LendingClub’s credit marketplace enables borrowers to access capital at competitive rates and investors to earn competitive returns. To ensure equilibrium, adjustments are made in response to investor feedback, marketplace demand, loan performance, and the interest rate environment. In line with that goal, today interest rates are increasing for loan grades A and B, as we continue our efforts to offer investors attractive yields. Overall, portfolio performance continues to be stable versus the prior quarter.
Equity market volatility spiked in October, leading stocks to give back all their year-to-date gains. The CBOE’s VIX index (a measure of volatility) nearly doubled during October amid concerns about rising interest rates, the stability of corporate earnings, tariffs, economic weakness in China, and uncertainty over Brexit’s impact. Meanwhile, U.S. economic growth remains strong, with the Bureau of Economic Analysis reporting GDP up 3.5% during the third quarter. The unemployment rate fell to 3.7%, reaching a 50 year low, and it continues to grind lower.
The credit environment appears reasonably healthy, with credit card delinquency rates broadly stable quarter over quarter.1 While there are variations by category, across consumer credit, performance remains consistent with long-term averages.2 Given where we are in the economic cycle combined with the continued supply-side risk we have been discussing for some time, we have seen some unsecured lenders following suit by tightening credit and/or adjusting pricing on the margins.
The Fed continues along its rate-rising path, implementing another 25-basis point hike (to a target federal funds rate of 2-2.25%) in September. This brings the total number of hikes in 2018 to three. Fed guidance still calls for additional hikes this year and next as it continues to normalize interest rates. In contrast with recent weakness in equity markets, bond markets have so far mostly remained resilient. Despite some short-term jumps, yields on the benchmark 10-year Treasury continued to hover close to 3%.3 While interest rates on consumer credit have risen in tandem with Fed increases, credit card rates in particular have surged, contributing to the strong ongoing consumer demand for our product. By October, average minimum APRs had reached 17%.4
The LendingClub platform makes ongoing enhancements to maintain a balanced marketplace where borrower supply meets investor demand. The platform uses a variety of tools to do this, including interest rates, credit policy, and secondary market sales.
Including changes in grades A and B effective today, interest rates on the platform have been increased four times year-to-date for a total increase of approximately 49 to 114 basis points, depending on subgrade. (We will continue to monitor the interest rate environment to determine whether future rate increases are advisable.)
In addition, we continue to invest in capabilities that will help us prepare for a variety of economic scenarios. Specifically, we’re enhancing our data infrastructure to enable us to run more tests on the platform as well as to support more efficient decision-making.
Projected returns continue to be stable on a portfolio basis relative to last quarter. The projections below incorporate the impact of new forecasts plus interest rate increases taking effect today for A and B grade loans. Interest rates will be continuously monitored and may be adjusted as the environment changes.
Platform summary and projections as of November 6, 2018
As always, we will continue to keep you informed as things change. Please contact us at email@example.com with any questions you might have.
1. Source: Federal Reserve Bank of St. Louis, “Delinquency Rate on Credit Card Loans, All Commercial Banks,” (https://fred.stlouisfed.org/series/DRCCLACBS) 8/24/18.
2. Source: Board of Governors of the Federal Reserve System, “Charge-Off and Delinquency Rates on Loans and Leases at Commercial Banks,” (https://www.federalreserve.gov/releases/chargeoff/chgtop100nsa.htm) 8/21/18.
3. Source: Wall Street Journal, 10/31/18.
4. Source: Bankrate Inc.’s “CreditCards.com Weekly Rate Report,” 10/31/18.
5. “Average Interest Rate” is based on weighted average interest rates using the subgrade and maturity mix for issued loans in September 2018.
6. “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 November 6, 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.
7. “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 be materially worse.
“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.