Beating the Average Peer Lending Investment Strategies Scott

Beating the Average Peer Lending Investment Strategies Scott Langmack March, 2009

Agenda • • • Peer to Peer Lending Overview The Unbelievable Bank Industry Secret Understanding Unsecured Credit and Defaults Strategies for Maximizing Returns What to Expect 2

Lending Is Investing? • Two types of lending § Banks: Big, Powerful, Stable, Monolithic § Personal: The riskiest thing you can do • Why are loans to people you know risky? § Banks will destroy your credit, come after you with lawyers and ruin your life § Your friend thinks you have “Extra Money”, you wont really miss it, and since its extra, you didn’t need it anyway 3

What If You Could Operate Like a Bank? • For the first time in history, you can • You can leverage § Systematic selection of the best credit borrowers § Operational and Legal administration of thousands of loans & payment processing § The threat of ruining someone’s credit, and coming after them with collections and lawyers • All without ever getting your hands dirty 4

How To Think Of The Investment 5 5

How To Think Of The Investment Bank Disintermediation TAKING THE BANK OUT OF THE PICTURE Powerful and sophisticated investing 6

The Unbelievable Bank Industry Secret • Banks overcharge 20+ Million People § Banks overcharge the best to offer credit to the worst § Its about SHARE OF MARKET 7

Defaults Are Predictable • The only thing that can possibly go wrong is that a borrower wont pay you back • If you can know with a high degree of confidence the percentage of borrowers who will not pay you back, you can make money • The entire trillion dollar credit card industry is based on this very real, very well known dynamic 8

Why Defaults Are Predictable We are a credit society • People with good credit get: § Acceptance, options, stuff, pride § Better interest rates on everything, including mortgages • When people default on a loan: § Credit reporting agencies report broadly § It means REJECTION, for credit cards, mortgages, car loans, etc. 9

What's in a FICO Score? 10

Defaults Vary Dramatically By FICO Score Credit card statistics for November ’ 08 to April ‘ 09 11

Default Rates are Part of the Return Formula • Very best credit risk people • Low default risk = low interest rate loans 20% 15% 10% 0. 5% 5% 0. 8% 8% 6. 7% 0% Loan Rate Expected Defaults Fees Investment Return 12

Loan Rates Vary Based on Expected Defaults • Higher default risk = higher interest rate loans 20% 15% 4. 7% 0. 8% 10% 17% 5% 11. 5% 0% Loan Rate Expected Defaults Fees Investment Return 13

Current Recession Adjustment • Like banks and credit card companies, Lending Club raised rates to borrowers 20% 7. 7% 15% 10% 0. 8% 20% 5% 11. 5% 0% Loan Rate Expected Defaults Fees Investment Return 14

4 Keys To Maximizing Returns 1. 2. 3. 4. Diversification is essential Select for job stability Select loan type Select your rate and expected returns 15

#1 Diversification is Essential • Best to have 400 or more notes • Make statistics work in your favor: visual example 16 16

Example of Ranges of Returns Number of Loans Expected Returns by Number of Loans Returns 17

Example: 10 Loans Number ofof Loans Number Loans Expected Returns by Number of Loans Returns 18

Example: 100 Loans Number of Loans Expected Returns by Number of Loans Returns 19

Example: 400 Loans Number of Loans Expected Returns by Number of Loans Returns 20

#2 Select for Job Stability The Most Consistent Factor • Look For: § § § Length of employment Stability of company Quality of company Stability of industry Tenure • Watch Our For: § § New jobs New careers Lower paying jobs Low tenure 21

#3 Evaluate Loan Purpose Lending Club statistics show defaults vary by loan purpose Data based on loans 12 months and older Vacation Wedding Green Energy Best Car Medical Credit Card Refinancing Debt Consolidation Other Average Moving Education Home Down Payment Home Improvement Business Loan Worst 22

#4 Select Your Risk/Return Mix • More volatility in the higher ranges § Example: Current LC total portfolio of loans between 12 and 18 months old: Target Return 23

What to Expect: Default & Return Curve Net Annualized Return At Various Stages Of 13% Loan Portfolio (LC Fees not included) 13% 13 -1=12% Net Annualized Percent 12% 11% 10% 13 -4=9% 9% 8% 13 -4. 75=8. 25% 7% 6% 5% 13 -7. 5=5. 5% 4% Delinquencies + Defaults & Charge-offs all impact NAR 3% 2% 1% 0% 0 3 6 9 12 15 18 21 Months 24 27 30 33 36 39 24

2009 Loans 2008 Loans : Default Curve Example 25 25

Beating the Average: Recap 1. 2. 3. 4. 26 Diversify x 400+ Job stability Purpose of loan Select risk/reward 26