Peer to peer lending

[brewer12345]

Personally, I have just been accumulating cash and awaiting opportunities. They do come up from time to time and when it happens I usually buy with both hands. YMMV.

[bamsphd]

Good to see you back on the board Bunny. Sorry to hear about the divorce, but jealous you got a kid out of the deal.

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Originally Posted by cute fuzzy bunny Clearly there are warts and risks, but I'm still waiting for someone to tell me what else I'm supposed to do with 5 years worth of cash, other than shove it in a mattress or put it in a checking account or other cash instrument paying 1% or less. Still not hearing anything.

Yup. Your choices are watch inflation evaporate your money, or reach for yield and roll the dice. Neither choice is too attractive. I've continued buying TIPS at auction for my five-year-emergency-fund bond ladder despite their negative real yield. I can understand why you might prefer to roll the dice.

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Originally Posted by cute fuzzy bunny I've said several times that I expect defaults to go higher in a bad market, and I wish I had collateral on the notes. That having been said, a 200 point drop in your fico score and being denied credit for 7 years is a pretty good stick.

If you are suggesting that after a bankruptcy it will be difficult for an individual to get credit, I believe you are mistaken. My understanding is that because there is a waiting period before an individual can file a second bankruptcy, most individuals who file bankruptcy are actually deluged with credit offers. Though it does often come as a surprise to them.

[photoguy]

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Originally Posted by cute fuzzy bunny Clearly there are warts and risks, but I'm still waiting for someone to tell me what else I'm supposed to do with 5 years worth of cash, other than shove it in a mattress or put it in a checking account or other cash instrument paying 1% or less. Still not hearing anything. You're also still sweating the defaults. I don't care, and I suspect that most people who have read and understood the p2p process don't either.

What is the purpose of cash in your asset allocation? In my case, I have multiple years of cash for two reasons:

1. to ride out market crashes so I don't have to sell equities during a downturn
2. to provide liquidity which could especially be useful to rebalance during a downturn.

If you have the same reason for holding cash, I think investing in P2P and Junk as an alternative is a mistake -- during a recession junk and p2p will plummet because of defaults and then you will lose the ability to pursue either option 1 or 2.

If you just have excess cash and don't need it for either option 1 or 2, then I think you have a whole slew of other alternatives for investing which should be considered as alternatives. E.g., in a simple case you could put the money in equities, real estate, commodities, gold, or any number of assets that have high expected returns.

[bamsphd]

This thread made me curious enough to at least glance at the prospectus.
https://www.lendingclub.com/info/prospectus.action

I became less interested when I saw:

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If we were to become subject to a bankruptcy or similar proceeding, the rights of the holders of the Notes could be uncertain, and payments on the Notes may be limited and suspended or stopped. The Notes are unsecured and holders of the Notes do not have a security interest in the corresponding member loans or the proceeds of those corresponding member loans. The recovery, if any, of a holder on a Note may be substantially delayed and substantially less than the principal and interest due and to become due on the Note. Even funds held by LendingClub in trust for the holders of Notes may potentially be at risk.

You are making an unsecured loan to a dot-com.

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We have incurred net losses in the past and expect to incur net losses in the future. If we become insolvent or bankrupt, you may lose your investment. We have incurred net losses in the past and we expect to incur net losses in the future. As of March 31, 2012, our accumulated deficit was $53.4 million and our total stockholders’ deficit was $48.5 million. Our net loss for the year ended March 31, 2012, was $11.9 million. Since inception we have operated at a net loss and a cash-flow deficit and expect to do so until sometime in calendar year 2013, depending on our growth strategy and our success in meeting such strategy.

Which has never made money.

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The U.S. federal income tax consequences of an investment in the Notes are uncertain. There are no statutory provisions, regulations, published rulings, or judicial decisions that directly address the characterization of the Notes or instruments similar to the Notes for U.S. federal income tax purposes. However, although the matter is not free from doubt, we intend to treat the Notes as our indebtedness for U.S. federal income tax purposes. As a result of such treatment, the Notes will have original issue discount, or OID, for U.S. federal income tax purposes because payments on the Notes are dependent on payments on the corresponding member loan. Further, a holder of a Note will be required to include the OID in income as ordinary interest income for U.S. federal income tax purposes as it accrues (which may be in advance of interest being paid on the Note), regardless of such holder’s regular method of accounting.

We don't know for sure how you will be taxed. However, we plan to make you pay taxes as though you were paid all interest on time, even if you do
not receive it.

