Lending Club Borrower's Income Verification, Loan Issued Year, and Initial List Status

Recently Lending Club modified the historical loan data file, included several new loan and borrower attributes and removed a few. One of the new fields is whether a borrower's income was verified by Lending Club during the loan application process. Recently, there was a discussion about verified income at LendAcademy forum. Some of the questions and concerns raised during the discussion were:

• Has the number of available loans with verified income gone down recently?
• Does the income verification really matter with loan performance?
• Does Lending Club verify income for all loans?
• Which borrowers are more likely to have their income verified?

It will be interesting to find answers to some of these questions and supporting data from the new historical loan data file.

Loan Issued Year

The chart below shows the borrowers' income verification for the loans by issued year. The loans with verified income are listed as TRUE and with unverified income are listed as FALSE. Two questions listed above are right away addressed from this chart.

• Lending Club doesn't verify borrower's income for all loans issued.
• The percentage of loans issued with verified income has gone up recently. Whether the retail lenders are seeing the loans with verified income at the time of offering is an open question.

In 2007, borrowers' income was not verified at all. Since then, the percentage of loans with verified income has been rising. In 2013 year to date, more loans were issued that borrower's income was verified than the loans with unverified income.

Initial List Status of Loan

Lending Club reserves a few loans for 12 hours and offers them to the institutional and large retail lenders who want to lend the whole amount for a loan. I am not sure whether the historical loan data file includes the loans that were offered and picked up by lenders as 'whole' loans. But, the loans that were initially offered as whole, designated with 'w', but not picked up as 'whole' loans are listed in historical loan data file.

The chart below shows the percentage of loans with verified and unverified income of borrowers with initial listing status and issued year of the loans. Lending Club started offering the 'whole' loans only since late 2012. With the limited data, there doesn't appear to be any significant difference in percentage of loans with verified income between the loans that were initially offered as whole or fractional.

Key Takeaways

• Lending Club is verifying borrower's income for greater percentage of loans issued on its platform recently.
• There is no significant difference in income verification for loans initially listed as fractional or whole.

Lending Club Loans Issued Since 2010 - Principal Paid Back and Months of Payment

This post is the last in the series of posts discussing when default of loans start to peak (Part 1, part 2, part 3, and part 4).

Months of Payment

The chart below shows the percentage of 36 month and 60 month loans defaulted as a function of months of payment for loans issued since 2010. By reviewing both 36 month and 60 month loans issued in same time frame, we may be able to better compare such loans. While the default patterns are very similar for first 10 months of payment, the rate of defaults increases rapidly for 60 month loans after 10 months of payment. 50% of defaults for both 36 month and 60 month loans occurred within 8 months or so, the 80% of defaults for 60 month loans occurred within 13 months compared to 15 months for 36 month loans.

Principal Paid Back

Similar chart for Principal paid back is shown below. It is clear from the chart that while 50% of loans of both maturities defaulted within 8 months, the 60 month loans paid back (9%) only half of principal compared to the principal paid back by 36 month loans (18%). Can the 60 month loans that continue to make payment make up for this extra loss in principal with longer repayment duration and/or higher interest rate?

Another interesting observation from above chart is the increasing difference in principal paid back between loans of 36 month and 60 month maturities. For example, the 20% of defaulted 60 month loans paid back 4% of principal little more than half of 7% principal paid back by 20% of defaulted 36 month loans. In comparison, the 80% of defaulted 60 month loans paid back 16% of principal less than half of 37% principal paid back by 80% of defaulted 36 month loans.

The chart below shows the scatter plot of Principal paid back and Months of payment for 36 month and 60 month loans issued since 2010. A second order polynomial trend line is shown on the chart separately for 36 month and 60 month loans. As the principal portion in monthly repayments for 60 month loans is much smaller than that for similar 36 month loans, the increasing difference between principal paid back with months of payment is understandable.

