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.

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.

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.