Monday, May 21, 2012

Month-end Rush to Issue Loans at Lending Club

Before I move on to analyzing next variable in Lending Club historical loan database, I decided to explore Loan Issued Date data little bit more.


First, 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 Rush

Later, 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 Progresses

Default 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 Rush

Similarly, 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 Takeaways

This analysis suggests two key takeaways from my perspective. Your comments are appreciated.

  1. 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.
  2. In addition to borrower default risk, lenders shouldn't ignore the risk resulting from loan underwriting process.

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  1. From what I can tell the end of month rush has stopped in recent months. It was certainly the case last year when LC Advisors money was put to work in the last day or two of the month. Now, we actually see an opposite trend. Lending Club taper off towards the end of the month and see a big increase in originations in the first couple of days on the month.

    1. Interesting observations, thanks for sharing. I didn't check the loan origination and default year by year ... may be should have reviewed the year by year comparison. Thanks.