Key Takeaways

• In the end, the months of payment is much more straightforward method to determine when defaults peak.
• For 36 month loans, 50% of defaults are expected to occur within 10 months of payment, and 80% of defaults within 20 months. 
• The default trend for both 36 month and 60 month loans is very similar for first 8 months of payment.

Lending Club Loans - Principal Paid Back and Defaults

In this post, I will analyze the defaults based on principal paid back by the borrowers before default. For earlier posts in the series, please refer to Lending Club Loans - Defaults with Loan Age, Lending Club Loans - Months of Payment before Default, and Lending Club Loans - Principal Paid Back and Months of Payment.

Loan Length

The chart below shows the percentage of loans defaulted as a function of principal paid back for 36 and 60 months loans. Similar to previous methodologies, the curve for 60 month loan is exaggerated, i.e. higher defaults at lower principal paid back because all of 60 month loans are less than 3 years old.

One interesting observation from this chart is that 2.7% of 36 month loans that default pay back less than 0.04% of principal, i.e. borrower only makes one or two payments on the loan. A few other interesting observations for 36 month defaulted loans are:

• About 44% of defaulted loans pay back less than 20% of principal.
• About 80% of defaulted loans pay back less than 50% of principal.
• About 95% of defaulted loans pay back less than 80% of principal.

Put another way, we can expect 50% of our defaulted loans to pay back less than 24% of principal. This causes a double whammy for peer to peer lenders who are using a non-retirement account for lending. The interest earned is taxed at higher ordinary income tax rate while the principal lost to default is deducted from capital gains that are taxed at much lower rate. The monthly repayments during the first year consist mostly of interest resulting in lender paying higher percentage of interest income in taxes while lower percentage of principal loss to offset the capital gains if borrower defaults within a year.

Credit Grade

The chart below shows the percentage of loans defaulted as a function of principal paid back for various credit grades. There are no surprises here.

• The defaults with principal paid back for loans with credit grades E, F, and G behave very similar to each other. The similar trend is also seen for  loans with credit grades B, C, and D. This may suggest that better returns to be have by investing in the loans with higher interest rate within each group.
• As expected the defaults of higher quality loans, i.e. credit grade A loans, tend to pay back larger portion of original principal. The open question is whether the lower interest payments for such loans cover the principal loss.

Key Takeaways

Overall, I am disappointed that principal paid back didn't prove to be as effective of methodology as months of payment in determining when loan defaults peak. It appears sometime simpler measurements are much more effective in describing the trends. Also, none of the methodologies discussed able to explain the defaults of 60 month loans without observing such loans to maturity.

Lending Club Loans - Principal Paid Back and Months of Payment

In the last post, I analyzed the defaults based on number of monthly payments made by borrower before default. In next post, I will analyze the defaults using another methodology of principal paid back before default. In this post, I will review the relationship between principal paid back and months of payment.

Principal Paid Back

While months of payments methodology provides us a time frame when most defaults occur, it doesn't provide a decent comparison for loans in different maturity cycle and loans of different maturity length. My expectation is that the principal paid back will serve as an appropriate proxy for matching the loans at the same point in maturity cycle. For example, a 3 year loan at 10% interest rate would take about 20 months (55% of maturity length) to pay off 50% of principal while same loan with 5 year term would take about 34 months (56% of maturity length) to pay off 50% of principal. In this analysis, I assume that defaults for these two loans should behave similarly when each has paid off same percentage of principal.

Principal Paid Back is one of my favorite data point in evaluating a lending strategy as it is a good method to gage the risk tolerance of a lender. It quickly communicates on average what percentage of principal is going to be recovered from defaulted loans. Combined with the return from fully paid loans, it also communicates how many loans a lender needs to recover principal lost from defaulted loans and just break-even.

For example, the screen capture above from PeerCube shows historical performance of loans issued between 2007 and 2009 for a specific lending strategy that only includes borrowers who own their home. On average, each defaulted loan paid back only about 42% of principal. To break-even, this strategy need to recover 58% of lost principal from other loans in the portfolio. With, on average, only 14% return (ROI to be discussed in future blog post) from fully paid loans, a lender need at least 4 loans to be fully paid to just break-even. If a lender invested in all loans meeting this criteria between 2007 and 2009, 55% of loans contributed 0% to return and only 45% loans contributed to achieving 7.32% ROI from this strategy.