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if we receive any principal and interest payments from a borrower after the maturity date of a five year term loan, we may retain 100% of these payments and are not obligated to distribute those payments to you.

We will not give you anything paid by the borrower after five years.

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If payment amounts on a delinquent member loan are received from a borrower member more than 30 days after their due date, then we, or, if we have referred the delinquent loan to an outside collection agency, that collection agency, will retain a percentage of any funds recovered from such borrower member as a service fee before any principal or interest becomes payable to you from recovered amounts in respect of Notes related to the corresponding member loan. Collection fees range up to 35% of recovered amounts (excluding litigation).

We will keep around a third of any payments made more than 30 days late.

I'm not a lawyer. The comments above reflect my best layman's guess on what the prospectus is saying. I think I'll stick with negative interest rate TIPS instead.

[cute fuzzy bunny]

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Originally Posted by bamsphd Yup. Your choices are watch inflation evaporate your money, or reach for yield and roll the dice. Neither choice is too attractive. I've continued buying TIPS at auction for my five-year-emergency-fund bond ladder despite their negative real yield. I can understand why you might prefer to roll the dice.

For what its worth, I almost feel like we're being herded away from safer investments towards ones where its easier to pluck our money away.

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If you are suggesting that after a bankruptcy it will be difficult for an individual to get credit, I believe you are mistaken. My understanding is that because there is a waiting period before an individual can file a second bankruptcy, most individuals who file bankruptcy are actually deluged with credit offers. Though it does often come as a surprise to them.

I'm suggesting that having a 200 point fico drop and then being unable to get credit, or getting it at a ridiculously high rate is a good motivator to pay your loan. I didn't say anything at all about bankruptcy.

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Originally Posted by photoguy What is the purpose of cash in your asset allocation? In my case, I have multiple years of cash for two reasons: to ride out market crashes so I don't have to sell equities during a downturn to provide liquidity which could especially be useful to rebalance during a downturn. If you have the same reason for holding cash, I think investing in P2P and Junk as an alternative is a mistake -- during a recession junk and p2p will plummet because of defaults and then you will lose the ability to pursue either option 1 or 2.

I have a 3rd criteria: make the most from my cash while its sitting there, definitely don't lose ground to inflation.

We already saw p2p during a recession, and likely the worst recession we'll see in our lifetimes (crossing fingers), and the default rate was lower than my average interest rate. There is a track record of 5 years of positive returns by quarter. I understand the risks, but feel the reward is better.

If my defaults rise from <5% to 15%, I see nothing at all that would change the income/cash flow in the near to medium term so I'd be able to use your options 1 and 2 at will. The only thing I can't make it do is output more cash on demand without selling notes (not a huge deal) but I don't need that. All I need is the ability to squeeze 1000-2500 a month in income out of it. While heavy defaults would reduce my future payments, even a bad recession would likely leave me still making money, and more than any reasonable bond or cash instrument will, at least at this time.

Again, what are the suggested alternatives that aren't losing money to inflation?

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If you just have excess cash and don't need it for either option 1 or 2, then I think you have a whole slew of other alternatives for investing which should be considered as alternatives. E.g., in a simple case you could put the money in equities, real estate, commodities, gold, or any number of assets that have high expected returns.

I have all of those, this is to earn money on my cash buffer. "more of the other stuff you already own a lot of" isn't a good option. I did say up front that this was a 3-5% allocation.

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Originally Posted by bamsphd This thread made me curious enough to at least glance at the prospectus.

I think you read all the worst booga booga stuff the lawyers insisted on sticking in there, and frankly I have no idea why they say that. The notes are held by an actual bank, and LC has a backup company primed and ready to go to service the notes cash flow in the event LC goes out of business. Since service fees (usually <.5%) are paid monthly, the backup transaction company would find it financially appealing to take up the work so it'd be better than a simple contractual requirement.

By the way, the same types of warnings on purchasing equities would say "This security can and may drop in value to zero four seconds after you buy it, you'll never get your money back, and it might drop to a penny and stay there for a hundred years". Yeah, who'd ever buy that crap?

Suffice it to say I do a lot of due diligence on most things, and money falls out of just about everything I touch. If there is too much perceived risk against the certainty of losing 5-10% of your cash's value to inflation or poor cash returns over the next 3-5 years...then do that instead!

[brewer12345]

It has been obvious that you are convinced that this is a great idea that cannot lose. Good luck. At least take one piece of advice: no more than 5% of your portfolio should be in this stuff.

