UPDATE: LendingClub (LC) Slips to Session Low, Shares Down 6%
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(Updated - October 17, 2016 10:06 AM EDT)
LendingClub (NYSE: LC) declined Monday, falling over 6%. On Friday after the market close the company in an SEC filing released a letter from its Chief Investment Officer providing:
a recap of 2016 credit and pricing changes implemented on the platform to date;
an update regarding recent credit performance and recent macroeconomic trends;
a description of pricing changes (as disclosed further below), credit enhancements and supplementing collections efforts; and
updated loss forecasts.
Interest Rates. Interest rates on the Lending Club platform increased by a weighted average of approximately 135 basis points from November 2015 to June 2016. Rate increases were concentrated in grades D through G in order to improve risk-adjusted returns in pockets experiencing higher losses.
Credit Policy Tightening. The credit policy was tightened in April 2016 to remove populations primarily characterized by borrowers with high indebtedness, an increased propensity to accumulate debt, and lower credit scores. In June, the maximum debt-to-income (DTI) threshold (excluding mortgage and the requested program loan amount) across the prime loan program was further reduced to 35% (from 40%). As a result of these changes, the platform no longer approves loans for approximately 9% of borrowers who previously would have been able to obtain a loan under prior underwriting criteria.
Source: U.S. Bureau of Labor Statistics, Labor Force Statistics from the Current Population Survey, October 2016; U.S. Bureau of Labor Statistics, Current Employment Statistics Highlights, September 2016; FreddieMac, House Price Index, June 2016.
Source: Federal Reserve, Consumer Credit (G19) Release, October 2016.
Source: Federal Reserve Bank of New York, Q2 2016.
Source: Federal Reserve Bank of New York, October 2016.
Increasing Interest Rates. As disclosed in the Form 8-K we filed today, effective October 14, 2016, interest rates on the Lending Club platform will increase by a weighted average of 26 bps. Rate increases are concentrated in Grades F and G with marginal changes in other grades. Increased interest rates enable Lending Club to continue to provide borrowers with competitive interest rates and investors with solid risk-adjusted returns. (See further detail in the Form 8-K and below.)
Tightening Credit. In line with actions taken throughout 2016, the thresholds on borrower leverage were tightened on October 12, 2016. The platform will no longer approve loans for certain sub-segments of borrowers who meet a combination of several risk factors such as high revolving debt, multiple recently opened installment loans, and higher risk scores on our proprietary scorecard. Accordingly, approximately 1% of borrowers who previously would have been able to obtain a loan under prior underwriting criteria will no longer be approved.
Supplementing Collections Efforts. Lending Club utilizes a multifaceted servicing strategy and makes enhancements regularly. Over the past several months, we have invested in additional tools to drive collections effectiveness, added new recovery strategies, added a new agency partner and expanded our internal collections team capacity. The early signs of all of these changes are positive and are allowing us to help our borrowers be more successful while driving better recovery rates.
Platform Summary as of October 14, 2016
36-Month & 60-Month Prime Loans
Average Interest Rate
Forecasted Annualized Net Credit Loss (1)
Projected Investor Returns (2), (3)
“Annualized Net Credit Loss” is also known as projected charge-offs. Projected charge-offs vary by loan grade and are based on historical data, expected performance, macroeconomic conditions and other factors. Projected charge-offs are provided as an informational tool, are not a promise of future expected charge-offs and should not be relied upon.
Projected returns are provided as an informational tool, are not a promise of future expected returns and should not be relied upon. Projected returns have been calculated by Lending Club as of October 2016, and are based on Lending Club’s assumptions regarding future interest rates, prepayment rates, delinquency rates and charge-off rates, among other things. Actual returns may differ materially from projected returns if Lending Club’s assumptions regarding such rates are different from actual future rates or if there are changes in other market conditions. Actual returns experienced by any individual portfolio may be impacted by, among other things, the size and diversity of the portfolio, its exposure to particular loans, borrowers, or groups of loans or borrowers, as well as macroeconomic conditions.
Projected returns calculated based on grade and maturity mix for the six weeks ending September 23, 2016.
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