Months of Payment

The chart below shows the Principal Paid Back as a function of Months of Payment for both 36 and 60 month loans. Actually axis are swapped as certain observations listed below are easier to see this way. [Edits 03/16/2013: As requested by Andrew in comments below, updated the chart to include linear trend lines and screen capture of trend model description.]

The 36 month loans and 60 month loans clearly have two different paths on  the chart. It is clear that the principal payback schedule is different for 36 month and 60 month loans. The scatter plot for 60 month loans shows most data points in the region below 30 months of payment and left of 50% principal paid back. This is primarily due to 60 month loans issued only since second quarter of 2010. The solid color at 100% principal paid back mark for loans with both terms is due to loans that are fully paid either on schedule or ahead of schedule.

The chart below shows the Principal Paid Back as a function of Months of Payment for loans with various credit grade.

This chart is very similar to the previous chart. From density of different colors, it can be observed that the 60 month loans are primarily carry credit grade E, F, and G. Also, it appears that majority of 60 month loans that are paid off early carried credit grade A, B, and C.

Key Takeaways

• The Principal Paid Back would be a good data point to gage the risk tolerance of a lender and variance in return of a lending strategy over the loan maturity cycle.
• Reviewing the loans that have paid back less than 50% of principal may offer better comparison between 36 and 60 month loans.

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.

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.

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.

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.

Recent Changes in Minimum Credit Criteria by Lending Club

Minimum Credit Criteria

In November, Lending Club not only hide the details of underwriting process, as described in my previous post Lending Club Loans - Impact of Recent Changes, but also changed the minimum credit criteria for the borrowers. The new minimum credit criteria is much more lenient and directed at attracting lower quality borrowers.

The minimum credit criteria in the latest prospectus filed in November 2012 is listed as follows:

Under the current credit policy, prospective borrower members must have among other elements:

• a minimum FICO score of 660 (as reported by a consumer reporting agency);
• a debt-to-income ratio (excluding mortgage) below 35%;
• minimum credit history of 36 months;
• 6 or less inquiries in the last 6 months; and
• at least 2 revolving trade accounts.

The minimum credit criteria in the previous prospectus filed in August 2012 is listed as follows:

Under the current credit policy, prospective borrower members must have among other elements:

• a minimum FICO score of 660 (as reported by a consumer reporting agency);
• a debt-to-income ratio (excluding mortgage) below 35%;
• a credit report (as reported by a consumer reporting agency) without any current delinquencies, recent bankruptcy, tax liens or non-medical related collections opened within the last 12 months, and reflecting:
• at least two accounts currently open;
• for credit credits 740 and higher, no more than 8 credit inquiries on the credit report in the past six months and for credit scores below 740, no more than 3 inquiries on the credit report in the past six months;
• a revolving credit balance of less than $150,000;
• utilization of credit limit not exceeding 98%; and
• a minimum credit history of 36 months.

The bold text above indicates the new condition added in the minimum credit criteria and the strikeout text above indicates the conditions removed. The new condition is nothing more than the lenient version of number of credit inquiries in the past six months.

Public Records

There was some discussion on LendAcademy forum about Increase in Applicants With Public Records. The table below shows the monthly loan volume with respect to number of public records for loans issued in 2012. In November, 127 loans were issued to borrowers who had at least one public record. The number of such loans increased to 202 in December, an increase of almost 60% over previous month.

I believe the changes in the minimum credit criteria as mentioned in November prospectus may have resulted in increase of borrowers with public records in December. No longer Lending Club excludes borrowers with current delinquencies, recent bankruptcies, tax liens, and non-medical related collections in past 12 months.

