Wednesday, February 27, 2013

Lending Club Loans - Months of Payment before Default

In the last post, I reviewed the defaults based on loan issued date. As I mentioned in the previous post, due to point in time snapshot of historical loan data that Lending Club provides, it is difficult to determine exactly when a loan actually was charged off or defaulted.

Months of Payment

In this post, I will review the defaults using a different methodology. Before a loan is charged off or defaulted, borrowers stops making monthly payments on the loan. Based on the total payments made by borrower, we can determine approximately the number of months or number of times monthly payments were made before loan was charged off.

The months of payment will always be smaller than when actually loans was charged off as Lending Club can take significant time to write off a loan once payment stops. Also, as there is no information about partial payments and any late fees in historical loan data file, this analysis assumes that all payments were made toward monthly payments.

Loan Length

The chart below shows the percentage of defaulted loans as a function of number of monthly payments made for 36 month and 60 month loan terms.


At first glance, someone may make following observations:
  • The 60 month loans default quicker than 36 month loans.
  • Most 60 month loans default within first 24 months.
  • Both 36 and 60 month loans have similar default trend within first six months after loan issued date.
Such conclusion may not be correct. While 36 month loans of at least three vintage issued years have reached full maturity, none of the 60 month loans have gone through complete maturity cycle. The 60 month loans were first issued in early 2010. This is the main reason why the curve for 60 month loans gives the impression that most defaults happen within first two years.

Following observations can be made for default behavior of 36 month loans:
  • About 20% of all defaulted loans make five or less monthly payments.
  • About 50% of all defaulted loans make ten or less monthly payments.
  • About 80% of all defaulted loans make twenty or less monthly payments.
Put another way, we can expect half of our default loans to occur before a borrower makes ten complete monthly payments. Assuming Lending Club takes on average four months (120 days) after payments stop to charge off loan, we can expect half of our defaults to occur by 14th month after issue date.

Credit Grade

The chart below shows the percentage of defaulted loans as a function of number of monthly payments made for different Credit Grades.


There doesn't appear to be any significant difference in default trend for loans with different credit grade. The separation of curves for Grade E, F, and G from rest of the pack at 15 months of payment and higher may suggest that greater number of such loans are defaulting earlier. Majority of E, F, and G grade loans are of 60 month term. As mentioned earlier none of the 60 month loans have reached full maturity yet. The separation in curve is most likely result of incomplete defaults data for 60 month loans to maturity.

Key Takeaways

  • We can expect half of our default loans to occur before a borrower makes ten monthly payments, i.e. by 14th month after loan issue date.
  • It is too early to compare default trend of 60 month loans with that of 36 month loans.
  • There is no significant difference in default trend for loans with different credit grade.



Monday, February 25, 2013

Lending Club Loans - Defaults with Loan Age, Part I

February has been slow month from blogging perspective for me. I spent majority of time making improvements to PeerCube. Three major enhancements released this month are ability to invest in multiple loans together from the list of loans, more robust BLE Risk Index that now includes 19 different loan and borrower attributes, and showing a list of loans with similar risk profiles as the one being viewed by a user.

When Default of Loans Start to Peak?

Recently, a participant on LendAcademy forum asked when defaults of loans start to peak. It is an interesting question so I decided to look further into historical data for Lending Club loans and see if I can find patterns for loan defaults. Unfortunately, Lending Club only provides point-in-time snapshot of historical loan data so I can't observe when a loan entered in default state. But, there are several different methods that can help provide insights from point-in-time snapshot.

One such method is to review the loans that are currently in default and when they were issued. This method assumes that similar pattern, in aggregate, will persist for loans in the future. One challenge with this method is that any variation in loan volume will skew the pattern. For example, if 1,000 loans defaulted out of 100,000 loans issued last year versus 400 loans out of 10,000 loans issued prior year, we may erroneously assume that loans default more within a year of being issued. In following analysis, I use the percentage of loans with default status to smooth out any effect of volume.