[cute fuzzy bunny]

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Originally Posted by brewer12345 It has been obvious that you are convinced that this is a great idea that cannot lose.

Never said that. Not even a little. I think its the best idea I can come up with to avoid the certainty of my emergency cash pile losing money to inflation, and so far nobody else has come up with any other ideas other than a) buy more equities, b) lose money on bonds or c) lose money putting it in cash instruments. I already have all of the equities I want, and I'm not too interested in losing money if I have an alternative.

I believe I've repeatedly characterized this as "likely to make money, historically it has, even through a difficult economic time, and its the best option I have right now.", and I've repeatedly asked for workable options. Not hearing any.

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Good luck.

Thanks. I think we all need a little luck.

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At least take one piece of advice: no more than 5% of your portfolio should be in this stuff.

You'd almost think that you read this stuff...

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Originally Posted by cute fuzzy bunny Would I put 500k into it? Nope. I consider this the same as a precious metal or other 3-5% asset class.

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Originally Posted by cute fuzzy bunny I did say up front that this was a 3-5% allocation.

I think I said it two other times, but I'm too lazy to look it up.

[jayc]

[QUOTE=cute fuzzy bunny;1240786]
Again, what are the suggested alternatives that aren't losing money to inflation?
QUOTE]

I will take my chances any day against inflation vs unsecured loads with a bunch of financial ne'er-do-wells via a dot.com company.

[JDARNELL]

This has been a good thread and discussion. Clearly we all have different levels of risk we are willing to accept and different level of investment knowledge. Something at some point I might be interested in if I ever have time to get around to doing it. Just too many competing priorities right now.

Something that I have been doing for years is buying church bonds. Over time though I have moved from compound to simple. Main reason has been to continue to add issues and increase diversification. Portfolio return is in the high seven range now which has fallen as with issue rates. Once I got a ladder in place I now I go for the longest duration I can get knowing that they will be called sooner.

JDARNELL

[brewer12345]

Quote:

Originally Posted by JDARNELL This has been a good thread and discussion. Clearly we all have different levels of risk we are willing to accept and different level of investment knowledge. Something at some point I might be interested in if I ever have time to get around to doing it. Just too many competing priorities right now. Something that I have been doing for years is buying church bonds. Over time though I have moved from compound to simple. Main reason has been to continue to add issues and increase diversification. Portfolio return is in the high seven range now which has fallen as with issue rates. Once I got a ladder in place I now I go for the longest duration I can get knowing that they will be called sooner. JDARNELL

Can you talk about these? I have heard of banks and other institutions doing church loans, but have never heard of church bonds.

[cute fuzzy bunny]

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Originally Posted by jayc I will take my chances any day against inflation vs unsecured loads with a bunch of financial ne'er-do-wells via a dot.com company.

Perhaps a lack of unnecessary risk aversion is why I'm stupidly rich and retired in my 30's? Just sayin'...

The average fico score I'm lending to is over 700 (so much for the "ne'er do wells) and in case you haven't noticed, everyone has a .com these days, while these notes are written by an actual bank.

My information says that for the last 5 years, I'd have made more money as a % gain in LC than with pretty much any other investment product, and inflation ate away pretty well at standing cash. One works to maintain cash value, one persistently doesn't. Do the math.

Of course, we could go with the thesis that there really isn't any inflation lately and won't be, which makes me wonder why every single bill I have is at least 20% higher than it was 5-6 years ago.

[brewer12345]

Quote:

Originally Posted by cute fuzzy bunny Perhaps a lack of unnecessary risk aversion is why I'm stupidly rich and retired in my 30's? Just sayin'... The average fico score I'm lending to is over 700 (so much for the "ne'er do wells) and in case you haven't noticed, everyone has a .com these days, while these notes are written by an actual bank. My information says that for the last 5 years, I'd have made more money as a % gain in LC than with pretty much any other investment product, and inflation ate away pretty well at standing cash. One works to maintain cash value, one persistently doesn't. Do the math. Of course, we could go with the thesis that there really isn't any inflation lately and won't be, which makes me wonder why every single bill I have is at least 20% higher than it was 5-6 years ago.

I see that giant chip on your shoulder from years ago remains perched where it was.

[cute fuzzy bunny]

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Originally Posted by brewer12345 I see that giant chip on your shoulder from years ago remains perched where it was.

Funny, I was going to say the same thing about a number of you folks!

I'm afraid I find the signal to noise ratio here somewhat worse than the last time I was here. I'm not getting anything out of this, and it seems many people don't want me to put anything into it either.