Did Lending Club modify 'proprietary' credit grade model to accommodate this change in minimum credit criteria? I was expecting the credit grade shifting to the right toward grade G for such loans. The table below shows the monthly volume and credit grade of loans issued to borrowers with more than 2 public records. There is no shift in credit grade of loans to borrowers with public records. It doesn't appear that Lending Club credit grade model accounts for the number and type of public records.

Accounts Now Delinquent

The table below shows the monthly loan volume  with respect to borrowers' number of accounts currently delinquent. It is clear from the table that prior to December, Lending Club didn't issue any loans to borrowers who had delinquent accounts at the time of applying for loan. In December 2012, Lending Club issued 15 loans to borrowers who had one or two accounts delinquent at the time of loan application.

The credit grade for loans to borrowers with one account delinquent ranged from A5 to F1 while the one loan to borrower with two accounts delinquent has credit grade of F3. It is too early to determine whether Lending Club's proprietary credit grade model accounts for borrowers who have accounts delinquent currently.

Amount Delinquent

The table below shows the monthly loan volume with respect to total amount currently delinquent for borrowers. Similar to accounts now delinquent above, in December 2012, Lending Club started issuing loans to borrowers who have any amount delinquent currently. In December 2012, Lending Club issued 10 loans to borrowers who had between $25 and $65,000 amount delinquent.

Did Lending Club proprietary credit grade model account for borrowers who have any amount delinquent currently? Not a chance! Any reasonable proprietary model most likely will consider borrower with higher delinquent amount to be of higher credit risk.

See the table below that shows the credit grade of loans issued in December 2012 to borrowers who had any delinquent amount. First, there is no visible pattern between credit grade and delinquent amount. Second, which reasonable model that accounts for currently delinquent amount will assign credit grade A5 to a loan for a borrower who has $65,000 in delinquent amount versus grade F1 to a loan for a borrower who has $25 in delinquent amount? This leads me to believe that the credit grade model doesn't account for amount currently delinquent.

Key Takeaways

• Lending Club has relaxed the minimum credit criteria to attract more borrowers that most likely will result in more borrowers with higher credit risk on lending club platform.
• Lending Club proprietary credit grade model doesn't appear to account for the credit quality of the new borrowers that only became eligible since lowering of minimum credit criteria.
• Lenders may benefit by taking the 'common sense' approach to details of public record, and accounts and amount currently delinquent until sufficient historical data is captured to show the pattern and impact of such borrower attributes.

How can PeerCube help?

The loan details page on PeerCube can be of great help to lenders as it shows 71 different loan and borrower attributes including the above-mentioned attributes that may shed better light on borrower's credit quality.

Below is a screen capture of PeerCube's loan detail page for a C2 credit grade loan with such attributes highlighted. Will you invest in a C2 grade loan whose borrower has one bankruptcy, two tax liens, two delinquent accountss and $5,369 amount currently delinquent?

Reviewing the loan detail page, PeerCube users can avoid loans that may be of higher risk than the assigned credit grade represents.

Around the Web

In last few weeks, I have become a big fan of blog Long-Term Returns. I highly recommend the blog to all readers interested in personal finance and investment. Most personal finance bloggers tend to express opinions based on personal experiences and without supporting data. That is where this blogger sets himself apart with the analytical perspective. Though the blogger is not a fan of peer to peer lending, p2p lenders will also benefit from his coverage of related topics of bonds, treasuries and fixed income securities.

Lending Club Loans - Impact of Recent Changes

Recently, in response to my post Lending Club 2012 in Review, Part I: Loan Volume and Amount Funded, a commentator pointed out a few recent changes related to Credit Grade in Lending Club's November 2012 prospectus and scarcity of F credit grade loans. Also, on LendAcademy forums, there were a few related discussions: High demand for D-G grades, Increase in Applicants With Public Record?, and Has LC loan quality dropped?. So, I decided to review the prospectus to see if I can find these changes.

Below is a highlight from the November 2012 prospectus available at Lending Club website:

Q: What are LendingClub loan grades?

