricanes Harvey and Irma stay on track with loan payments. We are also actively working with borrowers affected by the Northern California wildfires to do the same. (LendingClub does not have borrowers located in Puerto Rico.) While we expect to see some level of initial delinquencies related to any natural disaster, we also expect to see a high degree of normalization as the initial shocks to affected communities subside. For the vast majority of investors who have diversified portfolios, we expect to see limited long-term impact to returns from these disasters.
- Interest Rates. The overall interest rate environment remains low, with the Federal Reserve maintaining its Target Rate of 1-1.25% in September 2017. In its September release, the Federal Open Market Committee (FOMC) noted that despite a strengthening labor market and rising economic activity in the third quarter, the FOMC’s continued accommodative stance reflects a desire to support “further strengthening in labor market conditions and a sustained return to 2 percent inflation.”
- LendingClub Rates. On the LendingClub platform, we are implementing decreases in two A subgrades (A2 and A3) this quarter, from 7.07% to 6.08% for A2, and from 7.21% to 6.72% for A3. This reflects the shift to higher quality borrower profiles we are seeing and our expectations on charge-offs. Overall, we expect pricing for A grade loans to remain relatively stable.
Observations on Platform Performance
The majority of the platform continues to exhibit stable performance as investors experience the benefit of a series of credit tightening measures that we began implementing in early 2016 and continued through 2017. Our updated estimates for loss performance of new originations remains stable. While each investor’s portfolio is unique, and returns will be based on the performance of the individual Notes or whole loans selected for investment, projected investor returns for the overall platform remain largely unchanged from that shared in September. Projected returns continue to range from approximately 4% to 8% (see below).
In the third quarter of 2017, delinquency rates across A, B and C grade loans, which represent the large majority (roughly 80%) of LendingClub loan originations, continued to perform in line with forecasts and delinquency rates remain below peaks seen in the second and third quarters of 2016.
Among higher risk grade loans, consistent with the trend over the last 18 months, we are seeing some increases in delinquency levels and prepayment rates. The rollout of the G5 model and associated policy changes have reduced approvals to riskier borrowers in these grades.
However, given the trend of higher delinquencies and prepayments in the F and G grades, LendingClub plans to tighten its volume of F and G grade loans and proactively test new capabilities and refinements to our underwriting and pricing criteria that we believe will lead to a better outcome for both our borrowers and investors. During this testing phase, we will not be making F and G grade Notes available on our platform. F and G grades represent less than 3 percent of volume on the platform, thus we anticipate minimal or no impact to the investment experience for the vast majority of investors.
We will update investors on further developments in future quarterly commentaries. In the meantime, please refer to the LendingClub Help Center for questions regarding changes to our F and G offering, or contact Investor Services at 888-596-3159.
We continuously refine our methodology and update loss forecasts quarterly to give investors a sense of what they can expect. This quarter, overall loss forecasts are remaining stable for the platform relative to last quarter. Projected investor returns are also substantially similar to last quarter. Please see the summary table below.
Platform Summary and Projections as of November 7, 2017
Our agile process of continuous credit model enhancements and quarterly loss forecasting helps us anticipate and adapt to risks or credit cycle changes faster on behalf of borrowers and investors alike. We believe the difference between LendingClub and other financial institutions is the degree of transparency we provide to investors so they can make quick and informed decisions on their portfolios.
As always, we will continue to keep our investors apprised of changes on the platform. Please feel free to reach out to email@example.com 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.
1Investor 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“Average Interest Rate” the hypothetical loan grade and term mix used to calculate weighted average interest rate was generated by applying the fifth generation credit model to certain applications received October 2, 2017 through October 29, 2017. This hypothetical mix is for illustrative purposes only and is not a guarantee or indication of future inventory distribution. This analysis uses elements of backtesting. Backtesting is hypothetical and is provided for information purposes only. Backtested data has inherent limitations, including that historical borrower populations are not necessarily indicative of future borrower populations.
3“Projected Annualized Net Credit Loss (w/ Prepayment)” 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 November 7, 2017. Projected Annualized Net Credit Loss (w/ Prepayment) 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.
4“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 Annualized Net Credit Loss (w/Prepayment).”
“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.