SeasonalityFirst, I was curious to find out if there is any seasonality during the year in issuing loans. As the weekly loan issued count chart shows below, the high growth in issued loan, especially in first four months of 2012, masks any discernible seasonal pattern during the year except some potential summer doldrums.
End-of-month RushLater, I noticed something interesting in the chart above. If you look at the height of each bar, there appears to be a peak at every fourth or fifth bar. This pattern seems to be consistent for most of the year. Is it possible that these peaks represent the end-of-month and end-of-quarter rush in loan issued to meet the quota for the period?
As the loan issued count by day of the month chart shows below, sure enough there is a big jump in number of loans issued daily during last four days of the month (+50% more from monthly average). This unusual increase in loan issued at the end of the month exceeds the average (gray horizontal line) plus one standard deviation (shaded region above the average line).
We've seen many cases that it is very common for sales people to extend good discounts at the end of the period in order to close sales and meet quota for the period, car dealers for example. Is it possible that Lending Club could be rushing the approval process in order to issue the loans before the month-end? Can this end-of-month rush impact quality of loans?
Rising Default Rate as Month ProgressesDefault rate is one potential measurement of quality of loan. As the Loan Default by Day of the Month chart below shows, there is definitely uptick in default rate at the end of the month for loans with Charged-off and Default status. The trend line (red dashes) is upward sloping too for the whole month.
The chart also shows patterns for loans with status of In Grace Period, Late, and Performing Payment Plan, nothing that I can pinpoint to a certain behavior. If you do, your insights via comments are appreciated.
Start-of-week RushSimilarly, when I created chart for the number of loans issued by day of the week, there is a pattern of greater number of loans issued at the start of week, especially Monday and Tuesday. Also, a few loans get issued during the weekend. The increase in loan issued at start-of-week seems reasonable as backlog of loans to be issued builds up during the weekend. Also, it is possible that most borrowers provide information for loan approval during the end of the week or weekend.
If you read up to this point, I am sure you are as curious as I was whether default rate for loans issued by day of the week shows any patterns. As the chart below LC Loan Default by Day of the Week shows there is no discernible impact on default rate from issuing more loans at the start of the week.
Only the loans issued on the weekend show significantly higher default rate. Considering the small sample of loans issued on the weekend, this default rate may or may not be representative. An amusing thought occurred to me when I noticed the higher default rate for loans issued on weekend. These loans were in gray area with respect to approval or denied criteria for loans to be issued. Such loans were bumped up to a supervisor who primarily reviews loans on the weekend. As these loans were borderline case, the approval of such loans resulted in higher defaults.
Key TakeawaysThis analysis suggests two key takeaways from my perspective. Your comments are appreciated.
- The loans issued at the end of the month have higher risk of default. As lenders don't have control over when loans are issued, they will be better off investing in loans at Lending Club in last week of the month or first few days of the month.
- In addition to borrower default risk, lenders shouldn't ignore the risk resulting from loan underwriting process.
Fast Company recently published an interesting article Shaking Up Crowdfunding about the crowdfunding portion of JOBS (Jumpstart Our Business Startups) Act from the point of view of several characters involved in creation of the Act. Check it out!
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