A: For borrower members who qualify, we assign one of 35 loan grades, from A1 through G5, to each loan request, based on the borrower member’s:

• FICO score; 
• our proprietary scoring model which takes into account many of the attributes previously used by us and also allows borrowers to have delinquencies and public records; 
• loan term and loan amount

In addition to replacing previously listed loan and borrower attributes with the proprietary scoring model, the current prospectus also mentions allowing borrowers with delinquencies and public records. Both terms are highlighted above in bold.

The fewer low quality D-G grade loans may be result of the proprietary scoring model modifying weight of previously used loan and borrower attributes or incorporation of new 'unknown' attributes. Allowing borrowers with delinquencies and public records may be resulting in increase in borrowers with public record.

Such changes are not surprising as Lending Club is gearing up for IPO. It's focus has been shifting to non-lending financial institutions as lenders and attracting more borrowers to its platform becoming higher priority.

Can we confirm these changes using historical data from 2012?

Credit Grade Distribution of Monthly Loan Volume

The chart below shows the monthly loan volume in 2012 in relation to Credit Grade. The monthly volume lines for most months follow the same pattern except for December (Green line). There is a shift in the line for December from regular pattern for other months indicating there may have been a change in December how loans were allocated to different Credit Grade buckets.

Lending Club Monthly Loan Volume and Credit Grade in 2012

For most businesses, December tend to be a unique month due to holidays and end of calendar year. The chart below shows the monthly loan volume for 2011. The hypothesis being that if December is somehow unique month for share of loan volume across Credit Grade, it should show up in previous years too. As the chart shows, there is no deviation in line for December compared to the pattern for other months in 2011. This confirms that something changed in how credit grades are assigned for loans issued in December 2012.

Lending Club Monthly Loan Volume and Credit Grade in 2011

Monthly Loan Volume Change

The chart below shows the percentage change in loan volume for each credit grade in December from previous month in 2012. The large spreads in percentage change for credit grades that normally has low loan volume is understandable. The interesting observation is that the percentage volume change for credit grade D through G is consistently negative in the month of December, indicating the loan volume for credit D through G was much smaller in December than previous month.

Lending Club Loans - Percentage Monthly Volume Change in December 2012

As a comparison, the chart below shows the percentage change in loan volume in November from previous month in 2012. The loans with credit grade D through G show large percentage increase in volume from previous month. Was the volume drop in December for loans with credit grade D through G due to increase in volume of same grade loans in previous month? At this point, it is difficult to separate the influence of policy changes from the up volume in previous month.

Percentage Monthly Loan Volume Change in Nov 2012

Another interesting observation is the large spreads in loan volume for loans with A through C credit grades in December. As shown in the chart for November, most volume changes for such loans will be typically low due to the high volume of loans. An usually large spread in volume will indicate influence of a policy change where shifting of loans taking place across credit grades from credit grade with decline in volume to credit grades with rise in volume.

Key Takeaways

• The "proprietary scoring model" appears to have made some adjustments that is shifting the loans across credit grade, most probably toward B and C credit grades.
• Without knowing the actual changes taking place in credit grade assessment of a loan, the credit grade will become an unreliable indicator of quality of loans. In my estimate, just considering Credit Grade as loan selection criteria was accounting for the quarter of the default risk.
• With the credit grade becoming "proprietary" measure, most lenders may benefit by using Interest Rate bins (buckets) instead. Any analysis of historical data based on credit grade will become less valuable due to uncertain changes in credit grade over time.

PeerCube: Benefits of Loan Details on One Page

In my last blog post Lending Club 2012 in Review. Part III: Loan Title, Loan Description and State of Residence, I mentioned that I may take a short break to discuss a few development at PeerCube. In response, I received a suggestion to maintain the continuity of historical data analysis and discuss any PeerCube updates in a small separate section of the blog post. I thought the idea was excellent and time to time I plan to include PeerCube updates at the end of regular blog posts.

