Monday, October 22, 2012

Lending Club Loans - Borrowers' FICO Score and Defaults

In this post, I will review the borrower's FICO score and its relationship with defaults. At the end of September, Lending Club started reporting the FICO scores in narrow and uniform width bands. For this analysis, I decided to switch historical loan data file to a new one from Oct 14th to be more granular with FICO range. There is general perception that borrowers with lower FICO score are at greater credit risk and more likely to default on their loans. I wanted to find out if this perception is true in peer-to-peer lending segment also.

Loan Volume

As the chart below shows the majority of loans are issued to borrowers that have FICO score below 730. Less than 100 loans are issued to borrowers with FICO score above 825.


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The chart below shows the loan volume with FICO score for each application year, from 2007 to 2012. The loan applications from borrowers with FICO score 830 and higher were started to be listed on Lending Club in 2012.

The two observations stand out from this chart. First, more and more borrowers with lower FICO scores are applying for loan on Lending Club platform. The strict lending practices by traditional lending channels in the last few years may have resulted in borrowers with lower FICO score to look for alternative lending platforms such as peer-to-peer lending for loans. Second, the increasing smoothness of the FICO curve with time might be due to higher loan volume and Lending Club becoming more granular with borrower's FICO score since about 2010.


Loan Status

The chart below shows the loan status with borrowers' FICO score range for all loans issued since 2007. As expected, there is a clear trend of greater percentage of loans with charged off, default, and late status for borrowers with lower FICO score. Similarly, fewer borrowers with lower FICO score are likely to fully pay their loans.


The chart below shows the loan status of charged off or default with borrowers' FICO score range for application year 2008 through 2011. The pattern of defaults with FICO range each year are very similar to aggregate results shown in the earlier chart. The default rate on loans issued to borrowers with FICO score of 670 and less can be considered exceptionally higher than what normally seen for other borrowers on Lending Club platform.


Key Takeaway

  • There were no surprises in expectations of borrowers with lower FICO scores attracted to alternative lending platform such as Lending Club and higher defaults and late loans for borrowers with lower FICO scores.

2 comments:

  1. Hey Anil, I really enjoy your posts. I'm just curious about your thoughts on why there is a higher percentage of defaults/late at the top of the FICO range (820-830). I'm guessing it is because loans in that range is a much smaller sample size, but wondering if there was anything else.

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    Replies
    1. Thanks for liking my posts. Yes, you are correct. Sample size is too small for high FICO range.

      FICO Range : Current - Fully Paid - Late - Charged Off
      820-824 : 45 - 11 - 0 - 2
      825-829 : 36 - 3 - 1 - 0
      830-850 : 46 - 0 - 0 - 0

      In aggregate, only two loans were charged off, one in 2009 and one in 2011. Only one loan is late (issued in 2012). Two fully paid loans were issued in 2012. Only 22 total loans were issued in these FICO ranges before 2012.

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