Lending Club Loans - Borrowers' FICO Score and Bad-Loan Experience Index

After reviewing the defaults as a function of the borrowers' FICO score in the previous post, I decide to review FICO range according to bad-loan experience (BLE) index. Please refer to my first post on BLE Index for background information.

The table below shows the BLE Index according to borrowers' FICO score range. The range of BLE Index from 0.23 for FICO score 790-794 to 1.84 for FICO score 660-664 is not considerably wide. It appears that changes in FICO score is not significantly related to credit risk. The borrowers with FICO score below 709 appear to be greater credit risk.

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The table below shows the BLE Index according to FICO score range for loans issued each year from 2007 to 2012. Except for loans issued in 2012, the pattern of borrowers with FICO score below 709 being greater credit risk is pretty consistent. For loans issued in 2012, even the borrowers with better FICO score have BLE Index greater than 1.10. In my opinion, this observation shows that borrowers with better FICO score are more likely to default during the first year of the loan.

Key Takeaways

• No surprises that borrowers with lower FICO score are greater credit risk.
• The lenders who purchase notes on secondary market may be better of purchasing notes that have aged at least a year.