[brewer12345]

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Originally Posted by cute fuzzy bunny I'm afraid I find the signal to noise ratio here somewhat worse than the last time I was here. I'm not getting anything out of this, and it seems many people don't want me to put anything into it either.

Is this because we don't agree with you? Or just that we are unwilling to bow down before your obviously superior intellect?

I think you are a bright guy who usually has interesting stuff to talk about, but somehow every discussion/debate founders on a certain, well, call it obtuseness or inflexibility. You haven't gotten where you are by not being able to make decisions and stick with them, but sometimes I wonder if you would not benefit from considering other points of view.

I personally couldn't care less what you do with your portfolio. That said, I think we are in an environment where the whole planet is chasing yield and not doing so very carefully. When that happens it is usually a time to be very careful. I learned my lesson about making what would be smart investments except for the fact that everyone else is pissing into the well.

[Texas Proud]

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Originally Posted by cute fuzzy bunny Funny, I was going to say the same thing about a number of you folks! I'm afraid I find the signal to noise ratio here somewhat worse than the last time I was here. I'm not getting anything out of this, and it seems many people don't want me to put anything into it either.

I just think that this is one of those topics where people have strong opinions and think the other guy is not looking at the topic the way it should be....

As for investing in P2P lending, I think it can make a good return for a modest to higher risk... nothing wrong with that...

I also think that to make a better return, you have to put some effort into it and pick loans that meet what you want... letting LC do it might lead to lower returns (that is if your criteria is good)....


I think most of the comments are just to show the other side to readers... I do not see where people are trying to talk you out of this investment except to say that it probably should not be considered cash in an allocation (at least that is what I read).... and they want cash investments...

But hey, I have been wrong before and will be in the future....

[JDARNELL]

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Originally Posted by brewer12345 Can you talk about these? I have heard of banks and other institutions doing church loans, but have never heard of church bonds.

Sure I will start another thread to keep this one on track and share my experiences.

JDARNELL

[Nords]

Hey, mods, I'm beginning to feel that this thread has run its course... oink oink.

[bamsphd]

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Originally Posted by cute fuzzy bunny For what its worth, I almost feel like we're being herded away from safer investments towards ones where its easier to pluck our money away.

Some things never change. I felt that everyone was being herded away from index funds back in the post dot-com days.

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Originally Posted by cute fuzzy bunny I'm suggesting that having a 200 point fico drop and then being unable to get credit, or getting it at a ridiculously high rate is a good motivator to pay your loan. I didn't say anything at all about bankruptcy.

OK. I know you didn't say bankruptcy. I just thought you were alluding to it, and I was very surprised when a friend informed me that post bankruptcy credit was very easy to acquire. So I figured others might be equally surprised.

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Originally Posted by cute fuzzy bunny The notes are held by an actual bank, and LC has a backup company primed and ready to go to service the notes cash flow in the event LC goes out of business. Since service fees (usually <.5%) are paid monthly, the backup transaction company would find it financially appealing to take up the work so it'd be better than a simple contractual requirement.

If I read the prospectus correctly, LC has a backup company lined up, but did not seem certain that a bankruptcy court would allow the backup company to continue business as usual. LC's direct creditors who are not using the notes system could have a strong reason to argue that you are their peer unsecured creditor, and thus you should not get special treatment.

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Originally Posted by cute fuzzy bunny Suffice it to say I do a lot of due diligence on most things, and money falls out of just about everything I touch. If there is too much perceived risk against the certainty of losing 5-10% of your cash's value to inflation or poor cash returns over the next 3-5 years...then do that instead!

I'm pretty thoroughly convinced that to get rich quickly one needs to roll the dice on concentrated bets, diversification be damned.

I'm also pretty thoroughly convinced that to stay rich a portfolio should consist of extremely well diversified equity investments, buffered by extremely safe cash/bonds which act as insurance and are expected to be very liquid when equities go on sale. With the exception of the US Federal Government, I limit my exposure to any single company/organization to less than 1% of my portfolio, mostly via Vanguard index funds. I really like diversification. I tolerate my concentration at Vanguard because as I understand it, Vanguard's bankruptcy would not affect my ownership interest in each fund's underlying assets. I will also grant that adding other relatively uncorrelated investments to reduce volatility should be a good idea, which so far is mostly spoiled by high investment costs and/or lack of liquidity.

