Lendingclub's loans trend are getting worse

Lendingclub was a great idea to make consumer credit product available to ordinary investors.  Historically, it has great returns in 8~9% without much effort.  However, in recent years it becomes harder and harder to get a decent return even for people with diversified portfolio (>200 loans).  I've done some analysis with their public data and see some troubling trend.  The borrower quality becomes riskier yet the interest rates don't follow to compensate for more risk.  This caused skyrocketing chargeoff rates and strangely higher prepayment; both of them hurt investors.
The following graph shows the trend of average interest rate and average DTI.  DTI measures riskiness of borrowers and interest rate measures compensation to investors.
It is clear that pre-2014, DTI and interest rate moves together; which is correct - more risk, more reward.  However, from 2014 to mid 2016, interest rate falls dramatically yet the DTI keeps on increasing.  In mid 2016, there is a jump in DTI and interest rate towards normal high risk high reward domain. But the jump is short lived and trend moves again to higher risk but lower rewards.


Along with the dramatic increase of DTI, the charge off rates for 2013-2016 vintage loans increase year over year.  2017 vintage charge off can not be estimated yet, but I suspect it as bad as 2016 from interest rate and DTI trend.  The following graphs shows the monthly charge off rate and payoff rates.  "age" is defined as months between loan issue date and last payment date.  Although charge off happens 4 months after last payment date, the real impact to investors happens at the last payment date.  It is also worrying since the charge off increases in early age which increases loss given default (LGD).  Another interesting fact is the sudden jump in charge off rate for vintage 2013 loans after month 36.  This is due to charge off of 5 year loans; 3 year loans charged off or paid off at age 36.  5 year loans has much higher charge off rates than 3 year loans!









 Another alarming problem is that the prepayment rates also increases for 2016.  This looks like a model pricing error to me.  Borrowers are not charged the correct interest rates: good borrowers got charged high increase rate so they refinanced with lower rate quickly and bad borrowers were not charged enough rates to compensate for more risk.  Prepayment decreases investor gain from these loans and may even lead to a loss since lendingclub charge a 1% fee to prepaid cashflow after loan reaches 12 months.  Not only investor loss the interest income, lendingclub also charges 1% of the remaining principal.  This loss could be large since the prepayment rates increases continuously with age.










As of now, I think it is not wise for ordinary investor to invest in lendingclub loans.  Investor should have some sophistication (able to do back testing, filtering, modeling etc.) in order to not loss significant amount in this platform.

I've seen many people complaining about significant loss who has exposure in 2014-2016 loans.  Lendingclub needs to do a much better job to win back ordinary retail investors.