The loan details page on PeerCube includes 71 different loan and borrower attributes on one page. This collection of information enables users to  quickly scan loan details to identify any unusual attributes. With the recent changes in Lending Club policies, it is becoming much more important to review the loan details.

PeerCube Loan Details page: Borrower Details

The above screen capture of Loan Details page for a loan shows an example of discrepency that can be caught by reviewing this page. The Home Ownership is self-reported by the borrower. In this case, borrower reports Renting. Total Mortgage Accounts is reported by the borrower's credit report. In this case, credit report mentions borrower has three mortgage accounts.

Depending on your risk profile, you may decide to skip lending to this borrower due to financial uncertainty of the borrower. For example, this borrower may be a divorcee on hook for mortgage payments on a house occupied by ex-spouse, alimony, child support, etc. Such uncertainty about borrower's financial situation raises the risk profile of this loan significantly. Unless a lender was reviewing multiple spreadsheets made available by Lending Club or easy-to-scan one pager for the loan on PeerCube, he or she will misjudge the default risk with this loan.

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Lending Club 2012 in Review. Part III: Loan Title, Loan Description and State of Residence

Continuing the year-end review of Lending Club loans issued in 2012 from Part I and Part II where I discussed Loan Volume, Amount Funded, Interest Rate, Credit Grade and Loan Purpose ...

Loan Title

In 2012, the number of loans issued in relation to number of characters in Loan Title continue to follow similar pattern as previous years. Almost 25% of loans issued in 2012 had exactly 18 characters in loan title. Almost 50% of loans issued had less than 17 characters and 90% had less than 24 characters.

Length of Lending Club Loan Title, Loan Volume, and Total Amount Funded

The most popular 18 characters loan titles in 2012 are listed below. Considering 77% of all loans in 2012 were issued for debt consolidation and credit card refinancing purposes, it is not surprising to see related phrases dominating the loan titles.

• Debt Consolidation
• Credit Card Payoff
• Consolidation Loan
• 2012 Consolidation / Consolidation 2012
• 2012 Personal Loan
• Bill Consolidation
• Card Consolidation

Loan Description

In 2012, 38% loans issued had no loan description. 50% loans issued had loan description with less than 90 characters. 90% of loans issued had loan description with less than 332 characters.

Length of Loan Description, Loan Volume, and Total Amount Funded

There was not much surprise with 53 character length of loan description, majority of them mentioned debt consolidation or similar variation and a few words. Similarly, 335 character length of loan description was primarily borrowers who wrote a complete sentence.

State of Residence

In 2012, borrowers from 45 different states took out loans on Lending Club platform. Only borrowers from state of Iowa (IA), Idaho (ID), Maine (ME), Mississippi (MS), Nebraska (NE), North Dakota (ND), and Tennessee (TN) were absent. Borrowers from Indiana (IN) joined in 2012. Iowa (IA) dropped off in 2011 and Mississippi (MS) dropped off in 2012.

The average amount per loan continue to rise for borrowers from all states with most increase from 2011 was for borrowers from state of New Mexico (NM), Vermont (VT), and Delaware (DE). The borrowers from Alaska (AK), Massachusetts (MA), and New Mexico (NM) borrowed the highest average amount per loan.

Borrower's State of Residence and Average Amount Funded

Borrower's State of Residence and Rise in Average Amount Funded

One change in 2012 from 2011 was that Texas bumped Florida to be in third place for the highest number of loans issued and total amount funded. California and New York continue to maintain first two spots. There were no significant changes in share of loans issued and amount funded to borrowers in each state in 2012 from 2011.

Borrower's State of Residence, Loan Volume, and Total Amount Funded

In future blog posts, I may take a short break from reviewing characteristics of Lending Club loans in 2012 to discuss a few developments at PeerCube.

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Lending Club 2012 in Review. Part II: Interest Rate, Credit Grade, and Loan Purpose

Continuing the year-end review of Lending Club loans from my previous post where I discussed Loan Volume and Amount Funded ...

