NOTE: This post has been updated to reflect corrected information on certain details of LendingClub’s recovery process.
A recovery is a partial amount paid by the borrower after having charged off. When a borrower stops remitting monthly payments, the account will move through the various delinquency buckets. We discussed this progression in a previous post about roll rates. After missing 4 payments (or being 120 days past due), a customer moves into default status, after which the loan is charged off.
Post charge-off, LendingClub can continue to receive payments from either their own recovery efforts, or from those of a collection agency. If an agency is involved, the recovery amounts are highly dependent on their techniques and on what they are able to offer the borrower as an incentive. For example, a credit card company can offer to re-issue credit to the borrower in a limited way, which is often highly desirable to someone who is overextended and in need of additional spending power. In the case of LendingClub loans, because they are not connected to a revolving line of credit, a collector cannot offer this to the borrower and could therefore be in an inferior position when compares to other collectors.
We reviewed all accounts that charged off in 2012, as we wanted to be sure to only look at accounts that had been charged off for at least 1 year. This would allow a sufficient passage of time to assess the magnitude of recovery. During this time, we see some fluctuation in the percentage of accounts paying some amount of recovery. The percentage ranges from a low of 26% of charged-off accounts (April 2012) to a high of 79% of charged-off accounts (October 2012). This is likely due to changes in the recovery process, as most lending institutions test different processes from time to time to see what is more effective. Please also keep in mind that these amounts may continue to change over time.
As a lender, an even more important question is how much are we actually collecting. Of the total charged-off principal, we show the % at this point in time. Again, these numbers can change as more money comes in.
It’s a tough job to collect on a loan that has already been disbursed to a borrower in full and is not secured by any assets. In many cases, these borrowers are probably in default on multiple credit products and need to choose how to allocate their scarce funds. This prioritization generally has to do with the kind of debt in question and the ramifications of paying/not paying (e.g. car loans and mortgages are going to be higher priority, because these assets are important to a borrower). Based on the numbers we are seeing, an investor should assume that once a loan is in collections, the likelihood of receiving any recovery payment is quite low, and even then, it will be a small percentage of what is owed.