The chart below shows the percentage of loans with default status as a function of loan issued date. I only included 3 year term loans primarily because I have the historical data that covers the loans from issued date to maturity. Also, the 5 year term loans may have different default pattern. A peculiarity you may notice is the way I have chosen to plot X-axis (loan issued date). Instead of ascending issued year, I have reversed the axis and plotted percentage loan defaults with descending issued year. In fact, the chart below is a mirror image. As we are more interested in knowing when a loan may default, I believe flipping the X-axis better communicates visually the trend.


While reviewing this chart, think of that you are trying to find out how many 3 year term loans issued in January 2013 may default by the end of 2016. Think of right side of 2012 being end of 2013, right side of 2011 being end of 2014 and so on. The major assumption here is that future monthly default trend is exactly represented by the past monthly default trend.

Observations

While reviewing the above chart, two observations right away stand out:
  1. No loans are charged off or defaulted within first six months. This is understandable as majority of loans will go through stages of In Grace Period, Late (16 - 30 days), and Late (31 - 120 days) before being charged off. So, earliest most loans can be charged off is at least 120 days (4 months) after being issued.
  2. Th peaks appear during the year at regular interval. I am not very sure but I suspect this may have to do either with the time (end of December) when this historical loan file was downloaded or the Lending Club defaulting loans in batches at regular interval.
Based on the trend line models in this chart, for all 3 year term loans purchased in January 2013, we can expect 2.3% loans in default by the end of first year, 6.2% loans in default by the end of second year and 10.5% loans in default by the end of third year. By the time all loans mature, we can expect 12.4% loans originally issued to default. These numbers were obtained by substituting 0 for Month of Issued Date in trend line model for each year.

For 100 loans issued in January 2013, 2.3 loans can be expected to default in first year, 3.9 loans default in second year, 4.3 loans default in third year, and another 1.9 loan default after third year.

Key Takeaway

We may conclude from this analysis that the most default happen during the third year of 3 year term loans. But we need to be cognizant of the fact that the loans defaulting late in their maturity cycle have much lower impact on return as such loans have already paid back greater share of original principal.

In next post, I will further look in to default patterns of loans and also investigate other methods to analyze historical data for default patterns.


Monday, February 04, 2013

Lending Club Borrower's Revolving Credit Utilization, Loan Purpose and Defaults

While reviewing the loan volume with borrower's revolving credit utilization, I became curious to know how the revolving credit utilization of borrowers impact their reasons for borrowing on peer to peer platform. My initial thought was that borrowers with high revolving credit utilization most likely borrow for credit card refinancing purpose.

Loan Purpose

The chart below shows the cumulative loan volume % by loan purpose as a function of borrower's revolving credit line utilization. The findings here don't surprise me. The percentage loan volume for credit card refinancing and debt consolidation purposes is much higher (steepest slope) for borrowers with high revolving credit line utilization. The borrowers with low revolving credit utilization are more likely to borrow for house buying, major purchase, and educational purposes.

Lending Club Loan Volume by Purpose and Borrower's Revolving Credit Line Utilization

Loan Status

The chart below shows the moving average of loan volume by loan status as a function of borrower's revolving credit line utilization. There is not much of a surprise here either. In general, the loan defaults and charged off rise with rising revolving credit line utilization of borrowers. Even though the volume of fully paid loans declines with rising revolving credit line utilization, the volume of fully paid loans appears to be somewhat constant for lower revolving credit line utilization.

Lending Club Loan Volume by Status and Borrower's Revolving Credit Utilization

The chart below is similar to the one above. In this chart, the revolving credit line utilization is divided into buckets. Each bucket (bin) is 10% wide. For example, the first bin includes all loans issued to borrowers who have revolving credit line utilization between 0 and 9.99%. The loans issued to borrowers who have revolving credit line utilization either below 10% or above 90% seem to default much more.

