Thursday, October 18, 2012

Lending Club Borrowers' Location and Bad-Loan Experience Index

After reviewing the Lending Club borrowers' state of residence for default rate in my previous post, I was very curious to see how states stack up with respect to bad-loan experience (BLE) index.

As a refresher, the smaller the BLE index the better the parameter is in reducing the credit risk. The green color represents the parameters that have BLE index less than 0.90. The pink color represents the parameters that have BLE index greater than 1.10. For more information on BLE index, please refer to my first post on BLE index, Lending Club Loan Purpose: Default Rate and Bad-Loan Experience Index.


The table below shows the calculated BLE Index according to borrowers' state of residence. There were not many surprises with the states that showed up with highest BLE Index and that also had the highest default rate as discussed in the last post. The BLE index variation from Rhode Island (0.45) to Nevada (1.92) is not considerably wide. It appears that States are not that significantly related to credit risk. From this analysis, it appears Nevada is the only state of some concern.


The table below shows BLE index for each year from 2007 to 2012. The rows are arranged in the same order as the above table for easy comparison. Except Nevada, Florida, and California, none of the other states has BLE index consistently greater than 1.00.


Key Takeaway

  • The analysis of borrowers' state based on BLE index doesn't provide any conclusive answers about impact of borrowers' location on credit risk.
  • The risk-averse lenders may want to consider excluding borrowers based in Nevada, Florida, and California, the states that consistently show up with BLE index greater than 1.10.

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