Interest Rate

In 2012, Lending Club increased the interest rates for most credit grade three times, in January, March, and July of 2012. By the end of 2012, the interest rate for loans ranged from 6.03% for credit grade A1 to 24.89% for credit grade G3, G4, and G5. I am happy to see Lending Club continuing to tweak interest rates and making loans more expensive for lowest quality borrowers. It will be great if in 2013 Lending Club can start issuing a summary of discussions from their Interest Rate pow-wow at least every quarter. I'm interested in knowing what made Lending Club to decide to change the rates.

2012 Interest Rate and Credit Grade for Lending Club Loans

As seen from the loan volume chart in my previous post, raising interest rates doesn't seem to have much impact on loan demand. But is the slowdown in loan volume growth in second half of the year due to interest rate hike in July? The average interest rate for loans has risen about 13% from 12.49% in January to 14.12% in December. The average interest rate (13.64%) in 2012 was the highest compared to previous five years; it has increased over 10% from the average interest rate in 2011. I'm afraid that higher average interest rate may lead to higher default rates.

Average Interest Rate for Lending Club Loans in 2012

Average Interest Rate, year over year for Lending Club Loans

The average interest rate for loans with 36 month term and 60 month term in 2012 was 12.63% and 18.08% respectively. The rise in average interest rate for both loan terms was similar from previous year.

Average Interest Rate for Lending Club Loans with 36 month and 60 month terms

Credit Grade

The Credit Grade and its relationship with Loan Volume, Total Amount Funded, and Interest Rate has already been discussed in previous post and earlier in this post. The lower quality loans with credit grade E, F, and G are continuing to be dominated by loans with 60 month terms in 2012. Since 2010 when Lending Club first issued 60 month term loans, 23.85% of all loans have been issued with 60 month term. Year 2013 will be a pivotal year in better understanding the defaults behavior of 60 month term loans as such loans are reaching mid-way point in their maturity cycle. This will also offer better insights into lower quality loans as such loans recently have been primarily 60 month term loans.

Credit Grade and Loan Term for Lending Club Loans, 2010 - 2012

Loan Purpose

In 2012, Lending Club borrowers reported loan purpose as debt consolidation and credit card refinancing 77% of the time. Year over year, the percentage of loans with reported loan purpose of debt consolidation and credit card refinancing continues to rise. 77.15% of total amount raised in 2012 was used to fund loans with reported loan purpose of debt consolidation and credit card refinancing. This is an increase of almost 25% over 2011.

At this growth rate, soon loan purpose attribute will become irrelevant as a selection criteria for loans. There is nothing stopping borrowers from claiming debt consolidation and credit card refinancing by running expenses for other loan purposes through credit card.

Loan Purpose Reported by Lending Club Borrowers, 2010 - 2012.

Loan Purpose and Amount Funded for Lending Club Loans, 2010 - 2012

While there has been significant growth in volume and total amount funded for loans with reported purpose of debt consolidation and credit card refinancing, the pattern for average loan amount has stayed the same for past three years. The highest average loan amount are for loans for small business, house purchase and debt consolidation purposes.

Lending Club Average Loan Amount and Loan Purpose, 2010 - 2012

The average interest rate for debt consolidation loans has risen to 14.11% in 2012 from 12.72% in 2011. The loans for car and major purchase purposes continue to carry lowest average interest rate for past three years.

Lending Club Loan Purpose and Average Interest Rate, 2010 - 2012

The table below shows the percentage of reported loan purposes within a specific credit grade. An interesting observation is that the debt consolidation loan purpose was more often reported for lower quality loans with grades E, F and G while the credit card refinancing loan purpose was more often reported for higher quality loans with grades A through D. Another interesting data is that the majority of loans for major purchases and car carry the high quality grade A rating while the majority of loans for home purchase carry the lowest quality grade G.

Loan Purpose and Credit Grade for Lending Club Loans in 2012

In my next post, I will continue reviewing the characteristics of Lending Club loans issued in 2012.

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