So the idea of diversifying across say 1,000 different borrowers using these LC notes seemed interesting. However, once I understood that if I bought 1,000 of these LC notes, I would technically own 1,000 unsecured loans to LC each with repayment terms derived from LC's loans to the ultimate borrowers, instead of being great diversification, LC notes became an unsecured loan to a dot-com before that dot-com made a profit. Definitely an investment subject to my "at most 1% of the portfolio" personal rule.

I also still w*rk, so even a small amount of time spent screening borrowers is currently a big negative. Though it sort of looks like a fun game. While working, a stable cash flow is unimportant. If I lose my job, liquidity suddenly becomes important. So at this time LC notes do not look like a good choice for me. However, our situations are certainly different. I can not imagine living on $20k/year, and frankly don't see how you will do it given the numbers you quote.

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Originally Posted by cute fuzzy bunny LBYM? I'm going to try and live on about $20k a year, with a paid off house, but in one of the more expensive places to live. My electric and water bill last month were $1000 total. My taxes, insurance and minimum bills I can't avoid are about $11k a year. My spending over the last 7 years has been about 3-4k a month, now its going to be less than a grand. If I get any more LBYM I'll have to use a smaller font.

Though my household currently has 5 rescued pets (my wife worked at a shelter for awhile), likely to soon be 4 because of cancer, so our situations do have some similarities.

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Originally Posted by cute fuzzy bunny I'm afraid I find the signal to noise ratio here somewhat worse than the last time I was here. I'm not getting anything out of this, and it seems many people don't want me to put anything into it either.

I'm glad you are back. Just pace yourself, and don't feel a need to respond to every post until everyone agrees with you. Searching for some of the above quotes, I realized that you are treating posting here as a full-time job! You don't have to fill the whole forum all by yourself!

[photoguy]

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Originally Posted by cute fuzzy bunny We already saw p2p during a recession, and likely the worst recession we'll see in our lifetimes (crossing fingers), and the default rate was lower than my average interest rate. There is a track record of 5 years of positive returns by quarter. I understand the risks, but feel the reward is better.

My understanding is that the interest rate on LC loans has not stayed constant over time and has in fact increased. This may be a result of taking on riskier loans so that using historical default rates may not be any accurate prediction of what would happen in a future recession.

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Originally Posted by cute fuzzy bunny The only thing I can't make it do is output more cash on demand without selling notes (not a huge deal) but I don't need that. All I need is the ability to squeeze 1000-2500 a month in income out of it. While heavy defaults would reduce my future payments, even a bad recession would likely leave me still making money, and more than any reasonable bond or cash instrument will, at least at this time.

Ok. Your reason for holding cash is different from mine as I absolutely want the ability to provide liquidity in a market crash (e.g., for rebalancing or bargain hunting). You can't do this with LC loans so it is not a substitute for cash.

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Originally Posted by cute fuzzy bunny Again, what are the suggested alternatives that aren't losing money to inflation?

I-bonds, 30 year tips, any bond fund with yield > 2%. And of course equities have expected returns greater than inflation.

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Originally Posted by cute fuzzy bunny I have all of those, this is to earn money on my cash buffer. "more of the other stuff you already own a lot of" isn't a good option. I did say up front that this was a 3-5% allocation.

That's perfectly fine but you are losing liquidity which is the main reason cash is king.

[Nords]

Followup.

Bamsphd brought up a few vulnerabilities with Lending Club:

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Originally Posted by bamsphd This thread made me curious enough to at least glance at the prospectus. https://www.lendingclub.com/info/prospectus.action I became less interested when I saw: You are making an unsecured loan to a dot-com. Which has never made money. We don't know for sure how you will be taxed. However, we plan to make you pay taxes as though you were paid all interest on time, even if you do not receive it. We will not give you anything paid by the borrower after five years. We will keep around a third of any payments made more than 30 days late. I'm not a lawyer. The comments above reflect my best layman's guess on what the prospectus is saying. I think I'll stick with negative interest rate TIPS instead.

Apparently Prosper has raised concerns about that as well, which they're now attempting to lay at rest through an SEC filing for a subsidiary to hold their loans.
The summary is here (with an organizational chart in one of the posts):
Prosper Funding LLC Approved by the SEC
The gory details of the SEC filing are here:
EDGAR Search Results
and the history is here:
Prosper Announces the Creation of Bankruptcy Remote Entity

If you're devoting time & effort to P2P lending then you should be following the LendAcademy.com blog to see more posts on this subject. The spotlight is now going to swing to Lending Club to see how they're protecting their loans from similar jeopardy.