Lending Club Loan Status and Borrower's Revolving Credit Line Utilization

Higher number of loans are fully paid off that were issued to borrowers with revolving credit line utilization below 20%. This observation leads to the question of whether borrowers with low revolving credit line utilization tend to pay off loans early.

The chart below shows the loans that were charged off or fully paid for issued year 2009 through 2012 as function of revolving credit line utilization. The ratio of loans charged off to fully paid appears to be about 7 for borrowers with lower revolving credit line utilization, i.e. such loans are seven times more likely to be paid off early than charged off.

Lending Club 2009-2012 Loan Status and Borrower's Revolving Credit Line Utilization

Another observation worth highlighting is that unlike the earlier chart above, this chart doesn't show that defaults and charged off are higher for loans issued to borrowers with very low revolving credit utilization. The reason of discrepancy may be due to much higher loan volume in recent years that skews the default rate in the earlier chart.

Key Takeaways

  • The borrowers with high revolving credit line utilization are more likely to borrow on Lending Club platform for debt consolidation and credit card refinancing purposes.
  • The default rate of loans rises with rising revolving credit line utilization of the borrowers. In contrast, the loan pay off rate declines with rising revolving credit line utilization of the borrowers.
  • The borrowers with low revolving credit utilization are seven time more likely to pay off loan early than to default on the loan.


Friday, February 01, 2013

Lending Club Loan Volume and Borrower's Revolving Credit Line Utilization

In next few posts, I will review the loan characteristics and default rate with respect to the revolving credit line utilization of borrowers. I believe revolving credit line utilization is one of the major borrower attribute that influences the chances for borrowers to default.

Loan Volume

The chart below shows the Loan Volume (right Y-axis) and Cumulative Loan Volume % (left Y-axis) as a function of borrower's revolving credit line utilization. Almost 20% of loans are issued to borrowers who have revolving credit utilization less than 29% and 20% of loans are issued to borrowers who have revolving credit utilization greater than 80%. The loan volume rises with rising revolving credit utilization up to about 70% revolving credit utilization. A few loans have also been issued to borrowers whose revolving credit utilization was greater than 100%.

Lending Club Loan Volume and Borrower's Revolving Credit Line Utilization
The chart below shows the Cumulative Loan Volume % by loan issued year as a function of borrower's revolving credit line utilization. Do you notice a wide gap between the lines for loans issued in 2012 from the lines for loans issued in prior years? This gap indicates that borrower profile based on revolving credit line utilization for loans issued in 2012 is very different from prior years. In 2011, 18% of loans were issued to borrowers who used up to 20% of their revolving credit. The share of loan volume to such borrowers dropped almost half to 9% in 2012. Similarly, about 30% of loans in 2011 were issued to borrowers who used up 70% or higher of available revolving credit. The share of loans volume to such borrowers rose about 20% to 36%.

Lending Club Loan Volume by Issued Year and Borrower's Revolving Credit Line Utilization
These trends may indicate that quality borrowers with low revolving credit utilization are not much interested in borrowing through peer to peer lending platform. Also, peer to peer lending platform being attractive to borrowers with higher revolving credit utilization may have resulted in Lending Club relaxing the minimum credit criteria late last year.

Key Takeaway

  • If defaults and returns are closely related with borrower's revolving credit line utilization, I expect the loans issued in 2012 to behave very differently than the loans issued in prior years.

Expanded Credit Utilization Information on PeerCube

The Loan Details page on PeerCube contains additional information related to revolving credit line utilization that provides better context to lenders about borrower. For example, the screen capture below shows such information for a currently available loan that carries F2 credit grade. I typically gravitate toward reviewing information highlighted below. This borrower is carrying, on average, about $10,000 balance on each of his revolving accounts. All of his bankcards are maxed out and total credit balance exceeds $100,000.

Loan Details page on PeerCube with expanded credit utilization information.